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Start with the end in mind and focus on it often – especially when you feel like wavering!

Start with the end in mind and focus on it often – especially when you feel like wavering!

Both sides of politics in Australia are telling us that we will need to wait for an increasingly longer time before being able to access the aged pension. Although the rules around qualifying for the pension are complex and must be explained by a qualified professional in relation to your own needs, one thing is clear – you need to take responsibility for your own wealth creation if you wish to be able to have the retirement you wish for.

Set a personal goal is to create a capital base big enough to generate sufficient income to meet your daily and annual needs WITHOUT reducing the capital base.

Work out your income needs – let’s say $100,000pa. In retirement for the sake of this exercise let’s invest risk free – say govt bonds – and let’s assume an easy rate of 5%pa. A capital base of $2,000,000 at 5%pa generates $100,000pa. This is both simple and easy to understand.**

The rules around retirement in Australia are complex – you are being imprudent to ignore that complexity simply because it’s a long way off. You should treat your mortgage broker, accountant as your most important financial allies. You need to know each one personally and be able to talk to them whenever you need to.

Never invest in something you don’t understand. One day if your plans falter you need to be able to look at yourself in the mirror and see the person responsible  looking back at you. No-one will take an interest in your future better than you. Your key advisers should be integral passengers at the front of your financial bus trip but you need to be the driver. They should not be driving the bus with you not even being in the bus as a passenger.

Here is a financial folly – most Australians think that superannuation of $300,000 sounds like a lot. Let’s say you currently earn $50,000pa. How can savings equivalent to 6 years income last your potential retirement lifetime! This illustrates that financial folly.

We are sometimes told (by politicians) that $1,000,000 in superannuation makes you part of the super rich. By my definition – $1,000,000 invested at 5%pa equals $50,000. In my world that is not super rich. In my world $1,000,000 is not even close to enough to retire on. Those same politicians will retire on their parliamentary pensions for life. Don’t rely on politicians for your financial future.

Each and every one of us has the potential to aspire higher should we so choose. The principles that I will cover in this series of blogs will show you how. There are various asset classes to invest in with the two primary ones being property and shares.

My series of blogs will deal with investing directly in property

In the current housing boom post Covid, there is clearly considerable interest in property again.

Are all houses good investments? What makes a “good” investment?

I will cover that in next week’s blog

** When I began my own personal investment journey the govt bond rate was around 5%, it is currently under 2%. This does not alter the goal – it may simply alter the time taken to get there. Adjusting goals to reality is all part of the process.

Alan Heath

No question is too small for my time…Call or email me anytime…

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.

Alan Heath

No question is too small for my time…Call or email me anytime…

Construction finance is a completely different ball game. As such it has all of its own pitfalls – it is without doubt the least understood area of mortgage financing.  An area where accurate information and an expert on your team are absolute essentials to making good decisions.

Nobody likes to pay a non-refundable deposit to a builder only to find you can’t get the finance.

My very first “retail” presence in the mortgage industry was operating out of a display home that I owned and leased back to the builder. Every weekend for those two years were spent focusing on finance for construction.

So, on that note, let me set the scene and open my CONSTRUCTION blog series with an important building block…

Read more

What can you borrow and what must you pay for?

It can be so much fun to build your own home – it literally is about building your very own dream. The first step and probably the most important, is to find your block of land.

People often start the other way – and looking at display homes is truly great fun!! If only the money barrel was bottomless!!

No matter where you start, the house salesperson will pull you back to the block of land because the house you like must fit the block of land you have.

There are TWO separate purchases – and each must be financed;

1. The land is a single payment – with its own settlement
2. The house is a series of progress payments to the builder – the first payment (when the foundations and slab are poured) is usually defined as its “settlement”

What makes a house and land package a “package”?

It is ONLY a package if the builder who is selling you the house, also owns the land. To be specific, that means – the VENDOR on the land contract and the VENDOR on the build contract are the same. This is as rare as the proverbial hens’ teeth.

Most “packages” are sold in display homes using that language to make you think that you MUST use that builder for that land. The builder probably has a few blocks on hold with the land developer – it’s not a package at all.

We should continue now by removing “package” as a meaningful term in lending – we simply have land and a house – two transactions;

• The builder will build your house on your land
• I will “build” your house finance on top of your land finance.
• The land will settle and you pay that loan (usually P&I) until the builder starts
• The land loan is then “consumed” by the construction loan and switches to I/O as Progress Draws occur until handover (you get the keys).
• At which point it switches back to P&I and hey presto! – You have your final home loan…living the Dream!! As they say.

Now for an important factor which must be considered. You need to live somewhere while you build. This could well be renting, meaning you have rent and a construction loan in your lives, so it’s always good to build with a bit of a cash buffer behind you. For first home buyers, it could be understanding parents who let you shift back in for a while.

Let’s turn back to the fun now – designing and building your home. What can you borrow? What must you pay for?

In most cases you will pick a design from a builder and add your own modifications and selections. You will in all likelihood add items outside of the contract – typically;

• Driveway
• Perimeter paving
• Fences
• Floor coverings
• Light fittings
• Air conditioning

If you wish to borrow for these then I need fixed price quotes from your supplier of choice.

At some stage during the design process you will make your selections for;

• Kitchen appliances
• Tiles
• Tap fittings
• Bath
• Electrical – no. of power points and their type
• The “facade” of your choice
• Roof material

Once the contract and the final plans (contract plans) are dated and signed you can still make changes – these are called variations to the contract.

A good builder will wait until all of these processes have been completed at which stage I am given the “build pack” for bank valuation.

If there is a shortfall between the contract price and the bank valuation you need to fund that from your own cash.

Variations and Shortfalls are a very important pause point, both of which I have covered in a previous construction series blog. 

Even if the bank valuation matches the contract price there will still be a gap between the loan amount and the contract price. That is completely normal. Before the bank picks up payments by way of progress payments you will need to put in your contribution first – also completely normal.

Progress payments are laid out in the contract. The builder gives you an invoice at pre-planned stages. You sign them to say you are happy with the work, fill in a form that the bank will have given you previously and email both to me. I will look after it for you from there – that part couldn’t be simpler.

All sounds difficult? It is to a certain extent. Construction should only be entered into with “your eyes open”.

However – it is such fun to see your very own dreams come true and then move in “to live your dreams”.

I thoroughly enjoy construction finance for this very reason and as your trusted expert in construction finance we will walk the path together.

Alan Heath… Mortgage Broker Brisbane CBD…

No question is too small for my time…Call or email me anytime…

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)

If the interest rate is 5.2%pa This would be a neutral return (ignoring inflation)

If 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

If 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. So 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.

Alan Heath

No question is too small for my time…Call or email me anytime…

Lets take a detailed look at “Off the Plan Construction”… 

Off the plan construction can occur both in the large developments of units and also individual house and land projects however, it predominates in multiple storey unit developments.

The builder keeps control of the product from start to finish and you have very little choice, if any, of finishes.

You sign a contract (usually well before construction commences) and pay a deposit (usually 10%).

Once the developer has a certain number of “pre-sales” their bank will approve finance to them to commence construction.

In this case the developer has the construction loan and once the construction is nearing completion you are notified that you need to have your finance in order so that you can settle (usually with 14-30 days of this notification).

You “settle” on the finished product.

In some respects it is similar to buying a “second hand” property but in some very significant aspects it is very different. The most common “off plan” option is a multi storey unit development.

Pre-sales and initial contracts could easily occur up to two years before you will take eventual possession.  Finance approvals once issued last 90 days.

No matter what you might think, and no matter what words are used, you will sign a contract, which will be unconditional and binding on you to settle, but you cannot obtain unconditional finance approval at this stage.

You might (in fact should) seek out opinion as to whether you can obtain finance on your current circumstances. You might obtain an indicative approval but no matter what you might think or even be led to believe it will remain subject to:

• Valuation of the finished product
• Reconfirmation of your financial circumstances within 90 days of settlement

This is a VERY important point, as there is an element of risk. At the very least before you make ANY other financial commitments in the time between signing your off plan contract and its completion you MUST stay in very close contact with your mortgage broker.

Financial commitments that could impact on your ability to gain the unconditional approval necessary to settle include:

• Buying a car under finance
• Shifting house
• Buying an investment property
• Taking maternity leave or having a child
• Changing careers or employment

There are risks and benefits of buying off plan.

Perceived Benefits:

• The property may be sold out or unavailable if you wait – buying now secures what you want
• The value of the market may rise between signing and taking occupancy
• Depreciation benefits of new property

Perceived Risks:

• The value of the property may fall between signing and taking occupancy
• Your circumstances may change and you may not qualify for a loan.

Let’s consider these risks in more detail and look at ways to manage them

Falling value: A lender will lend against the value at time of completion. In a falling market this presents a risk. Let’s use an example. The purchase price is $500k let’s say the bank values it an only $450k. You will have to put in the $50k shortfall in addition to your original deposit. In a rising market everyone has happy faces at settlement time as you have made a capital gain with no holding costs, but for every benefit the coin can be turned over. When buying off the plan you must be sure you are aware of the risk.

Changing Circumstances: A lender will only lend within 90 days of settlement. (As I mentioned earlier this is a little known fact – loan approvals and loan documents “expire” after 90 days and must be reapplied for.) This might be as simple as reassuring the lender that nothing has changed in your financial circumstances. The consequence of this in buying off the plan is that you will sign an unconditional contract for the purchase BUT you cannot apply for the loan until 90 days from settlement.

It is prudent to check with your mortgage broker that you qualify for the loan now BUT then you need to realise that you need to carry that risk all the way to settlement. Let me give an example of things NOT to do. Don’t give up your salaried employment and become self-employed during this time. Don’t take ANY other credit facilities (eg. upgrade your home and increase your home loan) unless you have checked with your mortgage broker. 

Off plan purchases are becoming popular again because the market is rising. It is a concern that people will ignore the past and take imprudent risks.

We have only just come out of a period of falling values in the off plan market that have created a large number of very sad stories. If a developer forces you to settle (which they can do as you have agreed unconditionally 2 years prior) then, unless you can raise the additional capital you may have to sell the asset.

This can be a very sad story as you are going to be selling that asset in a market that has fallen. Once again, with off plan buying as with all property purchases, it is a case of “buyer beware”.

As a general rule, people buy off plan because they perceive a benefit. To cover the risks it is advisable to:

• Sit very still financially until the property settles
• Have a strong cash buffer behind you so that you can cover any surprises

If you know me at all you’d understand that even crossing the street carries considerable risk.

The old saying – “Look to the right, then look to the left” before you cross a busy street applies very well to buying “off plan”

• Consider the risks carefully before “stepping off the kerb” (signing the contract)
• Think carefully as you cross for any surprises (stay in touch with me)

Following these steps and maintaining contact with me and you will arrive safely at the other side – with a new property and a loan that settles.

Alan Heath… Mortgage Broker Brisbane CBD…

No question is too small for my time…Call or email me anytime…

When is buying property not buying property – or “shared” construction schemes.

This is a blog about things to avoid!

In my mind, buying property (real estate) puts your name on the title. If your name isn’t on the title you didn’t buy it.

I cannot give advice but, I can give guidance in relation to the question “WHY you would want to invest in property?”

In that respect – do you ever remember looking up the answer page in a maths text book and then working backwards to the start?

The answer is clearly found in two of my earlier blogs :

• Investment guidelines : start with the end in mind
• The power of leverage : something you are not taught at school

The WHOLE POINT of investing in property is that you want the power of leverage – you WANT the borrowing.

Why? – read the abovementioned blogs for a detailed answer, but as a quick summary …

• $100,000 invested in cash or shares – when it doubles is worth $200,000
• $100,000 used as a 20% deposit in a $500,000 property – when it doubles is worth $600,000 – how?
• $500,000 doubles to $1,000,000, then sell and pay back the $400,000 loan

Now back to the blog : when is buying property not buying property?

In my mind, buying property (real estate) puts your name on the title. If your name isn’t on the title you didn’t buy it.

At times of high interest in real estate (such as we are in now) all the “schemes” of the past come back to haunt the market.

They present as low risk because you are “sharing” with others. They are sold as an easy entry to property without the risk of borrowing. Nothing could be further from the truth.

Mezzanine financing (in real estate) is when a developer uses a “property advisor” to raise money from private investors.

To use a fictitious example –  DEV Property Group raises $1,200,000 from private investors. You might only have to put in $10,000. You are promised a return on your money at very attractive rates – say 20%. You are given an official document called a Convertible Note. It promises that if the developer can’t pay you the interest you can convert to shares in the company.

DEV Property Group puts $200,000 of the capital aside to “pay the interest” – that in itself is a warning bell. Dev Property Group now takes the remaining $1,000,000 and uses it as “deposit” on a loan with a Bank. They might be able to borrow up to $9,000,000 to develop a piece of real estate. DEV Property Group has the loan and is on the title, the Bank holds the mortgage.

If and when it turns to tears – and eventually some of these do turn to tears – DEV Property Group goes into receivership. The bank sells the property for a loss (it isn’t completed). You are left holding a convertible note in a company that is bankrupt. Your $10,000 “loan” ranks behind the bank and other secured creditors. It is usually small investors who thought it was a low risk way into property who discover they get NOTHING back. It is the highest risk of all.

Similar to mezzanine financing is when a “financial advisor” encourages you to buy into either “listed” or “unlisted” property trusts. Once again pooled funds are handed over with “pieces of paper” given in return. In some cases these “pieces of paper” have restrictions on when you can sell and who you can sell to. You will probably be given a glossy brochure showing some of the “property” the trust may or may not invest in. The property trust may or may not borrow – giving some similarities to the previous example.

What is your investment worth?

It is here that words from my stockbroker uncle are emblazoned into my brain. He said “Unlisted property trusts are valued by the trust itself and can only be bought and sold through “advisors” – DO NOT – invest in it”.

The owner of a house is an unreliable source of its value – it’s called a vested interest. A listed property trust can be bought and sold every day on the stock market – at least its value is determined by “the market”. This then is no different to buying shares. There is absolutely nothing wrong with that – BUT – you are simply buying shares – you don’t have the title – so you are not buying property.

To go back to start – if you wish to buy property – the whole point is to borrow. The whole point is to take advantage of the power of leverage.

If borrowing isn’t for you that’s ok BUT, that simply means that property isn’t for you.

The only way that you should buy property, is to borrow and put your name on the title.

Alan Heath…Mortgage Broker Brisbane CBD…

No question is too small for my time…Call or email me anytime…

There are many people with many varied opinions in sourcing property and in this respect my opinions are only that – opinions. All the same, let me offer my opinions based on experience.

If you are looking to source quality “second hand” property one excellent source is a buyers’ agent.

A buyers’ agent can discuss and advise on suburbs, will have statistics at their disposal on value (which is different to price) and also expected rental amount and vacancy rates. Eventually, in consultation with the buyers’ agent you will define the property characteristics you want, and he or she will then obtain a shortlist of properties that meet the criteria. You can inspect them and only buy the one you want.  You pay the buyers’ agent for this service.  A buyers’ agent will look at up to 100 properties to buy just 1, you might typically look at 5-10 before fatigue takes over. It can save time and money (they will probably negotiate better than you, as they know its value).

If you are looking to source quality “brand new” property which is usually “off the plan*” an excellent source is often referred to as a “research house”.  This is a very mixed area for its trustworthiness because such a business is paid by the developer. There is nothing wrong with that. When you sell your own house you engage a selling agent and pay them. This person is called a real estate agent and works exclusively (or is supposed to) for the vendor.  A research house is effectively a real estate agent, as they are paid by the vendor. The BIG difference though, is that they represent themselves as working for you. This is a clear conflict. There is nothing wrong with a “conflict of interest” as long as it is declared, understood, and does not influence the recommendations. One way is to ask for a referral from someone you know and trust – someone who has used this particular business before,  then trust comes from the referral. You might ask for contact details of satisfied customers. Ideally obtain this information from someone other than the research house.  It is very much a case of “buyer beware” BUT if the business is one that can be trusted it is an invaluable source.

*”off the plan” is usually bought before the developer has even gone to site. Completion and hence settlement might be 12-24 months away. Some things to keep in mind:

• A lender will lend against the value at time of completion. In a falling market this presents a risk. Let’s use an example. The purchase price is $500k and you have a 20% deposit of $100k, and hence a loan of $400k. At time of settlement let’s say the bank values it at only $400k and at 80% the maximum lend is now $320k. You will have to either put in $180k or should you elect to borrow 95%, that loan would be $380k. Even still you would have to find $120k and pay a mortgage insurance premium. In a rising market everyone has happy faces at settlement time as you have made a capital gain with no holding costs, but for every benefit the coin can be turned over. When buying off the plan you must be sure you are aware of the risk.
• A lender will only lend within 90 days of settlement. (A little known fact – loan approvals and loan documents “expire” after 90 days and must be reapplied for.) This might be as simple as reassuring the lender that nothing has changed in your financial circumstances. The consequence of this in buying off the plan is that you will sign an unconditional contract for the purchase BUT you cannot apply for the loan until 90 days from settlement. It is prudent to check with your mortgage broker that you qualify for the loan now BUT then you need to realise that you need to carry that risk all the way to settlement.

Let me give an example of things NOT to do.

• Don’t give up your salaried employment and become self-employed during this time.
• Don’t take ANY other credit facilities (eg. upgrade your home and increase your home loan)  unless you have checked with your mortgage broker. 

Off plan purchases are becoming popular again because the market is rising. It is a concern that people will ignore the past and take imprudent risks. We have only just come out of a period of falling values in the off plan market that have created a large number of very sad stories. If a developer forces you to settle (which they can do as you have agreed unconditionally 2 years prior) then, unless you can raise the additional capital you may have to sell the asset. This can be a very sad story as you are going to be selling that asset in a market that has fallen. Once again, with off plan buying as with all property purchases,  it is a case of buyer beware.  

My advice would be to always seek expert advice. If you wish to purchase a new “off plan” property, ask me. 

Alan Heath

No question is too small for my time…Call or email me anytime…

Important Guides to help make your Investment Home Loan work better for you; Interest Only versus Principle & Interest Loans (often referred to as I/O and P&I) 

I cannot emphasise strongly enough how important it is to thoroughly check strategy involving Interest Only loans with your accountant. Common sense unfortunately doesn’t always agree with Taxation Office rulings.

Let’s start by going right back to basics. One of the main reasons we invest is to give us the future we wish for and, if they have been nice to us, we might leave some to our children – even in a blog I can have some humour.

Food and Shelter are two of our most basic physical needs. We should aim to retire with either a home that is debt free, or with enough capital to produce sufficient income to cover accommodation needs for the balance of life. There are products now called Reverse Mortgages but they are a last chance fall back – not a primary plan.

So what is the lesson? As a general rule it is sensible to have the home loan for your primary place of residence as Principle and Interest so that it is slowly retired over time. There are many good reasons to modify this rule BUT only if there is a strategy in place that still aims to have a debt free residence in retirement. Your mortgage broker, financial planner and accountant can work together with you on this.

This is where an Interest Only loan can become a part of an overall strategy.

You only have so much after tax income. Any interest expense on an income producing asset is tax deductible. Payment of principle must come from after tax income.

As a general rule you should aim to pay down principle on your owner occupied residence and reduce that debt before paying down principle on an investment loan, hence ..

• Your owner occupied home loan might be Principle and Interest.
• Your investment home loans might be Interest Only.

Ok – that’s the general principle. Now for some finer points;

If there is a possibility that your current owner occupied residence might one day become a rental property, a Principle and Interest loan with minimum repayments and an offset account might be useful. You should discuss this with your accountant and mortgage broker.

I/O always has a term – let’s say 5 years. After 5 years your property might be positively geared – therefore you might consider letting it roll to P&I then and let your tenants pay off Principle as well as Interest.This is really using other people’s money to create your wealth.

An interesting point, not widely known is that although an Interest Only loan has lower repayments and hence is “easier” to pay, they are “harder” to get. This is because the overall loan still has a term of 30 years. When a bank assesses servicability of a loan with a 5 yr I/O period, they assess it over the remaining 25 years. If you want a second 5 Yr I/O term , it is assessed over the remaining 20 years. Eventually the bank wants its money repaid!

Be very wary of any scheme that involves what is called “capitalising the interest” on Interest Only investment loans – effectively letting the loan increase. The taxation office has given specific warnings about such schemes – best not to be too smart and create a problem you don’t need.

Either way, there are a number of combinations of options suitable for creating your investment wealth.

Call or email me today to discuss your personal situation and how we can make your money work harder for you.

Alan Heath

No question is too small for my time…Call or email me anytime…

 

What’s happening with APRA and interest rates?

 For most people the question would be who is APRA? The Australian Prudential Regulatory Authority or APRA was established by an act of parliament in 1998 following the collapse of several regional banks and is charged with the financial stability of the financial system – which includes oversight of the banks.

When a bank lends $100 – they must hold some “unlent” or lazy capital. For the biggest banks this is as low as $2, for smaller banks it might be as high as $10.

This money can’t be “lent” so earns no money.

It is this capital that buffers a bank in the event of a large default on its loans

 APRA is directing Australia’s largest banks (ANZ, NAB, CBA, Westpac, Macquarie) to raise more of this “lazy” capital (and in the event leveling the playing field with smaller banks.

 This, of course, comes at a cost – and someone has to pay. These banks have decided that the borrowers must pay

 In the midst of a construction uplift being encouraged by low interest rates, and with these dwellings being taken up in larger than historically usual numbers by investors, APRA has also directed lending institutions that they MUST restrict GROWTH in investment lending to no more than 10% per annum

 Their logic is that in a downturn, investors would be more likely to offload property than someone in their own home and this might “destabilize” the financial system.

 The stick that APRA are applying is forcing a bank to have to raise additional capital if they go over that target.

 So in a nutshell

• All banks MUST restrict growth in investment lending to 10% or endure the cost penalty of having to raise additional capital
• The 5 majors have been directed to raise additional capital AND restrict growth in investor lending to 10%

 The majors have decided to raise the cost to ALL existing and new investment loans (all Interest Only loans in the case of NAB)

 The others have decided to raise the cost to all NEW investment loans

 The additional cost varies a little but is generally around 0.27%pa. To keep this in perspective this means that investors have lost out on the most recent Reserve Bank rate cut

 The upside at the moment, if there is one, is that owner occupied loans are in high demand. First home buyers and owner occupiers are highly sought after at the moment and this will reflect in price.

 “Serious” investors , if I can use that term, will take this in their stride by simply factoring in the cost. A decision to invest should not be so marginal that 0.27%pa would change the decision.

 The consumer is entitled to feel a little confused though

• The Reserve Bank has its foot on the accelerator
• APRA has its’ foot on the brake

 To understand – the Reserve Bank and APRA in conjunction with each other are trying to have their cake and eat it. Lower interest rates to decrease the Australian Dollar , without over heating housing (especially over heating the investor segment)

 Have you ever driven your car with your right foot firmly on the accelerator and your left foot firmly on the brake? It isn’t a good strategy.

 There are some who question the wisdom of the Reserve and APRA – but that is not my role. My role is to help you understand what is happening, guide you with accurate facts and help you make considered decisions.

What should you do?

• If you notice the rate on any of your loans go up in the next few weeks and you think it shouldn’t have then you must contact me and we will deal with that together – it’s what I’m here for
• If you believe you currently have 20% or more equity in your own home and if your rate is not currently under 4.5%pa then you should contact me – together we will decide if we can help you make use of the current competition for your highly desirable business as an owner occupier.

References:http://www.afr.com/markets/equity-markets/secret-to-big-bank-profits-20130419-ilt9b, http://www.apra.gov.au/adi/prudentialframework/documents/agn-112-1-1.pdf

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

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Alan Heath… Mortgage Broker Brisbane CBD