ST: Ways to pay for that overseas home

Ways to pay for that overseas home

We uncover financing answers for homebuyers with their sights set beyond the shores of Sentosa Cove

Bryan LeeSun, Jul 22, 2007 The Straits Times

SECURING a home loan is a pretty straightforward affair for a local property, but once you venture further afield for that beachside hideaway or Paris pied-a-terre, things can get seriously complicated.

Beyond the usual considerations of interest rates, credit limits, loan tenures and affordability, buyers of overseas property need to deal with a number of other issues.

Foreign exchange risk is probably at the top of the list, but the rules and policies governing property ownership and financing often differ from country to country.

Also, processing fees are common for these mortgages.

Then there is the key question: Where do you get these loans in the first place?

The giddy rush of securing that prime unit with the perfect seaview might prompt many to sign up with the first bank that comes along. This could be the financier recommended by the agent selling the house or the lender with a booth at the property fair.

Well-heeled investors who have established themselves as favoured bank clients will probably be able to call on their private bankers to arrange a plethora of financing options.

But for the less privileged, a little knowledge can go a long way and help is at hand if you know where to look.

Mortgage brokers such as Mr Dennis Ng, who founded the loan consulting portal HousingLoanSg.com, can offer advice on the best route to take - and it is free as brokers earn their keep from the banks.

Global banks with outlets in Singapore such as Standard Chartered (Stanchart) and Lloyds TSB offer 'one-stop shop' services to anyone interested in an overseas home loan.

Stanchart mortgages head Elaine Heng says the bank can offer housing loans in many markets around the world through its international network.

Singapore bank United Overseas Bank (UOB) has been making a push offshore since the start of the year, aggressively marketing home loan packages for properties in Malaysia, Thailand and Shanghai.

Property experts say there are essentially three forms of financing available for those eyeing homes overseas.

Each has its pros and cons, and availability differs across geographies and across banks.
Borrowing local overseas

TAKING out a mortgage in the country where the property is located is probably the most straightforward route.

Many foreign banks, such as Australia's ANZ, have offices in Singapore and should at least be able to help buyers get in touch with mortgage managers in their home bases.

International bank Stanchart goes a little further by handholding customers throughout the entire application process. And it can do this for loans taken in any country in which it has a retail banking operation.

EXPERT ADVICE

Rental advantage

If the overseas property is to be rented out, a local mortgage makes for a neat solution as the rent collected can be used directly to repay the loan.

This eliminates foreign exchange risk, and in high-tax regimes such as Britain and Australia, mortgage interest can be used to reduce taxes on rental income, says Savills Singapore's property consultancy director, Mr Ku Swee Yong.

A quick click at the websites of the country's banks can yield a preview of what financing costs might be like. British and Australian banks give fairly detailed information about their mortgages.

Helping hand

Mortgage brokers such as Mr Dennis Ng, who founded the loan consulting portal HousingLoanSg.com, can offer advice on the best route to take - and it is free as brokers earn their keep from the banks.

Global banks with outlets in Singapore such as Standard Chartered and Lloyds TSB offer 'one-stop shop' services to anyone interested in an overseas home loan.

Singapore bank United Overseas Bank has been making a push offshore since the start of the year, aggressively marketing home loan packages for properties in Malaysia, Thailand and Shanghai.

Interest rates, terms and conditions would probably be fairly similar to those offered to local buyers and the loan would be secured against the newly purchased property.

As a foreign buyer, you might find yourself offered a smaller credit limit than a local buyer would. But 70 to 80 per cent of the property's worth seems to be the typical cap.

A quick click on the websites of the country's banks can yield a preview of what financing costs might be like. British and Australian banks, for instance, give fairly detailed information about their mortgage packages.

If the property is to be rented out, a local mortgage makes for a neat solution as the rent collected can be used directly to repay the loan.

This eliminates foreign exchange risk, and in high-tax regimes such as Britain and Australia, mortgage interest can be used to reduce taxes on rental income, said Savills Singapore's property consultancy director, Mr Ku Swee Yong.

But obtaining a local mortgage might become progressively harder, said Lloyds' deputy Singapore head, Mrs Suzanna Lee.

She said British banks, for example, have become stricter in their loan approvals because of heightened vigilance against money laundering and terrorist financing since the 2001 attacks.
And Thai banks have long been barred from issuing mortgages to foreigners.

Multicurrency offshore loans

OFFSHORE loans offer much more flexibility, which can translate into convenience and savings.
Such mortgages are provided by local and foreign banks in Singapore, and generally offer a number of currency options for repayment.

A mortgage for a sprawling homestead in Perth could, for example, be repaid in Singapore dollars. In many instances, the lender lets the customer change his repayment currency several times over the term of the loan to help offset exchange rate movements.

Lenders providing such loans include ANZ, Lloyds, Stanchart and the Royal Bank of Scotland. Each has a restricted list of countries for which they offer the service.

As with basic mortgages taken in the foreign country, the overseas property acts as the collateral, an arrangement that offers a number of advantages.

Interest rates are tied to the currency in which repayment is made. This means homebuyers might pay less interest than if they had taken a local loan in the country.

According to the Lloyds website, the interest rate for a British property loan can vary, ranging from 1.88 per cent if repaid in ten to 9.52 per cent if repaid in New Zealand dollars.

If Singdollars are used, the 3.79 per cent interest rate easily beats local rates charged to Britons of about 7 per cent.

Beyond the potential interest rate savings, offshore mortgages allow the canny investor to take advantage of currency movements.

For example, a customer could exploit the Singdollar's depreciation against the Australian dollar.
A loan of A$100,000 (S$131,590) taken in Singdollars years ago when the Singapore and Australian currencies were on a par would in effect be worth A$75,000 (S$98,693) today, so a switch to Australian dollar repayment using rent collected from the Australian property would yield handsome savings.

Of course, savings can turn into extra costs if you get it wrong.

As a general principle, homebuyers are advised to pick either the currency of the country they are buying the property in, or the currency they are paid in, said Lloyds' Mrs Lee.

Offshore loans are also the only way to obtain a mortgage to buy that luxury condo in Bangkok. In Singapore, the service is available only at UOB and Bangkok Bank.

Pledging Singapore assets

ASSET-RICH Singaporeans have yet another option.

If you have a home in Singapore that is paid up to some degree, you can take out an equity loan and secure it against that property.

This is not strictly a mortgage as the money raised can be used for non-property-related purposes.

But this option can come in handy when buying homes in restricted markets such as Thailand.
It can also help investors achieve full financing for the overseas property if it is taken together with one of the mortgage types described above.

These loans are typically set at the same interest rates that apply to a regular Singapore mortgage.

At today's average rates of 3 to 4 per cent, equity loans allow investors to take advantage of Singapore's relatively low borrowing costs.

Another alternative is to use other assets such as fixed deposits, unit trusts or shares as collateral. But the interest rates charged are generally higher for these types of loans.

The credit that can be raised from these financing options is not limited by the value of the foreign property.

For equity loans, the limit is generally set at 80 per cent of the Singapore property's worth.
This cap would be reduced further by any outstanding mortgage and Central Provident Fund obligations associated with the property.

The greatest disadvantage of these arrangements is the muddying of risk, as the overseas investment could affect your assets in Singapore.

If the foreign investment turns sour, you would suffer the dreaded double whammy if you lost the most permanent roof over your head.