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UK Mortgages – Pounds Or Sing Dollars?

Lately we have been getting more questions on this after the British Brexit vote.  Obviously if one is taking a mortgage on his UK property in Sing Dollars or SGD, it has to come from Singapore banks mostly.  However if one is based in Singapore or Asia, but prefers this loan to be in Sterling Pounds or GBP, there are now more options with our expanded coverage through our exclusive tie-up with our mortgage partner firm based in London.

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In short, our clients at MortgageWise can now consider UK mortgages in GBP from both banks here in Singapore, as well as those based in London.  There are advantages and disadvantages to consider for each option, like some additional costs to take from UK banks, still it may well worth consideration for some especially those who like to “reserve” their TDSR capacity for their next property purchase here in Singapore.  After all TDSR is a structural measure and is not about to go away even if the Singapore property market crashes tomorrow – there will always be a constraint or limit to how much one can leverage for real estate investments from Singapore banks.  Speak to our mortgage consultants who can better advise you on which option to go for.

In this article, we are going to address more the issue of which currency to go for when it comes to leverage for your UK property purchases.  And we give our opinion against the backdrop of what will likely happen in a post-Brexit world where interest rate is likely to stay low in UK leading to softness in the currency as well as some likely correction in property prices.

Generally speaking we think that, in order not to have too much forex exposure, it is always prudent to service the loan in the same currency as that which it is denominated in when the loan is being disbursed, in this case in pounds for a property bought and valued in pounds.  And the reason is quite simple – there will not be unnecessary forex exposure leading to banks calling for loan paydowns in event the currency movements is against one’s bet.

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Let us give an example to illustrate what we mean.  Suppose someone takes out a mortgage from a Singapore bank last year way before Brexit for his London property purchase at the price of GBP800,000.  And the bank gives a maximum LVR (loan to value ratio) of 70% and hence disbursed a loan of GBP560,000 on 14 Sep 2015, the date of the completion of the purchase.  At point of loan disbursement, as he opted for the loan to be serviced in SGD, it was converted based on an GBP/SGD rate of 2.167 (from XE.com) on 14 Sep 2015 to SGD1,213,520, and he started servicing his loan based on this principal.  No one could have foreseen Brexit materializing and at exactly one year down the road, GBP/SGD has weakened to 1.798 on 14 Sep 2016.  Let us also assume that he has serviced his loan diligently at around SGD$6,730 for the last 12 months at an interest of 3% p.a., over a 20-year loan tenure.  His outstanding principal has now been reduced to SGD1,168,548.  But look at how much is this same outstanding loan when revalued in pounds – GBP649,915!  That’s even higher than his original loan by 16%!

The worst scenario is if his existing bank pulls the rug from under one’s feet and now reduced the LVR to 60% as part of its prudent credit policy post-Brexit and assuming that property prices has went under by 5% during this time, how much would this borrower have to pay down in such a revaluation exercise – the difference between his outstanding loan of GBP649,915 and 60% of GBP760,000 (value drop 5%) – a whopping GBP193,915 or SGD348,659!

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Such is the risk from movements in forex which could lead to “margin call” to pay down on one’s outstanding loan.  This is unlike property financing in the same currency like in Singapore’s context, margin call on a Singapore mortgage would only happen, if the bank decides so, from a drop in valuation.  Hence in times where the currency movement works against one’s favour at a same time when property prices are going through correction, it can be quite a painful double-whammy hit!

So it is not as simple as one thought – to close one’s forex exposure on monthly cashflow and opt for the mortgage repayments to be in the same currency as one’s income.  For property purchase in a different currency from one’s income, there will always be exposure to forex risks in either one of two areas – one-time exposure at loan disbursement when one buys, or ongoing exposure through loan repayments.  One needs to choose which area to close this forex exposure.  And weighing the risk-rewards between the two, it is always wiser to opt for the latter as ongoing exposure will not lead to a “big event risk” like a loan “margin call” or call for paydowns.  One should close this risk by opting for the mortgage to be in the same currency as disbursement currency, as there are other ways to “hedge” the currency risks from ongoing repayments.  For one, the rentals collected from an investment property forms part of the hedge.

Another big advantage, often overlooked, for opting for the mortgage to be in pounds – should pound weakens further it makes economic sense to pay down more on the loan using the stronger Sing dollar, thereby realizing the exchange gain.  In fact what one should do in such an instance is to remortgage one of his existing Singapore investment property or gear up for a term loan to pay down partially on his UK mortgage.  There is no change to one’s total debt position really but just a transfer from one existing mortgage to another, but allowing for one to lock in real gains from exchange movements.  Another way to look at the same concept is that one “postpone” the conversion from pounds to Sing dollar from one point in term at disbursement until such time when the currency movements is favourable with pounds in a weaker position, so one will then “convert” using less Sing dollars.  Plus there is no need to convert the whole loan at the same time, unlike if one were to opt for the loan in SGD from the start.  Having said that, the converse is also true and should pounds strengthened to beyond 2.20 or higher you will end up with a bigger loan in Sing dollar terms.  So caveat emptor.

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Incidentally this last point on the flexibility to pay down or “reduce” the loan whenever the currency is in one’s favour can become a selling point if a lender offers a dual-currency feature to switch between GBP and SGD and vice versa during the tenure of the loan.  Such a switching facility is available for our Australian property loans which I will cover in another article.  Unfortunately none of the local banks offer that now for UK property loans.

Given the current macro environment where UK is set to trigger article 50 to exit Eurozone over the next 2 years, we do think that the conditions make pounds a better option than SGD financing for UK investments.  Those who have taken out UK mortgage in SGD over the past years may need to rethink their positions.  Speak to our experienced consultants who can show you the best options available from both Singapore as well as private banks in London.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

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