Financing your overseas home

Source : Sunday Times – 3 May 2009

Before you get tempted by that one-of-a-kind apartment in Melbourne or that previously unaffordable flat in London, it would be a good idea to check out your financing options.
Depending on where their properties are located, investors can head straight for a lender in Singapore or approach one that can refer them to the relevant overseas branch.

They can also try to find a lender in the country where the property is located, but this can be a waste of time as most lenders will not lend to a non-resident, experts said.

Banks such as Standard Chartered Bank and United Overseas Bank (UOB) will put investors in touch with their teams in the relevant markets. UOB, for instance, offers loans for overseas homes in Malaysia, Thailand and Shanghai, China – places which may not be covered by some foreign banks.

Standard Chartered Singapore can leverage on its global footprint. But, for those looking to invest in offshore homes in Australia, the United States, Canada and Europe, including Britain and France, it will refer them to Lloyds TSB Bank, an arrangement it has maintained since 2006.

Lloyds TSB and banks such as the National Australia Bank offer overseas property loans from Singapore. The former, in particular, has the widest jurisdiction when it comes to such loans as it covers 11 countries including Britain, France and New Zealand.

Overseas property loans can be taken in various currencies, but you face quite a bit of risk – including possible capital losses – as they will be subject to currency fluctuations.

‘The Australian banks with operations in Singapore had a bad time last year as many of their clients opted for Singdollar lending and got caught out on the currency exchange, losing thousands of dollars in equity and causing many margin calls,’ said Mr Steve Douglas of Smats, an Australian property finance and taxation portal.

‘Some of these banks even had to stop lending for a while, not because of a bad property market but because of bad lending practices as they did not properly inform their clients of the real risks of multi-currency lending.’

Mr Barry Lea, chief representative of Lloyds TSB Bank, said: ‘Generally, you can’t go hugely wrong matching your loan with your fixed or liquid assets. If you have the option to switch between the two, you will have the flexibility to mitigate your risks.’

Because of the global credit crunch, taking an overseas property loan is not as easy as in the past. ‘Banks have generally tightened their loan approval criteria in view of increased risks due to the ongoing financial crisis and the fall in property prices,’ said the founder of www.HousingLoanSG.com, Mr Dennis Ng.

Instead of keeping to a typical loan-to-valuation ratio of 70 per cent to 80 per cent in the past, banks are now generally more comfortable with giving a loan for up to 60 per cent to 70 per cent of a property’s valuation, experts said.

Mr Lea said the ratio can be as low as 50 per cent in some US states. It rises to 65 per cent to 70 per cent in Australia, New Zealand and Britain and can possibly be higher for single-currency loans from some lenders, he said.

A property’s valuation is also something investors should watch out for as prices in many markets are still falling. ‘Any distressed sale of properties might affect sentiment and the market valuation of properties,’ said Mr Ng. He advised investors to make sure the banks can match valuation to the purchase price as the buyer has to pay for any shortfall between the price and valuation.

Investors should apply for in- principle approval to ensure that they have a lender’s support before they buy an overseas property, said Mr Lea. ‘It will also save them time and trouble if they intend to go overseas to look for a property and they can wave it under the nose of a vendor so as to substantiate their means.’

Fees for certain countries have also increased somewhat over the last 12 months or so, to reflect a risk premium and higher capital cost of funds, said Mr Lea. For instance, the arrangement fee has gone up for British and Canadian properties, he said.

Often, investors will invest a lot of their energy in finding the right overseas property and then have little inclination to shop around for that huge overseas property loan, said Mr Lea.

Given the level of uncertainty due to the economic downturn, investors should be even more careful in considering all aspects of borrowing, and not just the interest costs, he said.