Ringgit versus pound loans


MALAYSIANS who bought properties abroad – in countries whose currency is strengthening against the ringgit – may have to fork out more to finance their purchases, if they have not “locked in their loans” or created a pound-denominated fund at earlier and more favourable rates.

The ringgit has been weakening against a basket of currencies – notably US dollar and Singapore dollar – since the fall in oil price in June 2014. The Swiss float, on Jan 16, added to the volatility and the ringgit has fallen further since.

It is now more than RM2.70 to S$1, about RM3.60 to US$1 and about RM5.50 to a pound.

The story of Malaysians entering international property scene since 2009 is clearly seen with the interest in Battersea Power Station project, one of Malaysia’s most promoted and famed property ventures abroad.

A buyer in Battersea project who declined to be named says the rise in pound does not really affect her. In fact, she is “happy” with the rise in pound because she has been progressively building a pound-denominated fund starting from RM4.70 – or lower – to finance her purchase. She bought the property in January 2013 when the exchange rate was about RM4.70 to £1.

When she sells later, she will earn both in terms of stronger pound and higher value of the property.

She says people who bought into London – and other overseas properties – would be serious and savvy investors. They would have “locked in their loans” at the time of purchase, and at the same time, started a pound-denominated fund.

Unlike Malaysia where buyers pay for their unit progressively, the Battersea – as with other London projects – requires a 20% downpayment in order to sign a contract of sales, which is equivalent to sales and purchase agreement. The remaining 80% is paid when the project is completed. About six months before the completion of the project, the buyers will shop for a loan, if they have not done so.

Phase 1 of Battersea, comprising more than 850 units of studios and 3-room apartments, is scheduled to be completed in June 2016. Phase 1 was priced between £400,000 to £6mil, at about £1,000 per sq ft. Some of the buyers have put their units up for sale while others plan to rent it out.

A source from Battersea Power Station Malaysia Sdn Bhd says an information pack with loan contacts were given to buyers. “We have not asked for payment because the property is not completed,” she says.

Maybank and CIMB are two local banks offering up to 80% financing. OCBC offers a lower margin. A bank officer who declined to be named says foreign banks may offer a 60% or even 50% margin, with a more attractive rate of interest. Maybank is offering an effective rate of 4.8% for a ringgit loan and 4.6% for an Islamic pound-denominated loan. CIMB’s effective rate is 4.3% for pound-denominated loan or 5.55% for ringgit loan.

Maybank’s overseas property portfolio currently forms about 1% of its total housing loan portfolio, of which the majority is for properties located in London zones 1, 2 and 3. CIMB offers financing only for London zones 1 and 2.

Whether it is a London or Singapore property, should one opt for a ringgit or a pound-denominated loan?

Two officers from different banks say it depends on the objective and income of the buyers. Those who earn in pound – or for other reason – may opt for a foreign currency loan. Those who earn in ringgit will lock in the rates with a ringgit loan. The buyer is not subject to forex fluctuations even if pound goes up to RM7 per pound because he has “locked in the rate” at RM5.50, for example, the officer says.

However, if it is a pound-denominated loan, he will have to pay more unless he plans to use the rental from the project to offset the loan. He has to make sure he gets a steady rental income from the unit.

From his experience, the officer says he has yet to come across a customer whose rental income from the property he is financing is able to cover his loan, unless the customer has other properties from which he is getting rental and which he has already fully paid for, or other sources of income.

Rahim & Co consultant, marketing (London properties), Guy Major says there is “inherent danger” if one takes a pound-denominated loan when one is earning in ringgit. “It is ‘dangerous’ to have a mismatch between your ability to pay based in ringgit and a pound-denominated loan),” he says.

“We have seen this before in past financial crises. If pound goes from RM5 to RM8, your debt would have doubled in ringgit terms,” he says. Those who have locked in at a lower rate, and have amassed pound, are in a very good position.

Switzerland’s float of the Swiss francs offers a lesson. On Jan 16, Switzerland lifted the rate of 1.20 francs to the euro suddenly. That shook the financial world. Hungarians and the Poles mortgaged their homes in francs to take advantage of lower interest rates. They took up a foreign currency mortgage because they live in a relatively higher interest rate country and have decided to borrow in a lower interest rate currency (Swiss francs).

They then have to repay interest and principal in Swiss francs. They did that in order to reduce interest repayment but the risk they assume is huge. Hungarians and the Poles earn in Hungarian forint and zloty. They need to buy Swiss francs every month to repay their mortgage.

The same thing may happen to Malaysians who do not have a sure and steady pound-denominated income but opts for a foreign currency loan.


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