Residential Mortgage Financing Options for Offshore Buyers

Residential Mortgage Financing Options for Offshore Buyers

This article has been authored by CT Johnson from Basis Point Consulting

This article has been authored by CT Johnson from Basis Point Consulting

Although I mostly deal with corporate finance, one of the most interesting areas of non-bank lending in Australia is individual residential mortgage financing for offshore buyers.

Traditional Mortgages Have Become Difficult to Access for Foreign Buyers

We do a lot of work with Chinese clients who are either Australian property buyers themselves, or who serve the offshore Chinese buyers’ market.  The Big Four Banks have all either abandoned this market or radically increased their documentation requirements for offshore buyers, with the net effect that many of these foreign property purchasers cannot obtain traditional mortgages to finance settlement of their Australian off-the-plan properties.

And Use of Cash Has Also Become Difficult

Exacerbating this problem is the fact that over the past 12 months the Chinese government has tightened currency controls, making it extremely difficult for Chinese buyers to use their own cash to settle their transactions.  For a Chinese buyer with a property settlement coming due, this is a huge problem; for an Aussie developer with 30% of their sales to overseas buyers who may now be unable to settle, this is a potential catastrophe.

The Finance Options Available to Foreign Buyers of Australian Property

The good news?  There are lenders who will finance these foreign purchasers.  The bad news?  There are only a few options and they’re all pretty expensive.
In the Australian market, there are only 3 publicly available sources of finance for offshore property buyers.  I routinely make this statement and am occasionally challenged on it, but no one has yet pointed to a 4th source that’s actually in the market with a product that foreign buyers can access.  If you dig into those claims, you mostly hear about lenders that are “planning” to offer such-and-such a product, or private lenders that are effectively unreachable.  So I’m only counting sources with products that are currently available to the general public.

Option One

The first source is Australian.  They have a low documentation product that essentially requires only a passport and clear title to the property to qualify.  They charge 12% interest, plus a 2% origination fee, plus 1% in other fees, and they lend at or below LVRs of 70.

Option Two

The second source is Singaporean.  This product has high documentation requirements, similar to a bank, plus a host of other restrictions – e.g. it’s only available for properties within 10 km of the Sydney or Melbourne CBDs; applicants must be between 21 and 65.  They charge 4.7% interest, plus fees of around 4%, and they lend at LVRs of 70.

Option Three

The third product is Australian, backed by Chinese investment.  This product only recently came on the market, so its less clear how it works.  It appears to be a medium documentation product with no geographical restrictions that charges 9.5% interest, plus 2-3% other fees and LVRs at or below 75.

Market Outlook

I know of two other products that should come to market in the next two months, but they’re not yet on offer.  Both are similar to the third option described above and both are Australian products backed by Chinese investment.

How This Impacts Australian Property Developers

Given the volume of off-the-plan properties that have been pre-sold to foreign investors and which will come due in the next 12-24 months, this is an area that’s important to many Australian property developers and to the Australian property market as a whole.  While new lending options will come into the market, this space is currently underserved.  If you’re a foreign buyer struggling to settle, or an Aussie developer sweating out the possibility of massive settlement default rates, it’s a topic with massive financial ramifications.  Unfortunately, that looks set to persist for some time.

About the Author

CT Johnson is the General Manager of Basis Point Consulting, a business information firm that focuses on finance and investments from China.  For more information on this topic, feel free to visit the Basis Point website (www.basispoint.com.au) or contact CT directly at ctjohnson@basispoint.com.au.

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