SGD Financing for Aussie Home

[CrossEyed]

My financial planner is recommending I refinance our Sydney home to a Singapore based loan.

Anyone else considering this right now given the high AUD and interest rates ?

[don't do it]

The SGD is currently only worth AUD 0.77, which is close to its lowest point over the last 5 years. You'd be crazy to refinance AUD to SGD right now - the gap between the two currencies will almost certainly narrow over the next few months.

Having said that, currency movements are very hard to predict. But remember, just 6 years ago the Aussie dollar was worth less than the Singapore dollar.

[don't do it]

Then again, take a look at the thread "USD and AUD" in "Investments and Property". Maybe the AUD will keep rising...

Well, good luck anyway.   

[way up]

way up the massive difference in mortgage ( interest rate) AUS 9.5% and then factor in a 10+% curreny change risk over the next few years and see if you are ahead.

I expect you will be. Take your fin planners advice not the people here.

[nope]

Huh? How can you be better off if SIng interest rates are 2.5% and Australian rates are 9.5% and the currency changes 10% in the SGD's favour? Yes, you'd save 7% in interest, but you'd be 3% worse off. And the AUD could fall against the SGD far more than 10% over the next 2 years.

In the PP's scenario you'd be much worse off if you refinance. Spreadsheet it out yourself. The question is how the currency will move, and no-one can predict that. Just be aware that you're taking a huge risk - people don't seem to realise this when they refinance.

[beware]

This is a very dangerous cross currency swap for an individual investor who cannot hedge against currency fluctuations. 

If you did this transaction on $500k AUD you would stand to lose about $188,000 dollars. 

It looks great on paper, but currency volatility is skittish.  You do not have the resources at your disposal to protect yourself, or write off your losses.   I would highly recommend you go back to your financial advisor and challenge his recommendation and get him to show you

a) why he thinks it is a good idea
b) what the horizon scenario is (it, what happens if the market moves a ceratin degree in a postitive or negative direction)
c) if he has ANY idea what a cross currency swap is.  If he does not, get yourself a new financial advisor. 

[to beware]

can you explain in detail why this is not a good thing to do.  i understand the fluctuation in the exchange rate will be calculated to reduce the loan principal to keep the loan/security ratio at a reasonable rate.  So, isn't it a good way to reduce the principal?

[sternbear]

Huh? How can you be better off if SIng interest rates are 2.5% and Australian rates are 9.5% and the currency changes 10% in the SGD's favour? Yes, you'd save 7% in interest, but you'd be 3% worse off. And the AUD could fall against the SGD far more than 10% over the next 2 years.

In the PP's scenario you'd be much worse off if you refinance. Spreadsheet it out yourself. The question is how the currency will move, and no-one can predict that. Just be aware that you're taking a huge risk - people don't seem to realise this when they refinance.

Assuming OP is earning SGD, any gains or falls in AUDSGD are opportunity cost not a real cost. If OP converts entire mortgage to SGD at today's exchange rate and then repays the entire loan in SGD the AUDSGD can go up or down as much as it likes there will be no real costs to the borrower because they earn SGD and pay SGD

In fact someone earning SGD an paying a mortgage in AUD does have currency risk and could end up paying much more than 9% in AUD should SGD weaken

[to sternbear]

are you saying if one earns in SGD then converting AUD to SGD loan is a good thing to do?

[P.O.D.]

The A$ is at record levels and it is highly likely it will fall in value over coming months and years especially if interest rates are used to help curb inflation. This means the value of the mortgage in A$ will fall.
The S$ will be defended by a prosperous Singapore so its may not go far from its current position.

Generally, the time to change your mortgage to another currency is when the @ss falls out of the A$ (mortgage currency) not when its strong.

[CarrieT]

It's a great thing if A$ appreciates or stays stable against S$, but a really bad thing if it goes the other way. If you borrow S$ to finance an A$ asset and the value of the A$ depreciates then you could end up owing more S$ then when you started

[No]

Huh? How can you be better off if SIng interest rates are 2.5% and Australian rates are 9.5% and the currency changes 10% in the SGD's favour? Yes, you'd save 7% in interest, but you'd be 3% worse off. And the AUD could fall against the SGD far more than 10% over the next 2 years.

Only if that entire proposed change takes place over one year.

If, for example, it takes two/three/five years for the AUD to fall 10% against the SGD, the interest rate differential means you come out ahead. Certainly it's a significant risk any way you look at it, because there's no telling how far the AUD could fall, but it's nowhere as simple as the above.

[No]

Of course, the above assumes no change in interest rate differential as well, which is another, separate risk to take into account.

[Sternbear]

"Posted by: P.O.D.
Insert Quote
The A$ is at record levels and it is highly likely it will fall in value over coming months and years especially if interest rates are used to help curb inflation. This means the value of the mortgage in A$ will fall. "

Surely if interest rates are are used to curb inflation then AUD rates will remain high and this will support the currency.... both very good arguments for converting that mortgage to SGD

[P.O.D]

"Posted by: P.O.D.
Insert Quote
The A$ is at record levels and it is highly likely it will fall in value over coming months and years especially if interest rates are used to help curb inflation. This means the value of the mortgage in A$ will fall. "

Surely if interest rates are are used to curb inflation then AUD rates will remain high and this will support the currency.... both very good arguments for converting that mortgage to SGD

Inflation is a problem and getting worse in Singapore. Maintaining the S$ is a cost burden for the government even though it is cash rich.
 
I doubt Australia will be under such pressures to raise interest rates because the A$ is strong and if it does weaken it will make their economy stronger since they export many minerals. They are not so dependant on imports. They have plenty of oil and gas of NW shelf also, so a weaker A$ will make their exports more competetive.