Get Your Dream House In Las Vegas With Borrowing Lowest Interest Rate Currency
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My current rant is against financial advisers who suggest borrowing in a currency with a low interest rate to purchase a home in a different country, such as United State. That can work, but most people don’t understand the real risk.
For instance, some would find the appeal it purchasing a house in las vegas high rise condos using the Singapore dollar, which has a much lower interest rate than the US Dollar. But there is danger in gambling with foreign currency using borrowed money.
Let’s say the new property launching from turnberrytowers.com/ in Turnberry Towers will cost US$2,000,000 (example – not actual price). The bank might only able lend a maximum 80 percent of the cost. The bank will lend it in either Singapore dollar at an interest rate of 2 percent, or US dollars at an interest rate of 10 percent. But financial advisers often fail to tell you this critical point: based on pure interest rate theory, the US dollar will depreciate against the Singapore dollar by the differential of the interest rates of 2 per cent and 10 percent.
Of course, currencies and interest rates fluctuate for many reasons. The point is that if the bank has loaned you the maximum of US$1,600,000 in foreign currency equivalent whose value then rises, the bank will consider you to be in debt for more than US$1,600,000. A friend of mine in this situation, whose loan is far greater than US$1,600,000, recently received notice — a “margin call” — from her bank requesting a further S$400,000 to make up the difference, and she is now sick with worry.
And be aware. If you rely on US dollar rentals from your new home to pay your Singapore-dollar mortgage, you are back in the currency risk trap. US dollar rental payments can in theory depreciate against the Singapore dollar over time, meaning that you risk receiving less when the rental is converted to Singapore dollars—and thus bringing in less to service your Singapore borrowings.
In some cases, the bank will allow you to give the margin-call money to them to hold on deposit, which you can earn interest on, but you continue the same risk of speculating with currencies using borrowed money. In fact, if you read the small print in your loan agreement you may find that the bank also has the right to demand a revaluation of the house if United State property prices slide instead of increase. If the house valuation goes down, this has the same potential result of a margin call, in that your loan may now exceed 80 percent of the value of your house.