When to buy. What are the key factors affecting the borrowing capacity of an Aussie Expat?
The first question most clients as is how much can I borrow?
As an Expat, the factors that affect the amount you can borrow can be different from those of an onshore borrower. The timing of purchase can significantly affect the amount you can borrow.
Today I’d like to focus on two key factors that are outside of your control but can directly affect borrowing capacity and, if timed well, can assist you with a purchase.
The first factor is interest rates. Interest rates affect the cost of the loan; when applying for a loan, the lender will apply a cost to the debt; the cost is governed by the actual rate of the loan PLUS a notional buffer of 2.75 to 3% on top of the rate.
If we go back to the beginning of the year, the rate being used was in the vicinity of 5.25%, with the recent interest rate rises, 2.35% over the past months, then this has now increased to an assessment rate of 7.6%, I’m sure you would agree, that’s a significant difference.
From a pure borrowing capacity perspective, this has had the effect of reducing the amount that can be borrowed by 20%; if rates rise further, as they are expected to do, then it’s not inconceivable to see the amount that can be borrowed drop further.
The second factor that I’d like to highlight is currency exchange rates. As you will have seen, over the past number of months, the AU$ has dropped against the US$, now with many of the Expat currencies pegged to the US$, this has had the effect of increasing the value of your income!
From a borrowing perspective, this is a definitive win!
If we go back to 6th April 2022, before the interest rates started to rise, the US$1 was buying AU$1.31. However, the value of the AU$ has dropped against the US$ over the past six months, and today the same US$1 is now buying AU$1.57 (27th September 2022), that’s an increase of almost 20%!
So, what does this all mean?
If you were onshore, then your buying power has reduced by 20% due to the rising interest rates; however, if you are an Expat and earning a currency pegged to the US$ , then the interest rate rise has reduced your borrowing capacity by 20%, but the increase in the value of your earned currency has provided a 20% increase over the same period. The net effect of this would mean that your borrowing capacity has remained the same.
Now, there are always other factors, such as living expenses, etc. In the country you live in, you can see that you are potentially in a much stronger position being offshore than if you were onshore.
The AU$ is currently lower than the 10yr average, so how long it will remain at this level, there is unclear. With various economies around the World showing strong signs of recession, history has shown that the US$ strengthens in times like these. However, the Australian Economy has previously shown to be more resilient than other economies; if we look back less than ten years to April 2013, then US$1 was buying AU$0.95; wasn’t that a good time to be earning AU$!
What this shows us is that the currency can have just as significant an effect on the borrowing capacity of an Expat as interest rates, unfortunately neither can be controlled! They can be timed, though, and currently, the exchange rate movements have been in the favour of the Expat; if the AU$ increases, though, this will have an equally significant negative effect.
You will no doubt have read over the last few months that the Australian property market has come off the boil and, in some cases, shown negative growth; from the feedback of our clients, the noticeable factor is the lack of competition when bidding on a property. This is being supported by the Corelogic data showing the number of days a property is on the market; perhaps now or the near future is a good time for Expats to ask themselves if this is the right time for them to buy.
While there are always many factors that will affect a purchase, the situation with the Aussie Dollar falling is currently a silver lining to what many are viewing as a fairly dull outlook, but it may not last long!
If you’d like to connect directly with Adam Kingston from Australian Expat Finance, THE EXPATRIATE Mortgage Specialist, click on this link.
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