Securing a loan for overseas property purchases

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Selecting a lender

As the hype grows in Singapore over the investment of overseas property, a key consideration for potential buyers is their source of fund to pay for the property. Not many are lucky enough to be able to pay for the entire property using equity and thus, most buyers would need a loan. This can be secured in a few ways.
1.       Get an equity loan on your Singapore Property to fund your overseas purchase.
If you have built up excess equity in your Singapore property, you can consider taking an equity loan to fund your investments. While this option may seem straightforward, you could risk losing your Singapore property if you have problems making the repayments.
2.       Borrow from a Singapore Bank to buy your overseas property.
There are various banks here that provide mortgage for overseas properties in Australia, Malaysia, Japan and UK. Typically, the minimum you can borrow is SGD$300,000. You are also given a choice of taking a Singapore dollar-denominated loan or a local currency denominated loan.
3.       Borrow from a bank in the country of investment.
The third option is to secure your mortgage through an overseas bank that is from the country of your intended investment. Example for a Australia property purchase, you can either approach the banks directly or through a Singapore mortgage broker for a Australia home loan. Usually you have to finance your mortgage in the local currency.

Application Process

In Singapore, most banks are willing to give a letter of offer as soon as you have confirmed your purchase. Because the banks are here, the application process is more streamlined and the loan can be confirmed in a relatively shorter time. You will need to submit your income documents, copies of NRIC, debts documents like credit cards statements, bank deposit statements, reservation form, Credit Bureau consent form amongst others.  The approval process could take between one to two weeks.If you are taking a loan from an overseas bank, in most cases, you will need to prepare additional documents like longer term income documents, nationality certificates, etc. You might need to incur costs to get certain documents to be certified as true copy and courier fees. The application process may take anytime from 2 weeks to one month.For projects in some countries like Australia, banks will only accept applications for properties that are near completion. Thus, you need to prepare contingency plans in the event that banks do not want to issue you a loan, in which case, you might need to pay for the property in cash.

Loan to Value Ratio

The loan to value ratio refers to the amount of loan a bank is willing to lend you. First, note that sometimes, the value of the property might be below the price that you paid for the property. In which case, you will have to cough up more cash. Generally the loan to valuation (LTV) for overseas properties by Singapore banks is 70%. However depending on the projects and locations, LTV can drop to 50%.   If the mortgage is taken with an overseas bank, depending on mortgage products and borrowing restriction, LTV can sometimes go up to 80%. In deciding whether to take a mortgage with a Singapore bank or overseas bank, borrowers should assess what are the LTV required for their investments.For all Singaporean buyers, the banks will be assessing your Total Debt Servicing Ratio, even for your overseas property purchase. Borrowers also need to earn a minimum annual income to qualify for the loan.

Type of Currency

You can take a loan based on Singapore currency or a local currency. Generally if the property is to be rented out, it is advisable to take the mortgage in the local currency with a local bank. The rents collected can then be used to offset the mortgage without incurring exchange rate risks. However, it may not be so straight forward if the borrower takes a local currency loan with a Singapore bank. For example, if borrowers purchased a London property and take a GBP loan with a Singapore bank.They are expected to pay their loan instalments to a GBP account maintained with the bank. They will need to either remit the rental received into this GBP account or deposit SGD into this account and let the bank convert into GBP at prevailing exchange rate.

Lately there is a growing interest to finance the purchase in Singapore dollars. Singapore investors find it more convenient to pay off the mortgage in the currency they earned, and there is less hassle to transact in the local currency. In the case of Australian properties, some investors will use the rents collected to finance their children Australia’s education while they finance their investments in Singapore dollars.

Currency Risk and Margin call

At present, the main advantage of a Singapore dollars loan is that it is usually available at a lower interest rate than the local currency loan. However there is foreign currency exposure risk. For example if there is a significant reduction in the value of Australian dollars versus Singapore dollars, the Singapore banks may request for a margin call, or capital top up from their Singapore dollars Australian property’s borrowers to ensure that the LTV does not exceed the agreed level.

Interest Rate and Mortgage Package

In Singapore, most of the Singapore dollars loan for overseas properties are available based on a floating rate package. It is pegged to a market benchmark like the 3 months Singapore Interbank Offered Rate (SIBOR). There are generally more choices in the type of loans when taken up with an overseas lender which could include options to take up fixed rate loans or interest-only loan.

Overseas Property Loan Term

The loan term for overseas mortgage is between 5 to 25 years. Borrowers need to be at least 21 years old. Depending on the bank, the last entry age can be up to 70 years old.

Legal and other fees

Borrowers need to know that there are other miscellaneous fees involved when buying an overseas property. For example, legal fees and valuation fees are usually borne by borrowers. These fees can range from S$3,000 to S$6,000. Usually, the borrower will also have to take up fire insurance on their property. If it is a Japan property, banks will usually make it mandatory to have earthquake insurance coverage. Banks will also charge a processing fee between S$500 to S$1,000.

Conclusion

The above highlights the multi-faceted aspects of obtaining a loan for overseas property purchases and the cash that buyers would need to cough up. While it is ideal that buyers should ascertain if they can obtain a loan before purchasing a property, banks will usually require at least a reservation form to begin processing your loan application. Thus, buyers might want to approach the banks for a verbal assessment and to only enter into contracts with provision that the purchase should be subject to them being able to secure a loan, in order not to over commit themselves and turn buying that dream vacation home into a nightmare.

 

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