Loan pitfalls for HK investors
Its great climate, high standard of living and spacious, affordable housing have made Australia one of the top destinations for Hong Kong's property investors.
As a result, a growing number of Hong Kong people have been buying homes, mostly in Perth, Sydney and Melbourne, as investment properties, family homes, or flats for their children to live in while they study in Australia.
Rising interest rates have not dampened their appetite. Instead, the trend has been for buyers to finance their purchases by borrowing in 'unrelated' currencies with lower interest rates - a strategy that Barry Lea, deputy regional chief executive of Lloyds TSB Bank, warns may be fraught with risk.
'If you're borrowing today, an average loan in Australian dollars would cost you around 7.4 per cent while a yen loan would cost you 1.8 per cent and Swiss francs would cost you around 3.6 per cent,' Mr Lea said.
'We are not overly keen to lend in unrelated currencies. If you borrow in the currency of the country where the property is located or in the currency of your income ... you can't go far wrong.
'When interest rates are relatively high, as they are in Australia, people tend to look at alternative currencies offering lower interest rates.
'They see a 5 per cent or 6 per cent interest rate differential and they think that's the answer to all their prayers.
'What they forget is that [the differential] is per annum, and you can see a 5 per cent or 6 per cent adverse movement in the relative currency cross rates in a week or two - or less.
'That can wipe out the saving in the interest rate differential completely, and then you can get into adverse territory.'
Mr Lea said the worst case scenario would leave buyers with a loan that was bigger than the value of the property when translated into Australian dollars. The lending bank may then question the loan-to-value ratio and seek additional security or partial repayment - provisions almost certainly built into any loan taken out in an unrelated currency.
But that doesn't mean that banks won't let clients borrow in unrelated currencies to buy their Australian home.
'If we see them as financially sophisticated and fully understanding related risks - and they do have to sign off on substantial risk warnings - then we do allow it. And there are a lot of financially sophisticated people around in this part of the world.'
Mr Lea said the danger was if people saw it as some kind of 'universal panacea', which it wasn't.
He said the answer was simple: 'Borrow in the currency of the property or your significant income or savings.'
Craig Burgess, head of Westpac Private Bank Asia and country head for Hong Kong, said the choice of loan currency was important.
'We generally suggest that clients look to align financing their loans in a currency to which they have exposure - for example, their income, investment income or the currency of the property they are financing.'
Loans could be 'very much tailored to a client's circumstance', Mr Burgess said.
'Depending on a client's portfolio and tax situation, they may wish to consider either interest-only loans or loans that pay principal and interest,' he added.
Beyond the property price, additional costs of buying in Australia compared well with other jurisdictions, Mr Lea said.
'If you look at buying in the United States or continental Europe you could be looking at 5 to 10 per cent of the purchase price in terms of other costs. Australia isn't too bad.'
What any potential Hong Kong buyer should know is that there are legal restrictions on the properties that non-Australians are allowed to buy. This largely shuts them out of the second-hand market and limits the ratio of developments that are open to overseas buyers.
