Guaranteeing Your Child’s Loan

Rising house prices are making it increasingly difficult to enter the market. Parents who guarantee their children’s loans can help, but it is important to understand how this can impact the parents’ retirement or investment plans.

Being a guarantor generally means using the equity in your own property as security for your child’s home loan. It can help a first-home buyer to secure finance for a property they can afford but may not have a large enough deposit for, and to avoid the added cost of lenders mortgage insurance.

There are other advantages as well. By guaranteeing a loan, you’re helping your child enter the property market sooner and your child may be able to buy in a more desirable location and a home that better suits their needs. If they did it on their own, they may need to go further out of the city or perhaps settle for fewer bedrooms.

 

The risks

You may want to help your child but it’s important you don’t go into the transaction blindly.

The main risk of guaranteeing the loan is that, depending on the structure of the guarantee, you could be liable should your child default on the payments, either by taking over the repayment schedule or handing over a full repayment.

If you can’t make the payments, the lender may sell the home used as security. If this is still not enough, the lender may also require you to sell assets to meet outstanding debt.

Another major risk is a bad credit rating if default occurs.

Plus, if you need to borrow money for another purpose, your property cannot be used. If later you want to buy an investment property, you can’t use the equity in your home because it’s already tied up in the child’s loan.

 

Minimising the risk

There are ways to minimise the risks. The most common is using a monetary gift or private loan. This involves borrowing money against your property in your name, and then gifting it to your child. You should have a legal agreement in place.

Another way to avoid the risk is to buy the property jointly with your child. This means your name is on the title and you have a certain percentage entitlement.

When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. You should also consider asking a legal professional to draw up a formal loan document outlining all conditions of the loan, interest rate and expected repayments.

Finally, outline an exit strategy. Financial situations change and, as the loan decreases with repayments, there may be an opportunity for you to withdraw your support to free up your assets without impacting your child’s loan.

To find out more on this and other mortgage related issued please give us a call on 1300 252 088.

Should you lease or buy your business assets?

Small business owners often don’t have the funds available to purchase business assets outright without impacting their cash flow. Yet ownership can be attractive. So should you lease or buy?

Financing options

You may not always have timely access to cash to buy business assets outright, or you may have more productive uses for your funds. There’s a range of options when it comes to buying and financing business assets.

Equipment loans: If you want to immediately own a business asset such as key plant or equipment, then you might opt to take out an equipment loan. The interest payable on the loan generally attracts a tax deduction.

HP agreement: A hire purchase (HP) agreement may be more suitable if you ultimately want to own the asset, but don’t want to tie up available cash. With HP agreements, the bank or financier purchases the equipment and initially hires it to your business for an agreed period of time.

Finance lease: A finance lease can also ultimately result in ownership of the asset, whereby the bank initially owns the asset and agrees to lease it to you for a prescribed period. The rental payments on a finance lease can be structured with a residual value balance, allowing you an option to purchase at the end of the agreement. This has the advantage of making the initial cash flows more manageable.

Or you may simply choose to lease an asset for an agreed term, which can have its own advantages, such as flexibility and certainty of cash flow.

Should you buy your premises?

Potentially one of the most significant decisions facing a small business is whether to buy or lease business space. Owning commercial real estate can be appealing; the premises may become a significant asset for your business, bringing potential for capital growth whilst negating the need to pay rent.

Owning your premises may also bring a welcome feeling of security. It also means you have control over how the space is laid and fitted out.

Purchasing your premises may also allow you to borrow against the asset in order to fund business expansion, while in some circumstances there may be advantages to purchasing business premises as part of your superannuation fund.

Disadvantages to ownership

One of the hurdles to purchasing of business space is the large cash injection that is typically required. The lender or mortgage company may also require a personal guarantee, which could put your home at risk in the event of business failure.

Naturally this could place additional pressure on your business and its cash flow; and not only at the point of purchase, since there will likely be fit-out and set-up costs to account for.

Cash flow is also less certain with ownership, as borrowing costs may be variable. The owner also retains responsibility for other variable costs such as rates and repairs.

Ownership may also present reduced flexibility if your business needs to relocate, upsize or downsize. If your business is specialised in its nature or operations, it may also be difficult to quickly sell a niche asset.

Finally, the injection of cash into a premises purchase can have an opportunity cost; it could reduce the potential for investment in other productive parts of your business. Small business owners need to question whether they should focus on their core business competencies instead of real estate ownership and fit-out.

For younger businesses and start-ups in particular, flexibility gained through a shorter-term lease may be preferable until the business is established.

Tax and structure

It is vital to understand all of the different tax and ownership structure implications before making financial decisions. Therefore you should consider engaging a licensed taxation accountant or financial planner to advise you where appropriate.

For example, the small business owner who purchases a business asset may be able to claim depreciation of fixtures and fittings, but when leasing assets the rental cost may instead attract a tax deduction in the financial year to which the cost relates.

Other assets

Different purchase or financing strategies may be appropriate for various business asset classes. For example, where the employees of a business use cars, a novated lease agreement between the business owner, employer and financier may offer flexibility for the employee, as well as reduce administration costs.

On the other hand, in the fast-moving world of information technology, a small business may choose to lease assets for shorter time periods, to reduce the risk of obsolescence since some IT equipment dates quickly.

Cash flow needs

The decision whether to rent or buy business assets will ultimately be decided by the type of business you operate and which method provides opportunities to optimise your cash flow.

Consider how and when your business assets will generate cash for you. As a rule of thumb, it does not make sense to finance an asset for a term longer than its useful economic life.

Also consider your cash flow. Do you have predictable and steadily consistent cash flow, or is your business subject to wide seasonal variations? Ideally you need to prepare detailed forecasts to compare scenarios and plan accordingly.

Choosing how and when to purchase assets are key financial decisions and expert advice should be thought.

By Peter Wargent  MYOB

Should I Refinance?

Refinancing a mortgage can be daunting. Fees, fixed versus variable interest rates and monthly charges all need to be considered.

The right refinanced loan could help you pay off your mortgage faster and for less, clear unhealthy debt or help you upgrade and add value your home, all of which are steps in the right direction.

My lender is charging me a higher loan rate than I see advertised elsewhere. Can I change lenders?

This is exactly the reason why most people change lenders. There may be a penalty clause in your current home loan, meaning you may need to pay a discharge fee, but it could still be in your financial interests to change.

When shopping around it is always important to look for the comparison rate of a product. A comparison rate is essentially the true rate, taking into account the fees and charges you will pay on the loan. So even though you see a lower rate it doesn’t mean the repayments are less.

We are able to take the hassle out of this for you. We have access to over 1,400 mortgage products from more than 30 lenders.

I have just come off a ‘fixed rate’ or a ‘honeymoon’ interest rate to a much higher rate. Can I move lenders or am I locked into my mortgage?

You can walk away from most mortgages, although penalty fees sometimes apply. To review your options, contact us.

If I move my mortgage to a new lender, is there anything stopping that lender from increasing their rates in a few months’ time?

It depends what kind of product you have. If you’re concerned about rising rates, perhaps you should consider a fixed rate home loan, where repayments are fixed for a period from 1 to 5 years.

Why do some lenders charge more than others for lending the same amount of money?

Banks and other lenders pay different amounts for the money they on-lend to you, they have different overhead structures and different profit expectations. All these factors affect how much they charge to lend people money.

 

To find out more on this and other mortgage related issued please give us a call on 1300 252 088.

Buying a Holiday House?

With the holidays fast approaching many people find themselves dreaming of owning their very own getaway.

However, buyers shouldn’t think owning a holiday home will be all blue skies and sunshine. Wakelin Property Advisory associate director Jarrod McCabe said people should not buy a holiday home as an investment.

“While these properties do have the potential to bring in a rental income and experience capital growth that isn’t a reason to buy,” Mr McCabe said.

“The reason to buy a holiday home is for lifestyle benefits as it can actually be a very expensive process. “However, that is not to say there aren’t benefits in buying a holiday home.”

Here are Mr McCabe’s pros and cons for buying a holiday house.

PROS

■ Home away from home

You can pick a holiday home you truly love and personalise it if you own it. You are also able to pick your dream location and make it your own.

■ Unlimited access

There’s no need to book and you can go anytime you want. You have flexibility as you can head down for the weekend or head down for the whole of summer if you want to.

■ Rental income potential

While it shouldn’t be relied upon there is the potential to have either long or short term rental income. To best maximise this it is best to stay within an hour to an hour and a half of the city for potential renters.

■ Potential for capital growth

Depending on where you buy there is the possibility of good capital growth. While this is a plus, it is not a reason to buy a holiday house as it can’t be relied upon.

 

CONS

■ Expensive

A lot of the locations people want to buy into are quite expensive, most of the time you aren’t looking at cheap property.

■ Potential to be empty

The property could be empty for much of the year. There are no guarantees you’ll have tenants for much of the year.

■ Obligation

If you own a holiday house you can feel obligated to go there. This can mean that you always end up vacationing at the same place.

■ Conflict of interest

Holidays and peak periods are when you are most likely to have renters for your property, however, this is also the period where you will most likely want to visit yourself meaning you need to choose between the two.

 

Jordan Marshall – Herald Sun

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Lenders Assessment

How lenders workout whether you can afford a loan

Different lenders use different formulas to work out how much you can borrow.

Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.

Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.

Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.

It is important is that people consider the ramifications of exposing themselves to debt. When assessing costs, it is better to be conservative with the numbers being used.

Assessment rates add a margin to the variable or fixed interest rate of the loan. The assessment rate provides added protection that a borrower will be able to repay their loan when interest rates rise, because they are sure to rise and fall throughout the life of a loan.

APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have.

The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7.5% to 8%. Mortgage assessment rates and methodology vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.

In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars.

Give us a call on 1300 252 088 to find out more.