Australian Home Loans: The Ultimate Guide for Aussie Expats in 2020
 

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As an Australian citizen living abroad, obtaining a home loan as a non-tax resident of Australia is available but gone are the days where banks would hand out loans to anyone who asked.

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Tightening of credit policies for Australians expats has been gradually increasing over the last four years. The high levels of restriction we see today are the results of the Australian regulators' actions to control the influx of foreign investments into residential property and minimising money laundering risk. 
 
Read on to see how the lending landscape has changed and what this means for you as an Aussie expat.

The current lending situation.

What’s still possible? 

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• You can still get a loan term of 30 years regardless of age. There have been talks to limit this to the retirement age, but for now, your grandma can still get a loan for the full 30 years.

• Variable-rate and Fixed-rate mortgages are available as standard. With the option to do split rate loans, i.e. a combination of variable and fixed.

• No interest rate margins/penalty by being overseas. You'll get the same interest rates as those residing in Australia will - assuming the same bank/product. 

• No early repayment penalties by law. This cost was abolished years ago and replaced with a one-off discharge (admin) fee when you pay off your loan - typically around AUD 300.

• Interest Only repayment loans are still available. Great for those seeking minimal monthly repayment and maximum cash flow flexibility.

• Able to cash out / release equity from existing Australian properties you own to borrow more for investment purposes such as buying another property, renovations etc.

What’s not?

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• Australian based banks no longer offer multi-currency loans - only AUD now. With the AUD depreciating since 2011 you were better off borrowing in AUD anyway, now you don't have of choice, sadly.

• Australian banks based Overseas. E.g. ANZ Hong Kong, NAB Singapore, CBA UK etc. No longer offer residential mortgage services. You'll see them around, but they're only serving corporate institutions now. 

• Relying on policy exceptions to get your loan approved. The lenders have now become very, very policy-driven. I.e. These are all our rules. Do you meet them? Y/N "But I've banked with you lot for 20 years!" doesn't get you very far nowadays I'm afraid.

In truth, the banks are still hungry to lend to Australian expats, but it's the regulators, namely the Australian Prudential Regulatory Authority that is imposing harsher restrictions on bank lending that is keeping a lid on foreign investment lending, which includes you, as Aussie expats.

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For more FAQs such as those relating to buying a home, refinancing, fees and expenses, please visit our FAQs page here.

How do the banks assess your foreign income?

(spoiler: it’s bad, sort of)

If you were living and working in Australia, the lender would consider 100% of your gross income when calculating your borrowing capacity but as an Australian expat, the lender would only look to take 80% of your gross income. 
It can range from 50-100% depending on the type of currency and the lender. 
 
This immediate reduction is to account for currency risk. The fluctuation of the currency relative to the AUD at any given time during your loan term. The more significant the reduction, the more volatile the lender perceives that type of currency to be. 
 
Currencies like the USD, GBP, SGD are tier 1 currency, secure and stable, and lenders would typically look to consider 80% of the income. Whereas currencies like BRL, TRY would see reductions by as much as 50%.
 
Of course, the foreign currency you earn has a good chance of appreciating (therefore strengthening your position) just as much as it has depreciating, but the lenders will always assess your application from a pessimistic, conservative angle to ensure even in dire situations you will still be able to service the loan. 
 
On top of this currency exchange reduction, Most lenders will also use Australian tax rates when assessing your income rather than that of the country you live in. 
 
There are a million Aussies scattered across a hundred different countries. And the majority of lenders don't have the capacity or the desire to want to understand how your income is taxed, so they just apply the Australian tax rates which they know is one of the highest in the world. 
 
The thinking behind this is that if you can pass the stress test using Australian tax rates, you'll pass anywhere else.
 
However, this especially hurts if you are in a low tax rate country such as Singapore, Hong Kong, or United Arab Emirate, which doesn't have to pay any income tax.
 
Fortunately, some lenders will allow you to use your local country's tax rates. If residing in low tax rate countries, this will have a significant positive impact on your borrowing power.
 
The table below shows how much of your income a typical vs. lenient lender would consider after deductions/taxes. 
 
Scenario: Gross $240,000 AUD equivalent income
Choosing a lender that is favourable to your income's currency will make a large difference in how much you can borrow.

Choosing a lender that is favourable to your income's currency will make a significant difference in how much you can borrow.

Buying with your foreign spouse may DOUBLE your stamp duty costs.

If you are an Australian citizen purchasing a property with a foreign national in joint names, please be aware that Foreign buyers stamp duty surcharge will apply to half of the property's value which can come as a shock.
 
For example, an Australian citizen buys a $1,250,000 property in NSW with a foreign spouse, jointly owned 50/50.  
 
This purchase would equate to a standard Stamp duty of $54,052 plus Foreign Buyers Duty of $50,000 for a total of $104,052. It is effectively doubling the stamp duty cost.
 
The alternative is to just purchase in the Australian spouse's name and only having to pay the standard Stamp Duty of $54,052. There's no penalty or surcharge levied on Australian citizens residing overseas.
 
If your home loan application doesn't service without your foreign partner's income, some lenders will allow the foreign spouse as a co-borrower and not have to be on the property title. 

Click here to calculate your stamp duty or learn more about foreign buyers duty.

Do you need to pay (Australian) tax if you get a home loan as an Aussie expat?

You only need to pay income tax on Australian sourced income. 

So if your home loan was because you bought an Investment property and that property is generating rental income then yes, you'll be required to lodge an Australian tax return every year from that point onwards.

But fret not! The Australian Tax Office (ATO) won't be coming after your foreign salary income, foreign investments or any offshore investments as a non-tax resident of Australia. (Except if you have a HECS/HELP debt, then you will need to report your foreign income to calculate the repayment of HECS/HELP - your foreign income won't be taxed)

Other taxes that may be applicable are: 

• Land tax (if the total land value in specific State is above the threshold limit), 

• Victorian Vacancy tax (if property left vacant in VIC), and 

• Capital gains tax (when you sell the property and made profit)

If you aren't sure about your tax residency status, contact us, and we'll be happy to help.

P.S. Negative gearing is alive and well for Australian expats. 100% of your Investment Loan Interest rate is tax-deductible, as is building depreciation, property management costs and much, much more. 

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Use our Investment property calculator and learn more on how to maximise your investment from a tax perspective.

Case Study: Aussie Expat couple Matthew & Kylie Living in Hong Kong (high variable income)

Background: 

Matthew works in Finance in a Senior position. The majority of his income comes in the form of Annual bonus, education allowance for the kids, and housing allowance, which pays for their high rent expense. Kylie is at home managing the kids.

Goal: 

Wants to buy Investment property for $2-3M (to build up tax credits while abroad with an expectation of capital growth) that will one day be their Owner-occupier home when repatriating back to Oz in a few years. Require 70-80% LVR, low rate with an Offset account and flexibility to pay the loan off as desired.

Problem: 

The lenders they approached declined their loan application due to failed servicing (stress test). The lender would not consider Matthew's substantial bonus income which accounts for 40% of his total income. Furthermore, the lender reduced his housing allowance to 64% and applied Australian tax rates to his income despite the Hong Kong tax rate capped at 15%.
Note: The above is the norm rather than the exception.

Solution:

Odin Mortgage provided Matthew with a personalised assessment and multiple lending options before any submission of documents. His high variable income got included in the evaluation, as well as the use of local Hong Kong tax rates resulting in borrowing capacity exceeding what was required. Structured a flexible split rate loan with an offset account and the ability to switch to Owner-occupier loan if plans to return to Australia came earlier.  
 
On paper, this may seem like a strong application, but to the majority of banks, this is a declined application. The result of which is 2-4 weeks wasted in the home buying process as you waited idly for the bank to take its time and tell you 'sorry, no, this one's not for us'. 

Your Home Loan approval starts with the right advice.

This year is arguably the most volatile period post-the global financial crisis and the lenders in Australia have tightened lending policies more than ever. 

That said, many of the loan scenarios are still applicable today, only that you might not be able to borrow as much as you once did a few years ago, and where you previously had dozens of options, you might now only have a handful. 

Speaking to an expert, finding out which lender suits you best and structuring your application to meet all the policies will be the key to a successful home loan.