Leveraged Portfolio: Financing an overseas property purchase

Disclaimer:  The following article is for educational purposes and should not be interpreted as a specific financial recommendation. Please see our disclaimer here.   

Expats in Latin America have limited routes to raising finance for the purchase of a local property.  Offshore bank mortgages (e.g. Isle of Man, Jersey) for the purchase of Latam properties are in very short supply and only available for high-net-worth clients and corporates.  Remortgaging is not always feasible; for example, remortgaging an existing property in the UK may not generate sufficient funds to finance a purchase in Brazil.   The cost of a mortgage in Brazil, the bank lending rate, is still much higher than rates in the US, UK and EU.  The Selic base rate is at a record low (2%) however many analysts project an increase in Selic in 2021/2022.  Update (Sept 2022):  Selic was raised in a series of frequent steps during 2021 and 2022 and now stands at 13.75% which has dramatically increased the local cost of borrowing in Brazil.  Please review the update at the end of the article.  

Let’s discuss the concept of a ‘Leveraged Portfolio’.  A diversified investment portfolio is used as collateral against a loan, which can either be used to reinvest into the portfolio or to purchase a property anywhere in the world.  The portfolio is used to generate repayments on an interest-only or an interest and capital basis to amortise the loan.

Common question – If I have enough cash to buy the property outright, why should I take out a loan against my own assets?  

Answer – It is a highly effective way of leveraging your assets and borrowing cheap money, especially in a low interest rate environment.  The growth of your portfolio (future pension) and property (residence and investment) should in theory, be higher than the interest rate of the loan (cost of capital).  

For a more detailed discussion, tune into this podcast interview with The Property Voice.

The objective of a balanced portfolio is to manage risk such that the value of the portfolio is protected from significant market fluctuations and the loan can comfortably be repaid over time while your investment grows.  This method works effectively if the growth rate of the investment is consistently higher than the interest rate of the loan.  In the current near-zero interest rate environment, it is highly effective!

The worst-case scenario is if the investment significantly falls in value and interest rates increase, therefore you need to work with an experienced advisor and conduct quarterly portfolio and LTV reviews.

A leveraged portfolio is also a useful method of consolidating assets which may be spread over several investment funds and bank accounts – a regular scenario for an expatriate who has worked in different countries.

Let’s consider the following example of Sven, a Swedish expatriate living in Brazil.

Sven would like to purchase a property in Florianopolis for R$1,500,000 (one and a half million Brazilian Reals) and let’s assume the exchange rate is USD/BRL is 5.0 (approx Q2/2020) and that he has $900K in liquid assets:

• $500,000  Investment funds 
• $300,000  Expat bank account
• $100,000  Government bonds

1.  Sven opens an offshore investment account with a recommended financial institution.

2.  He reviews his assets and cash balance and decides to transfer custody of his investment funds ($500K) and add $200K of  cash from his bank account.

3.  Some adjustments are made to the existing funds and the total of $700K is used to create a balanced portfolio, targeting 5% growth p.a.

4.  The bank is willing to provide a loan against the portfolio at 60% LTV (loan to value) which equals $420K. Sven only requires 50% which is $350K.  At least a buffer is available should he require more finance.

5.  Sven transfers $350K to Brazil at 5/1 => BRL 1.75M (R$ 1.750.000) which comfortably covers the cost of the property purchase with extra cash available for any additional costs.

6.  He opts for interest-only repayments and will review whether to repay capital in subsequent years. At a total rate of 1.75% (base rate + bank margin), he will be repaying $6,125 p.a.

7.  Sven expects 5% capital growth on $700K giving a return of $35K. He also expects capital growth on his new property in Florianopolis.

8.  In the future, if the portfolio has grown to $1M and the loan has been reduced to $250K, Sven would be able to borrow an additional $250K to reach a revised LTV of 50%

At Ipanema Wealth, we provide the full service of evaluating a leveraged portfolio, complete with financial modelling, set-up and ongoing reviews.

Update (Sept, 2022):  interest rates in the UK, EU and US have all increased and although relatively low compared to the historic average, may increase in the foreseeable future to combat inflation.  While the advantages of leveraged portfolios still apply, we would recommend a more cautious LTV and moderate asset allocation. 

For any enquiries regarding leveraged portfolios, please contact us with a specific question.