How do banks view foreign income loans for Australian Expats, living abroad and earning foreign currency?
This is an important question that needs to be answered and why one may need to seek professional advise from an Australian expat mortgage specialist when looking to apply for a foreign income loan from an Australian Bank.
“Understanding how Australian Banks view foreign income when assessing a mortgage is crucial to the success of your foreign income loan application”.Australian Expat Mortgage Broker Adam Kingston
Anyone who has applied for or researched borrowing to fund a property purchase in Australia, when living outside of Australia, earning a foreign currency other than AU$ generally can’t quite understand why a lender has decline a foreign income loan based on the inability to show servicing.
Servicing is an industry term, it’s basically is being able to show you have the ability to service or afford the loan, on top of your everyday commitments.
Every Australian Bank lender has its own model or rules, but broadly the majority have a model that looks something like this:
- Identify what income they will accept (eg base income, bonuses, allowances etc)
- Convert to AU$
- Discount by 20% – this is to protect against interest rate movements
- If allowing additional income, eg bonus (lower or average of 2 yrs) – discount a further 20% – this is due to not being guaranteed
- Apply Australian tax rate
The resulting figure is the net income amount the lender will use when assessing your foreign income loan application.
On a positive note, they will generally allow you to use 75% of the rental income to help to service the foregin income loan.
Let’s look at an example:
Client, Joe is married with 1 child living and working in Hong Kong.
Foreign Income is HK$1,000,000, HK$500,000/A housing allowance and bonus HK$500,000
So, how will a lender view the foreign income?
- Foreign Income (base and housing) – HK$1,500,000, to AU$ less 20% = $224,000
- Bonus – HK$500,000 to AU$ less 20%, less 20% = $ 60,000
- Total = $284,000
- Less AU Tax (AU$100k tax, $5k medicare ) = $179,000
When you consider Joe started with HK$2,000,000 foreign income, or AU$372,000 income, then as you can see the discounting is fairly dramatic.
Now we have Joe’s income, we need to deduct his expenses. They are:
Rent, Groceries, School Fees, Transport, Childcare, Utilities, Insurances, Medical, Memberships, Entertainment etc.
Joe lives in an apartment, his son attends the international school his family enjoy a comfortable expat life, but their living expenses are HK$ 80,000 per month or AU$14,900 per month, so from a lender perspective, Joe can barely afford his life in Hong Kong, this is without adding the further expense or liability of a loan for an investment property.
So, what can Joe do?
The detail of Joe’s situation and the wording of his employment contract and structure of his income may assist to create a notional surplus. In Joe’s case, his employer provides a housing allowance of HK$500,000/a. Joe’s rent is HK$41,000/m.
Will the lender allow the rent allowance to pay the rent rather than being treated as income? If so, then the income will drop but at the same time the expenses reduce. The key is that the rent allowance is not discounted by 20% and AU tax is not applied.
In Joe’s case, this was enough to make the difference of being able to obtain a small loan of $400,000 to buy an investment property in Brisbane with an 80% loan.
If you would like us to help you to identify what may be possible, please contact us.