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!

Smith Street is one of Melbourne’s oldest shopping strips. It is located at the boundary between the suburb of Fitzroy and Collingwood. The street is filled with cafes, restaurants; a lifestyle street welcomed by Generation Y who loves action and wants to be close to the Melbourne CBD. Perpendicular to Smith Street is Johnston Street where nightlife is prevalent with hip pubs spanning almost the whole street.

Smith Street is analogous to Lygon street of Carlton where countless Italian restaurants are located. Collingwood is often touted as the poor cousin of Fitzroy and Carlton because of its older style developments and its ‘industrial’ looks. Its proximity to the CBD prompted numerous residential developments over the year. Gradually, warehouses are being renovated and converted to residential units to meet the growing demand of inner-city suburb living.

Watch this space!

When it comes to marketing properties overseas, many developers are pretty keen to sell their stocks that are primarily off-the-plans. Off-the-plan properties are pretty popular with overseas investors because of stamp duty savings (e.g. buying off-the-plans in Victoria, investors need only to pay stamp duty on the land value) and the fact that only a 10% of the purchase price is required as a deposit and no further payment is required till settlement.

When it comes to building a portfolio for investors, it may not be necessarily a good thing to buy off-the-plan projects. The reasons are as follows:

Off-the-plan projects usually have ‘growth’ built into the price – e.g. if the project is going to be completed in 3 year’s time, it will be priced at its worth in 3 year’s time, NOT current market price. With rising construction and material costs, developers tend to price the units with a certain percentage increase so that the development remains economically viable.

The process of building equity starts only when the property is completed. It means that if you purchase a property off-the-plan today and it settles in 3 year’s time, your wealth building process actually starts in 3 year’s time, NOT today. For investors who are looking at building a portfolio aggressively, buying off-the-plan is not a strategy recommended for them.

Also, if an investor buys off-the-plan during the peak of the property cycle, he may get himself in a sticky situation when settlement happens. The valuation might not stack up and he will have to make up the difference with cash or available equity in his other assets.

The safest bet is to go for properties that are under construction or completed. Given the situation in the eastern seaboard, where new projects are far and few between, it is not easy to find good units that are still available during the construction phase.

A good alternative would be to go into house/land packages where the land title is registered. That way, investors can settle on the land within 30 days and building can commence right after the settlement of the land. The house would be up in 6-8 months and the investor can start his wealth building right away! That shortens the ‘waiting time’ for serious investors.

Lately there have been quite a number of developments being marketed in Singapore. Some clients asked me if they should buy South Yarra or Lygon, or along Queens road. All of these areas in my opinion are great areas. If you are in for the long term, you cannot go wrong.

The other day, I had a client who asked me a similar question. I told him whilst they are good areas, he could get carried away looking at so many new developments and the fact that he can’t possibly buy all of them means that there is something more than just looking at new projects and adding them to his already ‘messy’ portfolio.

I explained the importance of having a STRATEGY in place. It allowed him to have a helicopter view of where he is going and chart the course for his acquisition strategies. At the end of the day, it is down to a 15-year strategy and possibly looking at an annual income of $100,000 or more from his rental income. He was happy with it and it is not at all aggressive and definitely realistic; looking back at the past performances of the Australian property market where median price growth averages about 9% per annum.

Folks, at the end of the day, you can buy anywhere, for that matter; anywhere in the world. I guess the key is to have a holistic strategy. Just like what Stephen Covey said, ‘BEGIN with the END in mind!’…

About a month ago, I spoke to an associate about investing in Australia. She is married to an Australian who lives near Geelong in Victoria. She is adamant about not wanting to invest in a 1-bedroom apartment in the city. When asked why, she said, ‘who’s going to rent one-bedroom apartments?’

The question shocked me a little. She mentioned she would like to get at least 2-bedroom ‘and above’. I found out later that she has actually related to what had happened in Singapore and assumed the same set of conditions apply to Australia.

IMO, a one-bedroom apartment in the city fetches good rental yield, it is also easy to get rid of if the investment turns pear-shaped. Property managers would agree that renting a one-bedroom apartment in the city out will be quite easy as it is a lifestyle product that appeals to singles or couples without kids who wants to enjoy city living.

In Australia, the demographic movements are quite predictable.  When kids gets to about 18, they moved out of their parents home in the suburbs and gather a few mates to rent in the city. They want to be close to where the action is. The idea of having pubs, trendy restaurants nearby is a major attraction for them. Once they met their other halves, they get married and moved into the suburbs. Depending on their income level, they may move into a more desirable suburb if they have the capacity, otherwise buying or renting a house in a ‘growth area’ seems like a possibility.

They have kids later on and when their kids grow up, the kids move into the city and when their kids are gone, they may stay put or move into the city depending on their level of comfort.

A one-bedroom apartment usually is the first to be rented out in good times. It is also the hardest hit during a recession. The one-bedder is not popular for families with more than 2 members. With the emergence of Internet, some couples even rent a 2-bedroom and make one of the rooms as a home office where they can work from home. Having said that, a one-bedroom is not without its value. The fact that it has only one bedroom means that it appeals to a smaller market segment. Then again, the market segment of singles/divorced is increasing at an alarming rate in developed countries like Australia.

Investors need to be aware of the dangers of buying a unit less than 50sqm. In the past, banks do not really favour financing such units. But with increasing construction costs and land costs, banks are now willing to look at it more favourably.

My take is: Study the demographics living in the area you are investing in and watch your budget. At the end of the day, investing in properties is down to dollars and sense and if one-bedroom is what you can afford for the time being, it may be the best decision given the present circumstances you are in.

After debating this issue for a few years, and having spoken to many investors some of whom are very successful investors, I conclude the following findings:

1. Investors who embrace the concept of interest only loan have an exit strategy in mind. They know what they are doing and is fully aware of the risks, and rewards involved.

2. The so-called ‘risk adverse’ investor who pays down on the loan rarely goes beyond one investment property.

In simple terms, the advantages of interest only loan are as follows:

1. It maximizes ‘cash flow’ for the investor. Depending on the term of the loan, the investor services the interest only leaving the principal of the loan untouched. This means lower repayment and better cash flow for the investor.

2. The interest component accrued by the investor is tax deductible. Together with the depreciation allowance of the building and fittings, it allows the investor to build up ‘tax credits’ for purpose of offsetting capital gains tax should the investor sell his assets in future.

The risk of an investor is the holding cost – rental income less all outgoings including interest costs. If an investor manages his holding costs carefully, with buffer for the downside, he should be able to build a very effective portfolio.

So to pay down or not to pay down? It is really down to individual investors….if they have an overall strategy; taking into account cashflow and tax benefits etc…

An associate of mine told me his vision of wanting to help people generate a secondary source of ‘active’ income through FOREX trading. He has been researching and putting his whole head into it for the past few years. A young man with a passion I would call him; he has been making an active income consistently through FOREX trading. His strategies are profound and definitely practical for PMEBs(Professionals, Managers, Executives and Business people).

When I started looking at property, I came across many people who ‘traded’ properties for a profit. What do I mean? These ‘traders’ buy low and sell high. In some circumstances, they buy high and try to sell higher.

It’s common for investors to say that ‘timing is very important’ in the entry to property market. While I never attempt to refute that saying, it also goes to show the mentality of these investors are no more than trying to take profit when the market rises and sell for a tidy sum.

I explained to my associate how many property investors adopt the mindset of ‘traders’ when it comes to property investment and if they are caught out in the wrong end of the cycle, they often have very little way out but to sell for a loss(if they cannot hold). These property ‘traders’ then blame the vehicle – properties, as the culprit for their downfall.

One of my best property mentors, Zak Thaker said, ‘you can flip, trade, buy and sell properties once you have a base’. There is a keyword there - BASE.

I asked him what he meant by that. He explained to me the foundation of successful investors is to have a base of accumulated assets and equity in them. If you uplift equity within this solid foundation to acquire more properties, whether to ‘trade’ or invest for the long term, you find yourself better off than others who plainly just ‘trade’.

Makes a lot of sense to me. My associate’s idea is for individuals to make more than decent profits from a secondary active income source and channel part of that income to acquiring passive income vehicles like properties. So on one hand, you can continue to trade while on the other hand, you start building your asset base.

It cannot sound more logical to me. Folks, have you laid the foundation for your base?