You are looking to buy your first home or apartment in Sydney or NSW. What is the absolute minimum deposit required?
In order to have the minimum deposit we need to borrow up to 95% of the value of the property. This requires the payment of a lenders mortgage insurance (LMI) premium. This premium gets worked into the loan and is paid off over the life of the loan.
A minimum deposit will then vary on the purchase price. Here are some examples of what different deposits in NSW can get you:
Note that these figures are for owner-occupier lending and it is assumed that the buyer qualifies for the NSW government stamp duty concessions for first home buyers.
Investment lending is a little more complicated since lenders have varying policies on how much they will lend. Most will only lend to 80% loan-to-value ratios.
Do you have a deposit saved? Contact us to get started with a pre-approval.
APRA recently announced its intention to have lenders remove the 7.25% floor they use for servicing calculations. In a letter to the lenders, APRA state that they plan to remove the servicing floor and allowing lenders to assess on actual repayments plus a buffer, which will allow many people to borrow more. This will loosen the the tightening credit situation in Australia.
What does it really mean?
If you have recently been knocked back on a loan because you were unable to service the loan amount then there is a chance that you will be able to qualify for a loan once this comes into effect. Loans are currently assessed at around 7.25%, meaning that the lender will assess your ability to repay the loan should rates go up to 7.25%. This will be moving to the actual rate +2.5%, so if your home loan rate is around 3.6% then the new assessment rate will be approximately 6.1%. The new assessment rates will have a big impact on borrowing capacity.
The catch is that it is not finalised yet. APRA have given the banks time to comment before they push out the new policy. Once the policy is out, it is then up to the lenders if they want to adopt the lower assessment rate. Given the competition in the market, it is expected that most lenders will move to the new scheme as quickly as their systems will allow for change. This is likely to be as early as July 2019.
One thing to note is that it won't help you with your deposit. If you were unable to get a loan because of a lack of deposit then, unfortunately, you need to keep saving.
Contact us and let's see what might be possible under the new system.
Most Australian lenders offer both variable and fixed rate home loans. Depending on the current economic climate, fixed rates can seem very attractive. Before you rush in to fixed rates, beware the downsides of such loan types.
A fixed rate loan is one that is offered at a fixed rate for a fixed term. For example, you can usually get terms of 1, 2, 3, 5 and 7 years. During this period, you pay the agreed rate, regardless of what happens to variable rates.
People will consider a fixed rate when there is a high likelihood of a rate rise in the future or where they expect they may be challenged to repay if rates should increase. For example, couples that are thinking of starting a family in the future may want to lock in some fixed rates so they have certainty around repayments and can plan accordingly.
However, there are several downsides of a fixed rate loan:
You can alleviate most of these by having split loans where you have a portion as a fixed rate and a portion as a variable rate loan.
At the end of the day, be sure to talk to your mortgage broker about the advantages and disadvantages of fixed rate loans and the mechanisms that can be used to get you the best of both worlds.
Contact Us if you have any questions on whether a fixed rate is right for you.
Australian lenders vary considerably in their rates, the loan products they offer, their turnaround times and many other factors. Let’s take a moment to explore the different lenders out there.
The Big Four
Commonwealth Bank, Westpac, ANZ and NAB. They form the four pillars of the Australian banking industry. The are the safest of all the lenders. They also own some tier 2 banks such as Bankwest, St George, Bank of Melbourne. They have massive bricks and mortar presence – which comes at a high operating cost. The high operating cost generally means that the home loan rates they offer tend to be higher than the other banks. They will usually have the broadest selection of loan products. They can also be the strictest on who they will lend to and are often the slowest to approve loans.
Tier 2 banks
They are the smaller banks and credit unions such as Suncorp, me bank, ING, Bank of Sydney, Bank Australia. Like the big four, they are classified as Authorised Deposit-taking Institutions (ADI’s) so they have degree of protection from the Australian government and must comply with the lending restrictions from APRA. They have fewer bank branches than the big four, meaning lower costs, and can often provide better lending rates for home loans. They are sometimes fast at approving loans (although several are rather slow).
Non-bank lenders are those that are not classified as an ADI. They don’t call themselves a “Bank”. Examples are Resimac, ASCF. They often get their funding through private equity – where institutions will invest funds in them and expect a return from these funds. They usually don’t have any bank branches and rely heavily on the mortgage broker community to source their borrowers. Consequently, they can usually offer extremely low and competitive rates. They are usually quite fast at approving loans. This is the fastest growing lender group in Australia.
Specialist lenders are those that target clients they are unable to get loans from the banks. They specifically have loan packages for those that may have some black marks against their credit file, may have had a bankruptcy some years back or those that have recently started their own business. Their rates will be higher since they are taking on more risk.
Who do we recommend? It entirely depends on your situation. Some customers may be buying with a cooling off period so a fast turnaround is critical, others will be looking for product features such as offset accounts, some may want to stick with a certain group of lenders, some may need special treatment of their income since they may earn commissions or be self-employed, while others just want the lowest possible rate.
It is also why having a mortgage broker is such a valuable aide to your financing needs. We have access to over 35 Australian lenders. Contact us to get started.
Most sales professionals earn commission income. However, when applying for a home loan the commission income component does not get treated the same way as the base income and lenders vary in the way they will assess commission income.
Most lenders will “shade” commission income – usually taking only 80% of the value of it when assessing your ability to repay a loan. As an example, if you earn a base salary of $100,000 and commission income of $100,000 then the lender will use 100% of your base salary but only 80% of your commission income. In this case, despite you earning $200,000 in a year, the lender will only use $180,000 of it to assess your income.
The next challenge is how lenders will calculate your annual commission income. Some will take the lesser of the past two years as shown on your PAYG summaries while some will take the average of the two years. Others may only look at your current year earnings. If your commission income varies significantly from year to year then lenders may apply their own ad-hoc rules to your income.
The upshot of this is that it is a real minefield out there for those of you who are earning commission income, especially if you are trying to borrow close to your servicing limit.
Your mortgage broker will know the policies of the lenders and can help you find the right loan for your situation. For tricky cases, we can even ask lenders to pre-assess the commission income before making a formal loan application. This will give you assurance that your sales commission income won’t be a reason for your application being declined.
Several Australian lenders offer the ability for immediate family members to use the equity in their own home to help other family members get in to the property market without needing a deposit.
It comes with conditions and some potential traps for the unwary.
How does it work? Let’s say your parents or your partner’s parents have a home that they own outright. For this example, we will assume that he home has a value of $500,000. They can offer to be a guarantor on the purchase of your first property. They can offer up to 80% of the value of their property, in this case 80% is $400,000, in lieu of you needing savings for a deposit. They can also cover the stamp duty costs. This allows you to borrow 100% of the purchase price plus anything needed for stamp duty.
It is a nice way to give adult children a leg up into the property market. However, it does come with a few conditions and things to be wary of:
Talk to us if you would like help with a loan featuring a family guarantee.
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.