Tower Bridge london - uk property loan

Refinance Your London Property Loan?

BOE (Bank Of England) has just announced a quarter of percentage points rate hike from 0.50% to 0.75% this past week (2 Aug), mirroring the tightening path of its counterpart across the Atlantic.  What this means is that just like homeowners in Singapore, around 3.5m borrowers in UK on variable or tracker rate mortgages would start to see their monthly repayments head north.

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It is significant development which is not widely discussed in the financial markets afterwards or cause as much ripples as actions by US Fed.  Yet it is a vote of confidence in the resilience of the UK economy by its Central Bank, and has implications for all those exposed to the UK Economy and the Pound.  It is also significant when you look at the path of UK interest rate movements over the last few years:

uk mortgage interest rate

 

In its policy statement after the meeting, Mark Carney BOE’s governor, indicated there will be further “limited and gradual” hikes to come as the MPC (Monetary Policy Committee) sees a pick-up in economy supported mainly by household spending.  It forecast GDP growth of 1.4% this year which increases to 1.8% in 2019, with an unemployment rate that is expected to fall further from the current 4.2% and wage growth to pick up just like in the US.

There has been much debate in UK about the need to hike rates so early when there is still no light in sight in terms of a trade deal between UK and EU after Brexit, which is expected by end of the year.  This is especially so when recent statistics suggest a slowdown in the property market which the committee feels might be restricted to Central London, ie. affecting more on foreign investors.  By and large, BOE announced its intention to stay on a gentle tightening path, yet monitoring impact of upcoming events in Brexit negotiations as well as the much-feared global trade war of tariffs.

Before we go on, let us take a look at the GBP/SGD movements over the past 5 years since the Brexit vote in June 2016:

GBP/SGD exchange rate

Source: XE.com

 

It is clear from the chart, that since the lowest point of 1.689 three months after the vote in Oct 2016, the Sterling Pound has been trending up against the Sing Dollar.  In fact, the current dip in April this year presented UK real estate investors, those who had bought into the London property market after Brexit and took the loan in Pound, with the perfect window of opportunity to do a switch of currency now to profit from the gradual rise in Sterling.  Here’s what I mean by an example.

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Mr. Cheung invested into a London property after Brexit at a purchase price of £1m and took a loan in pounds at 60% LTV of £600,000.  After paying down his loan diligently over the last 2 years at an average tracker interest rate of 3% over 25 years, his current outstanding loan is at £566,768.  If he is to refinance this loan to SGD at the current rate of GBP/SGD 1.79, he converts his loan into SGD at S$1,014,514.  For the purpose of this study let us assume he continues to service the interest at 3% for the next two years when his loan in SGD terms will be reduced further to S$951,355.  Now watch. If he is going to convert this loan back to pounds and supposed the pair GBP/SGD continues on its climb to reach 2.00 by this time, that translates into an outstanding loan of £475,677.  This would be much lesser than had he continued on his existing loan in pounds for a total of 4 years from the beginning at the same interest rate of 3% which ends at £531,483.  In short, Mr Cheung would have managed to shrink his loan by £56K which is almost 10% of his original loan amount of £600,000.  In the meantime, with a recovering UK economy after Brexit, he might have also profited from a rise in the valuation of his property by 20% to £1.2m! This translates into a total gain of £256,000 and that is before exchange gains on both the profit as well as equity sum £400,000 of his own money invested from the outset, ignoring transaction costs involved.  Total returns on equity would likely be near 80% if he decides to transfer all his money back to his own domiciled currency.

 

There may be some fees involved in making the switch and refinancing to a Singapore bank, and it may come with a requirement to pay down the loan slightly as financing in SGD carries more risk to the bank than in GBP.  Still, it is more than justified by the “shrinking effect” from the loan as you can see from the example.

 

However, note that this would only work for those who bought into London property market when the GBP/SGD is already substantially below 2.00, ie. after the Brexit vote.  Otherwise, it is just a recovery in position for exchange losses on paper.  Having said that, for those super bulls out there on the Pound and believe it will rise back up to its glory days of 2.50 or higher eventually, there is no better time to buy into the doldrums of London property market now, and take the loan in SGD from Singapore banks at GBP/SGD at close to 1.80.  Speak to us now as we can bring you the most optimal financing option for your London property purchase.

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It would be not responsible-writing if I do not highlight the risk involved when taking financing in another currency from that of the underlying asset – the risk of “margin call” or call to pay down the loan.  The same “shrinking” effect explained above would turn into a “ballooning” effect on the loan when the Pound slips substantially below 1.80 and reaches new lows below 1.689.  At the same time, when that happens, you can bet that the property market goes into a turmoil with valuations dropping across the board.  The loan in SGD financing would then go over the usual LTV limit of 60% granted by banks in Singapore to foreigners (or 70% for Singaporeans).  You will be asked by the lender to pay down on the loan to bring this LTV back down to 60%, failing which the bank can recall the loan!  Another factor to take note is the pace of interest rate hikes in 3-month LIBOR interest rate for Pound (where most GBP financing is pegged to) relative to the local SIBOR (Singapore Interbank Offer Rate) for SGD financing.  The latter bears a close correlation with the US Federal funds rate whereas that for LIBOR is dependent on many factors.

 

So, caveat emptor! Investors who like to take position and benefit from a “shrinking loan” in SGD financing needs to have excess funds on the side for such paydown calls.  After all, paying down a loan reduces interest costs in the long run, as investors simply wait for a recovery in both the currency and asset price which is the reason why someone would want to enter a specific property market in the first place. Bottom line is one must have holding power.  Incidentally, it makes perfect to park excess funds early in SGD with the Singapore bank as AUM precisely for this scenario – where there will be no exchange losses when there is a need to top up or pay down. The funds are already in SGD.

 

Incidentally for this more adventurous group of investors in London property, some Singapore banks do offer a switching feature where one could switch from one currency to another and back, for a small fee.  This essentially gives the investor flexibility in terms of taking positions when they feel that the currency pair is headed towards one direction for a protracted period.  To this end, he could use the in-house view from the currency research team of the private bank or preferred banking.  Speak to us today as we can show you how to make use of such a feature.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements.  We aim to build trust with clients for longer-term partnership and not just do product-pushing for a one-time deals unlike bankers.  That’s why we always present “whole-of-market” perspective including packages that banks do not pay us.  See our clients’ testimonials.

 

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About Darren Goh

Darren Goh is the Executive Director and founder of MortgageWise.sg, and a thought leader in the Singapore mortgage industry with frequent interviews by the press Business Times, Straits Times, Zaobao and EdgeProperty for his views and analysis on the latest mortgage trends. His article has also been published in The New Paper (formerly TodayOnline). He started his career in consumer banking product development for 6 years, before moving on to an illustrious 10 years sales career in marketing luxury real estate (Ardmore Park) where he set the record sale price (still) of $10.64m and run his own successful boutique agency as KEO. He now combines his knowledge in both financial services and real estate investment to advise clients on mortgage solutions.
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