How Much Can You Borrow As An Expat?

When living and working overseas, many expats end up being surprised by how little they are able to borrow, considering their high-income levels. While incomes are often higher for expats and, in some cases, tax rates are lower, quite often, borrowing capacities are severely trimmed back by lenders.

There are a number of reasons for this, including things like currency fluctuations, but it’s essential that you get a picture of what your borrowing capacity might look like before applying for any finance.

Reduced Income

For the major currencies, like the USD, or GBP, a lender might assess up to 70-90% of the income. However, secondary currencies might only see 60-80% of the income accepted by a lender. Banks tend to do this due to currency fluctuation assessments that they create internally to give them an extra margin to buffer any potential movements against the AUD over the term of the loan.

This shading is also applicable to other forms of income such as overtime income, bonuses or commissions or foreign investment income such as dividend or rental income. If you are an expat who earns a large portion of their income through things like work-related allowances, it’s important to understand that this will be shaded quite heavily. If you currently have an Australian investment property portfolio, some lenders have now decreased the shading for rental income to 10%, which gives you a beneficial advantage overall. This also highlights that the rental yield that your investment properties produce needs to be considered when developing your investment strategy.

Determining your borrowing capacity is driven by two main factors, which are your income and expenses. The important thing to bear in mind here is that there is no shading applied to your expenses as they are viewed as 100% detractors to the overall assessment equation. This is an area where many expats struggle as they often choose to have discretionary expenses which Australian banks would not be able to fit into their HEM (Household Expenditure Measures). Things like lifestyle, entertainment and overseas holiday expenses can often largely eradicate a borrower’s borrowing capacity.

Even if you have credit cards that you rarely use and pay off fully each month, your borrowing capacity is being reduced as if they were fully drawn and we often see very large credit limits on these facilities, which can produce an outsized negative impact on your BC.

Loan to Value Ratio (LVR)

Expats can also be more constrained by Banks requiring them to inject a higher level of cash or equity when purchasing a new property. Many lenders will cap the LVR at 70% for expat borrowers, which may indirectly decrease your borrowing capacity if you do not have that capital available. We see instances where the bank determines that you have a BC of, say, $1 million based on your income and expenses, but the borrower only has $200,000 available as a deposit, so at a 70% LVR, the total amount you can borrow will be limited less than $500,000 as you could only buy a property valued at circa $700,000 to maintain the 70% LVR requirement.

Fortunately, we can often obtain loans of up to 85% LVRs without our Australian Expat clients having to pay Lender’s Mortgage Insurance (LMI). So, as you can see, this can be a very powerful means of helping them build and expand their investment property portfolios whilst they remain offshore and earn foreign incomes.

Australian Tax Rates

Many countries such as the United Arab Emirates have no or very low tax rates which can significantly improve your income. When you factor in the relatively high tax rates that Australian residents pay, your net income can fall quite dramatically.

The situation is also tricky for those expats who are self-employed. Typically, self-employed borrowers do have a harder time obtaining finance even when they are Australian residents living and working in Australia.

When you’re an expat, many of the major lenders aren’t set up to lend to self-employed borrowers, and you might need to look at secondary lenders. Expat-focused lenders often specialise in certain employment fields or industries, and this can also make it tricky depending on your occupation or method of remuneration.

While your borrowing capacity might be reduced compared to what you are actually earning, the good thing is that there are still options out there regardless of your personal circumstances.

There is a wide range of lenders available to ex-pats, but it is important to understand that your borrowing capacity might not be as high as you had expected. Seeking to determine your maximum borrowing capacity or an approval in principle (AIP) early on is the best way to get a clear understanding of how much you can potentially borrow, before actively engaging in your property search.