Not all deposits are equal in the eyes of Australian lenders.
If you are borrowing over 90% of the value of the property then the lender will be looking for evidence of 5% "genuine savings" in your deposit. This is required to satisfy the mortgage insurers.
Genuine savings is commonly evidenced by providing the last 3 months of your savings account statements showing that you have held at least 5% of the purchase price as savings. The lender will be looking to see that the savings have grown over this time and no big external deposits have been used to prop the savings up. Alternatively, you can use a term deposit or shares that have been held for more than 3 months or a combination of all of these.
If you don't have genuine savings then some lenders may look at the rent you have paid over the past three months and use that in lieu of genuine savings.
In any case - the key to genuine savings is planning in advance. If you know you need to satisfy the genuine savings requirement and you plan to apply for a loan in 3-4 months then get your savings in order as soon as possible. Show that you have held the minimum 5% over this time and try to keep it all in one savings account to make it easier for the lender to assess.
Contact us to get help with understanding where you sit with genuine savings.
The federal government recently announced a new scheme to help first home owners save a deposit to purchase their first property.
EFFECTIVE 1 JULY 2017 - Subject to legislation passing
Individuals will be able to make voluntary superannuation contributions in excess of super guarantee of up to $15,000 per year up to a total of $30,000 to purchase their first home. These voluntary contributions, which will be taxed at 15%, along with deemed earnings, can be withdrawn for a deposit on a person’s first home. Withdrawals will be taxed at marginal tax rates less a 30% tax offset and will be allowed from 1 July 2018.
First home savers will be able to salary sacrifice an amount from their pre-tax income directly into super. Individuals who are self-employed or whose employers do not offer salary sacrifice will be able to claim a tax deduction on personal contributions. However, any pre-tax contributions made under these rules must be within the concessional cap.
First home savers will also be able to make non-concessional (post-tax) contributions under this scheme. However, these contributions will not be taxed when they are withdrawn.
The amount of deemed earnings that can be released under these rules will be calculated based on the 90 day Bank Bill rate plus 3% - currently equivalent to a deemed rate of return of 4.77%. This is the actual amount of additional earnings that you will be able to release - so if you invest in a growth portfolio and make 10% earnings then you will be only permitted to release 4.77% of the earnings.
The Government has confirmed that the ATO will have the primary responsibility for administering the scheme, including:
The Government has also confirmed that while the concessional part of a release amount will be included in a person's taxable income, it will not flow through to other income tests used for other purposes, such as for calculation of HECS/HELP repayments, family tax benefit or child care benefit.
Contact us if you would like help with understanding if this strategy is right for you or if you need help with understanding how much deposit you need to purchase your first property.
Everyone likes ice cream right? Do you feel the same about debt?
There is good debt and there is not-so-good debt.
The not-so-good debt is the one that has a high interest rate and is not tax deductible. Examples of no-so-good debt includes credit card interest, personal loans and car loans. Too often I see clients with great cash reserves sitting in their bank earning 2% interest and they still have a car loan there costing them 12%-15% interest for the next 5 years. It makes no sense to me.
If you have the cash sitting in the bank then pay off your credit cards in full each month so you don't get stung with interest. If you still have spare cash and a non-deductible car loan then pay out your car loan.
And finally, if you have a home loan then consider setting up an offset account and dropping your remaining spare cash in there. This will offset the interest on your home loan and effectively give you much better returns than the 2% you are earning in a term deposit.
I also see people with home loans with interest rates way up over 5% when they could refinance and get a rate closer to 3.7%. A $500,000 loan at 5% refinanced this way would save $6,500 per year in interest. Or a whopping $65,000 over 10 years!
Get on top of your no-so-good debt and you will be able to eat a lot more ice cream!
Please share this with anyone you know that would like to get on top of their debt faster.
A common question by Australian investors seeking advice is whether they should invest in property or shares. According to the 2017 Russell Long-Term Investing Report, residential property has done extremely well over the past few years, fueled by historically low interest rates. Australian shares have a big tax-advantage through the franking of dividends. If you had the choice, which would be the best investment?
The answer is, if you can, diversify and invest in both.
Why? Diversification is the key to removing volatility from an investment portfolio and having all your eggs in one basket is opening yourself up to more risk.
Investopedia defines diversification as "A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio."
The 2017 Russell Long Term Investment Report lists Australian residential property and Australian shares as the top two for averaged returns over the past 20 year year period. Both asset classes have done well over the long term and both are good growth classes.
The Russell report shows that Australian property has done especially well over the past few years due to the low interest rate climate. Borrowing for residential property investment has been relatively easy and households have been able to take on more debt. However, if interest rates climb over the coming economic period then the great growth in residential property values that we have been experiencing will dry up very quickly.
Australian shares may be due for a resurgence, especially if the economy picks up and investors start to shift their sights away from property. Australian shares also provide the benefit of franking credits, where company tax paid is passed on through to Australian investors, provided a tax-efficient boost to earnings.
Don't stop at Australian shares either. The ASX represents around 2% of the global economy so picking up some international shares via an exchange-traded fund (ETF) will also diversify your share portfolio significantly.
So if you have the option to invest in both Australian property and shares then do it. If you only have property then be sure to consider diversifying to shares. More diversification in your portfolio is a good thing since it will help reduce the volatility of returns.
Identification for each applicant
Proof of earnings for each applicant
Deposit and other loans evidence
Purchase price (not required for pre-approvals)
For refinancing only
Interest-only lending has been traditionally very popular with Australian residential property investors. Several years ago, when lenders offered interest-only lending as an option with no rate penalties, investors would naturally flock towards these structures. Why wouldn't you? It gave you extra cash flow so you could keep investing.
Unfortunately, APRA has since intervened and forced lenders to change their treatment of interest-only loans. This has changed the attractiveness of interest-only lending to the point where it may simply not be worth it any more.
There has been articles in the press lately about the possibility of mortgage brokers going out of their way to push clients into taking out bigger loans so that they get paid bigger commissions from lenders. I wanted to comment on this since, while is sounds like a good story, the practicalities of it are quite a bit more challenging and unlikely to occur.
Let me say up front - yes, mortgage brokers are paid by the lenders based on a % of the loan amount. This comes in the form of an upfront payment of around 0.6% and a trailing payment of around 0.15% per annum of the balance of the borrowings. This is a payment in return for the broker services which includes searching for the loan, talking to lenders, doing the loan application, talking to the assessors and working with conveyancers and sometimes accountants.
Now back to the theory that mortgage brokers go out of their way to jack up loan amounts.
Firstly - it is hard to do. Customers know what they want to buy, they know the buying costs, they know how much deposit they have saved. The math is pretty simple to work out how much they need to borrow. For a mortgage broker to say "Oh let's increase the borrowing amount by an extra $50,000" then they will get the customer response of "Why? I don't need any more". I don't know about you but I just can't see how you would be convinced to borrow more than you need.
Secondly - let's say the morgage broker was able to convince a client to get into debt by an extra $50,000 for no great reason, what would the broker stand to gain? They would get an extra 0.6% upfront, which in this case would be $300 and an extra $75/year in trailing commission.
Would any broker risk their credit representative status for the sake of an extra $375? I seriously doubt it and any that do don't deserve to be operating. Their licensee will be checking their loans regularly and a pattern will emerge fairly obviously if they consistently write loans where clients are borrowing more than they need.
A tip for dealing with a mortgage broker is to be on the lookout for any suggestion that you should be borrowing more than you really need. If you feel that they are overly pushy then it will pay to shop around for a new mortgage broker.
Getting the lowest rate home loan is something we all strive for when taking out a new loan. However, there are attributes of your loan requirements that determine what rates are available to you. Some things you can control and others you can't. At the end of the day, lenders will offer lower rates for lower risk loans. Let's explore some of the more common factors.
One of the biggest influences on what rate you can get is the loan-to-value ratio (LVR). Put simply, this is how much you are borrowing versus the value of the property that you are purchasing. LVRs of 60% can drive much better rates than LVR's of 95%. In essence, having more deposit (resulting in a lower LVR) means you usually get lower rates.
The purpose of the loan makes a big difference. Owner-occupier lending, where you intend to live in the property, will get much better rates than when you are borrowing as an investor.
Many lenders offer better rates for larger loan amounts. Typically loans over $750,000 will often open up improved rates. While lower loan amounts still command good rates, your ability to negotiate a lower rate improves with loan size.
Most lenders now charge more for interest-only loans so that they can limit the amount of investment lending as per APRA's requirements. Consequently, interest-only rates are typically 0.4% - 0.5% higher than principal+interest rates. Going with principal+interest will improve the rates on offer.
No-frills loans, those without features such as offset accounts, will often provide lower rates. Loans with monthly fees or larger application will also give you lower interest rares. Be careful here since the fees can add up quickly and make what looks like a great rate loan turn in to quite an expensive one.
Tier of Lender
The tier of lender can often impact rates. It is no secret that the big four tend to charge more, on average, for home loan rates since they have a lot more invested in bricks and mortar branches. Tier 2 lenders will usually offer lower rates. Being flexible on lenders can usually open up more attractive rate options.
Other factors that can improve the rates on offer include having the property located in a metropolitan area, being employed in a full time job with the same employer for more than 6 months and having genuine savings.
As you can see, it is quite complex and sometimes very confusing. A mortgage broker can help since they will compare the rates and fees of loans and will be able to assist you with finding the best product in the market based on your lending needs.
An offset account is like a regular savings account except that it is linked to your loan account and any balance in the offset account reduces your loan principal. This has the main benefit of reducing the interest you pay each month.
For example, take a home loan at a rate of 4.0% p.a. with a balance of $500,000 and you had an offset account linked to the home loan where you maintained a balance of $50,000. The $50,000 in the offset account would effectively reduce the balance by $50,000 on which the interest is calculated - saving a cool $2,000 a year in interest.
Another benefit of an offset is account is that you can withdraw funds from it at any time, giving you easy access to your savings.
The main downside to an offset account is that many lenders will charge a monthly or yearly fee to have the offset facility. However, if your savings on interest is high enough then it will pay for itself over the life of the loan.
If you have a home loan then consider putting all of your salary and savings into a linked offset account. It can save you plenty on interest and allow you to pay off your home loan much faster.
Talk to us if you would like to learn more on how to save on interest by refinancing to a home loan with an offset facility.