By Jo’An Tan (guest contributor)
Singaporeans have been increasingly looking outside of Singapore to invest in real estate, by getting their dream retirement home, a place for their university-bound children stay in, or as an investment.
The popular choices have been Australia, United Kingdom, Thailand, Japan and Malaysia. The strengthening of the Singapore Dollar has increased interest in such properties as they are deemed to be more affordable. Local lenders have also introduced financing of foreign property loans in view of this trend.
In this article, we will focus on the intricacies of taking up a mortgage loan for Australian properties.
Financing a property purchase in Australia
While the local banks have recently forayed into lending for overseas properties due to the attractive margins, banks in Australia, through their licensed mortgage brokers, have long been offering loan packages to finance investment properties.
If you’re looking to take up a loan for an Australian property, you have the following choices:
- Take the loan from a locally domiciled bank (UOB, CIMB, OCBC, ANZ, NAB, Westpac etc.) The Australian banks listed here are based in Singapore, abiding by the lending guidelines of MAS.
- Borrow from Australian Banks and lenders in Australia.
While the biggest benefits of taking a loan locally are the cheaper rates (in SGD) and easier access, these two benefits are negated completely by the restrictive lending products and guidelines.
The combination of the peculiarity of each bank’s lending criteria and adhering to the overall lending guidelines in Singapore, makes it cumbersome and taxing for a borrower to take up a loan from a locally-based bank.
Cumbersome criteria when borrowing from locally-based banks
Some of the restrictive criteria include:
- Differing loan quantums for inner and outer city loans
- Exclusion of rental from existing overseas property when calculating income
- Rental of property to be purchased can’t be factored as income (whereas the Australian lenders domiciled in Australia are able to factor this in)
- Minimum loan size restrictions
- Minimum acceptable size of the property
- Minimum requirements on the income of the borrowers
- Limited or no interest-only options
- The loan taken up will be subjected to Total Debt Servicing Ratio (TDSR) framework and would appear as a record at the Credit Bureau
- Generally lower quantum of financing for overseas properties
- Adverse currency fluctuations may require customers to top up loans
- Locally-based banks do not finance land and building contracts
- Generally short tenures of loans granted
Taking up a non-resident loan from an Australian bank
One business development manager of an Australian bank situated in Australia I met recently commented they like doing non-resident loans (i.e. non Australian citizens or permanent residents) as based on their records, they have yet to encounter a single default!
Nonetheless, they have begun to reduce their exposure to non-residents lending. Some have reduced the lending quantum, which is also known as the loan to value ratio (LVR). However, most banks in Australia generally still grant up to an 80% LVR.
Most of my clients still opt for an Australian Dollar (AUD) loan by an Australia based bank (hence borrowing from offshore) despite the higher interest rates,primarily due to the TDSR as they may not be able to get the LVR they desire. Even if the interest rate is higher than an SGD loan, they do not want to fork out the huge lump sum to bridge the purchase due to the low loan quantum approved by an onshore lender.
Other features such as a 100% offset account offered by offshore banks as well as interest-only options up to 10 years are also deemed attractive. They also have an anti-age discrimination policy which is good news for older folks trying to secure a longer loan tenure. One of my clients who is 61 years of age managed to secure a 20 years loan tenure. If he had approached a locally domiciled bank, even if it’s an Australian bank, the loan tenure would have been only four years in total, and it’s highly likely his loan application would have been rejected!
While taking a loan from an offshore bank is a viable, it does have its share of issues. Some clients have had to deal with ill-equipped mortgage brokers that do not do due diligence on the clients and property purchased and hence present the case wrongly to the offshore banks, which resulted in a long-drawn and worrisome application process that at times overshot the settlement date, and the borrowers were then penalised with hefty late charges.
Factors to consider when taking a mortgage loan for an Australian property
So what should a prospective buyer consider before investing in an Australian property with regards to financing?
- Ensure that the project is deemed financeable by local or offshore banks
- Determine your ability to service the loan instalment in the event of an interest rate increase
- Scrutinise the loan agreement for any unreasonably detrimental clauses imposed by the lenders
- Ensure one have sufficient funds (cash) to bridge the purchase as well as other incidental charges relating to the property purchase such as set up fees, valuation fees, government charges, legal fees etc.
- Determine the appropriate timing to seek financing (depending on the completion stage of the property or settlement date of the purchase contract)
- Ensure you understand the volatility of mortgage interest rates so you are prepared for fluctuations
- Determine the availability of other features such as offset accounts that help you to save on interest
- Understand the long term outlook of the currency of the loan obtained as a mortgage loan is a long term commitment
- Seek a reliable bank officer in charge of international property loans or get the assistance of a reputable mortgage broker, who will assist you in due diligence and present your loan application to maximize your chance of approval, and match the right features of the various lenders loan packages to the needs of the client.
An international mortgage loan is more complex than a Singapore one as more due diligence is required, and it involves understanding the loan packages of overseas-based lenders and dealing with rules and regulations of a foreign country.
While it is not as straightforward, investors can make the right choice if they consider the above factors carefully and clearly understand the details of the loan.
By guest contributor Jo’An Tan, Associate Director of Redbrick Mortgage Advisory, which assists investors and homeowners in sourcing for the best financing option catered for their needs. They partner with major local and international financial institutions and deal with the banks on the consumers’ behalf. The team at Redbrick has handled over 2,000 properties and over SGD$2 billion in mortgages.