What is a foreign currency home loan?
A foreign currency home loan (often referred to as a dual currency home loan) allows a borrower to borrow in the currency they earn in as opposed to the currency the property is located in. Ie, if the borrower is living in the UAE earning USD and buying a property in Australia then the borrower can either borrow in AUD being where the property is located, or in USD being the currency the borrower is earning in.
What is the criteria for an Australian Citizen living overseas to qualify for a Dual Currency Home Loan?
Australian citizens living abroad need to have:
1) sufficient income to afford the repayments.The lenders will generally lend 5 x your cross annual basic income which includes your salary plus any rental income (proposed or current) as well as interest from deposits or securities.,
2) Clean Credit history free from bankruptcies or defaults,
3) Minimum 30% deposit plus costs as well as sufficient funds or investments left over that could be used to cover a call should the currency go against you,
4) Main applicant must have 12 months in current permanent salaried/waged full time position,
5) Property is in good condition and otherwise acceptable security to the bank.
What are the risks of a foreign currency home loan?
There are risks associated with a foreign currency loan. The main risk is fluctuation in exchange rate and noting that the absolute maximum LVR the bank will do and maintain is 70% so at no time can the LVR exceed this amount. The best way to explain is by way of an example.
Purchase price: $400,000 AUD
Loan Amount: $280,000 (70% LVR) AUD
Loan taken out in USD when exchange rate was 1:1 so loan amount is $280,000 USD.
AUD weakens against the USD so now $1 AUD buys 90c USD.
Convert loan of $280,000 USD to AUD ($280,000/.09) = $311,111 AUD
As the AUD has weakened against the USD the loan amount of $280,000 USD is now worth $311,111 AUD. Presuming the property is still valued at $400,000, the LVR now is $311,111/$400,000 = 77%.
The LVR has increased to 77% and therefore the client will be required to deposit funds to reduce the loan amount down so that the LVR is 70% or below. In this example they would need to pay in $31,111 AUD to bring the LVR back into line.
If the AUD strengthens against the USD – in this case the borrower would have a win as the currency has moved in their favour. In this scenario the borrower could either convert the loan to AUD so they can lock in the win or leave it as it is and hope the currency keeps moving in their favour.
Can I borrow in USD as an Australian expat?
Yes, providing you earn that currency or pegged to that currency. You can borrow in USD, HKD, SGD, AUD, GBP, YEN, CAD, CHF, NZD and EUR
If my currency is Pegged to another currency, can I borrow in that currency also?
Yes – you can borrow in either the currency you earn in, a currency that its pegged to or the currency the property is located in (ie, AUD). For example, those earning AED can borrow in USD or AUD.
What property can I buy with a foreign currency mortgage?
Freehold residential property (no vacant land) that is in good marketable condition close to major cities or regional areas.
When do I have to make Repayments?
Repayments are required quarterly in arrears.
Foreign Currency or Dual Currency loans are available to Australian Citizens living abroad. These loans do have their benefits in that the interest rate will generally be considerably lower that what one would pay for an AUD mortgage. However, it is not risk free and changes in the exchange rate may result in a call if the LVR of 70% is exceeded.