News

When I first began in Mortgage Broking, over 17 years ago, only 10% of the market used mortgage brokers. The question was – “why would you use a one?” It was as if the reason to use a mortgage broker was because there was something “wrong with your credit”.

Today 60% of the market uses mortgage brokers and the question has changed – “why wouldn’t you use a broker?”

It’s primarily about trust.

A client of mine said to me when we first met; “I don’t trust my bank – but at least I know that … The problem with a broker though is how to know which one you can trust”.

A broker is paid by a lender – so how can you trust their intentions … well a bank employee is ALSO paid by the lender and HAS to tell you what their employer TELLS them to say. A bank employee may well provide you with a legal duty of care BUT – an employee’s PRIMARY responsibility is to their employer.  As a Mortgage Broker in Brisbane the thing I find most perplexing is that almost half the market STILL walks into their bank and takes what they are given often without question or options. How do you know for instance that a bank will give you the best home loan rate or the best home loan for you – and not for their own bottom line?

Here are some proven tips to find a trusted mortgage broker – if a mortgage broker ticks all these boxes they are the one for you ·        

• Are they PAID THE SAME no matter which lender they recommend?       
• Do they ask you for your personal circumstances before making lender suggestions?          
• Do they explain the reasons behind their recommendations – including the impact that mortgage insurance may have on the choice?          
• Are they a member of the leading professional body: the MFAA – to be a member a broker now MUST hold a Diploma in Financial Services?          
• Do they work for a reputable brand – avoid one-man bands?          
• Do they have experience?         
• Do they have a website – does this web site have regularly updated information and useful tools such as a mortgage calculator?         
• More particularly these days do they have a presence on other online sites? – facebook, linkedin, twitter, google places. You don’t want a broker stuck in the past.          
• Do they have peer and industry recognition – you should be able to type their name and brand into Google – what has happened in the past should be there for you to see.          
• Can they give you names of people who recommend them – better still does someone YOU TRUST recommend them?   

Above all, what you want is someone who will find the best home loan for you.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

STOP PRESS!  Positive Credit Reporting… 

In George Orwell’s book “Nineteen Eighty Four” the term doublespeak was coined. Specifically and deliberately deceptive, doublespeak makes a negative term sound appealing.  Positive Credit Reporting is doublespeak.

Your credit report has always been made up of a series of negatives. If you defaulted on a credit contract, a telephone bill, a rental agreement, a personal loan, a credit card, this showed on your credit file as a “default”.

If you eventually made payment for this amount then it would be amended to a “paid default”.

In my opinion this is a fair system. If I was going to lend you my money – I would like to know if you have a history of not paying debts back and arguing about them if you didn’t. That may sound a little harsh, however, as my personal opinion, I think it is fair.

Under a new ‘Positive Credit Reporting’ scheme introduced recently, lenders now have access to an extensive database of information that records not just your defaults, but also the timing in which you pay your bills. They can now even tell if you have paid the minimum amount or extra.

In my opinion no amount of doublespeak can make this a “positive”.

Some people like to pay bills early, some like to pay them close to the required date. And there is nothing wrong with either of these two statements.

Some people like to do everything “before it is due”, and some people run closer to or even after a due date. You knew all of these people at school – dare I say it the former were called “nerds”. The latter were more likely to be “popular”.

Take a step back and consider that scenario from the opposite perspective. Imagine that same mentality in present day– the “nerds” would actually now be more likely referred to as efficient effective and organised and the “popular” inefficient, non-committal and disorganised”.

Unfortunately however, it is often the nerds that end up in charge of banks and credit agencies.

When positive credit reporting was introduced every time you were just 5 days late – your late payment would be recorded. There has been discussion now to make this 14 days.

Sites such as mycreditfile.com.au allow the everyday Joe (be he nerd or popular!) to purchase a copy of their own credit file, however the information recorded on this new system is available only for lenders. Meaning you may have a squeaky clean credit file and still be turned down for credit because of a history of late or irregular payments!

I have already had an anecdotal example where someone applying for a personal loan has been told that they were “delinquent” by an average of 9 days on their “positive” credit  file and hence credit was declined. The term “delinquent” doesn’t sound very positive to me!!

Until the system is changed though – what is the lesson?

Positive credit reporting is now here and it is in fact the MOST negative system imaginable.. BUT … it is what it is.

The nerds are in charge and you need make every endeavour to fit in.

Here are some suggestions;

1. Arrange for your home loan to be debited from your account the day after pay day
2. Establish a separate “bills” account and allow your providers to direct debit from this account
3. Check and update your Direct Debits periodically, if a processing error occurs and your bill isn’t paid – It won’t be deemed the banks fault and you may also be stung with penalties and fees from both sides

This should help ensure you are never “late”.

Perhaps the “popular” people need to become nerdier.  Perhaps the “nerds” need to let a little bit of “disorganised” spill in their world! It is what it is.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

 

Go back only 5 years to 2012 and the talk was that “property price never went up”. Now the talk is that it (Sydney) has gone up too far.

The Reserve Bank and the banking regulator APRA are applying measures to slow the growth in investor lending.

Banks are responding in varied ways that are now favouring owner occupied loans over investor loans

• This is great news for owner occupiers and first home buyers
• Serious investors aren’t being deterred – they just factor in the price

To cut through the noise .. owner occupiers were given the last rate cut, investors were not .. it’s not the end of the world

The noise is over what is “causing” property price to rise. I would simply state that property value rises on average per annum between 5-8% (in a cycle that is not uniform) and so it has been for a 100 years (Alan Kohler : ABC economics journalist)

Peter Costello (former Aust Treasurer) states “Negative gearing isn’t causing property price to go up, interest rates are. When interest rates fall, property prices have to go up. The only way to bring down property price is to increase interest rate” (The Australian Fri 17th Jul).  However, as stated by the Reserve Bank, Interest rates are forecast to stay low for the “foreseeable future”.

Here is a property truism of my own, gained from historical data over several property cycles

• When Brisbane Median House Price is 80% of Sydney Median House Price – it is “overpriced”, and
• When Brisbane Median House Price is 50% of Sydney Median House Price – it is historically cheap – it’s time to buy.

Sydney Median House Price is now $1million and Brisbane Median House price is still only $490,000

The last time Brisbane was this “cheap” was in 2002.

When Sydney appears expensive buyers shift their focus north (and why wouldn’t you!)

The last time Brisbane was only 50% of Sydney’s signalled the start of a long buying cycle that “ended” when Brisbane hit 80% of Sydney’s.

What does this mean? – history would indicate that Brisbane is at the start of a cycle that may last 3-5 years and end with Brisbane Median House Price at around $800,000.

The message? The time to buy in Brisbane is now.

Call or email me anytime… It’s what I’m here for… 0411 601 459

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below)

Talk to me, ask questions, read up to date information, video on topics of interest…

App Store: http://apple.co/1ObU9AI  Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

You’ve Found Your Dream Home? Let Me Find Your Dream Loan ..

Working out what makes your dream home is one thing, but what really makes the “Dream Loan”? 

My job is to find the “perfect fit” for a loan that works with your life

When approached by new clients I often get asked, “what’s the rate?” The rate of your home loan is indeed very important and rest assured I will leave no stone unturned to secure you the best rate I can BUT it’s vitally important to slow down first and let me take into consideration all aspects of your needs before we should decide on a loan for you.

Choosing a home loan based solely on the rate is like trying to buy a house based only on how many bathrooms it has – sure, it may be an important factor, but it isn’t the only one. If we get the wrong loan to begin with, then the costs involved in correcting the mistakes down the track can be very unpleasant.

Your dream loan has to be one that fits in with all aspects of your needs and wants. Your loan will most likely be a part of your and your family’s lives for a long time.

Let me state the MOST COMMON MISTAKE that people make when choosing a loan.

Thinking that their life won’t ever change…YOUR LIFE WILL CHANGE..!

YOUR LOAN NEEDS TO BE ABLE TO CHANGE WITH YOU … It still surprises me how many people ignore this obvious connection…?

The most common mistake that people make is to get talked into a loan that can only change with significant cost, because they fear change. Anyone who runs a business successfully knows that managing change is the MOST important thing they will have to do.

The only certainty in life IS change ….

Your dream loan is a loan able to morph with your lives, shift house with you (see my last blog on shifting home), stay stable through the good times and the hard – to put up with, metaphorically, everything from baby spew to teenage tantrums.

Every person is different – every family is different; Every bank product CAN be different…How? By talking to me, your experienced professional – I am here for the LIFE of your loan – each time you shift, each new addition to the family – each job change – together we can help your dream home work wonders with your dream loan…

So…Exactly how will I find your dream loan?

I will talk to you.

We will discuss your current needs and also the things that you can reasonably see going forwards. I will make sure that we choose a loan together that matches those needs and also leaves wiggle room for the unexpected.

I will absolutely find you the lowest rate from a lender and product BUT it is not where we should begin.

If you use me as you should, I will become part of the journey with you, a phone call, an email – and you will be surprised how often I answer you “in the moment” even as the years go by – and I will make sure that your loan really is a dream and not a financial nightmare

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

 

Life evolves and so do our living needs. Relationships change, children appear, grow up (and stay increasingly longer at home), there may be times when we are single, employment opportunity leads to new places … the list is long and as varied as you can imagine…

When property prices stayed flat post GFC, shifting house became very difficult as the deposit for the next home is usually found within surplus from the sale proceeds of the previous.

Now that house prices are moving again, I am finding that many of my clients want to shift home.

Read more

 

Essential advice from Brisbane’s expert mortgage broker; Alan Heath of Mortgage Choice Brisbane CBD.  

Quite possibly the most debated issue faced when buying a property; ‘Should my home loan be Variable or Fixed? Let’s take a look at each broken down into some finer details.

Variable Interest Rate Home Loans

As the name suggests the interest can vary at any time. The interest rate can go up or the interest rate can go down. Here is a good question for you – over the last 20 years have interest rates in general gone up or down more often? Most people will take a negative view and say that they think rates go up more often. The opposite however, is in fact true! Since 1994 variable interest rates have had a general downward trend. So the FACTS – for the last 20 years interest rates have GENERALLY GONE DOWN!!

What are some of the features of variable interest rate loans – in particular let’s rate these features as good for the borrower or bad for the borrower;

• You can make additional repayments – good – this shortens the term of the loan
• You can redraw your additional repayments at no charge in an emergency – good
•  You can hold money in an 100% offset account on a daily basis which reduces the interest paid – good 
• You can adjust the payments at any time to suit circumstances as long as you stay above the minimum – good
• You can repay a variable interest rate home loan in full at any time without penalty – good – most commonly this is when you sell your house ·         
• You can switch your home loan to a different type (usually for a small charge) – good – this creates flexibility
• Your variable interest rate can go down – good!! 
• Your variable interest rate can go up – bad!! But given that over the last 20 years variable interest rates have generally gone down, it is, in my opinion, that the good outweighs the bad. 

Fixed Interest Rate Loans

Again as the name suggests a fixed Interest rate loan is not affected by market fluctuations, as a ‘fixed’ rate is locked at a specified percentage for the duration of the fixed period. 

Let’s take a look at the features of a fixed rate loan;

• You are heavily restricted in your ability to make any additional repayments, in some cases you can make no additional payments without penalty – bad  
• Even if you can make small additional repayments you cannot ever redraw this additional amount – bad
• With very few exceptions – you cannot have offset accounts against fixed rate loans – bad 
• You cannot make changes to the repayments – bad
•  You cannot repay your loan in full without paying penalties called “break costs” – bad. If you decide to sell your house you will have to pay these break costs 
• You cannot switch to a cheaper product – ie.  to a lower fixed rate two years into your three year period – VERY bad 
• Your fixed rate loan cannot go up – good
• Your fixed rate loan cannot go down – bad 

Also understand an underlying principle here; when a bank lends at a fixed rate, the bank has usually borrowed money elsewhere at a fixed rate and is lending it to you at a margin. The bank itself has restrictions placed on it when it initially borrowed to lend to you.

Clients often ask me, “Is now a good time to fix?” My answer? “The best time to fix is never!”

So why do people fix their interest rates. People generally fix their rates because they want the peace of mind of knowing their budget. In uncertain times they want to know they will be ok financially.

TWO reasons to CHOOSE variable… 

 1. When fixing, you will need to select a time period that you wish to fix for – usually 1,2,3,4,5,7 or 10 years. Logically, you would want to try and come out of fixed rate the very next time rates will be low. It’s now 2015 – so which year between now and 2025 do you choose to gamble your interest rate on? Even economists don’t see that clearly into the crystal ball. You also need to be sure you won’t be selling your home between now and 2025, or you face excessive “break costs”.  In essence, you need to be sure that life won’t throw any changes at you that will require you to readjust your strategy over that period. For most, that is far more easily said than done!

2.  Something that is rarely, if ever, spoken of. Most variable loans are now written as a “standard” rate less a discount. The size of the discount is negotiated at “point of sale” and this discount stays with you for the “life of the loan”. Fixed rates are just that – a fixed rate .. but .. When you come out of your chosen fixed rate period, what happens then?

At the moment in a highly competitive market banks are offering very generous discounts on variable loans. Let’s say you opt for a 50% variable rate / 50% fixed rate split loan and you negotiate a very generous discount on the variable component.

In three years’ time when your fixed rate loan comes out of fixed, perhaps in a less competitive environment when discounts aren’t as generous, you decide to go variable. Will you get the generous discount from the past applied or the less generous one from the present?

I can say categorically as a broker that no matter what you may be “told”, you will not get an undertaking in writing about the discount that will apply in the future, and if it’s not in writing it’s not real.

Variable loans are often looked upon as taking a gamble on the market and Fixed Loans as a stable “safe” choice.

Upon closer inspection however, it’s actually quite the opposite. Personally, I see more “stability” in knowing what percentage discount would be applied, written into the loan contract, servicing the entire life of the loan. I wouldn’t take the “gamble” of only knowing my rate commitments for period of time much smaller than the life of the loan.  

THERE IS A BETTER WAY … “Fix your repayments not your rate”

You can have the peace of mind of planning a budget and keep all of the advantages of variable interest rate home loans. Irrespective of the interest rate on your variable rate home loan, pick a nominal interest rate – either the loan term average of 7%pa or if you wish to be even more conservative choose a rate higher than the average – say 8%pa. Work out the repayments and start paying them now. Any additional payment over and above the required minimum builds up in your loan as available redraw able to be taken back should a “rainy day” arrive.

A conservative view would say that if you can’t afford repayments at the long term average you probably shouldn’t be buying that house.

THE BEST WAY TO REDUCE YOUR REPAYMENTS isn’t by fixing your rate – it’s achieved by buying a cheaper house. That said, in certain situations, there are of course exceptions to the above suggestions;

• If you know that you have a period of say 2-5 years coming up when you might drop back to only one salary. This might typically be during a period of having children. If you know you simply cannot afford rates to go higher during that period then perhaps you might need to forego all the benefits of variable rate loans and ensure you take a loan for that period where the rate cannot go up.
• An investor for commercial reasons might decide to fix the interest expense for a period of time.

I will always discuss your circumstances with you and take careful note of your requests. Of course if you prefer to take out a fixed rate loan I will assist, however I will not approach this decision as many advisers do which is to encourage you to fix by creating a sense of fear and uncertainty.

Keep in mind when an adviser or a bank employee promotes fixed interest rate loans they are promoting a product that makes it harder for you to leave. Discussions with advisers or bank employees about fixed rate loans aren’t always as they seem. An employee of a bank must act in his or her employer’s best interests

The primary message here is that you need a mortgage broker to act in your interests. 

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD… Home Loan Specialist for the everyday you

 

The term cross collateralise means that one loan uses two properties as security. Why might this happen and why should you avoid it?

You have decided to buy an investment property. Your owner occupied residence is worth $500k and your home loan is now only $250k. You have what is called equity in your home. The usable equity is the available equity that a bank will lend against. For this example let’s also stay under 80% to avoid mortgage insurance. This means you can take your borrowing against the home out to $400k giving $150k of usable equity.

The investment property is $500k. For simplicity sake, lets say that the purchase costs are being taken care of with cash. Therefore you need a loan total of $500K. However, a bank will not lend $500k against a house cost of $500k.

A common example outcome from a bank conversation: “You’d like to buy an investment property? – certainly. You’d like to borrow 100%? – certainly. Here is your loan for $500k” It all seems so simple. You have a home loan for $250k and an investment loan for $500k. You have two houses.  What’s the catch?

The catch is in the loan documents and most people don’t even spot it because it seems so “natural”.

Your $250k home loan is secured by your owner occupied house, but the bank has used BOTH houses as security for the $500k investment property loan. You will find TWO addresses in the $500k loan documents. This loan has been “cross collateralised”. Total borrowings are $750k; total value is $1000k.

What’s the problem? The problem is that the bank has structured this to its own benefit and its own protection at your expense. The problem is that you have voluntarily handed complete control to the bank for your own future choices. Future choices that include not just your investment property, but your owner-occupied “home” as well. 

Take two examples;

• You have decided to become self-employed, and need to find start-up capital. 
•  You have had a new baby and need to take extended maternity leave on half pay. 

In each scenario, you would like to sell the investment property, using the profit for either the business start-up, or income to support extended leave. Despite still receiving income that covers your living and business expenses, in both cases banks will “assess” your income as zero. Herein lies the problem.  

To sell the investment property, which is cross collateralised with your owner-occupied home, you will need to fill in a form for a “partial discharge”. This is where you request PERMISSION to be able to retain borrowings against the house that is not being sold. The bank will assess your ability to keep the remaining loan (for your owner-occupied) with a full loan application based on your CURRENT earnings (which they count as zero). They can decide to deny your request and decline the application, forcing you to sell BOTH properties. This is not to say they will – BUT why would you give a bank this heavy handed and totally unnecessary position of power.

So how can you avoid this eventuality and still use the equity in your owner-occupied to purchase an investment property?

We still wish to borrow $500k for the $500k purchase. We borrow $400k using only the investment property as security. We can even do this with a different bank if that bank has a better product for the investment loan.

We then take a separate loan for $100k and secure it against your owner occupied. You now have your owner occupied with a $250k home loan and a $100k investment loan against it.

The difference is that you have control – over lender, product and future decisions. You can choose a different bank every time you purchase WITHOUT having to leave your owner occupied bank. The bank that has the best owner occupied product for you may not be the one with the best investment product! Just because one shop has the suit or dress you want, doesn’t mean that another shop mightn’t be the best place for shoes. You would never give one retailer all of your current and future business with the power to veto future decisions as well. Why on earth would you accept this behaviour from a bank??

Some finer points:

• Yes you now have three loans – which means two direct debits for the investment property. Yes it may appear more complicated but it is in fact simpler. If you need or wish to sell a house then the loans against that house clear to zero in a “full” discharge. The other house is not involved. The bank does not need to, and in fact is unable to make an assessment about the other property. Quite correctly – it is none of their business what you do with your money and what decisions you make. 
• How can a loan against the owner occupied property be an “investment loan”? An important principle is called the “purpose test” The purpose of the $100k loan is to purchase the investment property. The property it is secured by is not relevant. Of course you need to check this with your accountant – but that is because I have to say that in a blog. Your accountant will agree with this point. 
• Some people baulk at this structure saying that “they don’t want to involve the family home”. To even say this means they have not understood at all what the bank is doing with the cross collateralised loan. In my scenario only $100k of the investment purchase is secured by your home, $400k is secured by the investment. In the banks scenario the whole $500k is secured by your owner occupied and the whole $500k is secured by the investment – how is that for overkill!! 

What I am going to say next is not a criticism – it’s just the way it is. An employee of a bank must act in his or her employer’s best interests The primary message here is that you need a mortgage broker that acts in your best interests.

Let me help you make your money work harder for you and keep your futures in your hands.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD.. Home Loan Specialist for the everyday you..

Investment guidelines : The Power of Leverage.

I remember when I was quite young and was introduced to investing by my family – who as it turns out invested mostly in the share market. I was encouraged to buy my first parcel of shares. The business still exists today – Argo. After 12 months they had gone up and I remember proudly ringing my uncle and asking if I should sell, only to be told that “our family doesn’t sell” and that he would only help me if I was ringing to buy.

The message of course was simplistic but powerful all the same. To remember a conversation from so many years ago shows its impact. My early lesson was that investing is all about “time in the market” not about “timing the market”

There are many ways to approach investing – my comments are going to focus on guidelines for investing in property for the long term.

The first and perhaps most powerful message of all is “the power of leverage”

Let’s say you have $100,000 to invest and you can invest in an asset class that pays on average 7%pa. Let’s say you keep reinvesting the dividends or interest. In 10 years your money will have doubled to $200,000.

Now let’s take that $100,000 and use it as a 20% deposit for a property costing $500,000, meaning we borrow $400,000. With that same 7%pa return the property will be worth $1,000,000 in 10 years. With the $400,000 loan still in place your $100,000 has become $600,000

Give it another 10 years and the invested cash is worth $400,000, but the property is worth $2,000,000 and your investment worth a net $1,600,000

Invest for 30 years and the cash is worth $800,000 but the property is worth $4,000,000 and your investment a net $3,600,000

This is the power of leverage There are some cautions of course

• You will need to monitor the condition of the property and of course this is not cost free.
• There will be interest to pay on the loan – but you will receive rent to offset that.
• The power of leverage works in reverse as well – in a falling market your losses are magnified. As long as you service the loan however no bank will ask you to sell for a loss.
• This is not true of the share market where a lender can require you to sell at a loss even if you are servicing the loan. The share market is a legitimate market to invest in BUT if you are going to borrow it is a riskier proposition requiring a greater level of financial sophistication.

The blogs in this series will be about using the power of leverage by investing in property.

Want More? Download my app – Ask Alan – from the App Store and Google Play (click below) Talk to me, ask questions, read up to date information, watch video on topics of interest…

App Store: http://apple.co/1ObU9AI  

Google Play: http://bit.ly/1MP04tP 

Alan Heath… Mortgage Broker Brisbane CBD

 

Alan Heath, Home Loan Specialist for today’s you…

What is an Asset? There are differing definitions of what makes something an investment but they all focus on two main points

• The ability to generate income
• The ability to increase in value

In my opinion, the one to which the MOST attention should be paid is the ability to generate income because that is the most reliable indicator of something’s inherent financial value. From this perspective something that generates no income is NOT an asset. This rules out many things often “said” to be assets.

The most obvious here is a car. Let’s say the car is purchased with a loan. This car generates only expense for you, its value decreases year by year and the only income it produces is for the lender. The car is a liability to you. The car is an asset to the lender.

Let’s revisit purchasing an “investment” property.

Let’s say this property costs $100,000 and we borrow it all.

Let’s say it rents for $100pw so a 5.2%pa return

(if the property costs $200,000 and rents for $200pw, or costs $500,000 and rents for $500pw then the percentages are the same. Choose a value appropriate to your area – or just ignore the value and use my example)

Let’s say the interest rate is 5.2%pa This would be a neutral return (ignoring inflation)

Let’s say the interest rate is 6.2%pa. This would generate a negative return of 1%pa – this is what people call “negatively geared” – in this example that loss would be $1000

Let’s say the interest rate is 4.8%pa. This would generate a positive return of 0.4%pa – this is what people call “positively geared”

Negative gearing : How many times have you heard someone say that negative gearing is a good thing? Is it? What does it mean? Let’s put one thing to rest absolutely – losing money is a bad thing! Why would you invest to lose money.

There are two important points to understand Any real loss can be deducted from your taxable income reducing the tax you pay. In the example above let’s say you income is $15,000 – your income would reduce to $14,000. You didn’t pay tax before and you don’t pay tax now. The whole $1,000 loss is yours.

Let’s say your income is $60,000 – your income would reduce to $59,000 and given that your tax rate is 30c you get a tax refund of $300 so $700 of the loss is yours.

Let’s say your taxable income is $150,000 – your income would reduce to $149,000 and given your tax rate is 47c you get a tax refund of $470 so $530 of the loss is yours.

What is the financial “lesson”? All negative gearing generates a loss.Don’t take any notice of the refund – a loss is a loss.  NO investor tries to LOSE money.  A sub lesson is that using negative gearing as a strategy on a low income makes no sense.

So if ALL negative gearing means you have lost money – why do it? An investor is hoping that the other reason for investing – capital growth – outweighs the loss.

Let’s say that property rises by 8% in value this year. Your property is now worth $108,000. The loss can be justified with a very big BUT. The capital growth is a “paper gain”, the negative gearing loss comes out of your wallet each month – it’s real “in the moment”. One thing is clear – a negatively geared property that has no capital growth prospects is not a good investment 

Positive gearing : A positively geared property is what all investors should aim for. It generates income in the short term and capital growth in the long term. Sure the profit is added to your income and you pay tax on that profit. Making a profit and having to pay tax is a wonderful “problem” to have.

Now let’s go back to our examples

Let’s say our property that cost $100,000 (and we borrow it all) rents for $300pw which is a 15.6%pa return.

Let’s have an interest rate of 5.2%pa which gives us a profit of 10.4%pa or $10,400. Sure we have to pay tax BUT what a great problem. If you could find a property like that you’d want it!!

How do you find positively geared property – I sometimes have new investors come to me and say they only want to buy positively geared property.

There are two common sources but investors should tread very carefully. Often investment property in regional mining towns can be bought quite cheaply and rented out for very high rent. That would be a good thing, right? Not necessarily. Mining towns are often very narrow in employment scope and hence population. When mining is on the upswing, population swells, capital growth and rents escalate. As they say, all that glitters is not gold. If that mining town loses the mine then population leaves just as quickly and you investment property will drop in rent and have very little prospect of capital growth again. Investing in mining or other single industry towns is a high risk strategy. When a large company is considering closing that mine or industry down the average investor is rarely if ever given warning. The investor is left high and dry. You are probably gaining the impression that I would call investing in single industry towns “speculation” rather than “investment”

There is another way to find a positively geared property. EVERY property is positively geared if it is held for long enough. How? I have clients who purchased property for $100,000 and the loan was $100,000. It initially rented for $100pw but over time the capital value of the property rose – and is now $300,000 and the rent has risen with time too to $300pw. The key point is that the loan is still $100,000. There you have it! A $100,000 loan and $300pw in rent. What is the smartest way to get positively geared property.  Buy almost any property and hold it for a considerable time. The key now is simply to seek out a sound property that will be easily maintained over time.

There are other types of “specialty property” that can appear to have good rental returns. Let me give one example – Defence Housing. This is a property where you purchase a property and the Defence Force becomes your tenant. The tenancy period is usually quite long – say 10 years and the rent is often quite attractive. Let’s look at an important part of any investment – the exit strategy. This would commonly involve selling the property. You might need to sell the property because a particular situation has arisen. If you need to sell your property it is wise to be able to sell to the “whole” market, owner occupiers (including First Home Buyers) and investors. If you have chosen a property that can ONLY be sold to investors then you have eliminated the largest part of the buying market. It is wise to consider holding property that can eventually be sold without restriction to all segments of the market. (other types of property in this category – where you should look before you leap into buying – would be retirement style housing, and the govt sponsored NRAS (National Rental Affordability Scheme)

Although there is no right and wrong in this area, this factor in selling a home is often completely overlooked.

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Alan Heath… Mortgage Broker Brisbane CBD

 

Is it time to buy Real Estate?

Hindsight is a wonderful thing, but it isn’t much help when trying to anticipate the best time to buy Real Estate. That said, by analyzing past data it is possible to expose telling trends and cycles. And right now, the trend is your friend.

Let’s take a closer look into three particularly interesting and current trends:

• Trend 1: When interest rate goes down, house price goes up
• Trend 2: Sydney Median House Price rises at 7% per annum
• Trend 3: Brisbane Median House follows closely behind Sydney Median House Price 

Trend 1: When interest rate goes down house price goes up. 

Competing forces are at work with interest rates and there is evidence we are at a significant turning point.

 In early 2016, as inflation fell and the Australian economy slowed, the Reserve Bank cut official interest rates twice, catching (some) people by surprise. The truism that “when rates go down house price goes up” could not have been better demonstrated in Australia’s most expensive market – Sydney, where house price which had paused has kicked up strongly!

To see where house price is headed in 2017, we need to look at where interest rates are headed. The Australian p1 Jan 26 2017 stated that “low inflation has eliminated the chance of rate rises this year”. A proven reliable source, Bill Evans, Westpac’s Chief Economist, expects the Reserve Bank to stay firmly on the sidelines this year with no change predicted. He does however expect bank funding costs to rise by 0.3% this year. (Westpac Weekly Update Jan 23 2017). This is significant – Westpac are predicting rates will rise (by a small amount) this year.

 There are other players now in the rate equation – APRA and ASIC – both are government regulators with specific roles inside the financial system. (for a more info on their roles and effect, read my blog “What should I do about rate in 2017”)

 2017 could well prove to be the turning point in the (Sydney) property market.

 If rates to consumers trend up that means Sydney property price may well flatten and even turn down. Many people thought that in Sep 2015 and were proved wrong, but this time there is much more political sentiment encouraging a pause for Sydney house price.

 The message here: All signs suggest we are nearing, if not already at the turning point of the current cycle. If you were looking to ‘wait and see’ the bottom of the market, then wait no more!

 Trend 2: Sydney Median House Price rises at 7% per annum

Has Sydney house price gone too far? Opinions don’t matter – only numbers matter. And numbers show that by even the most conservative trend – Sydney Median House Price has been rising at 7% over the last 30 years.

 Look back to 1998 and 2002 when Sydney Median House Price “overshot” the trend. FOR EVERY YEAR THAT HOUSE PRICE OVERSHOOTS TREND, there is a year down the track that it must pause for.

 Fact – in Sep 2015 Sydney Median House Price overshot the trend. Fact – Sydney Median House Price has now overshot the trend by MORE in the current cycle.

 In my opinion, this means that Sydney Median House Price will now take a pause sometime soon. This upward trend cannot continue forever – it just doesn’t work like that.

 The message here: Buy in Sydney if you are going to hold long term until the next cycle – but don’t buy in Sydney to make a quick gain – as the saying goes – “that boat has already sailed”.

Trend 3: Brisbane Median House Price follows but lags Sydney Median House Price

Certainly, one of the most topical trends of the moment is the confident up-rise of Brisbane Median House Price. Interestingly this is equally true at the moment in … Gold Coast, Canberra, Hobart and Adelaide as well. (Domain Quarterly House Price Report Dec 2016)

 Our Sydney clients buying in Brisbane at the moment are doing so confidently, and either at or above asking price. They’ve seen this trend before…

Brisbane clients however, are experiencing frustration at not having their lower than asking price offers accepted and consequently are taking several attempts before being successful.  

 The market where you can offer low and wait to hear back from the agent to negotiate has GONE.

Look back at 2002 when this has happened before. Sydney house price swiftly rose, then stalled, and Brisbane (suddenly looking more affordable) eventually then caught up.

It is happening again right now – the numbers speak for themselves.

The message here: Buy now in Brisbane (Gold Coast, Canberra, Hobart and Adelaide) and capitalize on an upswing…  The trend is your friend.  

As always, you can call of email me anytime, it’s what I’m here for.. 0411 601 459