Interest only loans- What’s happening?

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Interest rates are a hot topic right now.  Up until recent times, home loan rates were identical to investment loan rates It’s not as easy as it once was to apply for an interest only loan. Over the last few months lending for this type of loan has been tightened by the banks in an effort to slow the pace of record growth in investment home loans and encourage borrowers to start paying down their debt.

Lenders are under pressure by APRA (the government regulatory body) to make it less attractive to borrow interest only loans, a strategy intended to protect investors and achieve sustainable growth in the home loan market.

Lenders have responded to the crackdown in different ways. Some now ask for larger deposits for investor loans or have scraped discounts they previously offered. Others have begun to price loans with principle and interest repayments cheaper than interest only loans. Still others now offer better discounts on owner occupied loans or restrict investors to borrow less than owner occupiers.

As these changes vary from lender to lender, it has been difficult for investors to know which way to turn. Many borrowers are worried about whether the changes affect their existing loans or what they should do when they make a change or try to restructure their loan.

As your mortgage broker, we keep up to date with these industry changes and can assist you to assess the best options to suit your needs.

Interest-only loans can be a tax-effective way to invest in property, but they are most effective when accompanied by advice and tax planning.

Because the monthly repayments are minimal for a specified amount of time (usually between 1-5 years), it offers a method to free up funds in the short term for other investments, renovations or to pay off other non-tax-deductible debt.

Problems may however arise when the interest only period ends and borrowers who haven’t planned their finances carefully are unable to pay off the increased instalments, now including principle along with the interest.

Another drawback is that because you are only paying off interest, your original loan amount doesn’t reduce, which equates to a considerably higher cost over the full term of the loan.

 

What counts as genuine savings in a loan application?

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If you apply for a home loan, particularly if the loan is for more than 80 per cent of a property’s value, you’ll more than likely have to prove to lenders that you have a satisfactory amount of savings. This is to demonstrate your ability to funnel a portion of your income into repayments.

Although it can differ, in most cases lenders generally look for consistent additions to savings over a period of at least three months and preferably a year or more. This means that the following are not considered genuine savings:

  • a cash gift
  • an inheritance
  • casino/other gambling winnings
  • proceeds of the sale of a non-investment asset
  • government grants and other finance offered as incentives

 

For those who don’t have any genuine savings but still want to obtain finance, there are options, these include:

  • Guarantor loans – Having a guarantor on your loan may mean that no deposit is required, with the equity or asset the guarantor stakes standing in for a deposit.
  • Other significant assets such as shares, managed funds and/or equity in residential property – Depending on your chosen lender, cash isn’t the only thing accepted as genuine savings. There are even situations where the sale of a vehicle can be considered as genuine savings if proved that it was owned for three months or more.
  • A strong rental record may see a lender allow you to forgo the genuine savings route – Some lenders will waive the requirements if a letter can be produced from a licensed real estate agent confirming that rent has been paid on time and in full for the preceding 12 months, as it highlights your ability to make repayments on time and on an ongoing basis.

Are you prepared for an interest rate rise?

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While Aussie mortgage holders have enjoyed low interest rates for several years now, the party might soon be over.

The Reserve Bank of Australia revealed in the July minutes of its monetary policy meeting that it considered the neutral cash rate to be 3.5%, a two-percentage point increase over the current record low cash rate of 1.5%.

This means Australians should potentially brace themselves for rate hikes soon.

Here are some suggestions to prepare for a rate rise:

  1. Crunch the numbers

Ask yourself how many rate rises would impact your money goals such as renovations and holidays. Online calculators can help you crunch the numbers.

  1. Shop around for a better deal

If your home loan isn’t charging a competitive rate now, you’ll be left even more out of pocket if rates climb higher.

  1. Consider locking in a fixed-rate

It’s worth thinking about locking in a fixed-rate loan. Look for a fixed loan that allows extra repayments so you can reduce the balance sooner.

  1. Make additional repayments now

Making extra repayments or paying a lump sum while rates are still low, helps pay off the loan sooner and minimises the impact of possible future rate rises. Loans with offset or redraw facilities also provide you the peace of mind to access that extra money, if you need.

  1. Pay off other debt

If interest rates head north, expect to pay more on personal loans and credit cards. If you have an outstanding credit card balance, try chiselling away at the debt today.

Source: Your Mortgage

Overcapitalisation, Some Common Mistakes

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Simply put, over capitalisation is when the cost of a home improvement is more than the value it adds to your property.

While some renovations can increase the value of your home, there is an upper limit on what properties are worth at any given time. 

1 – Getting Emotionally Involved

Many homeowners undertake a home renovation for emotional reasons. Very often they fall ‘in love’ with the property. This emotional issue applies to both home owners and investors. 

2 – Not Doing Your Homework on Comparable Market Pricing

Unfortunately, it is important to recognise that most suburbs have a median sale price and an upper sale threshold specific to your suburb. Even different streets in your suburb have different price thresholds; that’s because your neighbour’s houses and the general streetscape have considerable influence on the value of homes in your street. Before renovating it is important to consider the housing styles, demographics of your suburb, and sale prices achieved of other homes in the area that have recently sold.

3 – Under-Estimating all of the Costs Involved in Building

This is one of the biggest mistakes that homeowners make when renovating their homes. Homeowners typically under-estimate the costs involved in building. Such as; demolition costs, professional fees, contingencies for variations, foundation changes due to soil conditions, fit-out and landscaping, kitchens and bathrooms, escalation of building costs and delay and acceleration costs to finish the project on time.

4 – Poor Selection of a Builder

Property owners who decide to employ a builder to undertake home extensions also encounter problems because they have not undertaken sufficient research on the experience of the builder, and their past record in undertaking renovations. Especially their “variation claims” history, often Builders locks unsuspecting homeowners into building contracts which cost homeowners thousands in variation costs. Another common mistake is to let the Builder provide the design, and therefore restrict the homeowner from getting competitive quotations upon the Builders design.

5 – Doing it DIY to Save Money

Some people also make the mistake of trying to undertake home renovations themselves. This can prove costly in time and is financially unwise because a poor standard of work will only devalue the property. Character homes in particular require a higher standard of renovation work and you may need to carefully select tradesmen with past experience in this area to ensure that the work is properly completed. Always seek competent, professional advice and trades people before undertaking a major renovation.

6 – Failing to Stick to a Budget

A common problem is that home renovators do not operate within a strict budget and are unable to complete planned renovations because of a lack of money. This mistake results in homeowners financially overextending themselves through a lack of financial planning. The “Catch 22” is that renovators often can’t then sell their ‘half completed’ renovation and end up in severe financial hardship.

7 – Poor Functional Design Layout and Design

A very common problem is that home renovators end up spending too much on a poor functional layout because of the limitations of the existing building. In many cases the homeowner would have been better off, to have demolished the existing house and start all over again. Another common problem is where the style of the renovation is inconsistent with the rest of the house; you’ll often see houses for sale with a modern extension that clash with the rest of the house which is still stuck in the 1970’s. These properties are “lemons” on the market and typically homeowners lose money on these renovations.

8 – Spending Money on the Wrong Things

If you are living in a $100,000 house you will not get a good return on an investment in a $35,000 bathroom. Swimming pools are a good example of additions to a property that often doesn’t add value. Many buyers do not want the work, expense, and potential for accidents that come with a pool. The general rule is that you should not spend more than 25 per cent of the value of your home on home improvement renovations.

9 – Underestimating the Disruption to Your Lifestyle

Undergoing a major renovation and living through it, is often overlooked by most homeowners. The disruption to your lifestyle, the mess, the noise and restrictions is something that should not be discounted. If you are having major renovation (especially if you are a family with young children) consider moving out and renting elsewhere during the construction phase.

Before you make the decision to renovate or buy a new house, carefully ask yourself the following questions.

1. Decide what it is you are looking for in a final result and ask yourself if it will be cheaper to buy a different home or to renovate your old one.

2. What is the average selling price of homes in your area?

3. Will renovations alter the appearance of your home so that it appears out of place in the neighbourhood? Check the styles of other homes in the area. Keep in mind it might be a better idea to match or keep in step with the styles of other homes in the area. A poor design could devalue your home by thousands of dollars.

4. How much will renovations cost compared to what you paid for your home. What is the expected increase in value because of the renovations? 


The decision to buy a new home or to renovate is not one to be taken lightly. It is recommended that you think through every aspect of the project prior to getting started. Seek the advice of a local professional architect/building designer as well as a real estate professional if necessary to determine how the proposed renovations will affect the value of your home.

In general terms, you’ll probably avoid overcapitalising if you keep the cost of your renovations to less than 10% of the value of your home. The less you need to invest in your home to give it that wow factor, the more you can expect to get back when it’s time to sell. And always keep a close eye on the sale price of similar properties in your area.

 

Source: Gary Pemmelaar

Reserve Bank holds interest rates at 1.5%, warns on high Aussie dollar

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Despite being under pressure from tepid economic growth, weak inflation and a surging Australian dollar, the Reserve Bank has left interest rates unchanged at its August board meeting.

The stance was all but universally expected, given RBA governor Philip Lowe made it clear last week that rates would not be moving for a considerable period of time.

The market had priced in a zero possibility of a rate change into its calculations.

 

The RBA last changed settings in August 2016, when it cut the official cash rate by 25 basis points to the current historic low of 1.5 per cent.

While the RBA left its forecast for the Australian economy unchanged, it expressed a degree of anxiety about the impact a stronger Australian dollar is having on economic activity.

Cashflow vs Capital Growth

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Most investors appreciate that there are two components to the returns from investing in property: capital growth – where the value of the property increases over time; and cash flow – from rental income. An investor’s age, earning capacity and asset base will determine whether they are more interested in long-term capital growth or cash flow returns.

Younger, high-income earners may choose to invest for long-term capital gain. They are not concerned if their net cash flow is less than the costs associated with holding the property. In fact, they often seek investments with such a shortfall because they can claim this loss against other taxable income. In essence, that’s what ‘negative gearing’ is all about.
Other investors, may tend to choose property that delivers a net positive cash flow. These are ‘income’ investors.

Opinions differ as to which is the best approach – to invest for growth or cash flow? In the end overall returns from property will be a combination of both.

Property is a long-term investment
It’s important to remember that property is a medium to long-term investment. The yields will change (as a percentage) over the life of the investment. A property that is cash flow negative when you buy it may well become positive as rents increase and your loan gets paid off (providing you choose a principal and interest loan – which not all investors do).

Where to look for growth
Most new capital city properties will not return a positive cash flow when you first purchase them. This is because rental yields are quite low in terms of a percentage of the purchase price of your investment. Countering this, depreciation allowances on newer buildings are higher and as we noted earlier investors in a high tax bracket can claim investment losses against other taxable income. Well located, quality real estate in capital cities will usually (all things being equal) attract good tenants and enjoy low vacancy rates, so the cash flows will still be consistent and continuous, while you wait for that capital growth to kick in.

Where to find income
In outer suburban and regional areas, it’s possible to locate lower-priced property with comparatively high rental yields and this is a strategy that many ‘income’ investors choose. Regional areas have not historically enjoyed the same capital growth as capital city properties.  It’s not wise to generalise, as the regions are so vast and their economies and growth drivers are very different. Mining towns are regional and many investors have enjoyed stellar short-term growth and unbelievable rental returns in these areas, but they may be regarded as high risk.

– Philippe Brach

Is it worth making early repayments of student loans?

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ONE of the earliest debts many young people take on is to pay for university. If there is such a thing as good debt, this one fits the bill — education generally leads to higher lifetime earnings.

Most people who borrow to fund university studies do so using the Federal Government’s Higher Education Loan Program, called HELP, previously known as HECS.

This education debt is likely to be your cheapest debt, indexed annually at the rate of inflation. For 2016, that rate is 1.5 per cent.

Financial planners generally advise students are likely to come out ahead by directing any savings into a high-interest savings account or term deposit rather than repaying the debt early.

To be in a better financial position, you need those savings to earn more than 1.5 per cent after tax.

That means that if you join the workforce and pay a marginal tax rate of 32.5 per cent — meaning you earn between $37,000 and $80,000 a year — your savings would need to attract a 2.23 per cent rate to grow faster than your student debt.

Some online savings accounts offer introductory rates of 3 per cent while one-year term deposits are being offered at 2.6 per cent. If ex-students can invest their money at a rate that grows faster than indexation that applies to their HELP debt, they would be better served to invest their money and have it grow quicker than the debt is growing. Once their funds have surpassed the debt, one could choose to pay it all off.

It is worth noting that out you cannot get a HELP payment back, but you have access to your savings in a term deposit — albeit on the terms set out by the bank.

And when it comes to paying off debt, the basic rule is that you start with the most expensive after-tax debt.

From a purely financial standpoint, if you can earn a better return on your savings than the HELP indexation rate, you’re probably better paying down the loan through compulsory repayments each year.

But if it’s hanging over you and there’s peace of mind to be gained by paying it off early, well, you can’t put a price on that.

https://www.moneysmart.gov.au/life-events-and-you/under-25s/studying/paying-off-your-uni-debt

 

– John Dage

Loans for vacant land

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Whether you are buying land for an immediate build, as an investment or for a ‘one day I will build and live here’ dream, a vacant-land purchase can be financed by a range of mortgages.

If you are planning to build immediately, or at least soon, a construction loan might be the best option. Most lenders demand that building on a construction loan must start within a specified time.

This mortgage type allows you to draw down segments of the loan amount in stages as they are needed – for the land purchase and then for the stages of construction – which saves you paying interest on the entire loan amount when you don’t need to.

If you don’t plan to build immediately, and you want the loan for the land without any time pressures, a vacant land loan may be the best option.

While regular mortgage types can be used for the purchase of vacant land, most lenders also offer vacant land loans. Most will go up to a 30-year loan term and finance up to 90 per cent of the land’s value, and some go as high as 97 per cent loan-to-valuation ratio (LVR). Lenders’ mortgage insurance (LMI) would still most likely be payable on any LVR higher than 80 or 85 per cent, depending on the lender.

The vacant land purchase can be used to increase the equity in your existing home or investment property and, while redraw facilities are usually not available on construction loans, they may be on land loans.

If you have stumbled upon the perfect position for your dream home, future holiday getaway or retirement oasis, but aren’t ready to start building it yet, the next step is to speak to an expert about the different types of loans that can finance the purchase.

The RBA has left the official cash rate on hold at 1.5% (no change since August 2016)

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The Reserve Bank of Australia (RBA) has made its monthly cash rate call, deciding to hold the official rate at 1.5% for the 11th month running.

This decision was widely predicted with 34 out of 34 economists in a monthly RBA Cash Rate Survey forecasting the non-move. The general consensus seems to be that this will be the last hold call with 88% of economists polled saying that the next rate move would be a rise.

What is Lenders Mortgage Insurance?

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Lenders Mortgage Insurance (“LMI”) is one way of getting into homeownership without having the full 20% deposit which is typically required by most banks and financial institutions.

With LMI, lenders may allow you to borrow a higher proportion of the purchase price, allowing you to purchase a property with a smaller deposit than would otherwise be required. It may also enable you to borrow at an interest rate that is comparable to a borrower who has a larger deposit.

LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability. LMI protects your lender against a loss should you, as a borrower, default on your home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, your lender is entitled to make an insurance claim to LMI insurer for the reimbursement of any shortfall. Where a claim for loss is paid to a lender, the insurer may seek recovery from the borrower, or any guarantor, for any shortfall amount.

The LMI is added directly to your home loan in most cases, so it’s not a fee you need to pay upfront.

Can it be avoided? Yes, you can save for a bigger deposit, but in some circumstances saving for a larger deposit may not be an option. A larger deposit means you’d borrow less and therefore pay less interest over the course of your loan, but it also means delaying your purchase.

If the market is strong prices could rise, and so paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time. That’s a choice you can make with your financial advisor, and it will be an estimate at best.