As an Australian expat, you’re likely well-versed in the complexities of living and working abroad. One of the significant financial considerations you may face is how currency fluctuations impact your wealth and investments. The Australian dollar (AUD), like many other currencies, can be volatile, and its strength can have profound implications for your financial planning, especially when it comes to borrowing capacity for purchasing residential property in Australia.

In this blog post, we’ll explore how a stronger AUD can affect various aspects of your financial life, including foreign income, bonuses, expenses, existing liabilities, overseas property, and rental income. By understanding these impacts, you can make informed decisions and optimise your borrowing capacity.

Overview of the Australian Dollar's Strength

To understand how a stronger AUD impacts your borrowing capacity, it’s essential to grasp the factors that influence its strength. The AUD’s value is determined by a range of factors, including:

• Interest Rates: Higher interest rates in Australia can attract foreign investors seeking better returns, driving up the demand for AUD.
• Commodity Prices: Australia is a major exporter of commodities like iron ore and coal. Higher commodity prices generally lead to a stronger AUD.
• Global Economic Conditions: Economic stability and growth in key trading partners can boost the AUD, while global uncertainties can weaken it.
• Market Sentiment: Investor confidence and risk appetite also play significant roles in currency fluctuations.

When the AUD strengthens, it means you get more value for your money when converting foreign currency to AUD. However, this also means that any income or assets you hold in foreign currencies may be worth less in AUD terms.

Impact on Foreign Income

One of the most immediate effects of a stronger AUD is on your foreign income. As an expat earning a salary in a currency other than AUD, the exchange rate directly affects how much your income is worth when converted to AUD. Here’s how it impacts your borrowing capacity:

Higher Exchange Rate Reduces Income Value

When the AUD is strong, the value of your foreign income decreases in AUD terms. For example, if you earn USD 100,000 annually and the exchange rate shifts from 0.70 to 0.75 AUD per USD, your income in AUD drops from AUD 142,857 to AUD 133,333. This reduction in income can affect how lenders assess your borrowing capacity, as they typically consider your income in AUD.

Impact on Lender Assessment

Lenders use your income to determine how much you can borrow. A lower income in AUD terms means that you might qualify for a smaller loan than you would if the AUD were weaker. Lenders also consider your ability to service the loan, and a lower income could affect your debt-to-income ratio, a critical factor in their assessment.

Mitigation Strategies

To mitigate the impact of a stronger AUD on your borrowing capacity, consider the following strategies:

• Diversify Income Sources: If possible, diversify your income streams by earning in multiple currencies. This can help balance the effects of currency fluctuations.
• Use Forward Contracts: Entering into forward contracts to lock in exchange rates can protect you from adverse currency movements.
• Plan Timing of Conversions: Convert your foreign income to AUD strategically, taking advantage of favourable exchange rates.

Effect on Bonuses and Additional Income

Bonuses and additional income can play a significant role in your overall earnings, and their value can also be affected by a stronger AUD. Here’s how this impact unfolds:

Bonuses in Foreign Currency

If you receive bonuses in a foreign currency, their value in AUD will be reduced when the AUD is strong. For instance, a bonus of GBP 10,000 would be worth AUD 18,000 at an exchange rate of 1.8 but only AUD 17,000 at an exchange rate of 1.7. This reduction can affect your overall financial profile and borrowing capacity.

Additional Income Sources

Additional income sources, such as freelancing or consulting work paid in foreign currencies, will also see a decrease in value when converted to AUD. This can impact the total income considered by lenders when assessing your borrowing capacity.

Strategic Considerations

To manage the impact on your bonuses and additional income, consider:

• Negotiating Payments in AUD: If possible, negotiate to receive bonuses and additional income in AUD to avoid currency conversion issues.
• Hedging Strategies: Use financial instruments like options or futures to hedge against unfavourable currency movements.
• Timing and Planning: Plan the timing of receiving bonuses and converting additional income to take advantage of favourable exchange rates.

Influence on Expenses and Existing Liabilities

A stronger AUD not only affects your income but also has implications for your expenses and existing liabilities. Here’s a closer look at these effects:

Expenses in Foreign Currency

If you have significant expenses in a foreign currency, a stronger AUD means these expenses will cost less in AUD terms. For example, if you have rent or tuition fees to pay in USD, a stronger AUD can reduce these costs, potentially freeing up more of your income for loan repayments and improving your borrowing capacity.

Existing Liabilities

Existing liabilities, such as loans and credit card debts in foreign currencies, will also be cheaper to service when the AUD is strong. This can improve your debt-to-income ratio, a key factor that lenders consider when assessing your borrowing capacity.

Balancing Expenses and Liabilities

To optimise your financial situation:

• Refinance Debts: Consider refinancing foreign currency debts when the AUD is strong to take advantage of lower repayment costs.
• Manage Expenses: Keep track of major expenses in foreign currencies and plan for times when the AUD is strong to reduce their impact on your budget.
• Debt Repayment Strategy: Prioritise paying off high-interest debts, especially if they are in foreign currencies and are cheaper to service with a strong AUD.

Overseas Property and Rental Income

Many Australian expats invest in overseas property and earn rental income in foreign currencies. A stronger AUD can have several implications for these investments:

Value of Overseas Property

The value of your overseas property in AUD terms will decrease when the AUD is strong. For example, if you own a property worth USD 500,000, its value in AUD will drop from AUD 714,286 to AUD 666,667 if the exchange rate shifts from 0.70 to 0.75. This reduction in property value can impact your net worth and borrowing capacity.

Rental Income

Rental income received in foreign currencies will also be worth less in AUD when the AUD is strong. For example, if you receive EUR 2,000 monthly in rent, its value in AUD will decrease from AUD 3,200 to AUD 3,000 if the exchange rate changes from 1.60 to 1.50. This reduction in income can affect your overall financial profile and the income considered by lenders.

Investment Considerations

To manage the impact on your overseas property and rental income:

• Diversify Investments: Consider diversifying your property investments across different currencies to balance the impact of currency fluctuations.
• Hedge Rental Income: Use hedging strategies to protect your rental income from adverse currency movements.
• Monitor Exchange Rates: Stay informed about exchange rate trends and plan your financial decisions accordingly.

Conclusion

A stronger Australian dollar can have far-reaching effects on your financial situation as an expat, influencing your income, bonuses, expenses, existing liabilities, and investments. By understanding these impacts and adopting strategic financial management practices, you can optimize your borrowing capacity and make informed decisions when it comes to purchasing residential property in Australia.

Stay tuned for more insights and strategies to help you navigate the complexities of currency fluctuations and maximise your financial opportunities as an Australian expat. If you have any questions or need personalised advice, feel free to reach out to our team of experts.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.