How to Minimize your Mortgage Portfolio Liability........

How to Minimize Your Mortgage Portfolio Liability and become an International Property Investor

By David Haahr

In today's ever-changing and innovative financial world, consumers have become used to new and creative means of making and saving money. This is no different when it comes to borrowing money.

A little-known alternative to the standard method of borrowing focuses on allowing clients to significantly reduce their monthly mortgage and expenses while offering the potential to reduce capital borrowing and liability over time. Traditionally, if a client wants to borrow money to buy a property, he will pay the local area rates of wherever he is purchasing the property. This can be a hassle, especially if you're not a resident in the country where you want to buy.

Lenders in Thailand have been nervous of non-residents (Expats) and the result has been an ever increasing challenge for most all foreigners to secure any type of mortgage or property financing when relating it to the property market. There are a number of other countries that impose similar restrictions which include charging extra interest if you are buying for investment purposes and then place all sorts of restrictions on what you can and can't do with the property, to the point where some people abandon the whole idea.

If you're thinking of buying a home abroad or you already own foreign real estate assets there are a number of options available that you now need to look at. The first thing you need to be aware of is that buying a home overseas is a taxable action; it can draw an increased liability for taxes such as inheritance, income and capital gains tax not to mention that such a purchase often incurs stamp duty, transfer taxes and of course legal fees. This all means that it is sensible to research your purchase options and obligations carefully from a financial as well as legal perspective before making a commitment to purchase foreign property. Sometimes the establishment of an offshore company through which the property to be purchased will be bought is a more sensible approach from a fiscal perspective as it can mitigate or even completely negate financial losses....however, some countries disallow foreign ownership of real estate through an offshore structure.

There can be advantages for some overseas citizens and entities using an offshore company for the purchase of investment property in the UK for example. Using such an arrangement can sometimes result in the mitigation of capital gains tax as well as inheritance tax. This is not to say that purchasing property in international locations has not been without its challenges as anyone that owns property abroad will tell you. In the past any offshore limited company wishing to purchase property in the United Kingdom with the option of using it as an investment asset and letting it out for an income had a difficult job securing finance to do so. Options were strictly limited locally in the UK to commercial finance vehicles and the only other alternative when it came to offshore companies and UK buy to let property was using lump sum capital outlay to cover the whole cost of the property purchase. But now all that is about to change...

Fortunately, for those of us based in Asia, a lot of these barriers have now come down. Through our associations with some large international banks we can offer a product called the Managed International Currency Mortgage which is now available to the international property investor. They not only provide the facility for you to buy in a number of select jurisdictions (I am happy to supply the list to any enquiries) without requiring an existing property portfolio as collateral (subject to your credit worthiness etc) but for those with existing property portfolios in the for mentioned jurisdictions these lenders will also allow clients to borrow in different currencies to that of their income or base asset and take advantage of lower interest rates, which can significantly reduce their outgoings resulting in increased rental yields. The second objective of reducing capital borrowings is achieved by initially borrowing in a currency considered strong against your base asset, hoping that historic trends repeat and that the currency weakens over time. Guidance on the most appropriate time to switch currencies and make capital savings is vital and is included in the service. This then provides you with the opportunity to pay off the capital owed on the property earlier resulting in significant interest payment savings. These existing properties in conjunction with this product can also be used to release equity and allow you to purchase property in any location as well as increase your property portfolio or even start building one.

The way it works: Let's say a client purchases an investment property in the UK and borrows sterling-150,000 from a bank. If he were to borrow in his base currency (UK) at 6%, his monthly repayment on an interest-only loan would be sterling-750. This is assuming he has opted for an interest-only mortgage to keep costs down and expects a rental yield of 6% as well. Allowing for agents to manage the property and for some essential maintenance, the client's yield is actually reduced to 5%, which means that he has to make a contribution toward the property on a monthly basis. He justifies this to himself as he hopes for capital appreciation by the time he sells.

If the same client were to take advantage of a currency mortgage, and after some analysis and discussions with his agent then decides to borrow in Swiss Francs, he would be charged 3% rather than 6%, and so his monthly interest payment would be SF-375, which even after agent's and maintenance fees means that he is in profit each month and the investment is self-sufficient. Taking the difference between the obligation in the base currency and the selected currency, a perfect hedge has been created against adverse currency fluctuations. The client would also be getting dual use of the asset, as not only would he be getting capital appreciation on the property, he would also be getting participation from the savings, creating a new fund that can be used to repay the loan at some stage in the future or on a monthly basis. This in itself can retire the mortgage obligation 1/3 faster.

In this particular example, the total cost of the house, if he were to use the traditional method, would be sterling-425,000 over 25 years again (UK), whereas utilising our philosophy it would cost sterling-261,924, and the client would have the loan fully paid off after 19 years (rather than 25 years). (Note: The above calculation assumes interest rates remain unaltered throughout the term and that the client invested sterling-375 per month (from his extra savings) and received a modest return of 7% per year.)

Profit potential:In currency mortgages, clients can switch between currencies on a quarterly basis and therefore take advantage of weakening currencies, which in turn will reduce capital borrowings and monthly expenses. This again is part of the service package designed for the international property investor. The relationship between the British pound and the Japanese yen over the last 10 years has been such that if a client (thru his money manager) got the timing absolutely perfect, then as well as reducing monthly interest payments by 75% against Sterling rates, he would have also knocked off a staggering 35% from his loan thereby allowing the early retirement of the mortgage note.

Bear in mind, of course, that currency mortgages can work against clients as well. As such, selecting the currency at the outset requires careful analysis as to which currency is the most appropriate both from an interest rate basis and also from its strength in relation to one's base currency. Furthermore, the whole mortgage package must be managed on a regular (quarterly) basis in order to insure that both objectives are achieved in a timely fashion.

Questions Please Contact: David Haahr

Real-estate and International Investment Consultant

Ph: 66(0) 83 883 9796

Email: Rayfieldent@yahoo.com