Borrowing offshore at lower interest rates.

[simonjulie]

This might be a crazy question but.....
Has anyone looked into borrowing a slab of money overseas at a lower interest rate to pay out debt here? Why should we pay high interest when other parts of the world is lending at much lower rates than us?
Any clues?
Cheers
Simon

 

[alexlee]

Two words: currency risk. By doing this you're basically taking a punt on the exchange rates.
Alex

 

[Jontxu]

"Cultural" Differences

Hi Simon, wouldn’t that be great - I don’t have the answer; however this is what I think. Banks need to have a security against the loan, in other words, they need to be able to recover the money if one fails to pay. As a lender you face risks such as different legislation, fluctuations on exchange rates, cultural differences, ability to “recover” the asset, etc, amongst other things.

Happy Investing
Jon Salvador
www.headinghome.com.au
For investors … from investors

 

[LynnH]

Simon

There were a bunch of investors who got badly burned in the 1980s doing this - the problem was that the loans were written in overseas currency and when the AUD fell against the foreign currencies, the debt burden blew out. Since 1AUD suddenly bought fewer pounds sterling (or whatever) they were faced with having to find lots more AUD to repay the debt. Not for the faint-hearted!!!

Cheers
LynnH

 

[jaycee]

what are the "cultural issues" you think would be faced

I find I have cultural issues with local australian banks

 

[alexlee]

Cultural differences and so on aren't as big a deal. You can get a loan through ANZ Japan (via their Singapore office) so there would be no cultural issue there. You're still exposed to currency risk, though and for example the ANZ product requires that you live outside of Australia.
Alex

 

[grossreal]

hi simonjulie
I am interested in find a country that would lend in the first instance as security for them would be the biggest issue.
the rate rise or fall is not a big issue as you can prepay the interest into an account in that country and then the repayments are paid in local currency so you only do two payment in aust dollars and you would do that at the higest level so that not an issue.
the problem is the security for them as they would need to put a mortgage and be comfortable to hold that out side there waters and I think that would be an issue.
I know that there was a group pushing thesetypes of loans and I did look into it but never got very far as they couldn't get the loans in place.
but interesting concept the dubia guys are the best if you are looking.

 

[jaycee]

Exactly what I was alluding to - how different would it be from importing / exporting, which seems to have gone on ok for a good couple of 1000 years

The excahnge rate thing is another thing.. i rmeember a friend telling me when he was working in japan selling o/s how he had to monitor exchange rates & ensure that profit form sales wasn;t eroded by currecny fluctuatoins... sheesh !

 

[Jontxu]

Alexlee, What I am saying is different.

You are talking about ANZ with a "Japanesse" hat lending to another ANZ in another country, same family.

I am talking about ANZ lending me to go buy a property in Ecuador. With all respect to Ecuadorians out there.

Happy Investing
Jon Salvador
www.headinghome.com.au
For investors … from investors

 

[simonjulie]

Great food for thought folks.
If someone in Australia was prepared to manage the mortgaged securities for the overseas investor (like a holding company maybe like an insurance company) that may give assurance to the deal.
The fluctuating nature of currencey is something that I had not thought of.
Another thing Is that if it became a popular trend to borrow offshore the big banks here may be affected. Who knows the outcome of that scenario. I think we are getting closer to a one world economy every day.
Cheers
Simon

 

[marg4000]

I doubt any lender or broker here would touch it with a ten foot pole.

I remember the overseas loans fiasco of the 1980s? where people were severely burnt when the Aussie dollar lost value. From memory the loans were written in Swiss francs. People found that the amount they owed tripled or more.

Many bankruptcies followed. There were huge lawsuits against the banks (Westpac comes to mind) as borrowers claimed they were not warned of the risks they were taking.

It is not for the faint-hearted, basically you are gambling that the Aussie dollar will hold up against the currency you borrow. If it does, you're a winner. If it doesn't, you're a loser. Sounds like the casino to me.
Marg

 

[TheBacon]

Can you hedge in some way so that you limit the risk of the $AUD devaluing?

This might add a significant cost to the loan, however a 5% loan from the US, plus 1% for hedging is still cheaper than 8% in Aust...

No idea if this can be done, any one actually do this on the forum?

From memory there are some expats living in Japan that have borrowed in Yen to buy in Aus - although this is not exactly what this thread is discussing.

TB

 

[simonjulie]

Hi Marg
I agree, but I think the economic condition of our economy was different then. But it is a great risk all the same. I still think that the movers and shakers of this world will find more ways to mke a buck out of the need of others.
Cheers
Simon

 

[Peter_Tersteeg]

Many overseas lenders will only lend to 60%. There's not a lot of leverage there.

 

[simonjulie]

Thanks PT
That leaves a lot of lazy dollars tied up don't it.
Cheers
Simon

 

[eggnog]

Don't know if this is correct but from my understanding isn't this sort of what RAMS were doing. They would get funds from the US, transfer it to OZ, repakage it and on lend it to people like us to go buy houses.

 

[chilliaa]

Actually its pretty easy with the international based banks in australia.
I have a friend who is malaysian and has done this through either Citibank or HSBC banks.
All you do is ask what the rates are for the currency you wish to be exposed to. All legal documentation is done in Aus so thats no problem. However i think you do need to be a prime lender, ie no low doc, no doc schemes.
(Also this is not a recomendation to do it, only thats its quite easy to do)

 

[Peter_Tersteeg]

Don't know if this is correct but from my understanding isn't this sort of what RAMS were doing. They would get funds from the US, transfer it to OZ, repakage it and on lend it to people like us to go buy houses.

Every funder in Australia does this. That's why our rates have gone up in the last few weeks.

 

[redsquash]

In the last year the $A has been around 90 yen to 108 yen.

4 years ago the yen was 78 to the dollar
yen loans are the cheapest at around 2 %, but with max LVR 60 % it may not be so great depending on your circumstances
Checkout Lloyds Bank TSB hongkong , but you could be severely burnt and i would discourage you in this climate.
However if you don't need sleep or finger nails go for it.

 

[grossreal]

hi all
has anyone done this type of loan.
60% lvr is no problem.
I have looked at it some time ago but never spoken to someone that has done it.
for me if you borrowed and set up the account over at the office at the bank and kept paying the 8% but the loan was say 2%( and you term deposited 12 months interest and the loan was taken out of that account in there currency you have hedge the loan)
and if you take a 25 year loan and kept paying it out you go you have to be in front.
we have properties with 150% lvr being held by banks here but as long as the loan is being paid there is not a problem.
I would be very interested for my commercial funding and they re usually 60 to 70% lvr