This is just a quick note to all the Australian property investors out there who has taken SGD loan and now are facing margin calls from the banks due to drastic weakening of the AUD against SGD.
Do note that we do not advocate SGD loan for those who are unfamiliar with FX movements and who hasn't got the ability or resources to manage the fluctuations. The approaches that follow are just common strategies that many have taken to mitigate the situation. We do not warrant or represent in any way that they will work for you. Should you decide to adopt any of the approaches, please consider carefully or consult your financial adviser beforehand.
Now we are done with the warning. And before we talk about the strategies, the first and most important thing when caught in such a situation is NEVER NEVER NEVER IGNORE YOUR BANK!
Your bank does not want your property. And they are usually more than happy to help you sort out a strategy to overcome the situation. You should always pick up their calls. Explore options with them. And make yourself available to them when they need to know how you are doing! Sometimes you might have other investments that you can't liquidate immediately to solve the situation. Let them know and work out a compromise. The key here is, the banks need to know that you are on top of things. So stay on top of things!
So here's our 2 cents' worth...
1. It is not the end of the world!
Yes I know there's even a disaster like movie named "Margin Call" starring Kevin Spacey and Demi Moore, but no it is not end of your world. It can be a stressful period and for some who are a little unfamiliar with such, it is a little challenging. But trust me, it can be managed. Gone are the days when currencies can fall by half or more. These days, central banks are always ready to intervene should the situation turns too sour, and the prevalence of international trade does place a limit on how much currencies can move by.
In fact, compared to stocks, the downsides of currencies are much more mitigated unless you are into some obscure currencies like ISK or TL.
2. Wait for a while
Now that we got your heart settled down a little. The next step, which may sound a little risky but unless you have strong opinions or tip-off about the directions of AUD, wait it out a little. Usually a major movement can take up to 1 month to complete. Unless you are punting for profit, get to know what you are dealing with first. If it recovers in time, you might not even have to do anything. The bank may require you to top up or switch loans back to AUD. The best thing in our opinion is to let things settle and then decide what action to take. Premature actions often lead to more heartaches.
3. Switching your loans to AUD
This is something you might be tempted to do but often is the worst thing you can do in a dire situation. We advocate that switches are best done in calculated peaks and troughs. Not desperate moments. To switch loans is to actualize the loss and if the currency recovers, you can get caught in a very ugly double whammy situation.
But of course if you have not prepared for such a situation, switching of loans might often be your only course of action available. Then it is a sad but necessary step.
5. Paying down the loan
This is another very obvious option. But the issue here, is that you will be actualizing the losses. And once paid down, it is hard to get the sum of monies back. So do take note.
6. Topping up the security
Huh? I thought the security was the property? How do I top up the property?
Explore with your bank! Often banks are able to take in additional securities to support the loan. Additional AUD deposits (since it is now cheaper to buy AUD and the interest rate is much better than SGD, why not?), shares, unit trusts and sometimes even insurance policies. Check with your banker.
By pledging all your other assets to them, you can increase your security value without actualizing any losses.
7. Re-valuating your property
If you have held the property for a while or are confident that it has gone up in value, this might be a good time to get it valued. The higher value may mean that the margin call is but a hoax. For those who are lost, margin call is because your loan is marked as higher than your property value. But if your property value has also gone up in value... bingo! Problem solved.
8. Cross Collateralization
In certain cases if you have another property that has got a much lower loan, you can explore to convert the loan into a cross-collateralize mortgage where a single loan has 2 or more properties pledged against it. Again this differs from bank to bank.
Make no mistake that a margin call can be a stressful situation to go through, especially for new investors. However, it is manageable and often times investors can come up on top not only benefiting from the situation but also more importantly, learning from it.
I do remember a client who once had to commit an additional AUD 100,000 due to margin call as AUD has dropped to 90 cents against SGD. He bought up AUD 200,000 straightaway and held it for 6 months. AUD/SGD went back up to 1.22 and he walked away with 32 cents on the dollar. That's a handsome SGD 64,000 profit in 6 months or 35.5% for you.
Well, of course he had the monies so that helped. But at the end of the day, the key to good risk management is to prepare before it happens. But if you have no clue what kind of risks you are exposed to or how to properly manage your risks and finances, come talk to our Portfolio team. Your investment portfolio is not unlike your health. It's a lot to deal with before things happen, not after.
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