Saturday, 18 April 2015

Taking a Mortgage for Australian Properties, SGD or AUD?

In the next few months, I'll be making a decision to go AUD or SGD. Especially in rising SIBOR Rates and decreasing fixed rates in AUD. Lets first analyse the situation. 

Rule of taking loan in the country of origin.
1. Always take loan in the home country's currency as much as possible. 
- AUD win

Leverage power
2. AUD - 80%, SGD 75%
- AUD win

3. In Singapore, all loans originating from SGP will be subjected to TDSR, which means, there could be no more loan. SGD loans are still one of the cheapest loans around. Whilst, AUD is not subjected to TDSR. This secondary source of funds is very important to continued leverage and Capital growth.
- AUD win

Interest Rate
4. 2.5% - Sibor plus 1.4% spread. This is a variable rate which can rise to 5%. Whilst AUD gives a interest only 3.99% lowest spread now for a fixed 3 years. (AUD interest rates can go 9%). A 1.5% spread is good for insurance against rates rise. I'll take that.
- AUD win

Switch of funds
5. AUD is at all time low vs SGD, hence it would be a good opportunity to take advantage of the low exchange rate and switch funds when the time comes. If the rate changes 10% in the borrowers favour, based on 70% loan, the borrower earned 7% by switching. 
- SGD win

Given $200,000 start point and assuming all properties being $500,000. The AUD loan can buy 2 and the SGD loan can buy 1. Assuming Cap Growth to be the same - 5%, AUD borrower makes 2 x 5% of $500,000 - $50,000 and the SGD Borrower makes 5% of $500,000 - $25,000 per year.

Assuming forex moves 10%, the SGD borrower makes a nett 12% vs the 10% of the AUD borrower.

Assuming they both hold long... 5 years and each year the properties increase by 5% and for simplicity sake, they did not acquire more properties.

The AUD borrower would get (5x $50,000 per year) $250,000 and the SGD borrower assuming he makes the right decision and the exchange rate went back to normal. - he makes 30% on forex gains 30% * $105000 and (5 x $25,000) - $125,000 on cap growth, total of $230,000. The SGD borrower will probably have a greater cashflow of about (1.5% spread) ~$6000 (includes principal repayment) per year and for 5 years - $30,000. The total nett for the SGD borrower would come up to $260,000.

Thats a $10,000 difference in favour of the SGD borrower. - $2000 per year. Would that be good enough to offset forex risk and exposure to TDSR to take loan in SGD?

What do you say? 

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