Borrowing offshore at lower interest rates.

[casper007]

A twist to this thread is something I picked up a few years back when a client who was working on a US oil rig was being paid in USD ... could get a mortgage at US home loan rates ... which at the time were around 3%.

He was an Oz perm resident...

Certainly made his investment in OZ positive as rates here at the time were 7%+...

Just had to find lenders like HSBC and Citibank who have offices in Oz.

I agree with the fluctuations in exchange rates ... and if you have to watch them daily ... you might as well study up on FOREX trading and make money on buying and selling cash ... now there is a risky investment vehicle

 

[adamgo1]

I have been thinking of posting on this

As some have already commented borrowing abroad is essentially a currency play (although buying an asset in Australia might be seen as a bet on $AUD).

First you need to have a multi currency facility.

You can borrow foriegn currency loans in Australia from St George bank. Not sure of the terms.

http://www.stgeorge.com.au/mortgage/home_loans/stgeorge_home_loans/foreign_currency.asp?orc=personal

As many have pointed out you can borrow from HSBC/CITIBANK in singapore/Hong Kong.

Here is a link to LloydsTSB HK http://www.lloydstsb.com.hk/product/mortgage_tc.html

Most of the products are pretty similar.

There are also a number of private banks who can also arrange this for you.
E.G. http://www.kaupthingsingers.co.im/Pages/1406

There are also a lot of brokers out there who could help out. Savilles private finance in the UK are one.

These currency mortgages clearly fluctuate. You have to be able to cope with these changes (i.e. your debt rising). However most will limit the LTV to say 75% and then only allow you a further 10% buffer in case of a currency crash. I.E. if you debt grows to 85% LTV the lending bank will reconvert it back into the currency of the assets.

This at least provides a sort of stop loss.

If you are fearful of managing the currency trades you can have a currency manager look after it for you. They will manage the currency switches for you. They have three aims when doing this 1. Reduce your interest. 2. Reduce your debt. 3. Tax advantages. The biggest currency manager of multi currency mortgages in the UK has been doing this for a while. Here is their website. http://www.ecugroup.com/

They usually charge a performance fee for such services. This fee will usually come out of any profits made.

Alternatively;

Finally there are currency managers who have done away with the mortgage part and just synthetically create the trades that moving your mortgage debt would create. This save you the hassle of actually having to remortgage and being subject to the sometime restrictive terms of a multi currency mortgage (i.e. you can keep your current loan with your current mortgage lender).

How does this work in practise? Well you might set up an account with a CFD or spread betting firm with them to manage your currency account. You deposit in some cash (usually 5% margin) they simulate moving the debt. E.G. $50,000 would allow them to place trades that simulate having a mortgage debt of $1,000,000. The aim being to make money in the same way as a multicurrency mortgage.

The advantage being that you do not have to move your mortgage around. Also you can do it with a smaller margin (e.g. 5%) and they can break this up into smaller parcels than just simply moving all of it from Sterling to US$ to $AUD. The can split it into ten different trades and have only half of your capital exposed at any one time. They can also leverage it a lost higher than 1:20.
Here is a link to Multicurrency Mortgage http://www.multicurrencymortgages.com/
Currently Multicurrency Mortgage only offer this service to UK nationals but I'm sure anyone who offers a managed currency trade account could probably put this together for an individual. Multicurrency Mortgage also offer it as a spread bet rather than a currency trade as this does not attract tax in the UK (I don't know the tax status of this in Australia).

Obviously these are all speculative and higher risk strategies for investors. Leveraging the carry trade as well as leveraging in the property market may be a bit too dangerous for most! I think that there are ways to manage the risk though I have yet to take the plunge and go for a multicurrency mortgage (despite earnings in a number of currencies).

This isn't advise and I haven't got a multicurrency mortgage.

 

[grossreal]

hi adamgo1
thanks very much for that info will follow a couple of the links

 

[chilliaa]

why dont you just call citi bank and hsbc in your nearest capital city. To my knowledge you dont need to call the overseas offices. You will get your answer pretty quickly instead of all this speculation.

 

[grossreal]

hi all
5 months later and a bit of work.
the question is changed abit.
who has done a currency loan in australia with a international bank.
my understanding is that by term depositing or paying upfront the 12 month interest this does negate the movement until you want to refinance.
now I am looking at a 5 year fixed term in yen 55% lvr with a back up bank taking the loan to 80% so a first and second loan within the same bank.
similar to a construction loan where you have a first and vanilla mezz funder.
so whats the risks and the only people that would know that are the ones that got burnt.
the borrowing is here, the term deposit is here, the asset is resi only no comm at this stage but its comming.
and the rates are yen lending rates 2.5 to 3.0% with the mezz at 9% blended will be around the 5% or a bit lower. not sure at this stage
just going thru the lenders mangle.
so while going thru where are the risks.
currency movements are fine but that only when you refinance or revalue.
and my idea is to use the spare cash flow to invest in income producing leveraged japanese products to hedge against yen movements.
by having a term deposit (interest paid)and increasing assett class (hedge position)whats a few people here views.
this is a very interesting subject.
and I have learn't alot about it.
hope to hear people views

 

[alba]

These are called "carry trades" in the financial markets and a lot of people are doing it. Also a lot of them burnt their fingers in July/August last year when the yen suddenly rose against all major currencies. Another popular vehicle for this type of trade is the Swiss Franc but with the current cash rate the USD is right there too.
Grossreal, what you're saying is interesting, would you walk me through it in simple terms?

 

[grossreal]

hi alba.
this is a mortgage loan
its a split loan 55% as a first and at 2.5 to 3% fixed for 12 months and variable for 5 years.
the second is a variable from the 55% to the 80% and this is in aust dollars.
the yen can be changed at any time to us dollar,stirling and it cost 250 dollars each time.
the term deposit will then be changed into that currency.
but for me it will stay in yen as it does move but not a huge amount over 5 years.
and I can use the spare money to invest into a japanese share high yeild fund.
this would feed the term deposit.
so if the aust dollar should become something like the german mark at the start of world war 2 and was nearly worth nothing.
my yen account is being fed by the japanese investment( my hedge).
in effect you are not taking a mortgage but buying a currency and holding that currency for 12 months fixed and 5 at a variable rate and its backed by a australian assett.
in this case a resi property.
and they take a charge over the assett and a second lender puts a mezz on top to make up the 80% lend.
there is no broker involved in this transaction as I have not found one working in this field so doing myself
I found this lender from a introduction from of all places the bond market.which is also a very interesting market at the moment but thats another story.
I think if you have the term deposit so you don't have margin calls for 12 month min
and if the loan is for 5 years with a rollover availability,and of all the banks that are in australia today this lender I think will be the last one standing.
I am trying to gain the risk profil and where is the risk comming from.
the dollar could drop 30% and the yen rise 30% so have a 60% gap and as long as its a fixed rate and the hedge is covering the loan then it fine and swop to a different currency at the 11 month or roll for the 5 years and pay in advance the 5 years interest.
have to go thru the fine print yet.
and thats always the best part and with this lender I don't think tey will be in any mood to start striking out clauses in a loan doc.
come back and give me the risks you see

 

[boomtown]

and if the loan is for 5 years with a rollover availability

The Aussie dollar is at historic highs. While I am a bull on the next 18 months of the Aussie dollar I would be very hesitant to take a 5 year position. Thats a massive exposure when refinance time comes around

Whats your exit strategy? How do you get out if the dollar starts to slide? Can you refinance in Australia and use those funds to buy out your Japanese position?

 

[yieldmatters]

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

This is an old thread that has been dug up again!

Alex is spot on. Currency risk is the reason why its not attractive. You can take away currency risk by hedging (locking in an exchange rate) - look up "covered interest arbitrage". When you do this you will find the forward exchange will almost exactly wipe out your interest rate gain. This has to be otherwise people would have a risk free money making machine.

So grossreal - if you have found a way to hedge your FX exposure and still make money from the interest rate differential you should take it to an investment bank and sell the idea for $10M (or 1% of any money they make using it) !

 

[alba]

Thanks for responding...not sure if I see any risks other than the exchange rate volatility but still trying to understand how it works in practice. So you've got a 80% (interest only?) loan on a residential property of which 55% is in yen, thus on lower interest rate and 25% in AUD with our high interest rate. So it lowers your repayments and the money you don't pay to the bank gets invested in yen bonds?

 

[grossreal]

hi yieldmatters
not sure how it wipes out your position as this is what has been sadi before
but if you have a loan of say 1mil and the 3% is 30k and you deposit the 30K in an account and that 30k is being draw down on.
and your loan currently is ay 8% so 80K.
how does it wipe out the 50k difference remembering that you are A not selling out your position and if need be you can change to another currency if need be and still pay your loan repayments.
yes value of the underlying property has changed but that not an issue if you don't revalue and why would you revalue if the loan repayment are already paid infront.

So grossreal - if you have found a way to hedge your FX exposure and still make money from the interest rate differential you should take it to an investment bank and sell the idea for $10M (or 1% of any money they make using it)
this is from a investment bank so not lot of point me taking it to them.
put maybe will look at the 1% idea
yes alba
but not in bonds
in the investments banks high yield investment funds in asian( very similar but a bit different)
it not something unusual here
I do the same to get over serviceability issues for a lender its a form of hedging for them and if I am using a loc(and this is a form of loc )I put it into a high yeilding fund in the lender they like it and I feel a bit safer as I can remove at anytime.

 

[alba]

yes alba
but not in bonds
in the investments banks high yield investment funds in asian( very similar but a bit different)
it not something unusual here
I do the same to get over serviceability issues for a lender its a form of hedging for them and if I am using a loc(and this is a form of loc )I put it into a high yeilding fund in the lender they like it and I feel a bit safer as I can remove at anytime.

thanks GR...but what do you mean by this? The money you save on the 55%of your loan gets invested in an Asian bank? I thought the point was that their interest rates (and yields) are much lower. The point of the carry trade is to borrow yen at next to nothing interest rate and park it in a high yielding AUD or NZD account. I must be missing your point here.

 

[grossreal]

hi alba
no some the funds in china are doing 35 and 40% returns. the cost of money has not got alot to do with returns on invstments.
I think the asia two was working on getting a 20% return but some of the funds do alot better then that.
carry accounts yes but this is slightly dfferent in that this is to borrow at low rates hold and refinance as growth goes into the property.
yes you have currency differences but you have growth as well if you look at it a different way
if you bought a property in aust in aust dollar today and revalued it in 5 years and you fixed the rate then the value increase in 5 years is then lent against.
this is the same just the currency is different you don't even need to invest in a high yielding fund if you want to have long hold time.
each year you can put half of the interest into the deposit and if that was done the loan would keep going and keep taking out a fixed loan the same as you do with a long term hold here.
for me there is no difference
as this is resi buy investment properties then they are long term holds and you can time currancy changes if need be to sell out.

 

[joeExpat]

You could synthetically borrow in other currencies by setting up an opposing position via an FX trade, e.g. on oanda, long 300k AUD/JPY will generate a carry trade income of $1500 per month, partially offsetting an Australian loan of the same size which may cost $2200 per month, so loan costs $700 net.
http://fxtrade.oanda.com/tools/fxcalculators/interest_calculator.shtml
Would require minimum margin of $15,000, which also attracts interest.
But if AUD drops too much against the YEN... you're stuffed.

 

[redsquash]

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

60 % LVR is a problem , because you have to find the other 40 %.
You wont get a second mortgage on an O/s loan.

Normally Banks require you to have 20% deposit but with LMI that could be a lot less. You cant get LMI with these overseas loans.

With the extra 20 % deposit required you could in theory go out and buy another property, but you cant as your funds are tied up.
Also you may get a margin call on the loan if the LVR moves significantly , either due to a property price crash or currency movement or both.
As your overseas currency appreciates , you will effectively be paying more on your monthly repayment than your locked in rate , to meet the added Australian dollars required, for the interest.
An added expense is the Telegraphic transfer to be paid each month.
After 25 years you may have saved a heap in interest payments, provided the next 25 years sees the interest charges remain low.
What odds are you giving ?

In theory your savings might offset any currency movements over 25 years , but the additional funds locked up present an opportunity cost, ie the leverage one can have by buying an additional property.
You would need to be a lunatic to proceed in this environment for an O/S loan

 

[redsquash]

You could synthetically borrow in other currencies by setting up an opposing position via an FX trade, e.g. on oanda, long 300k AUD/JPY will generate a carry trade income of $1500 per month, partially offsetting an Australian loan of the same size which may cost $2200 per month, so loan costs $700 net.
http://fxtrade.oanda.com/tools/fxcalculators/interest_calculator.shtml
Would require minimum margin of $15,000, which also attracts interest.
But if AUD drops too much against the YEN... you're stuffed.

uhmm , $15000.
Not so much in the grand scheme of things.

That sounds too easy.
Are you doing it?

 

[joeExpat]

uhmm , $15000.
Not so much in the grand scheme of things.

That sounds too easy.
Are you doing it?

It's easy... but the high risk is still there.
Yes I do it, but not using the AUDJPY pair in the example, but rather a bunch of different currency pairs paying around $500/month on an exposure of around 320k, and I keep the margin above 10%, not 5% in the example. It's not related to any property loan.

I wouldn't really recommend it at the minimum margin, you should have the cash to withstand the margin requirements of the exchange rate fluctuations. Also at the moment some of the higher yielding currencies could be in for a correction (e.g. AUD, NZD, GBP).

 

[Perp]

60 % LVR is a problem , because you have to find the other 40 %.
You wont get a second mortgage on an O/s loan.

Lawrence (grossreal) would appear to have already done it, so I imagine he'd disagree.

You would need to be a lunatic to proceed in this environment for an O/S loan

That's unnecessarily disrespectful. I can assure you that Lawrence is no lunatic.

 

[boomtown]

Grossreal:

If commodity prices crash with the result that the RBA will cut rates and cause the AUD to sink - how do you exit your position?

 

[grossreal]

hi all
will answer/question in red.
60 % LVR is a problem , because you have to find the other 40 %.
You wont get a second mortgage on an O/s loan the same lender is the one to take it to 80% in aust here.

Normally Banks require you to have 20% deposit but with LMI that could be a lot less. You cant get LMI with these overseas loans there is no lmi as there is non with a comm loan so its not an issue.

With the extra 20 % deposit required you could in theory go out and buy another property, but you cant as your funds are tied up not if you are buying under market and part of the 80% has a lock built into it.
Also you may get a margin call on the loan if the LVR moves significantly not if you pay interest up front for 12 months and after 10 months restock the account as the loan is afor a term, either due to a property price crash or currency movement or both the property crash has the same risk as a aust loan and the currency adjust is mitigated by the interest up front .
As your overseas currency appreciates , you will effectively be paying more on your monthly repayment than your locked in rate why the loan has a fixed rate in yen and the account is holding yen not sure how the loan amount can go up until the loan is required to be paid, the loan is being takenout in yen, not as was the case that I pay each month in aust and convert to yen
its upfront and in advance at all times , to meet the added Australian dollars required, for the interest.
An added expense is the Telegraphic transfer to be paid each month
in the account up front so no telegraphic.
After 25 years you may have saved a heap in interest payments, provided the next 25 years sees the interest charges remain low.
What odds are you giving ?

In theory your savings might offset any currency movements over 25 years , but the additional funds locked up present an opportunity cost, ie the leverage one can have by buying an additional property you have the same leverage not sure at this stage how you use the equity as they re trying to get there heads around leins and equity lending but I think we will solve that one.
You would need to be a lunatic to proceed in this environment for an O/S loan
this you maybe right but been called that before.
but I am looking here for risks not trading as this si not a trading account and I m looking at this as a loan.

Lawrence (grossreal) would appear to have already done it, so I imagine he'd disagree. not yet but will have by the end of the financial.
and if I get it right will swop a few of loans.
its a bit of a pity they won't do comm at this stage or would have done it straight away.
If commodity prices crash with the result that the RBA will cut rates and cause the AUD to sink - how do you exit your position?
two things
1.do you think they will do this.
me no
why
the rates are not controlled by the rba
the RBA sets a rate but the banks don't have to nor will they stick to it.
if you think that the commodities will crash here then try telling that to the indians and the chinese taht are trying to buy every iron coal and oil tenament I would be more worried about the chinese and the indians go bust.
2. If the dollar went thru the floor what your exit stratgy mine would be to convert to a different currency very quickly and they can do it same day and no change.
if I was with a westpac loan and west,anz,st george cba all put there rates to 17% because there is a crash and its costing then more for there money and the aussie dollar is worth 4 Cents us what would be your way of getting out of that problem as you can't do in in one day and you can't refinance as they are all in the same boat.
so the reallity I see is thats not going to happen.
I see corrections on the horizon but in the us and in our food stuffs.
but in answer to your question I would exit into a currency that will hold up.
but I don't see taht as I have hedge my psoition with the interest up front and investing in the same banks investment funds that thats going to be an issue
as this is the same as westpac cost of funds movement.
I have not all the answers on this one.
and thats why I am asking the question.
I can answer alot of the question as I have already nutted as many as possible out
and any hairy one will ask then so I can get the answers for my own mind.
this is very uncharted waters for me.
and yes maybe a bit of a lunatic to some but thats how you make money.
and have chosen one of the largest banks I can find and the highest up the food chain in that bank to steer me correctly.
so why ask here
simple
due diligence
we have investors all over the world and they will have this type of loan not all but some. or they may have got burnt.
so if you are one of those investors and you are lurking in the shadows come out and let me know what you think.
I give my opinion on lots of things and assist where possible
on this one I am going into it looking for answers as I am looking at a major shift.
as for burning I don't
so post and let me know.
oh and as for disrespectfull I deal with chinese and indians and that does not get into my book
so don't worry about that
respect is some thing you earn not given
so someone to me is never disrespectfull
I just have not earn there respect
there is a big difference.
and for me I don't aim to earn respect
I gain it but by default.
and to show that default you do not get to open the door of the 6th largest investment bank not in australian but world wide and shake hands with the president and the vice president of lending and they present you with there card ( and there would be hell of alot of people want thoese cards and number) with out a bit of respect.
so I would not worry about that
I don't.
some call me mr tephlon, some a duck
as very little sticks
and you will find a few
a lunatic
but thats fine by me