Behind the Investment News

Borrowing overseas to get better interest rates...
By Phillip McGann, 5/10/2006

Can I borrow overseas at lower rates and invest locally in Australia?

Australian Interest rates are amongst the highest in the Western world and up until recently were 3 to 4% higher than countries such as the USA and Japan for similar types of borrowers i.e. home loans.  Many members have seen this as an opportunity and asked the question of their Advisers.

The simple answer is – no, "small, individuals" cannot borrow overseas, and really, it is riskier than people think. The reasons behind this analysis are a tad more complicated.

The biggest problem when trying to do this a practical one.  To access lower international interest rates you would need to borrow money domestically in say Japan from a local Japanese bank. 

This bank would require collateral for the loan and all your collateral is based in Australia along with your income. 

The next problem is exchange rate risk.  Your income is in Australian dollars whilst the interest repayments would be in Japanese yen.  If the exchange rate moved in the wrong direction, then the benefits of lower repayments in Australian dollar terms would soon be lost.

The difference in interest rates from country to country is reflected to a fair degree in the differences in exchange rates and these exchange rates fluctuate with changes in interest rate fundamentals between the two countries – this is known as the “interest rate differential” and was particular dramatic between interest rates in Australia and the US over the past three years as they came out of a recession and we continued in buoyant times. 

Whilst small individual investors cannot access offshore borrowings easily many larger investors and borrowers take advantage of these differentials all the time and manage the currency risk to ensure the benefit is not eroded.  The difference is they do it in the hundreds of millions of dollars not the hundreds of thousands dollars at the individual level.    

Quite often these same funds may well be  “brought back” to Australia and lent out to individual borrowers via the general banking system or via non-conforming lenders etc.  The lenders take on the currency risk and the resultant margin as well. So you are “sort of” borrowing offshore but not in the manner and cost that you would like!!