IT seems that everyone is looking to buy real estate abroad nowadays. In recent years, even local institutions such as the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) were reported to have acquired properties overseas - the EPF reportedly purchased four properties in London while PNB was said to have bought properties in Brisbane and London.
Property developers have also spotted opportunities away from home. Conglomerates such as S P Setia, TA Group, Magna Prima and Glomac are already developing residential and commercial properties outside the country. Now, even retail investors are getting in on the game.
Jazmine Goh, director of Henry Butcher Marketing Sdn Bhd, says the sales of overseas property increased last year. "Compared with 2010, we sold more [foreign] properties. [Demand] hasn't slowed down because of the unstable economic outlook. Here is one reason [demand is robust]: the weaker pound makes property in the UK cheaper. This gives local investors the opportunity to make gains from capital appreciation as well as the future appreciation of the pound," she says.
Just like buying local real estate, most investors would opt for a mortgage. It is possible to obtain financing for your dream foreign property from foreign lenders. The mortgage application process in Australia and London is similar to the one in Malaysia. There is also the possibility of getting financing from Malaysian lenders.
Financing from local lenders
Malayan Bank Bhd (Maybank) and OCBC Bank (M) Bhd currently offer financing for foreign properties, and their interest rates are comparable. Both banks offer ringgit-denominated loans for London properties that are located within specific zones close to the city centre. OCBC Bank offers loans for properties in Australia. The terms stipulated by both lenders are rather similar, with repayment periods of between 30 and 40 years, and the loan having to be settled before the borrower turns 70.
The advantages of using a local lender to finance your foreign property include having a familiar banking environment and mortgage application process. It is just like obtaining financing for local property. And since borrowers use the ringgit to repay their foreign currency loans, the currency fluctuations are mitigated, says Thoo Mee Ling, head of secured lending at OCBC Bank.
"You may be able to secure a lower interest rate from foreign institutions in the UK, but your repayment amount can fluctuate due to the exchange rate if you are exchanging the ringgit into the pound to make repayments," she says.
"With the existing relationships, high net worth customers with Maybank are able to enjoy more competitive financing packages, such as higher a loan-to-value ratio and competitive interest rates, for pound-denominated financing," says Lim Hong Tat, deputy president and head, community financial services at Malayan Bank Bhd.
Buyers will also be able to leverage the local lender's network of lawyers, valuers and tax consultants. The services provided by these parties are required as part of the mortgage application process. "We recommend professionals who are on our panel, and borrowers can ask them for their quotations and make comparisons. Once they have decided on which professional to use, we can act as the middle man if they are not familiar with dealing with foreign cultures," says Thoo.
Maybank's loans are only applicable for properties located in Zones 1 and 3 in London, while OCBC's loans are only available for properties in Zones 1 and 2. Zones are based on a system used to calculate the price of tickets for public transport in London. Zone 1 refers to the central zone.
The banks' margins for financing are comparable, ranging from 70% to 80% of the purchase price. Thoo says borrowers who need more financing can approach the bank. "We do provide higher margins on a case-by-case basis. It is not that easy to obtain loans from foreign lenders. As we know, some banks there are shunning mortgages [tightening lending] at the moment."
Borrowers buying high-end properties must seek approval from Bank Negara Malaysia if they want to transfer more than RM1 million a year outside the country. The central bank has implemented an exchange control notice called ECM 9: Investment Abroad, which allows a resident individual with domestic ringgit credit facilities to convert up to RM1 million per calendar year into foreign currencies.
Thoo says domestic ringgit credit facilities refer to all loans. "As long as they have an existing house or car loan, they can convert up to RM1 million [without seeking approval]. If they do not have any loans, they can transfer any amount overseas."
Those interested in acquiring foreign property can also get the assistance of property agents. Those who promote foreign property to local buyers often act as an adviser and middle man between the borrower and the lender.
Susan Chin, a mortgage manager with Jalin Financial Solutions Pte Ltd, which specialises in Australian properties and has an office in Kuala Lumpur, says, "Those seeking financing from local and foreign lenders do not pay us a fee [for their services]. The lender pays us a referral fee for each approved mortgage. If buyers prefer to head to foreign banks based in Singapore or Australia, for example, we can help to liase with the relevant parties for them. This makes it easier as we are more familiar with their process as well as their culture."
Financing from foreign lendersThose buying foreign property should explore the option of obtaining financing from lenders that are located near their property or those based in Singapore. For example, United Overseas Bank Ltd (UOB) provides mortgages for properties in Singapore, London and Thailand. Those looking to acquire property in China can also leverage the bank's regional network.
"Buyers can capitalise on the current low interest rates in Singapore to obtain affordable home financing. For example, customers looking to purchase a condominium in Thailand would find UOB International Home Loan (Thailand) useful," says Chia Siew Cheng, head of the loans division at United Overseas Bank Ltd in Singapore.
According to Chin, foreign lenders can offer high margins of finance. "Australian lenders can loan up to 80% of the property's purchase price. Also, although the loans are similar with a 30-year maximum tenure, many Australian banks don't impose an age limit on the borrower. However, they are prudent when approving applicants," she says.
A foreign currency loan obtained from a foreign lender exposes the borrower to exchange-rate risk. Currency acts as a two-edged sword: if the rate is favourable, the borrower benefits but the reverse also holds true.
Regardless of the route buyers take, the ability to meet the monthly repayments is essential. Chia says this applies when taking out multi-currency loans where buyers must ensure they have ample liquidity to fulfil monthly obligations and/or top up funds in order to have a security margin. "A top-up may be required if the value of the property has declined considerably relative to the loan size. Banks may then require a reduction in the loan's outstanding amount to achieve an acceptable loan-to-value [LTV] ratio," says Chia.
The LTV ratio expresses the mortgage as a percentage of the total appraised value of the property. For instance, if an individual borrows A$130,000 to purchase a house worth A$150,000, the LTV ratio is 87%. This ratio is used by lenders to qualify borrowers for a mortgage.
In addition to financing costs, customers should also be aware of the tax implications and tax liabilities associated with the purchase of these properties."It includes, but is not limited to, stamp duty, tax on rental income, local council tax and inheritance tax, all of which could impact their disposable income and available cash flow for repayments of overseas loans," says Lim.