Once again after much media and analyst speculation, the Reserve Bank of Australia (RBA) today just announced that the official interest rate will increase by 0.25% making the base cash rate 7.00%pa. This is now the eleventh consecutive increase.

The primary reason behind this increase is the RBA’s commitment to keep inflation under control.

This means that the average standard variable rate will change shortly to 9.02%pa. For each $100,000 of your mortgage this will increase repayments by approximately $4.80 per week.

Indicatively the best fixed rates as of today will be about 8.20% fixed for two (2) or three (3) years.

For an article in The Age about the increase please click_here

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.

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.