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Should Australians be taking their home loans offshore?

Should Australians be taking their home loans offshore?

We often hear about foreign nationals coming to Australia and buying up real estate. But what about those Australians who buy properties in other countries

This is particularly tempting due to the continuing strength of the Australian dollar, which remains high despite recent drops. Back in 2010, the International Property Investment Network’s Peter Mindenhall told Karma Resorts that “with the Aussie dollar as strong as it is, the traditionally ‘well developed’ and ‘stronger economies’ like the US and the UK are now very attractive indeed.”

However, buying offshore isn’t without its risks. Fairfax Media reported on November 27 on the predicament faced by Australian property buyers in Phuket’s luxury Chom Tawan district. A Thai court has ordered the sale of homes owned by more than 40 buyers in the residential development, unless Napawan Asia Limited, the project developer, pays back millions of dollars to the Industrial and Commercial Bank of China. 

The risks of buying offshore

This case illustrates some of the risks of becoming an offshore real estate buyer, despite the fact that it’s now easier than ever. Thanks to the internet, it’s not only possible to easily peruse foreign real estate listings in the hunt for that dream offshore property for investment or sea change, it’s also simpler to carry out the necessary communications with vendors, lawyers and builders — as well as any research around the local real estate market. 

At the same time, dealing with unfamiliar contacts can leave you vulnerable, as the Australian buyers in Phuket learned. What seems a good deal on paper can leave buyers in danger of losing it all if dealing with an unreliable or even unscrupulous developer or real estate agent. 

There are other potential risks, too. Depending on the situation, you could be dealing with a product you’re not seeing in the flesh, leaving you unable to check whether there are any repairs or maintenance issues with the property. If the property is being built, you’re also unable to regularly review progress. 

Along with this, there’s the issues around navigating a confusing, foreign tax and legal system, factoring exchange rates into your cost analysis and the troubles with trying to be a foreign landlord. Managing a property from a different state can be hard enough, let alone from a different country. 

Of course, any purchase is about balancing the potential risks and benefits. The financial advantages of buying offshore might offset these points.

How affordable is it overseas?

At first glance, it seems buyers can benefit greatly from applying their home loan calculator to foreign housing. The Organisation for Economic Co-operation and Development has figures for the price-to-income ratio of housing in various countries, a typical measure of the affordability of housing for the average buyer. The higher the ratio, the greater the value of housing in a country.

As of the time of writing Australia had the fourth highest ratio of house prices to income, with a value of 29.4. New Zealand and Canada were marginally higher, with ratios of 31.9 and 30.5, respectively, while Belgium streaks ahead with 46.6.

By contrast, take countries at the bottom end of the scale. South Korea has the most favourable ratio, at -39.4, while Japan trails close behind with -38.4. Meanwhile, the United States sits at a value of -9.8, and Greece with a ratio of 2.8. 

Some of these places are also more advantageous in terms of the cost of lending. While the World Bank puts Australia’s real interest rate at 6.5 percent, Japan (1.9 percent), South Korea (3.9 percent), the US (1.7 percent) all report lower values. This is even the case in countries like Malaysia (4.7 percent) and Thailand (4.1 percent). 

Of course, the price of borrowing for a house isn’t the be-all and end-all. The US and, especially, Greece are undergoing economic instability which makes them less reliable areas to buy a property you’ll be paying off for many years. It’s also important to factor in the cost of living itself, particularly if you’re planning on moving permanently. 

The offshore buyers checklist

If you do decide you want to buy overseas, you should consider a number of factors:

  • Get legal and tax advice for your country of choice before making any decision
  • Do research on the country’s property market, as well as the local area you’re investing in
  • Carry out a thorough background check on the reputability of anyone you’re dealing with, such as developers and real estate agents
  • Keep up with movements in the exchange rate

While the process is certainly tricky, if you’re determined to buy offshore, these points will help you avoid some of the bigger pitfalls.

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Learn more about home loans

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What's the difference between Real Time Ratings and comparison rates?

A comparison rate calculates the cost of a $150,000 loan over 25 years. While a comparison rate is a good industry benchmark, it doesn’t consider your specific lending requirements.

Real Time RatingsTM factors in essential information like your loan size, your loan-to-value ratio (LVR), whether you want an offset account and whether you are an investor or an owner-occupier.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

How does Real Time Ratings work?

Real Time RatingsTM looks at your individual home loan requirements and uses this information to rank every applicable home loan in our database out of five.

This score is based on two main factors – cost and flexibility.

Cost is calculated by looking at the interest rates and fees over the first five years of the loan.

Flexibility is based on whether a loan offers features such as an offset account, redraw facility and extra repayments.

Real Time RatingsTM also includes the following assumptions:

  • Costs are calculated on the current variable rate however they could change in the future.
  • Loans are assumed to be principal and interest
  • Fixed-rate loans with terms greater than five years are still assessed on a five-year basis, so 10-year fixed loans are assessed as being only five years’ long.
  • Break costs are not included.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.