Financial Planning for Expatriates, PR and Singapore Citizens | T: +65 6225 5707 | E: info@chartwell-associates.com
If you are on this page, then the chances are that you are an expatriate looking for an International mortgage.
The good new is that we can probably help you.
Over the years we have built up an expertise in international finance and an extensive network of overseas lenders, although since the GFC the number of overseas lenders has diminished greatly and lenders have become much more choosey.
The range and types of mortgages available in the offshore market has also shrunk and the choice is really between capital & interest and interest only. These are explained below, but to make a truly informed decision, contact us and ask for an appointment with one of our advisers.
(Also known as Principal & Interest or Repayment Mortgages)
This is the simplest type of mortgage. The payments you make to the lender every month pay off both the capital and the interest from the loan. Provided you keep up the payments, you are guaranteed to pay off the loan by the end of the term agreed (usually up to 25 years).
The lender calculates your monthly repayments depending on the amount borrowed, how long for, the prevailing interest rate.
If you would like to learn more about Capital and Interest Mortgages contact us here.
An interest only mortgage is where the lender only charges you interest on the money you have borrowed. You don’t pay the capital back until the end of the mortgage. The lender may ask you at the outset how you will eventually repay the outstanding capital and may even ask you to provide an investment plan of one type or another to repay the loan at the end of the term, but usually they will leave the repayment plan entirely up to you.
Every month, you pay interest to the lender for the duration of the loan. The lender calculates your monthly repayments depending upon the loan size and the prevailing interest rate. At the end of the loan period, the lender will expect the initial capital they lent you to be repaid in full by whatever means you have arranged.
If you would like to learn more about Interest Only Mortgages contact us here.
If you are living in your property there are usually no tax benefits, or any benefits, of having a loan outstanding. In this case the aim should be to pay off the loan as quickly as possible so that the money that was paying for the loan can be used for another wealth generating investment.
If the loan is for an “investment” property, then there are a number of good reasons to maintain the loan on the property as high as possible, for as long as possible.
This seems to be opposite to what most expatriate investors do. That is to put as big a deposit down as possible and then use their higher earnings to pay the mortgage off as soon as possible.
We believe it is best to separate the interest payment from the loan repayment for several reasons. So an interest only loan should be backed with a savings plan or a lump sum investment to serve as a repayment vehicle.
There are several potential benefits of an interest only loan combined with a saving plan or lump sum investment compared to a repayment mortgage.
1. Monthly payments may be lower
An interest only loan backed with an investment plan to repay the mortgage at the end of the term will usually result in lower monthly payments than a repayment mortgage, which obviously helps with cash flow. This is especially true now with interest rates at very low levels.
2. There may be tax benefits, especially if the property is rented out
There may be a tax benefit to paying interest on a mortgage for properties that are rented out. With the principal outstanding during the entire life of the loan, the opportunities for reducing taxes with interest payments remain, in contrast to the reduced tax advantages over time for the repayment method, as shown in the two graphs below.
The linear interest payments of the interest only loan continue throughout the life of the loan to offset rental income throughout the loan term. The continual tax benefit is especially desirable if your total income is expected to rise over time.
3. Interest only loans result in a lower financial commitment
In the event you are faced with a temporary disruption to your income or cash flow for whatever reason, such as vacancy in an investment property, unemployment, illness or any other circumstance that means reduced cash flow to pay a property loan or loans in the short term, you are much better off with a combination of an interest only loan and a savings plan because you can take a holiday from contributions into the savings plan until normal cash flow has resumed, which would reduce your immediate payment obligations by 30% to over 50% depending on the rates and terms of your loan due to the lower payments to the bank with an interest only loan. This could be a very important difference in the event of unforeseen difficulties as it helps you to buy time.
4. You can diversify your assets if they are heavily biased towards properties
Using the investment plan to diversify into other assets reduces the risk of your whole portfolio if your portfolio is heavily biased towards property, which has seen strong appreciation in recent years. If property prices are to fall, your portfolio would be directly affected. With a more diversified portfolio, the negative impact on your net worth would be less in such an event.
5. Interest only loans allow you to maximise the benefit from today’s lower interest rates
The lower the interest rates are, the more attractive an interest only loan is. If money were free to borrow, you quite likely would want to borrow as much as you could. Conversely, if rates were very high, say 25% or 30%, you would likely not want to borrow much at all if you could help it. Currently rates are generally low by historical standards, which is an incentive to borrow and maximises the benefits of interest only loans.
6. Savings plan or lump sum repayment vehicles are portable
Another benefit from backing the loan with an investment is portability. The investment stays with the investor and is not tied to the property in the event of a sale, enabling the investor to purchase another, using the investment to back the new property loan.
If you would like to learn more about P&I and Interest Only Mortgages contact us here.
Most expats considering buying an investment property are hoping for a “capital gain”, especially since most may have seen their own property increase in value considerably.
However, when buying an investment property the “capital gain” is arrived at in a very different way and it is important that this is understood in order to really appreciate the benefits of “investment property”.
Let us consider a property bought for U$100,000 with a mortgage of 70%, U$70,000.
Most people will be hoping that the property market will rise and make a capital gain on the price paid for the property ie. U$100,000. Let us assume that the property market does rise, but at a slower pace, and after 10 years the value has risen to U$150,000.
This represents a 50% increase in the purchase price, a gain of U$50,000. However, since this is an investment property this gain, if realized, could be subject to Capital Gains Tax.
However, in the mean time the tenant has paid off the mortgage of U$70,000. It is this U$70,000 represents the real capital gain, and this is not subject to capital gains tax. This is a guaranteed capital gain and tax free. Any gain in house prices is totally speculative, potentially taxable and really only the icing on the cake.
So for an initial investment of only U$30,000 you receive a guaranteed tax free capital gain of U$70,000 and a speculative (taxable) gain of U$50,000.
If, unfortunately, you buy at the top of a “property bubble”, and (as many commentators in the press have been predicting) the property market crashes by 25%, you would still have a gain of U$45,000 tax free, plus a potentially useful U$25,000 tax loss.