Currency conversion - am I missing something?

We moved to Australia from the UK almost 3 years ago, and we were fortunate enough to bring most of our cash with us at the time, when the exchange rate was pretty decent.

Recently, the GBP/AUD has gone into free fall.

When we first came to Australia in January 2007 we were getting around 2.5 dollars to the pound. At the moment it's hovering around 1.67 to the pound, and seemingly still in decline.

We have a house in the UK still, which we rent out.

It got me thinking, is it worthwhile me sending any spare cash back to my UK account. I figure if send it back at 1.67, and over the next few years it picks back up to around 2 then that's about a 20% profit.

Alternatively, assuming that 1.67 is the new 'norm' for the foreseeable, we can leave the cash in th UK and pay down the mortgage instead. This may even be the better option, as no doubt the British interest rate will eventually start to climb again so it would be nice to have some of the mortgage gone before we start paying out stacks of interest again. Double benefit being that the money has stayed in the UK, so there is no tax to pay on foreign exchange gains as we haven't brought it back over here. The tax would be paid in the form of tax on any increased rental return that we make due to a lower borrowing cost in comparison to rent income.

Basically, because the exchange rate is so poor for GBP it means that we earn a lot more than we did a year ago when comparing salaries against he UK as a function of the exchange rate, so our Aussie dollar goes a lot further in the UK than it does keeping it here.

I would be interested to hear any thoughts and comments, as it all seems to easy at the moment. Am I missing something?

By the way, we're not talking mega bucks here. I'm thinking along the lines of 50% of our regular monthly savings, plus say a third of my overtime to send home at the end of each month. The dealer I use for our currency transfers only charges $12 per transaction of any amount, so dealing costs are not an issue either.

The only drawback I can see is that it is using up some of our savings at the end of each month, that potentially we wouldn't be able to bring back in a hurry if we needed to as the rate may fall yet further still, but as above, leaving it there may not actually be such a bad thing anyway.

Cheers.
 
I reckon this is just gambling!

I Have assets (house / cash / Investments) in London, and am just forgeting about them..... I will pop in for the Olympics in a few years time and see how its survived.

I would like to go over and buy a property in SW1 maybe due to the callapse of house prices, but due to the banking system tightening their pants and that they don't look too kindly on investments at the moment (just compare buy to lets with normal mortgages), I am happy to play in my own back yard for the moment....especially when I am an Aussie, no bank wants to talk to you over there.

Good luck with your decision.....I guess if you know what you are doing , it will be OK, but if I did something like this, it would have to be called a bet.

Cheers,

F
 
I think buying blue chip London properties at the current FX conversion is not a bad long term proposition. We are hear about how shi* the UK economy is but I don't see them giving away properties in swanky areas like Chelsea and Knightsbridge.

If you want to trae FX, just jump on to any of the CFD guys like CMC markets or IG markets
 
There is no way I would convert A$ to pounds or US$ to buy assets denominated in those currencies. You'll lose your pants trying to pick the bottom of the slide in those currencies. You've heard about "picking bottoms", I assume. :)

It is wisest to believe that a trend will continue until there is sound evidence that it has reversed. I see no evidence that that has happened. If you have assets in England already which would allow to borrow in pounds and you only need to convert the deposit, that that might be different. The exchange risk would be lower

Personally, I'd rather be short the pound, but Fx is not my thing. :D
 
All interesting replies, thanks.

The way I was looking at it is that the UK is where I spent the first 32 years of my life, so it is a place I am comfortable with. It’s not like trying to pick another country to invest money in just because they have an unusually low exchange rate at the moment.

My thinking was that at the moment, any spare AUD funds I send ‘home’ get me a good swag of stirling. If, in the future, the rates swing back to something more like what we are used to – which is a good possibility as the UK interest rate won’t stay at 0.5% forever – then I may bring the money back over, if it’s worth it.

The fallback position is that, if the rate stays this low for a long time, as the money sent over is from spare funds, (we’re not talking sending all our savings or taking house equity out to send over here), it can stay in the UK and come off the mortgage. The upshot being that as the interest rates starts to rise again in the UK our mortgage will become expensive again, anything that can come off the capital we owe over there will act as more buffer against a rising mortgage.

I don’t really see it as gambling as such, no more so than trading any stock that is trading below it’s normal range. Plus, as above, the fallback position is that if it stays low we’re getting lots of pounds for our dollars to pay down the mortgage.

I think the thing that got me thinking about it was that we only moved here about 2 ½ years ago. At the time, if we had stayed in our UK house, we’d have been lucky to pay it off in around 10 years on our UK salaries. At the moment, due in part to the equity we have built in our Australian house but mainly due to the exchange rate, we could sell our Australian home and use the equity to completely pay off the UK house, pay to ship us and our stuff back to England and have a bit left in the bank. Effectively we’d have ‘made’ 7 ½ years up.

It sounds great in theory, but has one major flaw. We don’t want to move back to England. It is nice however, to think that if we ever got really fed up with work or whatever; we could at least consolidate and pay off one house. It’s a nice safety net if you like.

My worry is that, if the rate picks up again, our Australian house would have to increase in value at an alarming rate to keep pace with what the exchange rate would do to the equity we could use should we ever decide to return to the UK and pay off that house.

Hence why I thought drip feeding some monthly savings and some of my overtime back to the UK was a good idea now, whilst we are getting plenty of pounds to our dollars.

I’m not entirely sure I see where the downside in this is yet? (Except of course, if the exchange rate continues to fall and never recovers in my life time, which I don’t think is very likely).
 
I'd probably be thinking along the lines that you are too, and get the mortgage paid off with stronger AUD. The risk you are taking is that you are thinking that the pound surely can't go any lower, but it could. I don't think it's gambling like cfd or fx trading because you are dealing with a real house and looking at the best way to pay it off.

If it's staring you in the face as a no brainer maybe you should go for it.

Here's an example of something that stood out as a win for me. I had my retirement account $$ in US treasuries during the GFC getting 1/2% interest, and when the AUD took a dive down to the low 60c I paid the penalty for early withdrawal to the IRS and moved the lot to Australia before anyone could blink. Partner and everyone was objecting saying that the AUD would go down further and that I was gambling with the fx market.

But I felt that it was a no brainer in that that although I took a risk that I could do better, I wasn't taking a risk that I was losing anything - if you see what I mean. The subsequent rise in the AUD coupled with the higher interest rates here has made me and my Aussie account very happy, even after paying out the penalty.

So I think it's similiar in your case - you could perhaps do better on the exchange if you wait, but in the meantime you are still paying down a mortgage using stronger AUD so what does it matter. Maybe I'm missing something too.
 
That's exactly it Amadio, I don't see it as being a risk that it may slide further - in fact I hope it does continue to slide.

It would be different scenario if I were putting a huge single sum over there in the hope that the rate would bounce back to then bring it back over, but as I would be drip feeding a small amount each month then so much the better if the rates continued down. All I have to do then is stop putting monthly amounts over once it starts to rise back up, (if it ever does).

I can't see too much of a drawback at the moment, other than it using a portion of my savings each month that could go toward servicing another property here. That being said, were not talking large enough sums for that to be an issue I don't think.

Cheers.
 
If, in the future, the rates swing back to something more like what we are used to – which is a good possibility as the UK interest rate won’t stay at 0.5% forever

If you feel this way, just buy British Pounds on the Fx markets. Personally I'd still be selling.

Edit: Do a search on Jim Rogers and find out what he thinks of the Pommy Pound (and the US$). :eek:
 
You didn't mention "paying down the mortgage" in the original post.

What interest rate are you paying?

Yes, I did:-

Alternatively, assuming that 1.67 is the new 'norm' for the foreseeable, we can leave the cash in th UK and pay down the mortgage instead.

At the moment, our UK mortgage is a tracker and is 0.95%, which means we are very much CF+ at the moment. When the interest rate climbs back up to more normal level it would be nice to have some of the capital paid down to maintain some drgree of CF+

EDIT: - Thanks for the Jim Rogers tip, I'll have a search at lunch time. Cheers.
 
If I read you correctly, you are paying <1% interest, right? Why would you take money out of a strong currency where you can get 5% in the bank to convert to a weak one and get an effective return of 0.95% on it?
 
If I read you correctly, you are paying <1% interest, right? Why would you take money out of a strong currency where you can get 5% in the bank to convert to a weak one and get an effective return of 0.95% on it?

Yes, you read correctly. The rate is under 1%. I got it wrong on my last post when I said 0.95%, it’s actually 0.99% it’s a tracker mortgage that tracks the bank of England base rate (0.5% currently) plus 0.49%

I wouldn’t be taking money out as such, its money that has not gone in anywhere yet (accrued overtime).

I understand the point about leaving it hear instead to earn the interest, but figured that there should be a more than fair chance of the exchange rate coming back up to the 2:1 mark or above in a few years time.

If I left say $1000 in an account here at 5%, after 24 months, and taking off the tax, it would be worth around $1061. If I send the same $1000 to the UK today at 1.67 dollars to the pound I would have 598 pounds. If in 2 years the rate is up to 2 then the 598 pound would effectively be worth $1197. Yes, I know that it is totally exchange rate dependant, but looking at past histories it would seem unlikely that the UK/AUD rate would remain this low for ever more.

Assuming the exchange rate does stay low for many years, it’s unlikely that the interest rate in the UK on our tracker mortgage will remain at 1%. It was only 18 months ago that we were paying 7%. So, if the exchange rate remains low it gives me chance to buy lots of pounds over the coming years, which has a bigger impact on the mortgage interest once the UK interest rate starts to climb again.

Thanks for the comments, ‘losing’ the 5% interest here is something I hadn’t thought of so cheers for giving me something else to check out. That’s exactly why I posted originally, to see if I had missed anything.

The worst case scenario is that the exchange rate stays low, or lower, forever. However, the upshot of that for me would be the ability to buy more pounds for my dollar. I may never realize a profit as such on the currency exchanging as if I ever sold the house and wanted the money here, the self same low rate would spoil it. The mitigation in that scenario though, is that I really can’t see the interest rate in the UK staying at 0.5% for years and years to come, so ultimately I should still be better off by reducing the mortgage whilst it’s cheap to do so thereby minimizing the mortgage amount for when the interest rates rise.

That’s my thinking anyway, but hoping to hear any more comments & reasons why it may not be a good idea.

Still haven’t had chance to search for Jim Rogers posts yet, but I surely will.

Cheers.
 
With your mortgage rate so low, I assume this was based on a PPOR place.

Is your lender, especially in these times, aware that you have turned it into an IP?

I can remember my lender had a clause in there, to let them know if I was changing it from a PPOR to an IP.

Generally, they have privisos, and considering BTL's are about 5% more than PPOR mortgages, I assume they would want to know.

Or is it that maybe I am an Aussie, and are paying 'convict' rates

Curious

F
 
Or is it that maybe I am an Aussie, and are paying 'convict' ratesF

Convict rates.....funny! If my Australian PPOR mortgage was as low as low a rate as the UK one, I'd be a very happy man indeed.

The UK one is a BTL mortgage, we were lucky that the Woolwhich, (owned by Barclays bank), had a couple of amazing BTL products around the time we changed it to an IP. They only offered them for a few months. I doubt back then they, (or anyone else), thought that the BOE rate would head south as far as it did.

Some tracker mortgages in the UK had clauses that they would only track down to around 2-3%, however ours had no bottom so it tracked all the way down!

There are a handful of people in the UK that happened to snare tracker mortgages that paid below the BOE rate for 3 to 5 years with no lower limit, effectively there are people in the UK at the moment with 0% mortgages.

I think you're lucky to get a tracker under 2-3% above BOE rate nowadays, which means the banks must be creaming it in. It's still a cheap mortgage for people, but we've probably seen the last of the +0.5% trackers.
 
By the way, we're not talking mega bucks here. I'm thinking along the lines of 50% of our regular monthly savings, plus say a third of my overtime to send home at the end of each month. The dealer I use for our currency transfers only charges $12 per transaction of any amount, so dealing costs are not an issue either.

The only drawback I can see is that it is using up some of our savings at the end of each month, that potentially we wouldn't be able to bring back in a hurry if we needed to as the rate may fall yet further still, but as above, leaving it there may not actually be such a bad thing anyway.

Cheers.
Maybe just wait till the next Government comes in,and see how they intend to cut the countries deficit,which actually widened over the past 10 weeks,plus a weaker pound means in the short term they will pay more for everything,which in turn will bring the increasing fears of inflation,and who knows the "BNP" may be in power this time around..
imho..willair,,
 
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Boiled down to it's basics, you want to go "long" the british pound because you think it is oversold and ready for a rebound (I don't agree but that doesn't matter). The best way to do that is via Fx.

But by having an asset (a house) in England you are already long the pound. Provided any debt is denominated pounds it is immaterial whether you pay down that debt or not. The worst case would be to borrow in A$ to buy an asset denominated in a currency which is depreciating, and there are not many sound ones out there: Australia, New Zealand, Canada and Switzerland.

I have been thinking about buying property in the US but would only touch it if I could borrow US$. I would not use A$ under any circumstances.

Anyway, you asked for an opinion and I've given one so you are on your own from here. :)
 
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