Australian Expatriates and Foreign Residents - Understanding Foreign Currency Loans (FCL)
We do not offer access to foreign currency loans (FCL's) for the purchase of Australian residential or commercial property. We have done so in the past, and they may be an appropriate financing structures in the future, but current market conditions are not supportive and have not been for some time. Consequently, in most situations a direct Australian mortgage is typically the best and only financing option.
These loans have been very popular at particular times in the past because they have offered access to significantly lower interest rates than were available in the Australian domestic mortgage market. For expatriates with long-term income streams in another currency, and therefore a "natural hedge", they offered a suitable form of financing - and may continue to do so in certain situations.
Because we continue to receive regular inquiries regarding FCL's, and believe it is important that people fully understand the pros and cons associated with this form of financing, we have summarised some of the considerations that should be borne in mind below:
- Typically, the maximum loan to valuation ratio (LVR) available for an FCL has been 70%; this provides a lender with a buffer to protect them in terms of currency volatility. If there are adverse currency movements, and the maximum LVR is exceeded, then borrowers should expect to receive a request from the lender to make additional capital payments. This is akin to a "margin call", and when individuals are discussing this form of financing with a lender, they should very carefully discuss the circumstances in which a bank may make a request for an additional capital payment. The past few years have been marked with relatively extreme exchange rate movements, there is no sign that this will necessarily diminish.
- Bear in mind that most, if not all these facilities, will only provide access to a variable interest rate mortgage – fixed rate mortgages have not historically been available in this market. Therefore, unlike a Australian domestic mortgage, you do not have the option of fixing your forward financing costs with any certainty. We would always suggest that you obtain details of current Australian mortgages - variable and fixed - for comparative purposes before committing to an FCL.
- Given the existence of a foreign exchange risk, you need to consider whether the interest rate differential available between the FCL and Australian mortgage interest rates is sufficient to warrant that risk. Currently, with Australian interest rates at historic lows, we believe that the margin is unlikely to be adequate on its own to support this type of loan. However, if you are an expatriate paid in an overseas currency, then it may make sense to match currency of your income and expense, quite apart from interest rate savings.
- Prior to the GFC, it was common to see lenders make available what were called multi currency loans - you could in effect borrow in one currency, and then swap within a range of other currencies and there was no requirement that you and a matching income in the currency of the borrowing. This was an extreme example of "market exuberance" which disappeared, and now lenders limit themselves to lending in either the currency of the asset or the income of the borrower.
- In the past, it has also been common for lenders, particularly the Australian banks, to require borrowers to refinance into AUD at the time they returned to being resident in Australia. This requirement largely disappeared, but borrowers also need to appreciate that they may be required to pay withholding tax in Australia on the interest component of their loan when they become resident in Australia – in effect because the payment will be made to an offshore entity. If you have no matching foreign currency income, retaining a loan of this nature represents a clear foreign currency risk, and you should seek advice around continuance.
Should you opt for continuance, also ensure that you do not arrange automatic mortgage payments from your Australian bank account, otherwise you will almost certainly be paying your Australian bank an additional 2 - 2.5% because of poor/standard exchange rates. You should investigate arranging payments through OFX or another dedicated foreign exchange company, both the exchange rate should be better, and fees lower.
Australian Residents
Australian residents should note that it is typically impossible for them to access a foreign currency loan to finance or refinance an Australian property purchase, except in very unique circumstances. The only source of funding would be the Australian banks and they are, quite understandably, not in favour of extending this sort of financing to Australian residents unless they perhaps have access to very substantial income streams, or liquid offshore assets available as security, in the currency of the loan. We cannot provide any assistance in this matter, and Australian residents wishing to explore this option in more detail will need to approach their Australian bank, and probably the private banking function, for a response.
However, Australian residents should note that it is possible to arrange financing for the purchase of overseas property in a number of situations, such as in France, Spain, Italy and the UK - and in the United States. In these situations the minimum loan size will differ by country and the type of property you are seeking to buy - but you should expect to contribute at least a 30% deposit on any purchase and be in a strong financial position.