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 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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.