Image showing USD v AUD Currency exchange rate fluctuations

We are getting many calls from people living in Australia who are earning Australian dollars only, enquiring about refinancing their home loans into foreign currency.

Let us theorise for a few moments with some quick, rough and ready math based on US dollar exchange rate history. This is simply just some very broad concepts to consider before spending too much time calling around enquiring about this type of venture.

By the way we are no longer involved in any type of foreign currency loans. 

Let’s assume a borrower has an Australian home loan for $300,000 over a 30 years term. For the sake of this exercise we are also assuming the Australian interest rate is 9.5% and the current US dollar exchange rate is $0.95 for now, while the loan interest rate is 5 percent fixed in the US.

Excluding exchange fees, all loan fees and charges you will need $285,000 US dollars to pay out your $300,000 AUD home loan.

Let’s continue to assume the interest rate in the US is 5 percent. Great, over a 30 year loan term your repayments are $1529.94 USD instead of the $2522.56 AUD you need monthly to pay your $300,000 AUD loan over a 30 year term.

At the present $0.95 USD exchange rate you will need $1610.46 Australian dollars to exchange in to USD to meet the repayment, plus any fees and charges. Looks like an attractive saving.

Reserve Bank of Australia historical exchange rate figures indicates average USD exchange rate historically has been more like $0.7183 between 1983 and 2008. What would happen if the rate slipped to this average $0.7183 exchange rate while your loan is still in US dollars? The repayments would end up costing $2129.95 Australian dollars to covert across to meet the $1529.94 USD repayment.

This still assumes the interest rate has remained at 5 percent in the US. A serious side effect of this change in currency exchange is that if you decided you needed to revert back to an Australian currency loan you would now need $396,770 Australian dollars to pay out the $285,000 USD loan.

Unless there was a benefit of $96,770 or more during the exercise there will have been a negative result. In March 1984 the USD AUD exchange rate was hovering around the same level as it is in March and April 2008.

If currency exchange rates move down it could be tempting to hold out and wait for a return before converting back. If a borrower had done something like this in 1984 with a $300,000 AUD loan that had been converted into USD they would have found that by April 1985 they would have needed around $450,000 AUD to pay out that $285,000 USD loan.

The USD AUD exchange rate dropped below 50 cents in 2001, I visited Minnesota, Illinois and California in October 2001 and as an Australian visitor who is paid in Australian dollars, everything on that trip cost me double.

If some one had borrowed to pay out a $300,000 Australian home loan in December 1996 they would have needed $243,000 USD and by 1998, just 2 years later it would have required $426,315 AUD to convert that $243,000 loan back to AUD.

Waiting for an exchange rate return would have seen the requirement increase to around $486,000 Australian to pay out that a $243,000 USD loan by 2001. The December 1996 exchange rate did not return again until 11 years later in April 2007.

There is an attached graph showing Currency movement against the US dollar since December 1983 in more detail than the attached photo.