Borrowing offshore at lower interest rates.

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.

That's not the opposite - that is adding to the size of the position - long AUD, short YEN. If you do want to hedge, you go short AUD and long YEN, but then you pay interest cancelling out the benefit of borrowing the yen in the first place.


GrossReal, there was another thread not long ago on this same topic, but I can't find it. They were borrowing in Singapore dollars and doing a similar thing.

I like the idea in many ways. As mentioned currency movements are the main risk. However I think it is being overstated in this thread, as the risk can be minimised. To say don't do it because of FX risk is a bit like saying don't buy an IP cause the price might fall. Sure it might, but if you don't sell or get it revalued what does it matter? It doesn't if your in it for the long term.

Same with the yen. As long as there is a buffer, what do short term (which yes, can be large) fluctuations matter? Sure, there will be unrealised gains/losses as FX rates change, but as with IP values, so what? If you can hold a property positive cash flow due to this method, invest the cash flow to build up a bigger buffer/investment, it wouldn't be that many years before the exchange rate would be irrelevant. You'd be building up yen investments for free.

Keep us updated as to progress please! :)
 
hi s_t
thanks for that
thats my idea as well
my new purchase ( not thru yet)is a 10x 10 x5 x5 x5 with a 4% annual increase so I would have loved to do it but a comm so not in there basket.
all mine are long haul in property so for me any movement is not an issue as we have rate movement all the time the currant rate has gone from 6% to 9% in 1 year and will move around
does that make me sell my properties.
no
this is a long haul strategy and the question is
what risk am I not seeing not the ones I can see.
just so that I can tick off in my head.
yep fine lets buckle up and off we go.
 
That's not the opposite - that is adding to the size of the position - long AUD, short YEN. If you do want to hedge, you go short AUD and long YEN, but then you pay interest cancelling out the benefit of borrowing the yen in the first place.
No I'm not talking about a hedge, I'm talking about synthetically borrowing in Yen, in which case you borrow in Yen (short) & Buy AUD (long), so long AUD/JPY and collect the interest differential to offset a normal Australian loan. No other Yen position involved.
 
No I'm not talking about a hedge, I'm talking about synthetically borrowing in Yen, in which case you borrow in Yen (short) & Buy AUD (long), so long AUD/JPY and collect the interest differential to offset a normal Australian loan. No other Yen position involved.

Although it does matter at what level are you taking out the long AUD/JPY position - I certainly wouldn't do it at the current levels. If you took one out around 90 and place a stop under that level you should be OK, perhaps even realising some (50%) of your profits if it goes back over 100 and reload at the lows again. But it's always a high risk proposition.
 
Joe, I didn't read your earlier post carefully enough - I get what your saying now. Dad does a fair bit of what your mentioning (carry trades), with Oanda too (he really likes Oanda...).

I hadn't put the 2 togethor, but now that you point it out it is the same exposure as what grossreal is planning. I'm wondering how it might differ, practically? Obviously Oanda monitor the margin continously, so margin calls need to be considered. I guess yen lenders might also monitor this (they wouldn't want negative equity), but how frequently and with what margin requirements? Perhaps yen LVR is limited to 60% (as per GR's plan) for this reason.
It's similar but different mechanics:
- How do the interest rate differentials compare - oanda spread vs yen to Aud loan rates spread? Not sure what yen loan rates are.
- having to put up additional cash as margin for fx, vs prepaying interest
-complexity/costs in setup - Oanda is pretty simple and costs almost nothing.
-flexibility - would have to be cheaper and easier to switch to another currency, or out altogethor, with Oanda (extremely tight spreads, no fees).

Thinking of it synthetically like this does put a different perspective on the risks. Highest risk at the start I guess - while your waiting for the 6% yield, invested elsewhere, to start adding up and compound.
 
hi all
interesting site oanda and will have aread the yen is on par with the us dollar the yen trades at darling harbour at 90 in some and 111 in others and the us 98 and 105 so at of movement on the price of both but they are on a par.
I will ask about margin calls and at what percentage of debt movement triggers a margin call.
would need a very big devalue over 35% to cause it to go negative equity position for the yen lender as theya re the first lender.
it would be a problem for the second lender but they look at changes in the aust market.
but will have a read and thanks.
interesting to look at a chart on the yen and look at that against real estate boom and bust sydney they are nearly a mirror off set or lagged by 50%
rise 1992 yen bottom 1995 top 1997 bottom 2001 top 2007
now look at the sydney market
top 2003 bottom 2007 bottom 1997 top 1992/3.
I will look at it a bit closer but a few here should be able to produce the charts on the boom and busts and look at the yen seems to follow very closely.
maybe just co insidence
 
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Chart

hopefully this will work
 

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The credit with oanda for an AUDJPY trade position is 6.15%, so offsetting a 9% loan in Aus of the same size the net interest is 2.85% Margin requirements are flexible, 5% is possible but I try to keep it over 10%, i.e. 30k on 300k position. Interest is paid of course to me on this margin, around 7%.

But as I said in a previous post, AUDJPY is high at the moment, it would be more attractive around 90. And there is always the risk the AUD could go lower. It's risky and isn't for everyone.
Oanda has a game account in which you can experiment with their trading interface which is quite good, better to learn with this for a while before trading with real cash. http://fxtrade.oanda.com/
 
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.
Gross real.
I believe you have answered all my points very well and I would agree with you except for a few minor details.
To the best of my knowledge,
In obtaining a loan from foreign banks you cannot pay interest in advance.
An overseas loan will not get 80% LVR and even getting to 60% will be a struggle.
You can only get loans for residential property. Additionally There are no offset accounts should you wish to temporarily add more funds.
The wild swings of the currency market make a margin call quite realistic, more so with some banks than others.

The ability to access the equity is much more stringent by foreign banks. It may take you an additional 2 or 3 years beyond what a bank in Australia will tend to allow

I hope you don't think I was calling you a Lunatic. You have posted some excellent information on commercial deals.

If you are dealing with ANZ for a foreign loan you have a1% chance of not wasting your time in my experience with them.
 
hi all
have a look at this excel is not very good and alot of people have a problem with my excels as they are raw info now if I invest the difference in interest and allow a 5% increase on the funds over a five year term and have a 7% in crease in value over the 5 years.
and the rate goes from 101 today to the lowest it has been 55( and not sure it will go that far) in 5 years I am in front or at least back to my original position.
now that not good but it not tat bad either allowing that I am working on worst case senario's
and thats with out any spot gaps an dthey don't fall that far over night.
and

To the best of my knowledge,
In obtaining a loan from foreign banks you cannot pay interest in advance(that I am going to do).
An overseas loan will not get 80% LVR and even getting to 60% will be a struggle( have 55 but thats the max).
You can only get loans for residential property( at the moment true). Additionally There are no offset accounts should you wish to temporarily add more funds( with this bank they will offset if need be but I am not offsetting I am investing additional funds).
The wild swings of the currency market make a margin call quite realistic, more so with some banks than others (true and will ask at what percentage they will margin call and should be able to stop gap it not by them by me by monitoring the price).

The ability to access the equity is much more stringent by foreign banks( with the resi I don't need to access the equity as I only do mine every 5 years and that lines me up with my comm loans so that fine for me). It may take you an additional 2 or 3 years beyond what a bank in Australia will tend to allow

I hope you don't think I was calling you a Lunatic. You have posted some excellent information on commercial deals.

If you are dealing with ANZ for a foreign loan you have a1% chance of not wasting your time in my experience with them this is not an australian bank they are here and have a office but you would not call them a normal aust bank they are an overseas international investment bank with offices in sydney.
and sorry at this stage I don't wish to post there names but once I have everything done by all means will do so.
I will have to ask them first I don't think they will have a problem
more advertising the better but not sure with this product.
as I am a pilot here.

they have lots of investors using thes type of currency loans I am setting mine up to reduce rate, drop risk, fix 5 years, revalue and change after that
and invest the rate changes on the way thru and I have a couple of others within my group looking at the same

now under no circumstance is this to say this type of trading or loan is for anyone.
I setup my structures and this is a small structure but I am looking for risk advice here and noone should think to go to someone like the anz or hsbc and mirror this loan as this is a very spesific type of product and is desiged for this structure.
so this is not caveat emptor this is don't use this information to borrow.
I will as I think I know what I am doing and if anyone else has any risk come back to me
oh and if you do understand the excel and can do a better job by all means adjust and repost
 

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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

I thought about it the other way around, in some Middle East countries, you can get 18% on your short term deposit account. So you can get a personal loan here for a 10-11 % and send it over to make 8% profit without doing anything!!!
 
hi whitehope06
you can do the same in south africa
and people are looking at that for the comming world cup.
the rate is 12% to residential house repayments and the same in a term deposit.
the loans are smaller if you direct invest
as the properties are cheaper and its 12% net return and looking at 20% growthin the cbd areas.
but buying overseas is not my cup of tea at this stge but yes if you borrow here in a loc and invest in a high yeild, high growth area does look very attractve but you need legs in that area to secure you position and is very risky if you don't understand the market.
 
this is from a investment bank so not lot of point me taking it to them.
I think whoever is advising you is not very good (or is using you for fees). There is no way to take advantage of an interest rate differential without taking on FX risk. If there were then investment banks and hedgefunds could very easily set up a risk free money making machine that churns out billions of dollars in free profit.
 
hi all
have had a couple of chat and am in a bit better understanding with regards to this type of loan
and will keep you informed with regards to how its going.
at this stage.
yes I will be going with it.
so is going to be fun.
I have discussed the margin call issue and as I have not seen or heard of anyone doing this type of loan with hedging I think that my position is prity well covered.
I think that I will be in alot better position within 2 months to discuss it then as I will have the loans done and can give a bit of feedback provided I get over the line with the vendors.
and thats fun at the moment.
hedge and fx traders would not want to this type of loan as it ties them up as well as the lender and is long term not much good if you want to take out equity or gain on currency change
this is the opposite.
this is long term investing for a set term and locking away so the lender holds the titles and wait for growth and reduce repayments so a bit different and it is a structure so again not all can be put on a board.
but thanks for the input and will see how it all pans out
 
I think whoever is advising you is not very good (or is using you for fees). There is no way to take advantage of an interest rate differential without taking on FX risk. If there were then investment banks and hedgefunds could very easily set up a risk free money making machine that churns out billions of dollars in free profit.

I think you'd find that they do YM, though not risk free.
 
hi yieldmatters
as for fees
brokers and agents charge fees
lender get fees and the fees are incorporated in the loan structure.
there is nothing in this world that risk free and I understand risk.
but that a very different post
 
I agree with YM, although I must confess to not having read this thread that much.

But the way I see it, is its difficult to win.

Take the US for example.

At the moment, US rates are quite low and AUS are quite high.

So its logical to assume that the next US rate movements are likely to be up, and the next movements in AUS will be down (whether its the next move or one soon after doesnt matter). Thats the likely trend in the mid-long term.

If you borrow from the US, and US rates go up, you'll pay more interest, plus this'll increase the value of the USD, dropping the exchange rate and you'll need more AUS$ to pay your loan.

Similarly, if the Aus rates go down, our dollar will drop and the exchange rate will also drop. Again, more AUS$ needed to pay your loan.

The other thing that would happen in this scenario is that a drop in rates in AUS would mean the advantage you sought in the first place would be less ie the difference in repayments between the currencies would not be as great.

Anyway, my opinion only, not financial advice etc.
 
hi all
have had a couple of chat and am in a bit better understanding with regards to this type of loan
and will keep you informed with regards to how its going.
at this stage.
yes I will be going with it.
so is going to be fun.

Hi Grossreal,

I am kind of new to the forum, and am interested to learn about the tax implication, if any, on the path you have taken. I am sure the institutions you have transacted with would have reported to ATO. Assuming the scenario pans out as you have planned, would the interest savings you achieved be recognized as a capital gain then??
 
Hi grossreal.
Which Bank were you dealing with for a FX loan?
Now is a good time to get a FX loan in yen , but don't assume we have hit bottom, though I have.
 
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