Securing a mortgage while living abroad can be challenging task, especially for Australian expats. Navigating the property market from another country comes with its own set of challenges, and simple mistakes can easily lead to costly consequences. Whether you’re purchasing a home to return to or investing in property to build your wealth, avoiding common pitfalls is essential.

Let’s explore the five key mortgage mistakes that many Aussie expats make and how you can sidestep them to make informed, strategic decisions about your mortgage.

Mistake #1: Not Understanding Borrowing Capacity as an Expat

When you’re living overseas, it’s easy to assume that applying for an Australian mortgage will be similar to how it was when you lived at home. However, lenders assess expat applications differently, and that can affect how much you’re able to borrow. Many expats overlook this change and are caught off guard when their borrowing capacity is reduced compared to an Australia-based applicant.

The main reason for this is that many lenders apply a higher level of scrutiny to foreign income. Many banks may “shade” your foreign earnings, discounting them by as much as 20% to 30% due to perceived risk factors. The currency you’re paid in also plays a role; lenders consider how exchange rate fluctuations could impact your ability to make consistent repayments. If you’re paid in a currency with a history of volatility, this might further reduce how much you can borrow.

To improve your borrowing capacity, focus on maintaining a stable employment record, managing existing debts, and ideally, seeking expat-friendly lenders who specialise in overseas applicants. Partnering with a mortgage broker who understands the unique needs of expats can help you navigate this process and find lenders with policies that suit your situation.

Borrowing capacity between lenders can vary wildly between lenders, with recent examples seeing clients being advised their maximum borrowing capacity was only $500,000, and being able to secure them over $1,000,000. This comes down to knowing and understanding that no two lenders look at foreign income in the same way.

Mistake #2: Overlooking Exchange Rate Risks

One of the more challenging aspects of managing an Australian mortgage while living abroad is the exposure to exchange rate fluctuations. If you’re earning foreign income, even minor shifts in exchange rates can have a big impact on your repayments. This is particularly relevant for expats who are paid in currencies such as USD, GBP, or SGD and have to convert their earnings to AUD.

Exchange rate risks can cause your monthly repayments to vary and can increase your mortgage costs substantially over time. For instance, if the AUD strengthens against your home currency, you’ll need to convert more of your income to meet your mortgage obligations. This volatility adds another layer of financial risk to your investment, and unfortunately, it’s a factor that many expats don’t account for until it’s too late.

To protect yourself from these fluctuations, consider speaking with your bank or broker about setting up an offset account or buffer fund. This way, you’ll have a reserve to cover any potential spikes in your mortgage payments. You may also look into currency-hedged solutions to lock in favourable exchange rates for a set period, adding stability to your repayments.

Mistake #3: Failing to Obtain Pre-Approval Before Property Hunting

Many expats begin their property search before securing pre-approval for a mortgage, assuming that approval will come easily once they find a property they love. This approach, however, often results in disappointment. As an expat, securing a mortgage from abroad is not as straightforward as it might be if you were based in Australia. Lenders require additional documentation, and the approval process can take longer, especially if you’re applying with a foreign income.

Pre-approval is essential as it provides a clear understanding of your borrowing power and allows you to make offers with confidence. Without pre-approval, sellers and real estate agents may not take your offers seriously, especially in a competitive market. More importantly, having pre-approval can save you from the frustration of losing out on properties due to delayed financing.

To streamline the pre-approval process, ensure you have all required documents ready, including proof of income, employment verification, and details of any existing debts or financial commitments. Working with an expat-friendly mortgage broker can help you understand which lenders are more accommodating to expats and what documentation is necessary to speed up the process.

Mistake #4: Ignoring Australian Tax Implications

Tax is often the last thing on an expat’s mind when buying property back home. Yet, failing to consider Australian tax implications can lead to unexpected costs down the road. Owning property in Australia as a non-resident exposes you to specific tax obligations, including potential capital gains tax (CGT) and land tax, which can vary by state.

For example, if you later decide to sell the property, capital gains tax could be a significant expense, especially since recent legislation has removed the CGT exemption for foreign residents. Similarly, land tax laws differ across states, with some states imposing a “surcharge” for foreign investors, which could impact you as a non-resident Australian.

To avoid surprises, it’s wise to consult a tax specialist who understands both Australian and international tax laws. They can guide you on how best to structure your investment, manage tax obligations, and take advantage of any applicable tax deductions. Planning ahead can save you substantial amounts over the life of your investment and ensure you remain compliant with Australian tax regulations.

Mistake #5: Choosing the Wrong Loan Type or Structure

Selecting the right loan structure is vital, especially as an expat. Many Aussie expats unknowingly choose loan products that aren’t suitable for their unique circumstances or future goals. For instance, some may opt for a fixed-rate loan, thinking it offers stability, only to later realise that a variable rate or interest-only option might have been more beneficial given their foreign income and tax considerations.

Interest-only loans can be appealing for expats aiming to maximise cash flow while investing. However, if you’re planning to return to Australia in the near future, you might prefer a principal-and-interest loan to build equity faster. Furthermore, offset accounts can be a powerful tool for expats as they allow you to park savings in the same currency as your mortgage, reducing your interest payments.

The key to choosing the right loan type is to align it with both your current income situation and future plans. Consulting with an expat mortgage broker can help you weigh the pros and cons of each option and select a loan structure that best suits your financial objectives. They can also recommend lenders who provide flexibility in case your circumstances change.

Conclusion

Navigating the Australian mortgage market from overseas requires careful planning and awareness of the unique challenges expats face. By avoiding these five common mistakes—misunderstanding your borrowing capacity, ignoring exchange rate risks, neglecting pre-approval, overlooking tax implications, and selecting the wrong loan structure—you can make confident, informed decisions.

Securing a mortgage as an expat doesn’t have to be daunting. With the right guidance and a proactive approach, you can avoid pitfalls and turn your property purchase into a solid investment. Partnering with an experienced mortgage broker who understands the expat landscape can make a world of difference. Remember, with the right strategy, you can achieve your property goals, build wealth, and one day return home to an investment that’s grown with you.

If you’re thinking about purchasing a property in Australia from abroad, reach out for a free consultation to get tailored advice on securing the right mortgage for your unique situation as an Australian expat. Avoid common mistakes and let us help you make the right investment decision.

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.