Like what I said earlier in this blog, no one can really predict the outcome of Brexit vote and what an outcome it was with final results going the opposite direction to what most analysts had expected – a 52% leave vote!
The pound has been pounded by over 10% in 1 single day last week and will continue to remain weak in the near term. For those who have yet to enter the UK or specifically London property market and are contemplating doing so, there could not be a better time when a major crisis of such proportion hits. I have read that experts now forecast a drop in real estate prices in central London by 10% over next 2 years as Britain negotiates a tricky and complicated “divorce” from EU.
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For Singaporeans who have already bought into the UK property market, although asset value may have dropped somewhat in the short term due to forex, the good news is interest costs has also gone down by the same token. Bank of England (BOE) is also widely expected now to cut rates in 2ndhalf of the year in a bid to get growth momentum going and that translates into “double bonus” for Singapore investors with gains from both currency exchange and the drop in nominal interest rate.
For Singaporeans or Singapore-based PRs with London properties that are going to complete soon this year or in 2017, given the current climate and expected trending, it certainly makes a lot of sense to use leverage rather than full cash come TOP of their condos. Firstly we always advocate using leverage for investment properties as there is rental cash flow to help service the monthly repayments. Next, if the pound should weaken further from here, one could then benefit from doing this currency conversion progressively over time via monthly repayments on the mortgage, rather than a lump sum payment on TOP in the next few months.
The next question to ask for UK property loans is whether to borrow in SGD or GBP. The former is normally pegged to the benchmark cost of funds (COF) for SGD – 3M SIBOR, whereas if one borrows in GBP from Singapore banks, this is usually pegged to the 3M COF for GBP for the respective banks. This rate varies somewhat from bank to bank depending on how much it cost for each bank to secure the GBP funding, but usually in a very narrow band. However with all the uncertainty in the market now I do expect some banks will factor in more risks for GBP and this band might widen slightly. In the past we see clients going for SGD-based UK property loans not only because SIBOR was low and transparent and a loan peg that most Singaporeans are comfortable with, but they also “hedged” their currency positions. However moving forward, we see more people may decide to go with GBP loans in order to benefit from the fall in Sterling over the next 2 years as explained earlier. Not to mention the likely cut in interest rates back in UK leading to further downside to GBP COF. The driver for SIBOR is more dependent on actions taken by US Fed and although the risk of rate hikes for 2ndhalf 2016 has now diminished somewhat, once labour market conditions show improvements or if inflation start to reel its ugly head at some point, Fed might still make its move on rate.
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We think there is also some urgency now for Singapore investors to quickly sign up for GBP loans as we believe some banks might start to lower the LTV for new loans in view of the likely correction in asset values in UK in the coming months. Get a loan early now when you can still get up to 80% LTVin some cases, or have your processing fees waived! Or before the Singapore banks start to tweak their loan features or raise their spreads on GBP loans since COF has retreated so that the final rate levels with that in SGD financing. Speak to our consultants quickly today as we can help you to compare which bank has the best overall features and rates for your London property financing in GBP or SGD.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements. Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.