Equity Release – unlocking cash from existing assets to buy investment property.
A recent article on mortgage availability for expatriates focused on the very real benefits of accumulating a portfolio of properties to generate a passive income stream from rents and thus to supplement retirement income.
Whether you want to buy overseas property to live in, to retire to, or to create income from, you perhaps don’t want to empty your bank accounts of all your savings or sell other assets to do it. Vendor/developer finance is not an option in most cases and traditional lenders may not offer the most competitive packages. But before you abandon the idea completely, it is perhaps worth looking at your existing asset column for alternative ways of freeing up capital.
Home equity loans
Releasing equity (the difference between an outstanding mortgage if any and the current value) from your existing overseas property is a well documented method of raising cash via a traditional re-mortgage facility. This is worth looking into if you have some property with equity as well as easy access to a friendly lender who is not allergic to Expatriates! If however, you do not own a property with a high level of equity, then there are other ways to access capital.
Asset backed lending from offshore portfolio structures
Many expatriates and/or retirees living overseas will already have an offshore investment structure or Portfolio Bond that has over the years with ad hoc top ups and investment returns, risen to a valuation of USD1m or more. In many cases that can be used as security to provide access to a cash loan, secured by the portfolio itself.
A lending ratio of 50% loan to value would in this example, release $500,000 cash lent to the investor on a rolling term basis. As the asset assigned to the Bank guarantees the loan, the portfolio would have to be of a low risk nature at outset to qualify, and then be conservatively managed going forward, but even so may still provide a return higher than the interest cost of the loan in the current environment .
‘There are risks involved if the portfolio valuation were to fall below a certain limit which could in theory lead to a margin call from the lender, so a word of caution here is to avoid holding cross currency loans and any risky assets inside the portfolio.’
That said, the days of lending against highly aggressive portfolios are largely in the past now as we enter a new world of cautious lending strategies being adopted by banks. Many will now only look to be lending against low to moderate risk asset classes such as blue chip stocks, investment grade corporate bonds, government gilts, and professionally managed multi asset funds.
One of the main benefits of asset backed lending of course is that the security that you put up for the loan remains in place and fully invested even after the loan proceeds have been released to you. Furthermore, if your loan is costing say 5% a year in interest and your portfolio is conservatively managed yet still returns 7% pa, then this can be a viable option.
With proper ongoing monitoring and a full understanding of the risks involved and how to mitigate them, this type of fund raising can be a very powerful tool for individuals seeking cash for new ventures or who would like to buy a property for retirement income.
By Jerry Dingley
Jerry Dingley has been advising expatriates & international investors in the Asia Pacific region for 25 years. Specialist areas include expatriate retirement schemes, family trusts, inheritance planning, wealth protection vehicles, private client portfolios & QROPS UK Pension transfers.