‘Local real estate agents can make or break the ’social status’ of a suburb’, One of my vendors who used to be a real estate agent said. If real estate agents agree that it is a fantastic suburb, and with the media on their side, the chances of property values appreciating big-time will be great but the opposite happens when all the estate agents agree that the suburb is a slump.

Investors are very much influenced by the advice of real estate agents. They rely on the inputs from real estate agents to provide them with the general sentiments of a certain suburb and the social stigma associated with the suburbs. Hence never underestimate the power of estate agents!

For overseas investors, your best bet is to ask a local real estate agent about the suburb that you are buying into; that way you can never go wrong with your investment property!

The use of multi-currency to finance an Australian real estate is possible with non-resident investors. Essentially, it means the security (real estate) is in Australia and the loan (mortgage) taken in a currency other than Australian Dollars (AUD). In principal, if you are a Singaporean and is able to show proof that you have been earning a SGD income, you may be eligible for a loan up to 75% (for residential properties) of the property value or valuation, whichever is lower.

The advantages of taking a multi-currency loan are aplenty:
1. If you take up a SGD or JPY loan, with proof of income that you are earning in SGD or JPY, you are eligible for up to 75% loan to value ratio.
2. It saves investors in interest repayments and ensures the cashflow of the property is positive. E.g. most residential properties are between 4.5%-5% in rental yield. A SGD loan say 2.4%(cost of funds) plus 1% margin for the bank is 3.5% p.a. and a JPY loan say 0.5%(cost of funds) plus 1% margin for the bank is 1.5%p.a. in interest for the mortgage rate. The property will be cashflow positive if an interest-only loan is maintained.
3. The currency can be switched to lower the principal. Over time, just by switching between currencies the LVR will be lowered.

It is not exactly a walk in the park for investors taking the leap. The risks, though present can be mitigated with professional advice. The rule of thumb is to borrow in the currency that is likely to weaken.

Illustration of an investor who takes AUD300,000 in mortgage loan:

Assuming the AUD/SGD exchange rate is 1.3 at the time when the loan is disbursed, the liability in SGD is SGD390,000
If the AUD appreciates against SGD, e.g. 1.4 then the liability in AUD will be reduced. The amount would be SGD390,000/1.4 = AUD278,571 if the investor switched from SGD loan to an AUD loan. It helped reduces the principal sum of loan. Of course the investor can choose to sit on the SGD loan and do nothing to continue paying lower interest rates.

If the AUD depreciates against SGD, e.g. 1.2 then the liability in AUD will be increased. The amount would be SGD390,000/1.2 = AUD325,000. The investor will have to make sure if the amount in AUD is kept well below the bank’s requirement of 80% loan-to-value ratio, otherwise the investor may need to ‘top up’ the loan to ensure it stays within the bank’s comfort level. The investor can however instruct the bank to switch the currency to a AUD one if the AUD liability is near to 80% of the value of the property.

Some banks offer unlimited switching options for investors. By timing the entry of the currencies, the investors can wipe the principal loan off using this strategy. There is now a better opportunity for increased equity particularly if the currency pair is volatile in nature. A better pair would be AUD/JPY where the volatility is greater and hence presents better opportunities for investors. Of course the risk is also proportionally higher.

More information can be obtained from Australian banks offering multi-currency loans for offshore investors. This product, however cannot be offered to tax residents of Australia because of the complication of withholding tax by the ATO.

According to Herron Todd White, a leading valuer in Australia based in the eastern state, it has been reported that the capital city of WA, Perth has reached the peak of its property cycle. Residex has reported Perth as having the highest median property price in the whole of Australia, even more than Sydney.

Industry professionals said the main reason for the property boom in WA is mainly attributed to the resource boom. People flocked to WA for employment in droves and the supply of properties is not enough to keep up to the ever-growing demand.

The question is how long will this resource boom last? Judging by recent reports where Australia has just made a pact with China, it is going to last for a while. Housing affordability index cannot be rising forever. It will grow to a point where people deem it is not viable to buy properties at a certain price as the wages just cannot support the mortgage repayments.

When the resource boom is over, people might leave town in droves. This may create a temporary situation of oversupply in WA and it may be undesirable for many property investors.

For investors who have already invested in WA and had equity in their investment property, they may look towards the eastern states and capital cities for re-investment. Don’t get me wrong. I am not advising the investors to sell. All you need to do is to consult a mortgage broker or an investment specialist, they will advise investors how to uplift equity in their existing portfolio to increase their total asset holdings without much risk.

For investors who are thinking about buying into WA, it may be worthwhile to look at properties that are settling soon or house/land packages. If you are buying off the plans, good luck to you. Pray that the numbers still stack up at settlement, or better still, pray that the developers have enough margins to continue with the sale. I have heard of developers putting viability clause in WA projects in such a way that if they deem the project is not viable anymore, they can cancel the contracts or go back to investors to ask for more money.

So look to the east mates. The chances of going wrong may be lessened!

Hello all,

I hope you have had a great holiday period and are getting stuck into 2008 already.

Being my first day back on deck today I was expecting it to be reasonably quiet – it was far from it actually!

I thought I would take this opportunity to touch base with you in relation to some of the major banks increasing variable interest rates beyond official RBA (Reserve Bank of Australia) increases.

You may have already heard that the NAB have increased their variable rates by 0.12%pa and the ANZ this afternoon announced that they are increasing their rates by 0.2%pa as of Wednesday. (see attached article sourced today from The Australian online)

Obviously this is quite controversial given the RBA increases of last year, record bank profits and the likelihood of at least one further increase this year. The perception by many is that our large Australian banks source lending predominately from deposits rather than from bonds raised on various markets around the world – the latter of which is highly linked to the issues in the US.

Overall it is a complicated set of circumstances but you should expect that there will be much media speculation about the legitimacy of these increases and it will be interesting to see how it pans out in the coming months.

Bear in mind that there could well be one or two banks who could be positioned to weather the current environment and possibly creating an opportunity for many people to potentially refinance to them and save money. Rest assured I will keep you up to date as more information comes to hand if this may be the case.

Nobody quite knows the length or extent that the US sub-prime crisis will continue to have on our local interest rates but hopefully it won’t be too long. The Australian banking system is exceptionally well regulated as a whole and competitive forces are likely to play a positive part for consumers in the longer term.

What does this means to you?

Arguably on a positive note, a further rise in official RBA interest rates in February has been reduced because of this independent bank action. But this more likely means only one more interest rate rise from the RBA in 2008 rather than two.

Of course if you have a fixed rate portion on your loan(s) this volatility will not affect you. Otherwise in most circumstances we should have already set you up on a top tier discount of at least 0.6%pa off the standard variable rate (ie discounted to about 7.97%pa or better). This means it is highly likely your mortgage will remain one of the most competitive products on the market.

Of course my service as your personal broker is ongoing so please feel free to contact me directly at any time to discuss any queries you have in relation to arranging a fixed rate component or arranging a quick free health check of your current finance structure.

Contributed by Clinton L. Waters from More, Rosh & Waters, a mortgage brokering firm based in Melbourne, Victoria, Australia.

I was very glad my good mate and pal, Mr. Alex Wong has agreed to be on the panel of contributors for this blog. A New Zealand born Chinese, Alex has worked in Melbourne for a large part of his working career and specializes in financing planning as well as tax planning for individual and corporations in Australia, residents and non-residents alike.

He is often invited as a keynote speaker for seminars and workshops and he is also actively involved in teaching with the Singapore Institute of Management as Adjunct Lecturer on topics pertaining to tax in the region.

I met Alex in Melbourne in 2005 during one of my trips to Australia. He came across to me as a very down-to-earth person and is extremely humble. He has no airs and is very passionate about the work he does for his clients. 

In the last two and the half years, I have received very good feedback from clients who have engaged his service. His unselfish and kind support to investors here and the region are well appreciated and I am pretty sure he will be a very valuable contributor to this wonderful blog.

Alex currently resides in Melbourne, Victoria, Australia. He lives in a house in Camberwell, a suburb east of Melbourne CBD with his wife and two grown-up children. He travels to Singapore twice a year for work and is definitely a lover of our very own hawker food.

You can read more about his profile here.

Welcome on board, Alex!