RBA drops interest rate for the second time this year
This afternoon the Reserve Bank of Australia (RBA) has cut interest rate by 0.25%p.a. This is the second change in interest rate since November 2010. The official cash rate is now 4.25%p.a. This is wholesale rate before banks’ margins.
The most competitive variable rates are around 6.45%p.a.
Monthly repayment (P%I over 30 years) will be approximately $628.78 per month per $100,000 borrowed.
For a full media coverage of the announcement by RBA, please click here.
Multicurrency loans – An attractive option or an additional risk?
Multicurrency loans – An attractive option or an additional risk?
The term ‘multicurrency’ refers to currency in more than one denominator. It may also be referred to as ‘cross-currency’. It’s nothing more than financing your asset (e.g. in Australia) with another currency (very often the currency in which your income is generated) with the underlying currency (AUD) being converted(at the prevailing exchange rate) at the time when the multicurrency loan is disbursed.
A lot of discussions have been done on the forums among investors who advocate using multicurrency loans as a way to improve the cashflow of residential properties in Australia.
Multicurrency loans – Photo by Sandra Pang
Multicurrency loans – A walk in the park or are you venturing into unknown treacherous terrains?
Let’s look at some benefits and pitfalls before we get too overly excited about this instrument.
Multicurrency loans – How these loans benefit non-resident investors
Lower interest rate – In Singapore, the interest rates for multicurrency loans are usually taken as SIBOR (Singapore Interbank Borrowing Rate, 3-month or 6-month) plus banks’ margins. Banks’ margins may range from 1.0% – 2.0% per annum depending on the amount of loan and also your relationship with the bank.
Repayments done quarterly or 6-monthly – this improves the cashflow given that repayments are not done on a monthly basis and rental gets paid into investors’ accounts at the end of the each month.
Opportunities to reduce your outstanding loan – As with all multicurrency loans switching options, investors do have the opportunities to ‘switch’ the loan back to the underlying currency to take advantage of movements in FX to reduce their outstanding loan.
Multicurrency loans – How these can work against the uninformed investors
Conversion to home currency depends highly on exchange rate. Let’s illustrate this with an example. If you are on an AUD loan and wish to switch to a SGD loan, you would want to do this when AUDSGD is ‘as low as possible’. This is then debatable. When is a good time to switch? Should you switch when AUDSGD is 1.2000? Will it go lower after you have switched?
Risk of margin calls – During the 2008 Global Financial Crisis, many investors who were on multicurrency loans swore that the instrument gave them more agony than pleasure. Many had sleepless nights thinking how low the AUDSGD will go to the next day. Some of these investors who had no equity to put up for margin calls had their loans converted back to AUD and inevitably the size of their outstanding loans got inflated because of the movement in exchange rate.
Lower LVRs – Banks will automatically lower the LVR as they need to provide a buffer for movements in exchange rate. e.g. while you can take up a loan of up to 80% LVR for residential properties in Australia with an Australian dollar (AUD) loan, you can only take up to 70% – 75% LVR (depending on banks) for a SGD loan if your ‘natural income’ is in SGD. If you are Malaysian, you can take up a Multicurrency loan in SGD for your properties in Australia at 65% LVR if you qualify for the loan.
Credit bureau records – In Singapore, multicurrency loans for Aussie properties are disbursed by Australian banks located here. Banks will run credit checks on investors on the credit bureau here before approving the loans. Hence this instrument is mainly catered to ‘private clients’. One would imagine his borrowing capacity locally can be significantly affected when a lot of loans are taken in one country.
Multicurrency Loans – Suitability
In recent times, you will see agents/developers marketing residential properties with attractive ‘cashflow projections’ splashed on their advertisements. If you are looking at investing in Australia, it may be wise for you to speak to a mortgage broker or an experienced consutlant who may be able to provide you with objective advice on your suitability of such loans.
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Reserve Bank of Australia DROPS interest rate by 0.25%p.a.
This afternoon the Reserve Bank of Australia (RBA) has cut interest rate by 0.25%p.a. This is the first change in interest rate since November 2010. The official cash rate is now 4.50%p.a. This is wholesale rate before banks’ margins.
The most competitive variable rates are around 6.70%p.a.
Monthly repayment (P%I over 30 years) will be approximately $645.28 per month per $100,000 borrowed.
For a full media coverage of the announcement by RBA, please click here.
Investment property in Melbourne – What to acquire
Investment Property in Melbourne –Market overview
The Melbourne property market has undergone a surge for the past 10 years and values of residential properties in most areas have more than doubled. The median prices of properties in Melbourne have grown by an average of 9.1% per annum on average for the past 10 years. That is quite a remarkable growth. If you are looking at buying an investment property in Melbourne, you must be thinking if there are further upsides to the prices in the future or will there be a sharp correction? Let’s look some factors that may affect your decision to acquire an investment property in Melbourne.
Investment property in Melbourne – photo by Sandra Pang
Investment property in Melbourne – Demand situation
Population Growth– According to the Australian Bureau of Statistics, the state of Victoria grew at a rate of 1.4% from the previous year to Mar 2011 and added 81,600 to its already growing population. Melbourne is ranked number two in the world after London as world’s most sought-after city for education. Every year, hundreds of thousands of international students arrive in the most livable city in the world for their high school and college education.
Investment property In Melbourne – Supply situation
According to a report ‘Australia Housing to 2020’ released on 15 September 2011, Australia’s cumulative shortage of housing could swell to over 500,000 units with Victoria needing another additional 405,100 households by 2020 and that means Victoria needs to increase 45,000 per year through to 2020. HIA estimates that at June 2011, the cumulative shortage in Victoria was 26,900 homes.
If you are intending to acquire an investment property in Melbourne, it’s worth noting that although the state as whole requires more houses to be built to accommodate the growing population, not all areas are good for investment. The breakdown provides by the report in HIA outlines certain areas in Melbourne which may run into surpluses up to 2020. So always do your own research to ensure you get maximum leverage on your money. Alternatively, talk to an experienced consultant from PPG to find out more about the probable areas to invest in.
Investment property In Melbourne – Types of dwellings
There are some choices involved if you are looking at acquiring investment property in Melbourne. Generally different types of dwellings have different risk profiles and they ‘behave’ differently as well. It’s important to understand your own risk profile and your goals before you start your acquisition.
Student accommodation dwellings – These are units that range from 25sqm to 30sqm units located near or within colleges in Melbourne. These are termed as ‘specific securities’ by the banks and lending ratio is normally capped at about 50% LVR. These are cheap to acquire and high in rental yield (gross around 7%-8% p.a.). However if you are gunning for capital growth, these securities are not for you.
Residential apartments – In recent years, apartments have become very popular for buyers looking to acquire investment property in Melbourne. Most Asian investors live in apartments in their own countries and could relate to it very well. Banks generally finance apartments with a maximum loan of 80% LVR (purchase or valuation whichever is lower) based on the combined total space of 50sqm or more. However some banks do capped a certain level of lending based on the number of units in that development especially if it’s a high-rise development. They want to limit their exposure in a particular development to the minimum. Rental for this type of dwellings depends highly on location, demand and supply situation. Apartments in general do appreciate in capital values in the long term.
Houses/townhouses packages – Traditional dwellings like houses and townhouses form the bedrock of residential properties in Australia. Over 90% of the population lives in these types of dwellings and banks are more than happy to lend money on such collaterals. Houses/townhouses in general do appreciate in capital values. However the rental yield for such dwellings in very established suburbs(where capital values have run) is a little low hence investors have to research carefully before taking the leap.
Hotels/Serviced apartments – These are primarily for short term let and have good rental yield. Banks do lend at 50% LVR on the value of these dwellings after the 2008 global financial crisis. These are generally acquired by more experienced investors looking to balance their portfolio.
Conclusion – How to prepare yourself to buy investment properties in Melbourne
My advice to do lots of research and speak to an experienced consultant from PPG to help you understand your goals/objectives and map out a property plan for long term growth.
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Australian real estate – Why it is viable investment for foreign investors
Australian real estate – Why it is viable investment for foreign investors
If you live in Asia and if you happen to be Singapore or Hong Kong, you may be bounded by the regulations to invest in properties in the country you are residing in. The governments have introduced cooling measures in the bid to curb the overheating property markets in these two countries. In Singapore, property investors had to come out with more equity when they are buying their second property and they have to hold out longer than before in order to avoid paying 22 per cent in stamp duties –a move to weed out speculators in the market. These cooling measures have driven a good number of property investors to investing in Australian real estate.
Let’s us examine some key factors why foreign investors would consider investing in Australian real estate.
1. Australia has a stable economy and one of the most resilient among the OECD countries.
2. Friendly policy to welcome foreign investors and Australian real estates are freehold.
3. Large tenant base – this is one key distinguishing factor between investing in properties in Asia and in Australian real estate. While the tenants for investment properties in countries like Singapore and Hong Kong are expatriates, tenants for investment properties in Australia are a mix of both locals and foreigners and this ensures low periods of vacancies in your investment properties. Allow me to explain why local Australians would like to rent instead of buy.
a. Rental yields for most new residential Australian real estates are usually about 4.5% to 5%pa – while mortgage interest rate is at least 6.9% now (with cash rate of 4.75% in October 2011), it is more economical to rent than to buy. This is where you have an advantage if you are a foreign investor residing in Singapore or Hong Kong. You can effectively take advantage of multicurrency loans at attractive rates of less than 2%pa to finance your Australian real estate and loans can be structured to allow ‘interest only’ repayments.
b. Australians find it hard to forego lifestyle benefits over property ownership.
c. Renting Australian residential real estate does not require a deposit – Australians aren’t exactly the best savers hence to fork out a deposit for a property can be tough for them.
d. Renting allows Australians to live in a desirable location at a more affordable price versus being pushed into the ‘outer less desirable’ locations where they may be able to afford to buy.
e. Younger Australians will rent in three or four locations before buying a home.
f. Australians are taxed to the maximum both directly (PAYG tax & GST) and indirectly (stamp duties, fuel excise tax, sales tax etc). This also makes it hard to save for a deposit once basic living expenses are taken into account.
g. There is no tax relief to buy an own owner occupied home while there is, when they purchase a piece of Australian real estate for investment– It is not uncommon for a relatively high-income earner to be renting and he may have half a dozen of investment properties, negatively geared to maximize tax benefits. It also allows the investor to build up an Australian real estate property portfolio as quickly as possible.
4. Australian real estate prices are generally lower than in Singapore and Hong Kong.
5. The tax regime favours foreign and non-resident investors. When loans are structured correctly, they do not pay tax on income or capital gains.
6. Deposits for all Australian real estate transactions are wired into a solicitor trust account and are held in trust till settlement.
Price trends of Australian real estate in the past 100 years
Australian real estate price trends – Sydney and Melbourne 1900-2010
The median price trends of Melbourne and Sydney in the last 100 years are one where it increases over the long term. Australia is the only developed country that came through the global financial crisis in 2008 unscathed.
At the end of the day, foreign investors can still be ‘hurt’ if they don’t do ‘the right thing’ or seek proper advice from the right professionals. The right professionals are few and far between and it’s always a challenge seeking out the right people who know what they are doing to help you out.
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Australian Dollar Exchange Rate