Welcome to our seventh episode of the #Expatchat podcast where we discuss the latest financial issues affecting Australian expats.
In today’s chat we have dedicated this episode to assisting Australian expats learn more about securing a mortgage from a bank in Australia whilst you live overseas.
Expat Chat Ep 7 – How Does An Australian Expat Secure a Mortgage
James Ridley: G’day expats, James Ridley here and I’m joined with my co-host today, Jeremy Harper from Hfinance. Just doing another expat chat, obviously there’s a few up there now and we’re just doing another one to cover off on a few questions from our recent webinar that we conducted with Jeremy about the mortgage process for an Australia expats and what they need to be aware of.
That’s also on our YouTube channel as well, the recording will go up there soon, but we thought we’d use this opportunity to do another episode. Talk about some general Q and A’s that we received from clients and attendee’s and essentially just a bit of a market update. But a short summary, I guess on Jeremy, obviously you’ve been running Hfinance for a while now. The main focus is Australian expats, that’s right?
Jeremy Harper: Yep.
James Ridley: And then you’re a former Australian expat as well. Where were you living before?
Jeremy Harper: So living upper East side Manhattan in New York.
James Ridley: Oh wow, okay.
Jeremy Harper: Yeah, that was that very interesting. I think at the moment right now it’s about negative four degrees. So definitely a bit different to the sunny blue skies at the moment.
James Ridley: Yeah, that’s right on the gold coast. But unfortunately, actually at the moment, I’ve got all the rural sort of fires going around, which is causing havoc and wreaking havoc, especially from an air pollution point of view. But we digress. So former Australian expat, living overseas, New York. That’s great.
So you’ve lived that Australian expat experience, you know what it’s like, you’ve been through a lot of the pain points that Australian expats go through. How long were you there for? Were you there for a long time or was it more of a short stint, like 12 months or…?
Jeremy Harper: Just a bit over two years.
James Ridley: Yeah. So a good stint.
Jeremy Harper: Myself originally from born and bred in Melbourne.
James Ridley: Yep. Yep.
Jeremy Harper: Started as a CA accountant, worked in the Melbourne CBD tax and advisory and then started working to industry accounting and then start up Hfinance mortgage broker. And then from Melbourne, moved over to New York for a couple of years. And now back in Australia, living in Sydney.
James Ridley: Yeah. Okay, wonderful. I mean the fact that you’re a CA accountant as well. That’s great. I do think that sometimes, depending on the industry, I suppose in the past I’ve seen mortgage brokers, financial planners, obviously they’ve got a bit of a wrap at the moment, post royal commission, but accountants are always that individual that people are happy talking to, that reassurance or reassuring advice that they give. So the fact that you’re a CA accountant as well, that’s huge. Do you ever have conversations about tax, property, anything like that with clients or not really?
Jeremy Harper: Just generally. I always try and give a little bit general advice and then I’ll just say go back to your accountant and have a bit more of a chat around them. And myself, just through my experience, being in the US, having to file with the IRS and having to deal with it’s three levels of state, federal, state and city. Understanding those expat tax pain points and having to file back here. So I can just draw on my own experience a little bit.
James Ridley: Yeah, and you make an important point just before. Guys, as always, a bit of a general advice disclaimer, anything we say today, it’s all general advice. There’s no personal advice given here. If you want obviously personal advice, please do engage us or Jeremy for the mortgage side. Just take this as general and nothing personal.
One of the points you mentioned there, IRS. I hate the IRS. Worst taxation authority in the world. I’m happy quoting it and I’m happy saying it just because I see all the pain points that our clients have to go through. The fact that you’ve got the federal level and then the state level. Obviously depending on the state and it’s going to depend whether you have many pain points. Obviously in Texas it’s not really an issue, those things, but California.
James Ridley: That’s terrible. So yeah, I completely understand that. A general summary of what we’re going to touch base on today. Again, just touching base on probably the recent main residence exemption, the resurgence of that bill now that they’ve updated, added a few caveats in there and then the general state of interest rates in the future, RBA decisions, how that’s looking.
And then I’ve got quite a few questions that I do want to drill you with, just from some clients as well as some attendees have sent through. Just to have a bit more of an understanding of an Australian expat securing a mortgage and especially a lot of, not necessarily pitfalls, but things you need to be aware of. So let’s jump into it. So let’s touch base on the RBA decision. You gave me some good facts just before about how we’ve been on one and a half percent, what was it, for almost three years?
Jeremy Harper: Three years, yeah. So then they, June this year they came through the first cut. July and then they went again August. So we’re now down to 75 points.
James Ridley: Yep. Yeah. Okay.
Jeremy Harper: Sorry. Not August, October. So down 75 points. A lot of the experts out there thought it was going to be November. It went a month early, so yeah, it’s interesting to see what happens before in the year. Maybe there’ll be another cut just before Christmas, particularly with what’s happening with the fires, they want to get some positive news out to the market.
James Ridley: Yeah, I think that’s a good way to look at it. I mean the fact that we’re at 0.75 and I suppose the majority of lenders, I would assume, are passing them on, those cuts. Which is good. And if it gets down to 0.5, say we receive that cut in December. I mean that’s huge. And I really wonder how they can maintain being at 0.5. When does relevant data about economic growth, unemployment rates, when does that come back up?
James Ridley: I know when I was listening to a podcast the other day, Shane Oliver, so he’s the head economist at AMP. He was saying that we are likely to see another rate cut, probably the next three months. And then we could see the Australian dollar drop to 65 cents. It might stay there for a while, but all in all saying that next year we’re still going to see growth. There’s still going to be growth in the economy. It’s not going to be quick, but there’s still growth. That’s the mantra. It’s slow and steady, which is good to see. But interest rate cuts, what else do they have left on the table to do? Quantitative easing, those sort of things.
Jeremy Harper: Yeah, and I think it’s important to understand that the big banks are under, if you’ve looked at the financials that’ve just come out recently, their cost of funding is under extreme pressure. They can’t pass on the full 25 points if there’s another cut, because they will then have to impact the savers that are within their own bank. If I look at my own bank statements, the return you’re getting just having your cash in a bank account, it’s raised at the moment. And I’m sure your clients, particularly the savers that are on that later stage of their life, they’re getting hurt because having money in term deposits, bank accounts, it’s hurting those guys. So I guess the idea is to weigh both of them up and see how it’s going to impact the economy overall because it does hurt people on the other side as well.
Jeremy Harper: But on the interest rate piece, you’re seeing lenders passing on 18, 20 points. It’s their internal model they do. We’re seeing on a fixed rate. So obviously you’ve got your variable rates and your fixed. So just for the viewers out there that might not know, the variable rate with that lender will generally get the rate passed, get passed through or the rate will get increased per variable. If you’re on a fixed rate with that lender where you’re locked in for that period of time. So if you’re on, let’s say, a two or three year fixed loan and the bank passes on a 15 point cut or increases, you don’t get that benefit or that expense. So that will lock in. So what you’ve seen from a pricing point of view is a lot of the two and three fixed anywhere between 20 and 22 points cheaper than that variable rate offered by that same lender.
Jeremy Harper: So it’s a little bit of a win if you want to lock that in you’ll get that benefit up front, that if the RBA cuts and they’re passing the rate down the track-
James Ridley: You’re not going to get that benefit obviously.
Jeremy Harper: Correct. For that two or three year period.
James Ridley: A question that I’ll ask now before I forget, having a fixed rate loan, can you break that loan? Can you refinance? What’s the process, fees, things?
Jeremy Harper: Yeah, so if you refinance a variable loan you’ll pay with that lender what you call a discharge fee, generally it’s 300, $350. It’ll be on the loan contract of that particular lender. That’s sort of the rough quote. If you are breaking a fixed loan there will be a break fee. It’s calculated by the date into that fixed loan and then the date you’re trying to exit and they’ll quote you. And that’s based on their lending and what it cost them to lend that to you.
Jeremy Harper: So if it’s a large loan, you can get quoted 10, $11 000 with that lender.
James Ridley: Oh wow.
Jeremy Harper: Yeah. If it’s near the expiry and it’s a small loan. Again, it depends on when you entered the loan. It could be a couple hundred dollars so it could make sense. So in that scenario, best bet is to call the bank and say if I also get a pay out today, what would that… Give me a rough quote.
James Ridley: I didn’t realise that it could be that high. My interpretation that yes, higher fees, but I suppose, yeah, if you’ve just started a fixed loan, you’ve got another three years left on it, the fees can be that high which is substantial.
Jeremy Harper: Yeah. And again, it depends on that cost of funding for the bank when you took that out.
Main Residence Exemption Update
James Ridley: Yeah. Okay. The other item that I mentioned earlier was the main residence exemption. Obviously this is a huge pain point for a lot of Australian expats. We blew past that transition period of 30 June, 2019 and then they’ve brought it back in and I’m just bringing it up because they’ve brought it back in. Now they’re saying the new transition period is during 2020 but it’s thrown in a few caveats.
The caveats that they’ve thrown in is someone that’s considered an excluded foreign person or foreign resident. And then the other caveat is life events. So just mentioning this because it’s just so crucial. It’s so damaging. Whilst the legislation, it acts in a prospective manner, it’s purely retrospective in nature. So just means that they’re taxing us on years and years that we’ve owned these properties as main residences. But the caveats they’ve included is essentially if you’ve been overseas for a period of greater than six years as a nonresident, then you’re counted as an excluded foreign person.
James Ridley: And the life events they’ve included is terminal medical diagnosis of yourself, your spouse or a child that’s 18 years or younger. And if you had to sell the property, then you don’t have to declare as a taxable event, if you pass away or your spouse passes away or, again, a child passes away under the age of 18. And then the last one is essentially if there’s a divorce within that six year period. So the main reasons why they’ve introduced these caveats is a preservation of capital.
Obviously the first two, medical diagnosis, which is damaging from a terminal point of view, try and preserve that capital because obviously living costs are going to go up to service that depending on the diagnosis, those sort of things. But regardless, just as damaging as the old legislation. Someone having to pay capital gains tax on a property that they’ve owned for say 15 years.
James Ridley: They lived in it for say 10 years in Sydney, which is quite common to be honest, Sydney, Melbourne. And then they move overseas. They rent it out for five years, they want to sell it but they sell after that 30th of June, 2020 as a nonresident, paying CDT on it all the way back until they first purchased it. So really scary in terms of the potential large tax bills that could come about.
But again, just mentioning that it is at draft stage. It’s meant to be on the order of business in November now, so we won’t know too much more until December, hopefully. But again, a very short window for Australian expats to consider selling. Considering that the transition period is 30th of June, 2020. When you’re refinancing or you’re engaged by someone to refinance, do they ever bring up topics around the tax items? CGT, main residence?
Jeremy Harper: Yeah. So I guess what I would say around if they’re looking at selling whilst they’re abroad, that could be something, maybe a question would be, okay, why? If it’s purely, if they’ve got an existing mortgage on that property back in Australia and they’re selling because it’s a cash flow issue. So maybe the rent they’re getting on their Sydney property is not covering the costs of the mortgage.
So they don’t want to have to, every month whilst living in the US or living in Europe, put money towards the property. Maybe an option could be, if they’ve just left that mortgage as it is, they might be paying principal and interest. Can we look at refinancing and maybe get an interest only loan? And that’s going to extend out their cashflow. What does that look like from a monthly income versus expenses and maybe that could be a solution whilst they’re living abroad.
What Is An Appropriate Interest Rate for an Australian Expat Securing a Mortgage?
James Ridley: Yeah. Yeah. Okay. No, that’s very interesting. Well listen, let’s dive into some questions that some clients and viewers have sent through. Some pretty important ones here. And I think a lot of them will seem true home to a lot of people as well.
So first one I’ve got here is, “I’m currently with a big bank in Australia. It’s not one of the big four but my interest rate is 6% which is huge. Is this too high considering the current market or is there a guide on a rough rate I shouldn’t have on an investment property?” Pretty open question, but a 6% interest rate, what’s your thoughts on that?
Jeremy Harper: 6% is far too high, particularly in this environment. You can see a lot of lenders that we can get Australian expats secured with a mortgage, so provided Australian citizen living abroad, and they can serve as that loan under that lender you can still qualify for pricing. It’s exactly the same as if you or I were to get investment property whilst living in Australia. So to set some examples, you should be looking at the low 3%, around that range.
You’ve got to keep in mind the larger, and even the small banks, do take advantage of people long term, being that loan for a number of years because that’s when they make their margin on the back end. And if they understand you’re living overseas and they also understand it might be difficult for you to move lenders so they’ve got a little bit of a hold over you as a borrower.
James Ridley: Yeah. Okay. Yeah. When I saw that come through I thought 6%, I nearly fell off my chair and I even think anything over 5% is too much. Generally most clients that I come across, they’ll have something between three to four. That’s pretty standard to be honest. So there’s a few factors that could play there. Because they do mention it’s an investment property. We don’t know the size of the loan on it, the LVR.
Jeremy Harper: Could be interest only.
Can A Long Term Australian Expat Secure a Mortgage?
James Ridley: So there’s a few factors that obviously play into it, but 6% just way too high. Yeah, taking the piss there. Okay. So next question here. “I’ve been away for 15 years now and have about 150 K I’d like to use for a property purchase. I haven’t lodged a tax return since I left. Is this going to be an issue with me getting a mortgage in Australia?” It’s a good question.
Jeremy Harper: It is a good question. So depending on the credit team that pick up the file and the bank, but they might ask the question, can we see your last tax returns? Provided if you’ve lodged a no return necessary when you left, then that should satisfy that requirement. And really if you’re not generating Australian income. If you don’t have an existing Australian property or has to file because you might have a debt then that’s fine because you’re earning income overseas and you’re a non Australian tax resident.
James Ridley: Yeah, a common thing there as well is, depending on the account they’re seeing, they’re probably going you’ve got no Australian source of income. I’m going to put you down as return not necessary going forward. So that’s why you might not have, obviously an Australian tax return, but most commonly if there’s been a period without tax returns, you can engage an accountant to go on the HO portal on your behalf and tick their own boxes to say return not necessary or non resident [inaudible 00:15:52].
James Ridley: And that’s something that they’ll bill you for obviously. But yeah, by the sounds of it, it depends on the lender policy.
Jeremy Harper: Correct. And obviously, if you’re going down a pathway of purchasing an investment property, you’re going to have Australian rental income. So then your Australian tax obligation is going to change in the future.
James Ridley: Yeah, yeah, of course.
Jeremy Harper: Start reporting…
James Ridley: Yeah. No, that’s a good point. Next question. Moving on. “How often should I consider refinancing?” That’s a good question.
Jeremy Harper: Every two years try and really review your loan and the interest rates and the fees you’re getting charged. The first point of call is to go back to that lender and negotiate with them and see if they can bring you in line with what they’re offering new customers. Quite often, I’m sure people would understand. They see on TV or website, come to our bank, we’re going to offer you clients this rate, you’re on a completely different rate.
Jeremy Harper: There is that, they call it lazy tax. Oh we do take advantage that you’ve been on the book for a few years. So see how close you can get to that rate they’re offering. And if that’s in line with the market, potentially you don’t have to refinance. But every two years. If they don’t come to party you can look at refinancing.
James Ridley: Yeah and I suppose Australian expat mortgages are those things that we have for a very long time. I daresay a lot of people that they are lazy in the sense of, okay I’ve got a mortgage, I’m just going to accept it for what it is. I’m just going to keep paying. And they won’t look to refinance because maybe the process of when they originally got the loan was painful. They maybe worked with the bank, which made it really hard and therefore they don’t want to go through that one or two month process of refinancing and they’re just going to accept it, bite the bullet. Just keep paying it.
Jeremy Harper: Yeah. The only thing about if you’re continuously refinancing, it’s important to note that a standard mortgage is 30 years so you really don’t want to be continuously extending out the 30 year facility. So making sure that your repayments are just as high, maybe if not a little bit higher than what you were paying just so you can smash out that mortgage.
James Ridley: Yeah, absolutely. And I suppose you’ve got to remember that when you’re refinancing there’s always those little fees we incur, discharges, those sorts of things. So if the new mortgage is a few bips or a significant percentage difference there or your repayments and you’re winding down the loan quicker then yeah, it makes sense.
Jeremy Harper: Correct.
James Ridley: You really got to weigh out the pros and cons of refinancing, so that’s good. So every two years there guys. I suppose another one here. “What’s your opinion on another rate cut? Do you think we’ll get one in the coming months?” I suppose we talked about that just briefly before, but client sent it through. Do you think we’ll get another rate cut?
Jeremy Harper: Yeah, I think if they’re going to have one the near future probably will be before Christmas, as we said. Maybe get everyone all excited and rushing into the shops before Christmas, a little bit more activity going in the economy.
James Ridley: Yeah, no, I think you’re right. Especially with what’s going on at the moment, not just obviously Queensland, but down in New South Wales, extending further down to Victoria, all these bushfires that are going on. It’s the worst we’ve ever seen.
James Ridley: I think I saw a post the other day on the socials where someone said that you compare it at the moment there’s 950 000 hectors, which have been burned in Australia. And you compare that to a damaging fire that occurred in the Amazon last year, which was only 150 000. So it puts things in perspective. And they also think that we’re not even at the worst point yet.
They think it’s going to get a lot worse due to the weather that’s predicted. So it does make sense that governments can do that and they can put through policies like this where it’s to provide a bit of relief. So you’re right, get more people spending money. So it’ll help the economy. So I think that’s important. So yeah, maybe next month, I reckon next three months, but next month does make sense in leading to Christmas. Another one here. “Are you finding more people are buying in Australia now that the interest rates are low?”
Jeremy Harper: Yeah. So you’ve seen the first time buyers are definitely coming into the market. There’s a range of incentives that have already been out there for first time buyers with low rates, plus with the proposed first time buyer scheme. It’s been come in one gen next year. Basically the government’s going to act as a guarantor.
So instead of mom or dad using their property, provided you can qualify for the programme, you can get in with as little as 5% deposit and not have to pay mortgage insurance. So we are seeing there’s a lot of activity around there.
But also we’re seeing that the Australian expats, there’s people in Hong Kong, people in London with Brexit, people in the US. So a lot of people are reassessing their own situation around, do we want to live abroad?
Jeremy Harper: Because Australia is still seen as very much, particularly in property, very safe. So there’s always that need to maybe now’s the time we come back. Maybe we purchase that property to come back to.
James Ridley: Yeah you’re right. And Australians, we’ve always had a love affair with property. It’s pretty obvious that we love, from an investment point of view, that we know what we paid for it when we first purchased it, we assume that’s what it’s worth over the next five, 10 years and it’s going to go up in value. And then we love being oblivious to what it might actually be doing compared to, say what our super account is changing every day or an investment account or shares, whatever it might be. So we do have that love affair because we love being oblivious to what it might be worth.
James Ridley: People obviously that bought in say Sydney, maybe a few years ago and then they’ve actually gone backwards. They’re not happy. But yeah, you’re right. We do love property, we see it as a safe investment because it’s that physical asset. So no, I completely understand that. So that’s a good point you make there.
And I think further on that would probably be a fact that, I know for a fact that a lot of clients that are based in the US are considering property purchase in the near future because of the relative strength of the US dollar. Purchasing power’s a lot greater. And you said that before as well. They’re making a good little return on their funds, are transferring home to Australian dollars or maybe potentially parking in an offset account. So you’ve got some options there as well.
What Is The Difference Of A Redraw Versus A Offset Account For An Australian Expat?
James Ridley: A good one here, “I have a mortgage and I’m trying to understand what the difference between a redraw facility and an offset account is.”
Jeremy Harper: Yes. So an offset account, if you log into internet banking and you’ve got the mortgage up in the front. At the top. And then below you’ve got what you call an offset account. It will look like a everyday bank account, it will have a BSB and account number. And so, for people that don’t understand offset account, you can just imagine it’s exactly like a bank account accept whatever the funds are sitting in the account.
That’s going to offset the interest charged on that variable loan that you’ve got. So let’s say it’s a 500 000 or variable loan, you have 50 000 in your offset account. Well that lenders going to charge, provided it’s linked, they will charge $450 000 interest or sorry, interest on the 450 borrowings.
Jeremy Harper: And so for an Australian expat, you could use your offset account to receipt your foreign transfers into. Generally you’ll get a debit card, you can go to ATM, withdraw cash in Australia, use it to pay bills, receipt the rental income, so fully transactional account.
Whereas a redraw account, if you log in, it will be a redraw function within the loan. So it will only have one loan. And let’s say you have a $500 000 loan facility and you’re repaying more than the monthly minimums. So $2 000 a month’s what you’re meant to repay. You’re being a good saver, you are paying off two and a half thousand. You might have built up a redraw facility that you can draw down, so it might be $10 000 so you can go in and redraw that out. So you just have to be mindful of, as you’re saying, there’s different tax considerations.
Jeremy Harper: Because one, you’re redrawing borrowings. So you’re effectively creating a new borrowing event. Whereas the offset account is a savings account essentially.
James Ridley: Yeah. So I can pull funds out of an offset account then use that for investing or even personal purchases because the loan balance is still there. It’s still the original loan balance. The interest expense that increases is still a tax deduction if it’s an investment. So that’s really good. Whereas redraw, not so much. So that’s an important factor. But that’s a good hour one there. Obviously offset account, separate account altogether. Doesn’t impact from a tax point of view, redraw it does in terms of, you can’t technically use the increase in interest expense. So double check that when ever you’re getting a mortgage. And I suppose whether that’s a mortgage feature you’d probably want.
Jeremy Harper: Yeah and just keep in mind that the redraw accounts is normally basics and maybe you can get a slightly lower rate using a basic package with a redraw, no offset. Whereas an offset account, you might have to pay an annual fee depending on the lender because it’s a premium feature. Maybe that rate attached would slightly higher, depends on the lender and how they’re packaged up. So you just need to weigh the two off and do you need it and how’s it aligned with your own goals?
Who Should You Work With When An Australian Expat Applies to Secure a Mortgage?
James Ridley: No, very important. Another question here, “I’m in Qatar and I was declined a mortgage. I have 250 000 in cash that I want to use for a purchase. Did I just use the wrong person to look into this?”
Jeremy Harper: Yeah. So going direct to any lender, they’ve only got one policy, a couple of proxy behind them. They will take your application and submit it and you get a yes, no. Whereas working with a broker, will take your information and sit down because they’ve got 35 lenders. Work out actually which of these lenders do you qualify with? Present those a couple of different options and then put an application together. So a real big key is not to send in an application that we don’t think’s got a 99% chance of getting approved. If it’s not going to get approved then we’re not going to send that application because it’s wasting our time and it’s a mark on the borrower’s credit file as well.
James Ridley: And it sounds like that’s also, relating to what we discussed in the webinar, bend the policy. And then different securities and how they’re treated. Even suburbs, the types, those sorts of things. Can you elaborate a bit more on that from a lender’s point of view?
Jeremy Harper: Yeah. So you might be an Australian expat and we’ve got you an application approved for an 80% lend. So they’re happy for the Australian expats putting 20% equity or cash and the banks going to lend 80% for that purchase. But then you have to be mindful of, okay, what’s the property that you’re trying to secure? Some lenders will have what you call postcode restrictions.
So if you’re looking to buy a property in West Chatswood, New South Wales or inner Sydney, they might say, because it’s a highly density suburb, there’s a lot of apartments. We’re only going to lend 70% if you’re going to buy something in that area. Or if it’s a small property, let’s say it’s smaller than 40 square metres internally, or it’s a unique property. It’s a kind of half farmstead. It’s got some acreage. They might say, look, we’re only comfortable lending base on that 60 or 70%. So what I would say is it’s important to yes, get pre-approved, make sure you can service that loan, but have a chat to us around what are you actually looking at?
Jeremy Harper: Is it a standard four bedroom house in gold coast? Well then it should be fine, but if it’s something unique, let us know. We can check with that lender as well to make sure that they’ll actually lend against that security.
James Ridley: Yeah, that’s some important considerations there. Yeah, I think it just goes to show that the mortgage process isn’t that simple.
Jeremy Harper: No.
Can An Australian Expat Use Equity They’ve Built up In Australia On A Mortgage Overseas?
James Ridley: Not at all. Another one here, which I’ve seen before and you might have, “can I use equity in my Australian house to refinance and take cash overseas to purchase a property?” So it sounds like they’re talking about maybe an equity draw down or something like that.
Jeremy Harper: Yeah. So this is where anti money laundering comes into effect. Whenever you’re moving money across borders, that’s a higher risk. So if you’ve got equity in Australian property and you want to buy something, you want say the US, a property to live in. The bank could assist. They’ll want to see the contract of sale on the US end, just to make sure that they’ve got control over where those funds are going. Because again, it’s a high risk when you start to cash out and take something abroad. So, yes. But there’s a lot of hoops you have to jump through.
James Ridley: Okay. So you can do it though?
Jeremy Harper: Yes.
James Ridley: It’s just obviously making probably sure that the security, the original Australian house, the issue with LVR and those sorts of things…
Jeremy Harper: Making sure that stacks up, making sure you can service, if you need to take a loan on the overseas end. Making sure you can service both loans at the same time because the bank needs to make sure we can afford both properties.
James Ridley: Yeah, of course. No, that’s important. One of the other ones that I’ve got here is, it’s an interesting one. It’s a good question though. “I’m about to become an Australian expat. Do I need to refinance or should I keep my owner occupy rate?” It’s a good question because I know a lot of people wouldn’t think about this.
Jeremy Harper: Yeah, so in your loan contract it will say that you need to update the lender of any changes to your residential circumstances. You’ve got to notify them if you move out of that owner occupied because some people might not realise that owner occupied loans and investment loans are priced differently, so the lender will have different capital requirements based on that type of lending. So it’s more expensive for them, it requires more capital to lend out investment loans and even more expensive to lend out interest only because, regulatory wise, they have to hold more capital and get more balance sheet funding.
Jeremy Harper: So you really should notify them if you’re going to change overseas, but if you decide not to, that’s up to the borrower. But I would recommend having a chat to them, renegotiating before you leave for overseas.
James Ridley: Yeah, absolutely. I think personally, if I was on a pretty good rate and I’m about to head overseas, I wouldn’t want to go and let the bank know, Oh, I’m about to go overseas about to be an Australian expat in a high risk country. What do I need to refinance? Oh yeah, James, you’re on 3.0%. You go on down, it’s going to be four and a half percent. I wouldn’t probably mention till it comes about, if it does ever come about, it’s likely you’ll probably refinance in three years time anyway or, sorry, two years maybe.
James Ridley: So I probably would just leave it as is, to be honest. If you’re getting a good deal. Yeah. I think not many people would think to update their bank to let them know that. And once they have an understanding of the investor rates that’s going to apply there. They sort of go, shit.
Jeremy Harper: Yeah. But just keep in mind if they go down that pathway and then whilst they’re overseas, let’s say they’re paying principal interest in that loan, they want to change their loan terms to interest only. That will trigger a full credit reassessment. And at that point obviously they’ll understand, okay, well you’re generating foreign income so you’re not living on the property. So that will raise a lot of flags at that stage.
James Ridley: Yeah. And that’s probably when you’ll get the higher interest rate.
Jeremy Harper: Correct.
How Do Australian Banks Assess an Australian Expats Overseas Income?
James Ridley: Yeah. Okay. You make an interesting point there about foreign income and, while it’s something we touched base on on the webinar, a lot of Australian expats when they’re working in tax free zones, Middle East, US, whatever it might be, they’ve usually got a base salary and then they’re lucky enough to have these allowances thrown out for living cost, rental, probably health, whatever it might be. And then bonuses as well. How do lenders treat different currencies as well as different wage structures?
Jeremy Harper: Yeah. So obviously what we’ll get is a copy of your contract employment. And you’ll quite often will have listed your base salary plus it’ll note any allowances. Now from base salary point of view, the lenders will convert the foreign income into Australian dollars and then take shade it by 20% generally and use that for servicing. Allowance a little bit different because, depending on the lender, some are comfortable to shade it by a further 20% and then take that gross amount.
Jeremy Harper: Some would only take half. And some just say that’s not acceptable because, when you think about the credit team seen as Australian banks, if you think about the Australian PAYG employee, generally it’s base. Our employers don’t pay for insurance unless you’ve been relocated to maybe mining, where they don’t pick up your regular expense, they pick up the kids schooling fees. So a lot of those types of income is just completely foreign to them.
James Ridley: You’re on a good wicket.
Jeremy Harper: Their credit policy just won’t accept that. So it’s a matter of working with lenders that are open to accepting that. And on top of that, also thinking about your bonus income. So if you’ve been paid a bonus, and particularly if you’re in America, it can be anywhere between 20 to 50% of your base.
Jeremy Harper: If you’ve been paid a bonus last two years. We can use that income for servicing so that can definitely Australian expats secure a mortgage. The other thing to consider is, if you’re living in an area where it’s a lower cost of living and we’ve gone through, it’s $1 000 US a month to live for a family of two or three. The Australian lenders will apply HEM. So that is your, basically, benchmark of living expenses and that won’t change. So maybe for a family of three they’ll go, okay, it’s three and a half thousand Australian dollars a month.
James Ridley: We’re going to use that instead.
Jeremy Harper: We’re going to use that. So that’s going to typically decrease your borrowing capacity.
James Ridley: And do they also look at incomes? You probably mentioned it, but there’s a lot to take in, to be honest. They treat your income almost like it’s Australian source as well. So they factor in tax rates as well. Is that right?
Jeremy Harper: Yeah. So most lenders will still apply the Australian tax rates against it. So if you’re living and working in a country that has a low tax rate? Your net tax is going to be a lot higher than what some of these banks will assess that. There are a few lenders that will accept net income for servicing. So obviously, for using those lenders, your borrowing capacity’s a lot higher.
James Ridley: Yep. So that’s great for people. Tax free environments, UAE, those sort of places. I think you previously mentioned in the webinar about a 20% shade or something like that. I think it’s about servicing or something regarding the currency.
Jeremy Harper: Yes. So, as I was saying, you’ll convert, let’s say it’s from US dollars to Australian, the FX spot rate. And they’ll shade that by 20% and that’s really just to factor in any current and future fluctuation. So let’s just say in two years time, because of the assessments done at the time of application, and the Ozzy versus the Australian it’s trading at 68 cents and then, in a couple of years time the Australian dollar strengthens to 72. Well that assessment’s factored in that movement.
James Ridley: It’s a huge margin of error though, that they’re factoring in …
Jeremy Harper: Well, it’s the banks, they’re being conservative.
James Ridley: Yeah, yeah. Makes sense. Okay. No, that’s good. I don’t have actually any other questions that I want to drill, most items we’ve covered in the webinar and this has been great to do this, this Q and A obviously.
Again, Jeremy Harper, Hfinance.com.au. He’s an Australian expat mortgage specialist. We use him in house here as well. And to learn more there’ll be a few links, obviously, under the blurb of this.
As another update, obviously Brett Evans, the managing director is currently in Dubai now. All up and running and set up. So if you’re in the Middle East and you want to catch up with Brett, he’s obviously got the office there in Dubai so do reach out to him. And in the meantime we’ll see you on the socials and appreciate your time Jeremy.
Jeremy Harper: All right, thank you.