Is it time for Expats to buy Property in Australia?

AUDSGD exchange rate back to parity…

Unfortunately this post may not be relevant at all for you guys but yesterday AUDSGD FX rate reached very close to parity as a result of overall weakness in the AUD. In other words one SGD is roughly equal to one AUD. The last time this happened was back in late 2008.

Going as far back as I can in Bloomberg (~1981), over the last 34 years the exchange rate has only ever been less than or equal to parity five times. What does this mean for us Aussie folk? Well if you are living in Aussie without unhedged foreign investments that just means more expensive holidays overseas.

 

Weakening AUD presenting some opportunities…

For us expats working in Singapore though, this presents an opportunity. We can borrow in SGD dollars and buy property in AUD, say you buy a 1 million dollar property with 20% down 200,000 then you’ll need to borrow 800,000. You then proceed to borrow 800,000K in SGD and convert to 800,000K AUD (roughly) and service your loan in the same currency as your salary – namely SGD. This acts as a natural hedge against the currency of salary if you plan to return to AUD!

Besides the natural hedge you also benefit from the lower interest rates available in SGD. Infochoice tells me that I can currently get a mortgage for around 5% while in Singapore you can get a mortgage for less than 2%. So let’s assume 5% and 2% respectively on 800,000K loan, monthly repayments for 30 years…At 5% you pay $4,295 a month and at 2% you pay $2,957. That’s a difference of $1,338 a month that can go into other investments or spending!

 

There is always a downside if you look hard enough…

Is there only upside to this? Well not really…there are two factors that you will need consider if you do purchase a property in Australia by borrowing in Singapore.

  • Interest Rate Differential: Australia only offers fixed rate mortgages out to 5 years (correct me if I’m wrong guys) while Singapore only offers floating rate mortgages (by the way, US offers 30year fixed rate mortgages!!). So although there is a 3% advantage now, however over the 30 years who knows how the different in the interest rates will be, you may possibly pay more interest in Singapore sometime in the future
  • Exchange Rate Risk: Where is the exchange rate risk if you get paid in SGD and service the mortgage in SGD. By the end of the term of the mortgage you would have paid off your whole mortgage. The exchange rate risk only pops its head around when you decide to refinance the mortgage in Australia and hence need to repay the full loan amount before maturity of the mortgage.  So consider after a few years, you decide to return to Australia. You will be paid in AUD dollars but servicing the loan in SGD dollars, introducing you to AUDSGD FX risk. To get rid of this you decide to refinance in AUD dollars, assuming you have 500,000 SGD left on your mortgage and the AUDSGD was at the lowest point ever in history 0.87 SGD per one AUD…you would have to borrow 574,713 AUD to repay the mortgage. That’s an increase in your mortgage of nearly 15%!

Thinking about this kind of strategy gives you a look inside how large institutions feel when they borrow in a foreign currency and get demolished when the exchange rate goes against them and they have to repay the principal using their weaker currency – Asia Financial Crisis of 1997 anyone?


Disclaimer :: Please note that all investments carry some risk. You should be aware that the value of your managed investment may not increase as quickly as expected, if at all, or that the value may go down.

Steven

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