Puzzle Finance Blog

Home buyers’ guide: Tricks used to make you pay more — and how to avoid them

 BUYING your dream home is a process that’s bound to stir up strong emotions.

Endless Saturdays spent at auctions — and the frustration of watching someone else seal the deal on what looks like your ideal abode — can take their toll.

But the worst trap a homebuyer can fall into is letting their feelings take over the transaction, an experience that’s all too common, especially in Sydney’s hyped-up property market.

Whether it’s high ceilings and polished floorboards, a luxurious second bathroom, a wine cellar or a French provincial kitchen that captures your heart, keep in mind that the fundamentals of a property’s value may have nothing to do with these trimmings. Nor do the designer furnishings installed by interior decorators, whose bread and butter is extracting more money from you.

A Commonwealth Bank survey of Australian buyers in 2013 found many admitted to being influenced by emotional characteristics of the property up for sale — and 44 per cent paid more for a property simply because they “really liked it”.

With properties selling as much as 10 per cent over the price guide the norm, it’s hard to know when to walk away, especially once buyers get caught up in the theatre of an auction.

The ever-present FOMO (fear of missing out) can push a house hunter over the edge and into dangerous overspend territory.

Property expert Peter Boehm, author of The Great Australian Dream, said first home buyers were particularly vulnerable to being led by their hearts.

And the number one tip he has for them is to “check your emotions at the door”.

“Buying a property is an emotional experience, because it’s probably the biggest investment you’ll make in your whole life,” Mr Boehm told news.com.au

“It’s going to be with you for some time, so it’s got to feel right. But the problem with that is that something that might feel right, might be out of your capacity to buy.”

He said many first home buyers “start looking at properties they shouldn’t, and then they get discouraged.”

They might show up at a few auctions and be quickly outbid, or have an offer on their dream property rejected, then become disheartened by the whole process.

“Unfortunately, the reality in today’s world is that you’ve got to be pragmatic,” Mr Boehm said.

The best approach, he said, was to understand your buying power, set your budget, and only look at suburbs where the median selling price is within it.

And once you are at the auction, “never bid with your heart”.

“You could end up being a slave to your mortgage and your first home could be a trap, it could be like a prison,” Mr Boehm warned.

Keep in mind that a sophisticated auctioneer will be working to draw you in, get your confidence, and generate competition among bidders.

“It’s their job to engage with you and talk about all the good points of the property.”

Psychologist Sarah Godfrey said emotions were an inevitable part of making big purchases, but you could minimise their impact by being aware of how they affect you.

“All our decisions are emotional, no matter what,” Ms Godfrey said.

“Studies should that we can’t actually make a decision unless we can get a sense of how we feel about the options.”

It’s just how we’re wired, she said.

And skewed decision-making often reared its head in distinct ways at auctions, where Ms Godfrey said there was four personality types to watch out for — in yourself and others.

1. The competitor: “This is the person who is in it to win. It doesn’t matter if they want the house or not, they just don’t want you to have it. They get caught up in ego and pride, because you are bidding against them.”

2. The dreamer: “The buyer who walks into a house and is off in fantasy land — women are particularly bad at this. They fall in love with a person’s lifestyle or status and are mesmerised by a clean and beautifully-decorated house.”

3. The adolescent: “Wants it now and doesn’t want to think about the long-term implications, driven by impulse and immediate gratification. Not realistic about price or essential characteristics of the property.”

4. The narcissist: “This is the person who has the real estate agent tearing their hair out. They believe they should get the house at a better price than anyone else and will not back down, they are grandiose and will fight to the last $1000.

Ms Godfrey said that while we’ve all got a bit of these archetypes in us, watch out for them or you might make a decision you will regret.

If you’re standing next to someone who appears to be “bidding without thinking” in a bid to get one up on you, “step back and think. Why is this person bidding this way? Is this becoming a battle?”

Sydney buyer’s agent Marcus Gould knows how easy it is to make the wrong decision in the property market.

“We take the approach that if you’re buying a property as your primary residence, you should see it as an investment,” he said.

“That’s what having an arms length buyers agent on your side is good for; it gives you that advantage.”

While it’s his job to remove stress from the process by taking over the search, Mr Gould has some tips for those who want to go it alone — starting with “do your research”.

“You’ve got to understand the suburb you’re buying in,” he said.

“Which streets are selling for a higher price, and why? Some streets are better than others; do your due diligence.”

This means looking past the shiny floorboards and tasteful furnishings which the agent has carefully ensured will capture the eye.

“The beautiful furniture and styling, it’s all there to make you want to buy. You’ve got to see past that and look at the quality of the structure,” he said.

“It’s important to look at the floor plan, and check to see if they’re common in the area. If not, you might have trouble selling it because it’s not as suitable,” Mr Gould said.

And it might sound obvious, but take a fine-tooth comb to all the relevant inspection reports.

“I know people who get the building and pest reports and they don’t even read them,” he said.

A good buyer’s agent will take down all the attributes of a potential purchase and put them in a spreadsheet for you, comparing them in detail with similar properties that have sold in the area.

“We look at the comparable sells — not the ones the seller’s agent puts in front of you, because sometimes they are no directly comparable,” Mr Gould said.

When it comes to bidding at auction, he said, “we’re always there first.”

“See how many people register, so you know the level of competition. Not all registered bidders will actually bid, but it’s good to keep an eye on what’s going on.”

Then, he said, look for signs of weakness in your competitors. Mum-and-dad buyers could be spotted a mile away, and were notoriously emotional bidders.

“When they start to bid in smaller increments, it’s a sign that they’re coming to the end of their budget. So if they start bidding in increments of $5000 or $10,000, we continue bidding at $20,000.”

Finally, patience is key: it takes most buyers up to six months to secure a property that is right for them.

Posted by Dana McCauley - News Corp Australia Network on 25th July, 2015 | Comments | Trackbacks | Permalink

There is one state investors want to buy property in more than any other place

 THERE is one state investors want to buy property in more than any other - Queensland.

More than half the respondents to the Australian Property Investors survey by property investment group MRD Partners revealed their next purchase would be in Queensland.

Western Australia was the second most popular suburb for would be investors, with 13.6 per cent picking that for their next purchase.

New South Wales and Victoria appealed to 12.56 per cent and 12.04 per cent of investors, while South Australia was where 7.86 per cent of investors wanted to put their money.

The Northern Territory and the ACT weren’t very popular with only 1.05 per cent of investors looking to buy there.

MRD Partner’s managing director Nick Lockhart said it was not surprising that Queensland was a focal point.

Since the survey he has been holding meetings in Sydney and Canberra and the overwhelming feeling is that the Queensland market still has some value in it.

Investors in the ACT, New South Wales, the Northern Territory and Queensland were particularly interested in putting their money into Queensland property.

Victorian, West, Australia, South Australian and Tasmanian investors were most likely to stay within their home markets.

Mr Lockhart said south east Queensland in particular had been long overdue for an upturn in its property market.

He said investors had seen huge gains in some markets since the Global Financial Crisis and it had reminded them that property can be a way to grow wealth.

Many felt they were “pretty well priced out’’ of the Sydney market and even within the areas they could afford to buy the rental yields were not as good as there were elsewhere.

“Investors know all markets go through what we call a ‘property cycle’ where there is typically a boom, followed by a flat market and some price correction before it lifts again and Brisbane is the only capital not to have experienced a substantial lift since the GFC,’’ he said.

“The Brisbane market has moved from recovery to growth but has not yet entered what we could call a boom market, so there is plenty of opportunity for people to get in now and buy before that growth starts.’’

The survey found it was not necessarily the wealthy that planned to buy an investment property with the majority of respondents classified as middle income.

The majority of investors also planned to spend between $350,000 and $450,000 on an investment property and the preference was for house and land.

Mr Lockhart said the majority of investors were positive about the market with more than 51 per cent of respondents planning to buy within the next 12 months.

Investors in the ACT were the most gung ho with 89 per cent of them planning to buy.

Tasmanian investors were the most subdued with only a quarter planning to buy within the next year.

Mr Lockhart said it was a good time to invest because of low interest rates but that was only the case in certain markets and buyers should focus on those markets which were in the recovery phase or entering the growth phase.

Posted by Michelle Hele - News Corp Australia Network on 25th July, 2015 | Comments | Trackbacks | Permalink

Debt repairers could be out to deceive

Comprehensive credit reporting is creating opportunities for unregulated sections of the financial services industry to increase their profits at the expense of consumers.

Whereas relatively little data used to be held on credit reports, now many more details are being collected. Monthly payment histories on loans and credit cards can now be shown on credit reports, and any missed payments of more than 14 days are noted. It used to be only limited information, such as missed payments of more than 60 days and bankruptcies.

Lenders access the credit reports when someone applies for a loan. However, the advent of comprehensive reporting will likely aid the growth of the credit repair industry. These are the companies that go by the names of credit repairers, fixers and restorers, which promise, for an upfront fee, to make debts go away and expunge black marks on credit records, but most of these companies are unregulated. They are neither licensed nor supervised.

Consumers are missing out on important consumer protections. For example, financial services licence holders must be members of a dispute resolution scheme that is free to consumers.

A recent report by academics at the University of Melbourne on the credit repair industry called for the sector to be regulated. The report notes that these companies charge high upfront fees for services that consumers can do themselves or are available for free through financial counsellors and legal advice centres.

The change to comprehensive credit reporting will lead to more errors and black marks on credits reports. Consumer advocates fear that will drive more people into the hands of credit repairers.

"Credit repair is becoming a huge industry and consumer advocates have been lobbying for a long time to have the credit repair industry regulated," says the Financial Rights Legal Centre's principal solicitor, Katherine Lane.

The Consumer Action Law Centre's chief executive, Gerard Brody, is damning of credit repairers. Their business models are "inherently deceptive", he says.

"You cannot remove legitimate defaults from credit reports. Credit repairers leave people, through their marketing, with the impression that they can."

So what should consumers who run into debt problems do?

Consumers should "never, ever" go to one of the credit repair companies, Lane says. "We have very extensive financial counselling in Australia funded by governments, which is free to consumers, so there is no reason why consumers should not be seeking advice."

The first step is to contact the Credit & Debt Hotline, 1800 007 007 1800 007 007  FREE, which will switch you to a counselling service in your state or territory.

If any listing on the report is inaccurate, there is a free process by which the consumer can go to the credit provider, such as a lender, to have the error fixed. Failing that, the consumer can get free access to the relevant complaint resolution scheme to which the credit provider must be a member.

As to falling behind on loan repayments, under financial hardship provisions, borrowers can have their debts renegotiated and repayments rescheduled, Lane says.

Credit reporting agencies are required to provide reports to consumers for free at least once a year. Lenders, mortgage brokers and credit repair companies are offering to obtain free credit reports on consumers' behalf.

Consumer groups say some lenders, mortgage brokers and credit repairers appear to be using the free reports to generate sales leads for their loans and credit repair services.

Credit reports can be useful for consumers to find out what is stopping them from obtaining credit. However, to obtain a credit report, a consumer's personal details, such as current residential address, has to be handed over to the credit reporting agency.

Those with a "pile of debt" need to get advice first, Lane says. It may not be in their best interests to get their credit reports, because they could be set upon by debt collectors.

Posted by John Collett - The Age on 24th July, 2015 | Comments | Trackbacks | Permalink

How to sell your home for more in a matter of days

 SELLING your house is a major event in anyone’s life and usually a good chance to realise a significant profit.

It is something most of us will do maybe once in life so expert advice is essential to maximise your sale price.

The right real estate agent can add 10 per cent to the house sale price, says Zoe Pointon, co-founder of real estate agent comparison site OpenAgent.

“If you put your house on (the market) at the wrong price you risk having it sit there for a long time, then people start to wonder why it hasn’t sold, that there might be something wrong with it and you end up wasting time and money on marketing costs,” says Pointon, an entrant in this year’s Telstra Business Women’s Awards.

But if you find the right agent, who knows your area and has a good track record for making the right appraisals on properties similar to yours the property will sell quickly and, often, for slightly more than expected.

Homeowner Richard Byerlee sold his house for $10,000 more than the appraisal price after finding the right agent.

“You need to have an open conversation with them (real estate agents) and make sure they are letting you know exactly what they are doing (to sell your house),” Byerlee says.

he said people should also be very open about negotiating commissions with agents.

He also agreed a sliding commission structure — the higher the sales price, the higher the percentage of commission — which gave the agent an incentive to achieve the best possible price.

Having all these key components in place helped him sell his property for more than expected within a few days of the first open house inspection.

Zoe’s top three tips for selling your house

1. Make sure you compare agents, don’t just go with the nearest on or the first one you meet.

2. Make sure the agent you choose is qualified and an expert in the area and style of property you are selling.

3. Discuss thoroughly how much you want to spend on marketing and commission fees before you go ahead.

Posted by Emma Blake - News Corp Australia Network on 23rd July, 2015 | Comments | Trackbacks | Permalink

Mistakes to avoid when putting your home on the market

When selling, a few simple mistakes can leave your home languishing on the market. Luckily they are easy to avoid, and with a little elbow grease your home will be market-ready in no time.

Neglecting maintenance

It's easy to let maintenance slide in your house when you've lived there for a while: stiff doors, battered flyscreens and a bit of rust just become part of the character of the place.

However, if you're looking to sell, those little "quirks" make your house look more rundown and ultimately less ready to move into straight away, which could decrease its value. 

Fixing all those small problems before you put your house on the market can go a long way to making your home look ready to live in.

Leaving your stuff all over the place

Sure, it is your house, but buyers want to be able to picture themselves living there.

You still live in the house, but excess personal clutter makes it hard for prospective owners to see past your belongings and figure out if the house will suit them.

You don't need to take down all your family photos, but clearing the front of the fridge, hiding laundry baskets (clean and dirty), and ensuring sports gear and children's toys have baskets or cupboards to go in will help make your home more universally appealing.

Over-customising your home

Spending a small fortune on a state-of-the-art kitchen or building a high-tech wine cellar might seem like a good idea at the time, but the chances are you won't recoup the money you spent when you sell.

Worse, any personal custom jobs - like floor to ceiling built-in book shelves - might not appeal to some people, so you'll be narrowing the pool of interested buyers.

Painting in 'unique' colours

With that in mind, your choice of paint can have a similar effect - not everyone wants a yellow kitchen.

People want to buy a blank canvas so avoid unusual colours if you can, or consider repainting in a more neutral palate before you put it on the market.

Forgetting about very first impressions

First impressions always matter, so give your entrance a thought.

Making sure your front gate works properly and fixing your path is a start, and it's well worth sprucing up your front garden you have one.

For an added wow factor, repainting your front door and window frames will make your house pop.

Not doing a deep clean

While cleaning your floors is all well and good, it's worth giving your house a deep clean to make it look pristine.

Cleaning all windows inside and out will make the whole house brighter, and making sure all appliances are sparkling, including the inside of the oven, will go a long way.

Doing a deep clean will also help you sort out a lot of miscellaneous junk, making it easier to face your big move when it comes.

Posted by Rachel Clun - The Age on 22nd July, 2015 | Comments | Trackbacks | Permalink

Rates are low – have you got the best deal you can?

With interest rates at record lows there has never been a better time to get a good deal on a mortgage. Fixed rates have fallen to a record low of 3.33 per cent for one-year fixed, while three-year fixed rates are as low as 3.94 per cent, according to comparator website RateCity.

For most people, the mortgage is the biggest expense they will ever have.

Many people pay more in interest over the life of the mortgage than they pay for property itself. Even a reduction of one percentage point in interest on a $500,000 mortgage over a 30-year period could save the best part of $100,000 in interest payments to the lender.

That is a big pay-off from making the effort to get a discount on interest from your existing lender or shopping around for a better deal elsewhere. There is more than a 1 percentage point difference in interest rates between the best fixed-rate home loan and the best offer from a bank, says Taichi Hoshino, the chief executive of comparator website Monetise.

"Advertised big bank rates are so much higher because they rely on making money from lazier consumers who don't argue or pay attention," Hoshino says.

Some borrowers are in a better position to get a better deal from their lender than others.

Those with larger mortgages are in the best position to get a better deal, says Aaron Christie-David, the principal of Mortgage Choice at Alexandria in Sydney.

Bargain with lenders

He says those with a mortgage of more than $300,000, who have equity in their homes of more than 20 per cent and a good credit record are in the best position to haggle with their lender.

However, sometimes borrowers just find the whole process of looking for a better deal too difficult and too time-consuming, Christie-David says.

Having found a better deal, they may baulk at switching lenders because the borrower has so many financial products, such as savings accounts, credit cards and insurance with their current lender.

Christie-David says anyone with a large mortgage, good credit record and a loan-to-valuation ratio of less than 80 per cent should not be paying variable interest rate of more than about 4.3 per cent.

He says some of the best deals can be found outside of the big banks, such as the credit unions, building societies, mutuals and mutual banks.

Fixed rates fall

Some of the deals on fixed-interest mortgages are particularly sharp, says Peter Arnold, a financial analyst with RateCity.

For example, three-year fixed mortgage rates have fallen to as low as 3.94 per cent and there are a couple of variable rates below 4 per cent.

Arnold says one reason for the lower fixed rates is that the cost of funding for lenders has reduced.

Another is the expectation the Reserve Bank will cut the cash rate again if economic growth slows and inflation remains benign.

"With these factors combined, we've seen lenders able to get more aggressive in their marketing and offer these sharper deals," Arnold says.

The standard variable rate is 4.83 per cent and switching to the lowest three-year fixed rate of 3.94 per cent would cut monthly payments on a $300,000 mortgage by more than $150, Arnold says.

Fixed versus variable

The choice for borrowers is not just one of either being entirely variable or entirely fixed.

Borrowers can always split their mortgage between variable and fixed. "You can have a foot in both camps," Arnold says.

That way, the borrower is never more than half-wrong. 

According to a survey of 33 experts by  Finder.com, almost two-thirds believe the Reserve Bank will cut the cash rate by the end of the year.

However, Michelle Hutchison,- a spokesperson for the comparison site, says borrowers should not be too concerned by a possible further cut in the cash rate. Rather, they should be prepared for an eventual rise in rates.

Most of the experts surveyed by Finder.com - 56 per cent - are forecasting the cash rate will start rising in 2016.

The final quarter of 2016 was the most likely time, on average, that forecasters expect the cash rate to start to rise.

"It's clear that interest rates will be on the way up, so borrowers need to make sure they are prepared by reviewing their budgets and working out if they can afford higher [interest] costs," Hutchison says.

She says borrowers with a $300,000 mortgage should factor in a buffer of 2 to 3 percentage points, or an increase in repayments of at least $400 a month, to protect themselves when rates start rising.

Drawbacks of fixed

Generally, fixed-rate mortgages have fewer features than variable rate mortgages. For example, many borrowers like to take advantage of mortgage offset accounts. These are linked to the mortgage.

For the purpose of calculating the interest on the mortgage, the balance in the offset account is deducted from the mortgage balance, thereby reducing the interest costs on the mortgage.

However, not all fixed-rate mortgages have offset accounts. And when they have offset accounts, some credit an interest rate that is lower than the interest rate on the mortgage or credit only, say, 50 per cent of the interest.

Also, early repayment of a fixed-rate mortgage can incur costs for the lender, which are paid by the borrower.

There are no longer those long, nasty exit fees that some lenders charged borrowers who wanted to break the fixed-rate term early. They were banned on all mortgages - fixed and variable - taken out after the middle of 2011.

Lenders are allowed to charge break costs that reflect the true economic loss to the lender, if any, from repaying the mortgage early.

The upshot is that anyone taking a fixed-rate mortgage should do so with the intention of staying the course of the loan term. Which way next for interest rates?

As always, there is a diversity of opinion from economists on what the cash rate is likely to do.

Shane Oliver, chief economist at AMP Capital Investors, says there is a 50 per cent chance of the Reserve Bank cutting the cash rate before the end of this year.

He says the economy has not collapsed, despite the mining downturn. The labour market is a little bit stronger than many had assumed and non-mining sectors such as housing, retail, tourism and higher education have picked up.

On the other hand, while the Australian dollar has come down, which is also a positive, it is "still a bit too high". And the investment outlook is quite poor and consumer confidence is sub-par, Dr Oliver says.

He thinks it most likely the Reserve Bank will sit on its hands during 2016, before possibly starting to increase rates in 2017.

CommSec economist Savanth Sebastian says the Reserve Bank will continue to maintain an "implicit easing bias" [lowering of rates] particularly given that inflation is likely to remain subdued over the coming year.

"Importantly, activity levels are lifting, driven by stronger home construction," he says. "And, as a result, we expect the Reserve Bank to keep rates on hold over the rest of 2015," he says.

David Bassanese, chief economist at BetaShares, says the Reserve Bank is not contemplating another interest rate soon. The bank could cut at its next meeting in early August if the Greek crisis worsens or the next inflation result is exceptionally low, he says.

"My base case at this stage, however, is that the bank is likely to remain on hold for at least a few more months, which may make it a stretch for the bank to cut twice by year-end, as my current forecasts imply," Bassanese says.

As to the question of whether to fix the mortgage or stick with variable rates, Shane Oliver says, with fixed rates at historic lows there may be a case for fixing but there is no great urgency.

Fixed rates are only partially determined by the cash rate. If bond yields increase globally, fixed rates may rise, regardless of any changes in the cash rate, Dr Oliver says.

Home owners may want to lock in at least part of their mortgage at a low fixed rate, with the rest variable.

"Most people would not want to fix the whole of their mortgage," he says.

That is because of relative inflexibility of fixed mortgages with restrictions on excess repayments and with break costs, should the fixed rate mortgage be repaid early.

  • Even a small reduction in the mortgage interest rate can save thousands of dollars in interest.
  • Those with large mortgages, substantial equity in their house and clean credit records are more likely to be able to get a better deal from their lender.
  • Fixed interest rates on mortgages are at historic lows; though most home-owners would probably not want to fix their entire mortgage.
  • Fixed-rate mortgages are relatively less flexible than variable-rate mortgages; most lenders allow their mortgages to be split between fixed and variable.
  • It may be some time off, but interest rates will increase. Borrowers should assure themselves that they will be able to make repayments, even if their mortgage interest rate increases by 3 percentage points.
Switched to better deal

Bradley Watts is young man with big plans for securing his financial future.

The 28-year-old shop-fitting project manager has refinanced his investment property in Queensland and his apartment in Parramatta in Sydney's west.

He was living in the apartment but now he rents further out west, and the Parramatta apartment has become his second investment property.

Watts went to see a Mortgage Choice broker, who found him a better interest rate with a rival big bank. Bradley prefers to stick with the big banks.

He is already thinking about buying a third property and thinks a bank will have more flexibility when the time comes to take out a third mortgage.

Watts  tried to get his existing bank to match the new interest rate and avoid the hassle of switching his everyday accounts and credit cards to the new lender, but the bank refused.

He decided to stick with variable interest rates, even though there are some good fixed-rate deals around.

"Our economy is facing more troubles now, with China and mining struggling, and I cannot see interest rates going up and [they] should be steady for the next two years, at least," he says.

Posted by John Collett - Money Manager (Fairfax) on 22nd July, 2015 | Comments | Trackbacks | Permalink

Need a better deal? Tell your bank

Whatever your lending situation, now is a better time than ever to review your loans - and there are plenty of opportunities available for anyone who does so

Usually, when you review your loans, what do you do? You ask the bank whether the loan can be structured in a particular way. You would then ask the bank for the best interest rate possible.

The most common response to such a request is that they will tell you what they cannot do and that there are only certain structures that are possible. Further, if you're lucky, they may reduce the interest rate slightly.

What we end up doing is leaving the control of our lending in the hands of our bank ... shouldn't the control be with you? 

Your mortgage should not be set-and-forget, with repayments simply being deducted from your account. You should be reviewing your loan about every three years to make sure you're not paying more than you have to in interest, or to take advantage of new package benefits which are being frequently introduced to the market.

With good advice, we should have a clear picture of the ideal loan structure to suit our affairs. Consideration must be given to variable or fixed interest rate, or a combination of the two. Is it appropriate for the loan to be repaid as principal and  interest or is interest only more suitable? Is a line of credit the way to go or should we consider an offset account ... indeed should we consider multiple offset accounts?

These structural issues are important to ensure your needs are best met. However, very rarely do I see banks set up loans in a manner that is most beneficial for the customer. The right structure can make a substantial difference to you over time.

We are in an environment of fierce competition. In fact, lenders are climbing all over each other to attract customers. What this means for you is that if you are willing to shop around, there are plenty of opportunities to make your loan cheaper.

So what's the bottom line? If it's been three years or more since you last checked your loan (for your home or for investment purposes), there might be a few surprises in store.

You could be paying too much interest, or there may be some package benefits on the market that you're simply not aware of.

To find out the best way to review your loan, speak to your financial adviser. And take the control away from the bank and put it back in your hands.

Posted by Thabojan Rasiah - Money Manager (Fairfax) on 22nd July, 2015 | Comments | Trackbacks | Permalink

Negative gearing works if it’s done properly

The government is out of step on the tax concession, but a Labor plan could position the party as a champion of more affordable housing.

Spot the odd one out: the treasury's tax discussion paper, the Murray report into the financial system, the Organisation for Economic Co-operation and Development and the Reserve Bank have all come out in favour of a re-examination of negative gearing or the capital gains tax concession that underpins it. 

It's only the government that is holding back. "We're not going to fiddle with negative gearing because the last time a Labor government fiddled with negative gearing, it destroyed the rental market in most of our major cities", a defiant prime minister told a Liberal state council meeting last week.

Never mind that he's wrong. Readily available graphs show that rent increases slowed in more cities than they rose when Labor temporarily wound back negative gearing in the mid 1980s. Never mind that in every city rents have increased faster since the reinstatement of negative gearing than they did in the years when it was wound back. Never mind that the explosion in negative gearing since the turn of the century has helped push house prices beyond the reach of genuine buyers.

Negative gearing and the associated capital gains tax concession aren't the only reason houses prices are soaring. But they are part of the problem, a part thatcan easily be dealt with without hurting renters or anyone else (including investors presently negatively gearing).        

Tony Abbott's stand is more about differentiating himself from Labor than it is about getting people into houses. It's about rhetoric rather than results.

In order to examine why house prices are soaring beyond the reach of ordinary Australians it's necessary to first establish that they are. After all, didn't research conducted within the Reserve Bank unveiled this month conclude that house prices were actually undervalued?

Last week's Reserve Bank submission to the parliament's home ownership inquiry shows typical homes now cost more of the typical wage than ever before –  in excess of five times the average disposable income. Back in 1990 they cost three times the average disposable income. Before negative gearing took off at the turn of the century they cost four times the disposable income.

But the RBA says that doesn't necessarily mean houses are less affordable. Record low mortgage rates have pushed down the cost of repayments to well below their decade long average. Compared to renting, buying is exceptionally cheap according to the preliminary research. Taking into account the high likelihood of continuing low rates the research finds that, compared to renting, paying off a home is cheaper than it's been in three decades.

Except that that's not the end of it. Cheap repayments aren't much help if you can't afford the deposit.

The RBA's submission shows that the typical cost of a deposit is higher than it has ever been, around 100 per cent of average disposable income – or it would be, were it not for the fact that many lenders have relaxed their standards.

But it says even taking into account of relaxed standards, deposits are more expensive than they used to be, forcing Australians without very good access to cash to either postpone or forget about buying a house. Typically these people are young, and without well-off parents to help them out. High prices are entrenching inequality.

A frightening graph in the Reserve Bank's submission shows the home ownership rate among middle-income Australians has slid since the turn of the century while the rate among high-income Australians has held up.

The turn of the century is when prices took off, climbing faster and for longer than ever before. A few months earlier in September 1999 the Howard government excluded from tax half of every capital gain, making negative gearing suddenly much more attractive (for shares as well as property). Until then, if you used losses to cut your taxable income you still had to face tax when you eventually sold. Afterwards you could deduct 100 per cent of your annual losses but be taxed on only 50 per cent of your eventual profits.

An extraordinary one in 10 Australian taxpayers became negative gearers. In order to get the properties they had to push up prices and elbow out would be owner-occupiers. Sure, they could have built new homes rather than buy existing ones, but they lacked the patience. Fourteen out of every 15 dollars borrowed for investment housing is spent on existing homes.

Labor is considering a proposal to put negative gearing to work. It would allow existing negative gearers to keep doing what they are doing. No-one would be rushed into selling anything. Anyone who wanted a new negatively geared property would have to build it. It's the same rule we apply to foreign investors. They are allowed to build but not to buy. The Melbourne-based McKell Institute reckons it would boost the supply of new houses by 10 per cent while boosting the annual tax take by $1 billion.

Labor ought to be able to sell it. It can rely on the treasury, the Reserve Bank, the OECD and the financial system inquiry for tacit support. Only the government is out of step. Labor can position itself as the party of more more affordable housing.

Peter Martin is economics editor of The Age.

Posted by Peter Martin - The Age on 21st July, 2015 | Comments | Trackbacks | Permalink

Experts warn of housing cost double whammy

 AUSTRALIANS can expect to pay even more for housing if the GST is raised, with experts warning of a “devastating” impact on housing affordability.

And would-be homeowners can expect a double whammy if the proposal goes ahead, with mortgages set to become more expensive as the big banks scramble to meet new lending rules.

Urban Development Institute of Australia vice president Michael Corcoran said with housing prices at “record levels” increasing the number of new homes built was essential to solving the affordability crisis.

“I think everyone including the Reserve Bank agrees that the only long term solution is to increase the supply of new houses and apartments,” Mr Corcoran said.

“If the GST increase only applies to new houses and apartments, prices must go up. And that will have a spill-over effect to established housing.”

He said ordinary families’ ability to make their mortgage repayments were hanging by a thread, sustained only by record low interest rates, which would not last.

And developers would be forced to reassess whether new projects were viable, he said, as a fifty per cent tax hike would “make significant inroads” into their profit margins.

“And this will impact on their ability to raise finance by demonstrating that the project is feasible,” he said.

Mr Corcoran called for a general land tax to be considered instead of raising the GST.

Housing Industry Association chief economist Harley Dale said if GST applied to new housing hit 15 per cent, the impact on the sector would be profound.

“It’s a bit of a no-brainer,” Mr Dale said, predicting a “sharp decline” in construction.

“There would be a significant reduction of new housing from both an investor and owner-occupier perspective,” he said.

The HIA is pushing for new properties to be exempt from any increase in the GST and wants alternative tax reform on the table, such as a broadbased land tax that would replace stamp duty.

“New home building is the only strong component of the Australian economy,” Mr Dale said, arguing a decline would also hit employment in construction and retail.

“At the end of the day it’s a roof over someone’s head, it’s shelter. It’s a necessity.”

Meanwhile, the peak body for mortgage brokers predicts the big banks will pass the cost of regulatory changes onto customers, in another blow to home buyers.

The Australian Prudential Regulation Authority has tightened “risk weighting” rules for the Commonwealth Bank, Westpac, National Australia Bank and ANZ and Macquarie.

The rules will require the big banks to raise billions of dollars of extra capital to balance the risk of their home loans, in order to increase the average “risk weighting” for mortgages on their books from 16 per cent to 25 per cent.

Mortgage and Finance Association of Australia chief executive Peter White said he would be surprised if the banks did not pass on the full cost of the changes, which are expected to add an extra 20 basis points to mortgage rates.

“It’s not going to be monumentally devastating, but it’s not good,” he said.

Mr White’s advice for those hoping to break into the housing market was to allow plenty of wriggle room in their budgets, warning against loans where people were “only barely able to make repayments”.

“We’ve been saying for a long time that it’s just a matter of time before rates go up,” Mr White said.

Posted by Dana McCauley - News Limited Network on 21st July, 2015 | Comments | Trackbacks | Permalink

Mortgage costs tipped to rise as banks face higher costs under new APRA rules

Big bank customers are predicted to face higher borrowing costs due to  regulatory changes unveiled on Monday, but it is expected to happen gradually as lenders quietly tweak their mortgage pricing.

The Australian Prudential Regulation Authority on Monday unveiled measures that will make mortgage lending less profitable for the big four banks and Macquarie.

These giants of our financial system will be forced to set aside more capital - funds for absorbing losses - for every dollar they lend out in home loans.

Experts predict the banks will pass on some of this extra $12 billion cost to customers, especially those with home loans.       

But rather than suddenly raising home loans interest rates, banks will tighten the screws gradually: removing a discount here, tweaking a deposit rate there.

Morningstar analyst David Ellis said that if the Reserve Bank cuts interest rates - something that is seen as possible but unlikely over the coming months - banks would recoup some of their higher capital costs by not passing on the reduction to borrowers in full.

This is what Westpac, National Australia Bank and Commonwealth Bank did in May.

If the RBA does not cut rates, Mr Ellis said banks would claw back the cost "quietly" such as by reducing mortgage discounts, rather than raising their advertised rates.

"You might not see it in the headline rates.. but I think discounts will be reduced and you will see it in deposit rates," he said.

Credit Suisse analyst Jarrod Martin said the extra cost to the big four banks and Macquarie Group from Monday's changes was equal to about a 20 basis point increase in mortgage rates.

However, he said the major banks were only likely to claw back "some" of this cost, not the full amount, as competition would restrict the big banks' ability to push up prices.

"In order to claw back half of the impact on return on equity, you are looking at a 10 basis point increase in mortgage pricing," he said. "There will be some competitive considerations – the regionals will not be impacted by this  change."

Westpac, which has previously warned that forcing banks to hold more capital may push up borrowing costs, also said that customers would feel some of the cost.

"While Westpac is well-placed to meet these changes, increased capital does come at a cost," chief financial officer Peter King said in a statement to the Australian Securities Exchange.

"The cost of holding higher capital will inevitably be borne by customers and shareholders," he said. More competition

The changes, which were recommended by last year's financial system inquiry, are aimed at making the banking system safer and helping smaller lenders compete.

By tightening the financial models used by banks to asses risk, known as "risk weightings," the regulator is ratcheting up banks' capital requirements by about $12 billion by July 2016. 

While banks have warned the extra costs may be passed on to borrowers, the change has been welcomed by smaller rivals, who argue it will level the playing field with the major banks.

The Customer-Owned Banking Association said the changes would allow smaller rivals to maintain pressure on the major banks.

"If the major banks seek to increase home loan interest rates in response to APRA's new, fairer capital settings, customer-owned banking institutions look forward to taking market share from the major banks," chief executive Mark Degotardi said.

Nonetheless, analysts said that given their dominant position in the market, it was likely banks would be able to pass on some of the extra cost to their customers.

Macquarie analyst Mike Wiblin said in a note that banks had a "clear mandate to reprice mortgages as funding costs rise due to the use of more (costly) equity to fund mortgages."

Mr Wiblin said he believed banks would meet the target through a mixture of retained earnings and issuing share through the dividends.

Posted by Clancy Yeates - The Age on 20th July, 2015 | Comments | Trackbacks | Permalink

Busting the five myths about negative gearing

In a submission to the Senate inquiry into home ownership, the Reserve Bank suggests that it might be time to review the negative gearing arrangements for investment property.

To be fair, the RBA's submission called for this review within the context of the entire taxation arrangements of investment property, of which negative gearing is simply one component.

Nevertheless, the significance of the RBA entering this debate is not to be underestimated.                  

The negative gearing rules in Australia allow investors to offset losses on their investment property against other income. 

Opponents of negative gearing laws claim that this income tax reduction is essentially a subsidy that is not available to owner-occupiers. They also claim that this subsidy distorts the housing market, making housing unaffordable for ordinary Australians.

Some even suggest that it is responsible for the house price surges in Sydney and Melbourne.

However, a lot of these claims simply don't stack up.

Myth 1: Negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates.

Myth 2: Negative gearing makes property unduly attractive for investors.

All investments, including property, can be negatively geared. Property competes, as an investment, on a level playing field. Abolishing the negative gearing rules for property would cause a market distortion, not cure it.

Myth 3: Negative gearing pushes aggregate prices out of the reach of average Australians.

There is simply no evidence that prices are skewed out of the range of the average Australian. The RBA made this clear to the Senate inquiry – the current cost of servicing new loans on housing in Australia is significantly lower than the average over the past decade.

Myth 4: Negative gearing benefits the wealthy at the expense of the poor.

Taxation statistics from the ATO show that of those declaring a net rental interest in recent years; approximately three-quarters earn less than $80,000 per annum.

Myth 5: Negative gearing rules make it more difficult for first home-buyers to enter the housing market.

This is one of the most contentious myths in the popular mindset. The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low. For example, in inner-Sydney gross rental yields can be as low as 2.5 per cent in some areas. This benefits the renter, not the investor, and allows renters a better opportunity to save for a deposit for their own home. Abolishing negative gearing would, in the long-term, drive rents up and make it much harder for renters to get on the property ladder.

The reality . . .

Some commentators have suggested that rents did not increase during the 1985 negative gearing hiatus. However, housing markets are sluggish to respond to demand shocks. Building new property to address market undersupply or waiting for population growth to absorb oversupply takes many years. Also most leases are fixed for a significant length of time. Observations made in a single year do not disprove fundamental economic principles.

Even if the opponents of negative gearing are correct, and abolition did reduce house prices, how much wealth would be destroyed? A 10 per cent reduction in average house value equates to a $570 billion wealth destruction. This is people's life savings and retirement plans, and it would hurt those currently with mortgages most heavily. Destroying wealth in one sector of the community to increase wealth in another is simply a wealth transfer form one group to another.

Similarly, making changes to tax rules that hurt the entire country simply to help a select few in Sydney and Melbourne is a wealth transfer from the regional areas to the city.

The reality is that abolishing negative gearing on property would create a market distortion, make it more difficult for future first-home buyers to save a deposit, increase rents and create significant wealth destruction and transfers.

If the government is serious about improving housing affordability, then it should explore options to increase supply and reduce the cost of inputs. Some suggestions include removing stamp duties, simplify and relax the complex planning system, reduce social housing, tighten trade-union legislation and increase urban infrastructure coverage.

Jamie Alcock is an Associate Professor of Finance at the University of Sydney Business School and specialist in the housing market.

Posted by Jamie Alcock - The Age on 19th July, 2015 | Comments | Trackbacks | Permalink

It’s fight night for property and shares

 PROPERTY versus shares: their battle for the hearts and money of Australians has been running for decades.

Like a couple of chaotic cage fighters, they will shock you, impress you and sometimes disgust you, but that’s no reason to avoid them.

Property is winning the popularity stakes, largely thanks to the familiarity of bricks and mortar and solid, steady long-term financial gains.

ASX research released this month shows shares have lost popularity in the past decade with the number of direct share owners dropping from 44 per cent to 33 per cent, and indirect share owners — through managed funds — plunging from 32 per cent to 10 per cent.

On the financial front, the referee’s decision in the property-versus-shares fight is not as clear. The winner starts with P, but it’s not property. It’s patience, and you’ll need plenty of that whether you put your money in shares, property or both.

Expect periods of five or 10 years where you get little or no growth. While Sydney house prices have boomed in recent years, prices in cities such as Adelaide and Hobart have gone nowhere, and in the past 12 months have been falling in Perth and Darwin.

On the sharemarket, patience is even more important. Our All Ordinaries index — which measures 500 major companies — is still sitting below where it was eight years ago, and has to climb another 20 per cent to reclaim the record high it reached in November 2007.

Adding dividend income makes sharemarket returns look healthier, as does adding rental income to property price performance. Speaking of income, shares are beating property thanks to their higher yields and their tax benefits.

But just like a cage fight, there will be blood. Aussie share prices more than halved during the GFC. Property prices move in waves, sometimes giant scary ones, and there are growing fears that Sydney’s boom will eventually end in tears.      

You can choose to avoid shares and property altogether and stick with super-safe cash, but with today’s low interest rates your money is going backwards after tax and inflation. For many investors, particularly those nearing or in retirement, all options seem scary.

Mixed martial arts world champion Ronda Rousey says fear helps make you stronger: “I’m a courageous person because I’m a scared person” she says.

There are always reasons to be afraid of investing. Greece, China, interest rates and political shenanigans are among the grey clouds we currently face.

Investors in shares and property will experience financial pain at some point, but history has shown that both are winners over the long term.

So, fight fans, let’s cross back to Ronda Rousey for some final words that ring true for investors: “My first injury ever was a broken toe, and my mother made me run laps around the mat for the rest of the night. She said she wanted me to know that even if I was hurt, I was still fine”.

Posted by Anthony Keane - News Limited Network on 18th July, 2015 | Comments | Trackbacks | Permalink

Could reforming stamp duty be the key to lower house prices?

 AS DEBATE rages over whether negative gearing and capital gains tax is really to blame for high house prices, there is one area that Treasury has acknowledged is an issue — stamp duty.

In its submission to the parliamentary inquiry into home ownership, Treasury urged state governments to reconsider levying stamp duty, which it labelled “one of the most distortive taxes in Australia’s economy”.

Treasury said state-based stamp duties drove a “wedge” between buyers and sellers, preventing “mutually beneficial transactions taking place”.

“Reducing stamp duties would improve land use, by facilitating households and business to move to land which best suits their circumstances,” the submission reads.

As the average price of homes in Sydney has increased dramatically, buyers are also paying much higher levels of transfer duty due to bracket creep.

The Law Society of NSW identified this as an area for reform in the submission it provided.

The committee pointed out that stamp duty rates in NSW had largely remained unchanged for 29 years, despite the average home price in Sydney skyrocketing to about $900,000.

When stamp duty was introduced, average home buyers were expected to pay a 3.5 per cent transfer duty as this was the rate to be paid on properties worth less than $300,000.

Nowadays the average home price in Sydney is about $900,000 and people are paying stamp duty rates of about 4.5 or 5.5 per cent.

The committee said it did not think there was ever any “legislative intention” for the average homebuyer to pay such high rates of stamp duty, and it believes that the 3.5 per cent rates of NSW transfer duty should be changed to apply to homes up to at least $1 million.

It pointed to a statement that was made in Parliament when the stamp duty legislation was introduced that “the increased rates for conveyances only affect properties worth more than $300,000 and thus will not affect the average home purchaser”.

The committee also believes that the high rate of stamp duty has added to higher house prices because buyers want to recover the cost of the transfer duty when they sell. The levy also discourages people from buying and selling.

While the committee noted that in the last financial year, NSW’s Budget raked in $1 billion more than expected because of extra stamp duty collected from the high number of homes being bought and sold, it did not believe that lowering stamp duty would necessarily mean this revenue had to take a hit, as it might encourage more people to buy and sell.

The committee believes other states and territories should also consider adjusting their rates.

“In taking these steps, state and territory governments would not only be assisting average homebuyers but would be incentivising turnover, thereby maintaining transfer duty revenue collections,” it wrote.

Posted by News Limited Network on 17th July, 2015 | Comments | Trackbacks | Permalink

Novice buyers should play to their strengths

When it comes to property, every buyer is in a microcosm: they have to ensure that the price they pay and the size of their loan repayments stack up for them personally. 

House prices in Sydney and Melbourne continue to be big news with rising prices creating a lot of discussion about a housing crisis.

In the March quarter, the Australian Bureau of Statistics reported a 1.6 per cent rise in property prices in Australia's capitals, with Sydney almost doubling that trend at 3.1 per cent growth.

That's mixed news for people who already own property, and a kick in the guts for those wanting to buy in Sydney. But it's also a wake-up call for those who watch market numbers too closely.       

As I've often pointed out, property markets and average prices are made up of hundreds of sales and auctions. They aggregate the cheapest with the most expensive to get their averages.

But for a couple buying their first home, they are not an average among hundreds of sales: they buy one home, at one price and pay one mortgage.

When it comes to property, every buyer is in a microcosm: they have to ensure that the price they pay and the size of their loan repayments stack up for them personally.

In a booming market, every buyer has to play to their strengths. What someone else is paying 14 suburbs away is immaterial.

In this market, you have to become really conversant with not only the real-estate market, but with lending formulas for home loans and also your own personal finances and budgets.

You need to measure personal affordability and your ability to pay off the loan, known as "loan serviceability".

One of the oldest rules in the book is that an appropriately-priced property should be valued at around five times your annual income.

This assumes a 20 per cent deposit and it means that if you and your partner bring in $120,000, the sweet spot is a house price of $600,000.

In Sydney right now, this rule of thumb has become somewhat out-dated.  Buyers are having to go to six and seven times their incomes to buy the house they want.

This means buyers can't rely on rules of housing affordability alone, and they have to address loan serviceability.

The question of loan serviceability varies from lender to lender and often hinges on monthly household expenses such as food, clothing, entertainment and so on.  Your lender will help you determine this, according to your personal situation.

You can use online calculators to see your borrowing power, and every property buyer should use one to self-assess their situation. However, lenders might calculate your loan serviceability differently and where one may approve you, another won't.

This can confuse borrowers. In an environment of having to stretch your income to cover a larger loan, first-home buyers should make at least one visit to a mortgage broker. Information is power, and brokers have the information.

The real lesson is to understand the property market from your own personal circumstances.

When a property market booms, it's painful to buy-in. But at the very least you can formulate your own affordability and loan serviceability parameters.

After all, it isn't the "market" which repays the mortgage – it's you.

Mark Bouris​ is executive chairman of wealth management company Yellow Brick Road. www.ybr.com.au

Posted by Mark Bouris - The Age on 17th July, 2015 | Comments | Trackbacks | Permalink

Five ways to make your DIY fund run more smoothly

Here are five things you can do with your SMSF to get the most out of it this financial year, writes Olivia Maragna.

If you missed out on organising your self-managed superannuation fund before the end of the financial year, take solace in the fact that you can now get things organised well and truly in advance of the next end of financial year.

Here are five things you can do with your SMSF to get the most out of it this financial year.

1 Plan to maximise your contributions

Currently the concessional (pre-tax) annual contribution cap is $30,000 per year for those aged under 49, and $35,000 for those aged 49 and over. Keep in mind that the over 65s will also have to meet the "work test" in order to contribute into super. The work test generally involves the individual working at least 40 hours over a single 30-day period during the financial year. The non-concessional (after-tax) annual cap is $180,000 per year and if the member is under 65, they can take advantage of bringing forward the two following years' contributions to make a lump sum contribution of $540,000.        

Contributing funds into super can provide for substantial tax savings where the income on the funds or earnings would ordinarily be taxed at personal marginal tax rates that are higher than the tax rate in the super fund, which potentially could be as low as 0 to15 per cent, saving you thousands.

2 Review your fund's capital gains tax events

While capital gains and losses are included in your fund's assessable income for capital gains tax purposes when you are in the accumulation phase, capital losses can only be used to offset capital gains and not other forms of income. As a result, plan ahead and review any CGT events, such as the sale of assets, that you are planning to realise this financial year and consider whether they can be offset by capital losses or consider the timing of when you realised the capital gain.

Care needs to be taken in this circumstance to avoid the Australian Taxations Office's ruling on "wash sale" arrangements, where an asset is disposed of with the primary purpose of creating a capital loss, but where the taxpayer's economic exposure in the asset is not significantly altered. Note that any capital losses can be carried forward to future financial years, however utilising these effectively may prove to be more beneficial sooner, and before you retire.

3 Explore the possibility of 'in specie' contributions

'In specie' contributions is where you can effectively transfer a limited variety of investments into the SMSF by related parties. This commonly includes listed shares and business real property such as your business' premises. Contributing these to the fund allows you to retain the investment but also can provide substantial tax benefits by moving investments into potentially a more tax-effective environment where it can continue to grow long term.

Keep in mind that the transfer into your fund will trigger a capital gains tax event and will count towards your contribution caps – so plan to minimise this by monitoring your overall tax planning and timing of when you transfer the investment.

4 Are any members eligible for a pension?

If the fund has members over preservation age  who can access their super, it may be worth considering drawing on your super fund through a pension. When drawing a pension, the tax on income from investments will reduce from 15 per cent to 0 per cent.

Care needs to be taken that the minimum pension payments are made in order to benefit from the 0 per cent tax rate.

Be aware that this is not a strategy that benefits everyone, so analysis needs to be done to ensure it is right for your personal circumstances and while there are potential tax benefits, the costs need to be considered also. Depending on the type of contributions you put into your super fund and the number of account balances you have in your SMSF, it may in fact be worthwhile to draw on some of your account balances; yet others may put you in a position where you are worse off.

5 Review your strategy

Part of the compliance process for a SMSF is that it has an investment strategy, and that the trustees are following that strategy. Regular reviews should take place in order for the trustees to ascertain whether any changes need to be made, either to the investments or the strategy itself.

A change in circumstances, retirement or incapacity may require an adjustment to your investment strategy so ensure you are reviewing this with your financial adviser and make any necessary changes to cater for changing circumstances. These are just some of the strategies that can be used to make your SMSF more effective for the financial year ahead.

As always, before implementing strategies around your SMSF, ensure you are talking to your financial adviser about your specific circumstances and to ensure you maintain your compliance at all times. A little forward planning may prove to be beneficial for this financial year and can also help boost your lifestyle in retirement.

Olivia Maragna​ is the co-founder of Aspire Retire Financial Services. Her advice is general and readers should seek their own professional advice before making financial decisions. You can follow Olivia on Facebook.

Posted by Olivia Maragna - The Age on 17th July, 2015 | Comments | Trackbacks | Permalink

When it comes to banking, disloyalty pays

More and more of us are figuring out that loyalty doesn't pay, especially when it comes to dealing with banks.

At least, that's one conclusion to draw from recent signs that Australians are ever so gradually becoming more open to shopping around in financial services - just like we do with other purchases.

A willingness to be a disloyal consumer is vital for a competitive market - but consumers are notoriously reluctant to switch their bank accounts.        

Changing banks is a hassle, after all. Many of us have multiple accounts with direct debits set up - and quite frankly - have better things to do with our time. This inertia, sometimes dubbed a "lazy tax," works in favour of banks because it limits the pressure on them to compete on price.

Recently, however, there have been some tentative signs these attitudes may be changing.

Figures from financial researchers RFi show the proportion of people who intend to switch banks for their main transaction account have almost doubled since 2011, from 7 per cent to 12 per cent. 

A KPMG survey earlier this year found younger people aged between 18 and 30 were less loyal bank customers.

This may be partly because of online banking, which makes it easier to compare rival offers and open up an account.

ING Direct chief executive Vaughn Richtor​ also argues there is a gradual cultural change occurring.

"If we go to a shop and we're not happy with the service or the products we walk out the door and go somewhere else. I'm not sure that was the case in banking, but I think it is increasingly becoming the case," he says.

To be sure, the numbers of people actually changing banks is still low.

RFi's surveys point to a slight increase in the proportion of people who switch banks each year, from about 4 per cent to 6 per cent.

There has only been limited use of a government scheme allowing customers to change banks by filling out a single form. About 250 people a month are using the service, latest numbers show, which is less than when the scheme was opened three years ago.

That is a far cry from Britain,  where a switching service that guaranteed people could change banks within seven days, has processed more than 1.7 million switches in less than two years.

But even though more could be done in Australia, the rise of online banking does appear to be encouraging customers to be more open to shopping around. 

If the trend continues, it may even have a silver lining for the other customers who can't be bothered shopping around.

Amid stiff competition in the home loan market, for instance, banks have been forced to work harder at keeping their existing customers happy, which may include offering them a good deal before they threaten to walk out the door.

If more of us are willing to be disloyal, it ups the pressure on banks to compete harder, which can only be good news for consumers.

Posted by Clancy Yeates - The Age on 14th July, 2015 | Comments | Trackbacks | Permalink

Creativity key to first-time success in red-hot market

Sky-high property prices and competition from overseas investors is enough to drive first-home buyers to despair. But instead of giving up on the great Australian dream, many are thinking outside the square.

Co-buying with parents or friends is an increasingly popular strategy helping buyers get a leg up in the pricey property market. Pooling their savings with others helps new buyers boost their purchasing power and sidestep costs such as lenders' mortgage insurance.                                 
Creative new buyers are even turning to crowdsourcing to build a deposit. Seventeen-year-old Caitlyn Argyle has raised nearly $6000 of the $48,000 deposit she needs for an investment property on the Gold Coast. She has promised one night of accommodation in her future home for those who make upfront payments of $100 and week-long stays for payments of $1260. For Argyle, appealing for the public's help was the best way to avoid more than a decade of saving for a deposit.       

"I've been reading for some time that a house is a good investment and decided that investing in one is what I need to do, but I also kept hearing that it's getting hard for young people to invest and get ahead," she says on her Indiegogo page.

"If I wait until I save the money up from working it will take me many years to raise a deposit. The longer I take, the more expensive houses will become and the longer it will take me to raise the money...in fact after expenses, taxes and increasing prices it might take me 20 years to buy one!"

It's no wonder first-home buyers, daunted by ever-increasing property price tags, are turning to alternative buying methods. Property price growth is outstripping wage growth across Australia.  In Sydney,   property prices surged by 15 per cent in the past year and wages grew by two per cent, Deloitte's 2015 Mortgage Report revealed.

Rather than playing an increasingly difficult game of catch-up, first-home buyers are combining funds with family members and friends, says ME head of home loans Patrick Nolan.

"Co-ownership is a new and evolving model where usually it's either friends or family jointly going into purchasing a property together," he says. "They wouldn't otherwise do that unless it was to support the first-home buyer."

A survey of 1000 people by ME last year found 14 per cent of buyers bought jointly with parents, 12 per cent bought with other family members and 4 per cent with friends. The figures are evidence of first-home buyers thinking of new solutions to the challenge of home ownership, Nolan says.

"People are now more aware of how to kind of work around these things and talk about the various opportunities and crowdsourcing is a really good example of that," he says.

But pitching in with others does have its pitfalls. Depending on the laws of each state, co-buyers may forfeit their rights to first- home buyer grants. This is particularly the case for people buying with their parents, who already own property.

Falling out with purchasing partners is another obvious drawback. Nolan recommends setting out a clear legal agreement.

"People can get these sorts of agreements established with the use of a lawyer so everyone's clear on what the expectations are," he says. "It should include simple things, such as what happens when one person wants to sell." While first-home buyers are the big winners in co-buying deals, parents can also reap financial rewards.

Chris Browne from Rising Tide Financial Services says two of his clients came up with a novel way of helping their child save a deposit.

"The parents told their child to 'come back home and pay us $150 board per week'," he says. "It all went into their offset account so it helped them with interest on their own mortgage and there was a formal agreement saying they'd relinquish $100 of that $150 per week board when their child was ready to purchase a property. So they were paying $150, but saving two thirds.

"This model [works] because it teaches people to save and that's what I like about it, as opposed to just gifting money for a deposit."

But Browne warns parent and child co-buying isn't for everyone and recommends both parties seek legal advice before buying property. 'It's quite challenging sometimes'

Living under the same roof as the in-laws might sound like a nightmare for some, but Tim Richmond says he is living the dream. Richmond and his wife Gaynor bought their first home in the Melbourne suburb of Coburg North in January with the help of Gaynor's parents Alan and Jan Silsbury .

The seven-bedroom, five-bathroom house cost them $975,000 with the Silsburys tipping in $216,500.

"It's essentially a multi-dwelling house," Richmond says. "So under the one roofline there's a five-bedroom house and a two-bedroom house. They've got their own front door, their own lounge room, kitchen, bathrooms and bedrooms and we've got our own.

"Co-habiting with your in-laws is quite challenging sometimes. There's lots of compromises, but the best thing about it is my three-year-old has his grandparents living with him all the time and that's really perfect."

Without the financial help of the Silsburys, the Richmonds say they would not have been able to buy the kind of house they wanted for another five years.

Before moving into their Coburg North property, the Richmonds and the Silburys rented a four-bedroom house in Ascot Vale.

"That was crazy, it was just too close,"  Richmond says. "We really wanted to look at a house which would suit everybody's needs.

"It's a big risk because obviously as a first-home buyer you try to buy under half a million and have a normal kind of mortgage, whereas our mortgage starts with an eight.

"As a first-home buyer I never thought I'd live in that type of property, but you're kind of forced to look at that kind of property because getting a three-bedroom house with five people, four of them adults, is not feasible."

The living arrangements also come with child-minding perks. Three-year-old Harvey is cared for by his grandparents two days a week, saving the Richmonds thousands in childcare fees.

"I think learning from multi-generational people is great," Richmond says. "I want him to have a varied education and having your grandparents around is very important."

Posted by Kate Jones - The Age on 14th July, 2015 | Comments | Trackbacks | Permalink

Sell first or buy first: what’s best?

There is a lot to consider when moving house, particularly when it comes to juggling the selling of your existing home and buying a new one.

Selling your old home and buying a new one is no mean feat. Both processes require a major commitment of your time, emotions and money! Most people choose to sell their old home first and then with the available equity purchase a new home. But there are times where buying first may better suit your circumstances.

We look at the pros and cons of each and talk to a buyer who recently juggled the selling and buying conundrum.

Selling your home first and buying later

Commonly, people sell their existing home first. This helps to free up their equity and establishes a realistic budget when it comes to finding a new house. Ideally you will time the selling of your old home and purchase of your new house as closely together as possible. This will help avoid the expense and trouble of having to organise interim accommodation and moving house twice.

There are a number of road blocks to this ‘ideal’ scenario:
  • You will need to manage both the selling and buying real estate processes at once.
  • It may take much longer than you anticipated to find and settle on your new dream home.
  • Real estate values may rise after selling, pricing you out of your desired market.
If there is an interim period between your real estate sale and purchase there are a number of options you can look at:
  • negotiate a longer settlement period on the sale of your home
  • organise to lease back your sold home from the new owner to give you more time to find a property
  • move into a rental property
  • stay with family or move into a hotel and place your goods in storage.

These options will generally save you money in comparison to buying before selling and incurring the costs of two homes and two mortgages.

It is important to take into account your accommodation arrangements when finalising the settlement dates on your home’s sale and new purchase. Laura*, who recently bought a three-bedroom house in Sydney’s inner-west suburb of Annandale for $1.217 million, had been renting in the interim. To be safe, Laura organised a few extra days in the rental property past the settlement date in case something went wrong.

“The actual [settlement] process was quite time consuming and there were a lot of administrative errors,” explains Laura. “You just have to expect that there’s going to be issues, our settlement was delayed twice through no fault of our own.”

Not only did Laura require the additional days she had factored in, it was also necessary to negotiate more time in the rental property with the leasing agent to cover the settlement delays.

“I was lucky that they hadn’t found a tenant yet. If they had, obviously it would have been a bit more problematic,” says Laura.

Buying your new home first and selling later

Buying before you sell can be financially tricky but you cannot control when your dream home may come on the market. For some, the convenience of a single relocation is worth the potential costs.

Without the equity from the sale of your existing home you are likely to require bridging finance to cover the purchase of your new home. Bridging finance can cost more than a standard home loan. Additionally, buying first can mean extra pressure to sell your existing property, leaving you with less control over the sale process.

There are some steps you can take to reduce the burden of juggling two properties:
  • Make the sale of your existing home a contingency on the purchase of your new home; but be warned, this may put sellers off.
  • Negotiate a longer settlement on the purchase of your new property, giving you more time to sell.
  • Rent out your old home until it is sold – but tenancy can make the sale process more complicated.
  • Rent out your new home while working on the sale of your existing home, but this requires timing the end of the tenancy with the sale of your existing home.
If you are in a situation where you are maintaining more than one property and require two mortgages it is important to shop around.

For example, Laura managed to obtain significant savings on her mortgage arrangements when purchasing her Annandale property by using the same lender who financed an investment property she bought several years earlier in Coogee.

After undertaking her own online research Laura tried two mortgage brokers before settling on her new loan arrangements. The first mortgage broker was recommended to Laura but she returned to the broker who had negotiated her first loan.

“I thought they structured the loans a lot better and it actually ended up being with the same bank which has my Coogee loan,” says Laura. “Because I have the two properties there was a lot more flexibility.

“I got a discount off the rate. For the three year [fixed] I received 4.99% and for the variable 4.79%. The investment property was fixed a year or so ago so that’s 5.39% at the moment.”

Laura also has the convenience of an offset account attached to the variable portion of her Annandale property’s mortgage.

Posted by Jacqui Thompson -Domain Blog on 2nd July, 2015 | Comments | Trackbacks | Permalink

The rise of the first-home buyer landlord

After being out-bid by property investors, many first-home buyers are adopting an "if you can't beat them, join them" strategy.

Buying a first home as a landlord is growing in popularity, banks say, and that's supported by survey data from consultancy Digital Finance Analytics, used in this week's graph.  

Buying as an investor, rather than someone planning to live in the home, can certainly make property ownership more achievable.

It means you collect rent to help cover the mortgage, while also being able to claim a tax deduction on your interest costs, something owner-occupiers can't do.

But despite these advantages - which mortgage brokers and others with a vested interest can be quick to highlight - it's important to also be aware of the risks.

Banks argue that lending money to property investors is no riskier than lending to owner-occupiers, and their experience in recent decades supports this. However, financial regulators aren't so sure.

Across the Tasman, the Reserve Bank of New Zealand is grappling with an even bigger property bonanza than Australia's, and it is looking closely at how different types of borrowers fare in a severe housing bust.

A recent Reserve Bank RBNZ  paper said evidence from Australia was limited because we had not suffered a severe downturn in such a long time - so it looked at Ireland, where a monster housing bubble burst during the global financial crisis.

It concluded that investor borrowers were no more likely to default when the economy was travelling well, but they were much more vulnerable in a property crash. Irish investors were about twice as likely to fall behind on their home loans than owner-occupiers during the GFC.

One reason investors are at greater risk is because they are not only betting on keeping their own job, they are also punting on the rental market, by assuming they will be able to rent the home at a certain price, and factoring this into their calculations. In central bank speak, investor borrowers face "additional income volatility".

That's not a problem when rental markets are tight, but it can be if the market cools down, as it is likely to.

The other risk is that investor buying is more likely to be speculative - driven by bets on future capital gains.

While it is their job to worry about these things, central bankers caution that speculative price rises are more likely to end in sharper falls, and this was the experience overseas.

The message for first-home buyers thinking about becoming investors is to be aware of these risks, as well as the benefits, of buying as a landlord. That means you should think about how you'd fare if the rental market slowed down; be prepared for interest rates rising; and don't assume prices can only go up.

Posted by Clancey Yeates - The Age on 1st July, 2015 | Comments | Trackbacks | Permalink

Seven ways to thrive in the new financial year

I'm not a big fan of New Year resolutions. That's because they're often made while under the influence of more than a few champagnes and generally evaporate with the onset of the next day's hangover.

I am, however, a fan of New Financial Year resolutions. Perhaps it's because we're not only sober by July, we're often a lot more serious. We know we're halfway into the year and we figure if we don't do something now then we're going to arrive at the end of the year either in the same position or, God forbid, a worse position than the one we started. 

That's why I think New Financial Year resolutions are the #getsh!tdone of resolutions because, usually, we mean business. We've put on our business socks and we've decided it's time to stop talking about getting busy and actually do something about it.  

The question is, what should you be making New Year financial resolutions about? 

Below are seven common money problems. I recommend you pick the one that most applies to you and create a plan around what you're going to achieve this year - to think, talk, plan and then of course, do.

1. If you're in a relationship

If you haven't had "the money talk" with your partner yet then decide this is the week you're going to do it. It doesn't matter if you're six months or six years in, if money is something you're not great at talking about then make this the year you're going to move on to the same page.

Start with what you both have, what you both owe and what you both want to achieve. If something is a surprise, talk through how you're going to deal with it together. Once you've chosen your money goals, decide how you're going to make those things happen. Together.

2. If you were hopeless with your taxes last year 

Start the financial year on the right foot by deciding to be super organised with this year's taxes. Before July is over, find a great accountant and organise your taxes early so you're already ahead of the game.

Then while you're there, ask your accountant for tips on how to handle your affairs better this year. It might include paying for all your expenses on the one credit card so it's easy to locate your deductions or simply being more aware of what you can claim.

3. If you have no idea where your money is going 

Set up a free cloud solution like those on the Money Smart website or, for a small monthly fee, look at Xero and start allocating your expenses so you know where your money is going.

Until you know what you have to work with and where you are overspending you can't do anything about it so decide to spend your first couple of months on this. Then set some goals, add a budget and decide to become a conscious consumer.

4. If you haven't set goals

Then set some today! Without knowing what you want to achieve with your money it's difficult to stick to any sort of budget or saving plan. Work out what your 12-month and three-year goals are, work out how much you need to make them happen, calculate it back to a weekly amount and then set up an automatic savings plan. Stick pictures of your goals up where you can see them or as the screen saver on your phone so you don't go off track.

5. If you want to retire

Then it's time to get serious. Make sure you talk to an expert in July who can help you define when you want to retire, how much you need to retire on, what you have and what the gap is. By having this conversation you can then set up a plan early in the year to do all or some of the following: work towards the gap, drop your spending, adjust your retirement timeframe and create a superannuation plan. 

6. If you're worried about asset protection

There are so many options available to you when it comes to asset protection. If you're not sure where to start and you've suspected that your assets might be at risk then decide to speak to an expert in July about how best to protect what you have. This can be a complicated process and there may be capital gains tax and stamp duty involved if you're moving assets but it's important to understand what's involved so you can make an informed decision.

7. If you have credit card debt

Whether you have one card or multiple cards, if you have long-standing debt then decide to do something about it. Perhaps it's looking at transferring the balance to a zero rate credit card or maybe it's consolidating your debt into a loan and then cutting up the cards. With credit-card interest rates potentially as high as 20 per cent-plus this is one type of debt that you should be doing something about.

A new financial year is a good opportunity to start to become financially organised. Choose today to make this financial year a great one. So pull out your business socks, embrace the #getsh!tdone hashtag and choose what you're going to work on this financial year. 

Melissa Browne is an accountant, adviser, author and shoe addict.

Posted by Melissa Browne - Money Manager (Fairfax) on 1st July, 2015 | Comments | Trackbacks | Permalink

How to change your life in a month

Procrastination: if it came with a salary I'd be a millionaire. Like anyone else, I can have a long list of things I should do with my money that I never seem to get around to.

So I set myself a challenge: make one small change to my money every day for a month. Here are the things I tried. 

Day 1 Work out annual income and expenditure 

Income from various sources, mortgage repayments, strata levies, council rates, mobile bills. Some areas it's easy to see where the money comes from and where it goes. But when it comes to spending on clothes, food and going out it's guesswork. Advertisement 
Day 2 Track spending for a week

This mirror to my money shows just how much I'm spending on coffee, picking up pre-prepared Woolies dinners, and catch-ups with friends that involve eating out.

Day 3 Set a spending plan 

It's clear: my spending needs better boundaries. I set a weekly allowance for spending on food, coffee, going out, and regular expenses such as mobile, internet, petrol and public transport. Now to test drive it for the rest of the month. Can I stick to it?

Day 4 Revert to a cash economy

I've fallen into the habit of withdrawing money whenever my purse was empty or just paying by a card. Now each Friday I pull out my cash allowance for the week. When it's gone, it's gone.

Day 5 Rein in spontaneous spending

Having a finite amount of cash in my purse each week really reduces unplanned spending. When I'm tempted to "just have a little look" in a few favourite shops I channel my inner financial coach and tell myself to stay away unless I've got money to spend.

Day 6 Declutter financial paperwork

Piles of paperwork kept for tax purposes clog my office. Time for a cull: anything more than five financial years old gets turfed.

Next, I download the Expensify app so I can scan my receipts in future.

Day 7 Set a mini financial challenge

It's easy to spend a lot on going out. I decide to see how much enjoyment I can squeeze out of $50 in one weekend. Plenty apparently. Friday night dinner and drinks with friends at a local cheapie ($20); Saturday brunch with a friend - I go for a cappuccino and a jaffle instead of a big breakfast ($12); Saturday evening is dinner at home with a friend; Sunday morning my local cinema offers bargain tickets for a documentary I'd been wanting to see ($6) plus coffee ($4). Afterwards we head to a packed Star City to watch a boxing match (free; parking $8).

Day 8 Cut one redundant monthly expense

A few years ago spending $23 a month on a Quickflix DVD subscription seemed like a good idea. Not any more.

Day 9 Save for a short-term goal

A ticket to a dance performance is in my sights. Under my new spending regime it would suck up 1½ weeks' worth of my weekly going out allowance. I put money aside for three weeks to spread the cost.

Day 10 Simplify one financial arrangement

My technology arrangements have become shambolic: two old phones, two different phone plans plus mobile broadband. Ditching my phones, one phone plan and the mobile broadband saves me $100 per month.

Day 11 Seek advice

As someone who has been self-employed for about 14 years, my retirement savings could be in better shape. My super fund offers a free one-hour consultation with a financial planner. It's a handy sounding board and helps me set a longer-term savings strategy. First step: change my investment choice.

Day 12 Make one change to the way you talk or think about money

I spot a book The One-Minute Millionaire lying on a footpath, pick it up and start reading. Straight away, it makes me aware of how often "I can't afford it" creeps into my conversations about money. I make a pact to keep my lips zipped on that front in future.

Day 13 Move towards a medium-term financial goal

Buying a piece of art has been on the wish list for a while.

I apply for a no-interest loan for buying art. Now for some gallery-hopping.

Day 14 Plug a leak

I'm a frequent visitor at my local library but the books, DVDs and magazines I borrow don't always go back when they should. Still, I'm horrified to discover I've paid 26 overdue fines totalling $186.10 this financial year. That would have covered my quarterly water bill. Library staff print out a copy of my shame file and I stick it on my fridge as a reminder to renew or return items on time.

Day 15 Sell some stuff

There's a drinking fountain my cat has never used and a few books on my overflowing shelves that I'm happy to live without. I pop them all on Gumtree. No takers so far.

Day 16 Make an asset work harder

I check out the Car Next Door website to see if I can make some extra dollars renting out my car. I'm happy to use a car occasionally and cycle, walk or take public transport the rest of the time. The idea goes on the back-burner for now when I find I don't meet all the scheme's criteria.

Day 17 Check your credit file

My application for the no-interest art loan scheme prompts an alert that there's been some activity on my credit file. To make sure all is well I get a free copy of my file.

Day 18 Spend nothing for 24 hours

What's it like to spend nothing for a day? I decide to find out. From 6am to 6am the following day I will not spend a cent. How hard can it be? Actually, it's an avenue to delight. I get a fresh perspective on my neighbourhood because I don't head straight to my favourite cafe on my morning walk. I get caught out, though, when an art exhibition opening charges $2 for a cider. Serendipitously, I find $2 on the way home.

Day 19 Find a way to buy or do something that seems beyond your means

A holiday would be lovely but it's not part of my spending plan at the moment. So I'm thrilled when I receive two offers of low-cost getaways. A friend invites me to her cousin's farm on the South Coast and another asks me to house-sit in the Southern Highlands while she's overseas. They are the perfect little pick-me-ups.

Day 20 Make a donation or give something away

A local cafe has a book swap so I pop some of my literary overflow on their shelves. I sign up to do a walk led by some people entering an Oxfam Trailwalker challenge. The price of walking the 12 kilometres on a sunny Saturday morning is a small donation. It's a double-shot of feel-good factor.

Day 21 Cut a quarterly or annual expense

With plenty of choice in the utilities market, I wonder if I can reduce my electricity bill. I key the details from my latest bill into the iSelect website and discover I can save about $100 a year if I switch providers. Surprisingly, my usage is below average for a similar household in my area.

Day 22 Have a tiny treat

A couple of weeks into my new spending regime I get the itch to spend beyond my boundaries. So I set aside some of my allowance for a tiny treat. One week it's a beautiful rose-scented facial moisturiser; another some scented candles. It makes me feel pampered and helps me stick to my spending plan.

Day 23 Prepare for the unexpected

I turn my intention to be better prepared for the unexpected into action and organise income protection and life insurance cover via my super fund.

Day 24 Increase your savings

Interest rates will inevitably rise again. I turn back the clock on my mortgage repayments and set a goal of paying what it was four years ago when rates were higher.

Day 25 Find an income boost

It's been a few years since I raised the prices charged by my small business. From today I'll be asking clients to pay a little more.

Day 26 Shop around for one item

An upgrade of my phone is overdue. I research potential contenders for about three weeks then pounce.

Day 27 Learn a new skill

A refresher course on how to build a website for nothing would be handy. I find a free afternoon workshop and sign up.

Day 28 Make, repair, recycle or repurpose something

My kitchen curtains need a revamp. By switching around some other curtains I avoid forking out for a new pair. While I'm at it I make a cushion, a project that's been on the drawing board for a while.

Day 29 Unhook from the credit card

Unexpected expenses - including the death of my hot water system - have left emergency funds depleted and my low-limit credit card overloaded.

When my credit card expires I use it as an opportunity to shift some of my direct credit arrangements to my debit card. It's another step towards operating from a cash economy.

Day 30 Put time or money into maintenance

In this case I choose my health. My gym membership expired in March and as a result I was feeling less fit. Poor health could cost me in the long run so I re-join the gym and resume my regular round of classes.

The Verdict:

Some of the things I tried worked. Some didn't. But taking a month to make a series of changes really helped me focus on how I wanted to be using my money. Things change and the way we spend can stay the same.

It made me conscious of bad habits that had been creeping in (those library fines were a shocker!) and helped me look beyond day-to-day bills to my medium- and long-term financial plans.

It's worth cooking at home more if it means having some original art on my walls or paying off my mortgage sooner.

I'll definitely continue with my weekly spending plan. Rather than making me feel deprived it makes me more resourceful and less impulsive in the way I spend.

I'd love to repeat this challenge in six months' time and see what a difference it has made. 

Posted by Money Manager - Fairfax Digital on 1st July, 2015 | Comments | Trackbacks | Permalink

Find strategies to cut loan risks

As the banking regulator APRA's recent attempts to slow the growth of investment property borrowing show, historically low interest rates and the easy availability of credit have increased the risks for both borrowers and lenders.

APRA wants to ensure that collectively and individually our financial institutions don't experience financial stress which could lead to a crisis and insolvencies similar to those in the GFC.

No equivalent institution exists to caution individual borrowers about the risks they are taking by borrowing especially large amounts for home ownership or investment purposes. Indeed if anything, the central bank and government are encouraging people to borrow by their low interest rate policy and ruling out changes to the negative gearing tax subsidisation of investment losses.       

This is why borrowers need to be aware of the risks they are taking on and develop strategies to reduce their possible impact. The first and most important point to understand is that just because an institution is prepared to lend money doesn't mean that they've evaluated the merits of the item being purchased.

Lenders are naturally more interested in the borrower's creditworthiness and ability to service the loan. In this process, they rarely delve into or consider the risks of future unemployment and relationship breakdown, nor do they consider the risks of a large unexpected rise in interest rates.

Unlike in the United States, where fixed interest rate loans for up to 30 years are the norm, the Australian system places the risk of interest rate increases fully and squarely on the borrower. This means that while borrowers can be certain that interest rates will remain low while the world economy struggles, the situation could change quickly in the future.

Consequently, many existing borrowers have been taking the opportunity to reduce their outstanding mortgages using the additional cashflow provided by falling variable interest rate loans. The clear message for new borrowers is that a faster repayment than required by the lender will also reduce their future risks.

In the case of investment borrowings, tax arrangements encourage a different approach, particularly when the borrower is subject to a high marginal tax rate. In this situation, paying off an investment loan will increase tax liabilities, negating part of the benefit.

Many investors therefore opt for interest-only loans and use all their savings to reduce any personal debts such as any mortgage remaining on the family home. Indeed, the smartest investment strategy to reduce borrowing risks is to own the family home outright and borrow on a tax-deductible basis for investments.

Among other benefits, this strategy ensures the tax deduction for interest payments on investment loans provides an excellent buffer protecting against the costs of future interest rate rises.


Daryl Dixon is the executive chairman of Dixon Advisory

Posted by Daryl Dixon - The Age on 30th June, 2015 | Comments | Trackbacks | Permalink

The secret to securing funding

There's one way to buy a business that's almost guaranteed to get the banks across the line.

Banks usually want property as security before they'll lend money for the purchase of a small business, but many aspiring small business owners don't want to put their house on the line.

It seems like an intractable problem but Campbell Flower of Odyssey Financial Management says one solution is to buy a business that has a property attached.

Banks will often accept this as security instead of the family home.

"Most people going into a new business or venture don't like to use their personal house as security," he says.       

"If they've got no experience, they'll need to put their house up. However, if they're a business with a property attached . . . that means their house is freed up, so they don't have to worry about it."

Businesses with property attached often include motels and caravan parks, and small industrial businesses such as panel beaters or mechanics.

"I've sold quite a few coastal caravan parks and the like. It doesn't matter which type of business it is, if there's a property attached, the risk then becomes less because the bank can always draw down on the sale of the property to recover their funds if the business goes bad," Flower says.

He says a tax-effective way to do this type of loan is for the SME's self-managed super fund to buy the property with money borrowed from the bank.

The business earnings would then be used to pay rent to the super fund, which, in turn, would repay the bank.

It's also a clever way of putting more money into the owner's super fund.

Whether the borrower can put property up as security is just one of the factors that banks consider when they decide whether to lend money to buy a business.

David Bannatyne, general manager, small business at National Australia Bank, the country's biggest business lender, says when deciding whether to lend to a potential small business owner, the bank consider "the three Cs": their character, their capacity to repay the loan and their collateral.

"We do secure our larger loans against collateral, and, generally, that's property," Bannatyne says, referring to loans over $20,000.

Experience and expertise in the business sector that the borrower plans to enter is also important.

One of his clients has 20 years' experience in the printing business. Based on that experience, NAB has lent the client more than $500,000.

"I'm lending to him because he knows the business and he has secured good contracts, but if someone just walked in off the street and said they wanted to borrow $600,000 to get into printing, we would be very reluctant to do that," Bannantyne says.

"If a person understands the business and has been very successful at it, then we'll fund them," he says.

When banks assess the capacity to repay, they look at whether the numbers add up in terms of the business cash flow.

"That's important, because I've had customers say to me in the past that the best thing we did was explaining to them that it wouldn't work," Bannantyne says. "When people are passionate about the business, sometimes the passions obscures their objectivity."

Neil Slonim, whose business the BankDoctor advises small businesses on how to secure finance, says while banks tightened credit in the wake of the global financial crisis, they are keen to lend again but are more cautious.

"If small business owners can't get money, it's because they can't demonstrate a plausible case to the bank for that money and it's not the bank's fault if they say they're not going to give the money because the proposal doesn't stack up," Slonim says.

Using a business property as security for a loan means the borrower does not have to put their house on the line, but there are drawbacks.

Buying a business with a property attached increases the overall size of the loan, and, of course, that loan still needs to be serviced, Slonim says.

Borrowing against a house can mean a smaller loan that it is easier to repay.

"Most small businesses have a limited capacity to borrow and if you use that limited borrowing capacity to pay for property, then you've got less to use to pay for the business," he says.

"The problem that a lot of people face when they buy a business is that they over-gear in the acquisition of the business and leave themselves short when funding the working capital of the business."

Posted by Christopher Niesche - The Age on 29th June, 2015 | Comments | Trackbacks | Permalink

Australians can get themselves out of spiralling credit card debt: all it takes is discipline

 AUSTRALIAN credit-card users have confessed they can’t get themselves off the “credit card roundabout.”

Sky-high interest rates on cards — many above 20 per cent — make it hard for almost half of the population to pay back, with many conceding they can’t wipe their growing card debts.

Some also admit they are struggling to set a household budget, results from financial institution ME’s Savings Intentions and Behaviours Survey found.

Reserve Bank of Australia figures show in April the nation owed a whopping $51.07 billion on plastic compared to $49.9 billion at the same time last year.

About $34.4 billion is accruing interest. 

ME’s head of deposits and transactional bank, Nic Emery, said a lack of money discipline was holding Australians back from getting financial back on track.

“It’s stopping them from paying back bills on time and paying back other debts that they have,’’ he said.

“The hardest thing is to start budgeting and looking what it is you spend and setting a budget.”

The findings showed about 57 per cent of households do set a budget, but almost half of them (40 per cent) fail to stick to it.

Soaring credit card interest rates will come under intense scrutiny following the announcement last week that there would be a Senate Economics References Committee inquiry to examine how and when interest is applied to credit cards, and also how min­imum payment levels are set.

Navacue financial adviser Ian Fox said credit cards remained far “too easy to get” and urged users to set new goals at the beginning of the new financial year which starts on Wednesday.

“The cards have too bigger credit limits and we are spending more than what we are making, we know that when we have to use a credit card,’’ he said.

“The other danger with credit cards is because of the bonuses like reward points, that’s well and good to get them, but what about in the month that you can’t pay your credit card off in full.”

The results also found 20 per cent of Australians consistently failed to pay their household bills on time.

Posted by Sophie Elsworth - Sunday Herald Sun on 28th June, 2015 | Comments | Trackbacks | Permalink

Melbourne off-market home sales surge as buyers pay a premium to avoid missing out

 OFF-MARKET property sales are booming throughout Melbourne as the hot real estate market drives buyers and sellers to seek new ways of securing their dream deal.

Properties ranging from Toorak mansions worth more than $20 million to $300,000 units in outer suburbs are changing hands behind closed doors and without advertising – often for premium prices.

Other homes are being sold within days of being listed as frustrated buyers make offers too good to refuse to avoid missing out again.

Estate agents said buyers who repeatedly missed out on properties at auction or in private sales were approaching them to find other similar properties before they were advertised .

Ray White Manningham director Frank Perri said off-market dealing was more prevalent than ever. 

“Buyers are not mucking around now,” Mr Perri said.

“They are upfront about what they can spend and they will declare their maximum price.”

Off-market sales were being finalised quickly and in all price brackets, he said.

Mr Perri’s agency sold a home in Yarra Valley Blvd, Bulleen, to a buyer who missed out on a nearby property.

The home with a market value between $1.25 million and $1.3 million sold off-market for $1.35 million.

Biggin & Scott Glen Waverley director Ming Xu said the agency was using its database to match vendors and buyers for off-market deals and doing so in quick time.

“We are finding more vendors are selling without officially putting their homes on the market.”

But Mr Xu said vendors who wanted to have full exposure for their properties should opt for a combination of print media and digital marketing.

Marshall White director Marcus Chiminello said there were more such off-market deals at the top end of the market.

His agency had handled up to 50 off-market sales in the past year for homes priced at more than $3 million, including 30 Sargood St, Toorak, that sold for more than $5 million.

“There’s more happening behind closed doors, and off-market and we probably have half a dozen opportunities in the $15 million to $30 million range,” he said.

Mr Chiminello said agents would usually recommend vendors go to the open market to get the

best price, but a well-managed off-market strategy using an agent’s buyer network could also result in strong competition and high prices.

In the outer-eastern suburb of Berwick, O’Brien Real Estate agent Paul Rogers knocked on the door of a grand, six-bedroom home at 7 Panoramic Tce and asked the owners if they would sell the property because he had buyers seeking premium homes. After weeks of negotiations, a $2.95 million sale was sealed.

In the hot Glen Waverley market where a new home site can sell for more than $2 million, some vendors knew they could get a high price off-market, Ray White Glen Waverley agent Travis Brown said.

“Buyers benefit from this as there is less competition,” he said.

“It means they might be better able to stick to their budget, rather than being tempted to offer more at auction,” Mr Brown said.

But he advised vendors to go to auction to take advantage of demand in the strong market.

In Geelong, Vanders Real Estate director Rod van der Chys said he did not get a chance to take a Newtown house to market because it sold soon after a couple of investors inspected it.

The 700sq m property at 41 Craigie Rd sold for a price approaching the mid-$400,000s.

Some vendors preferred off-market sales to maintain privacy, to save marketing costs and to reduce stress, agents said.

“Some owners don’t like to pay for advertising,” said Jayde Salter of Century 21 Wilson Pride in Noble Park.

Many investors also preferred this method because it was faster and first-home buyers intimidated by auctions also favoured off-market sales. 

“Investors want a quick deal and a lot of the time, the deal is sealed via email,” Ms Salter said.

Developers also preferred less competition that was often part of off-market deals.

“Any properties with development potential tend to sell off-market,” Claudio Cuomo, of Stockdale & Leggo, Glenroy said.

“Developers don’t like to compete so won’t always bid at auctions.”

Barry Plant Bundoora director David Moxon said many off-market buyers had been unsuccessful bidders at auctions.

In Mentone, Hocking Stuart agent Garry Donovan sold an Aspendale house off-market for $3.05 million to an underbidder of a neighbouring property.

Ray White Ferntree Gully director Patrick McConnachie said an off-market sale could appeal to owners to avoid the stress of selling, but it was not the best way to gain the highest price.

“It limits the competition between buyers which is the number one factor in achieving above average sale prices,” he said.

Posted by Ming Haw Lim & Tony Rindfleisch - Sunday Herald Sun on 28th June, 2015 | Comments | Trackbacks | Permalink

Get in before the back pedalling

 Capital city property prices have soared in recent years, as have the tax deductions claimed on "negatively geared" investment properties. As a result, housing affordability and negative gearing are back on the political agenda.

Property can be an emotive topic, as many Australians – both individuals and businesses – have a vested interest in seeing property prices continue to march onwards and upwards. Calls to end or severely curtail negative gearing are met with fierce resistance.

If you're not familiar with negative gearing (at least in the property sphere), it's the practice of borrowing to buy an investment property, where the interest and other property expenses exceed the rental income received. The net annual loss is claimed as a tax deduction against other income including, in many cases, the investor's salary.

Negative gearing discussions often getting bogged down in arguments over its impact on property prices and rents, or the tax rules that apply to other investments. Let's put away the crystal balls and tax books and take a look at what makes negative gearing tick.

Consider a simple example. Hugh is looking to buy an established Sydney property that will cost him $1 million (including stamp duty and other transaction costs). After deducting property related expenses, he'll earn $30,000 in net annual rent.

His mortgage broker has told him that, by using the equity in his home, he can borrow the full $1 million at an interest rate of 5 per cent. If he subtracts his interest expense from his rental income, the deal will net Hugh an annual loss of $20,000. Hugh is a lawyer, so he's got a good job that pays good money; in fact he's on the top marginal tax rate of 47 per cent (including Medicare levy, but excluding the "debt levy"). This means that each year the negative gearing tax deduction will save him $9400 in tax. Extrapolated over five years, Hugh will lose $100,000 (before tax). At first blush that doesn't sound great, but Hugh decides to proceed because (a) the ATO is effectively wearing half the cost and (b) he expects the property to be worth a lot more five years from now than it is today, netting him a capital gain.

The beauty (from Hugh's perspective) is that capital gains are discounted (by 50 per cent) before being taxed. So if he makes a $200,000 capital gain, his tax bill will be $47,000. That's just enough to offset the tax his negative gearing deductions saved him during the previous five years.

Overall, Hugh nets $100,000 cash profit and pays zero tax. Even if he makes a $500,000 capital gain, his effective overall tax rate will end up being less than 20 per cent. In fact, it's almost impossible to imagine a scenario where Hugh will end up paying more than 20 per cent of his profits to the ATO – happy days for Hugh.

What if things don't go so well for Hugh's investment? One of the main risks to property investors is rising interest rates. Let's look at what happens if interest rates increase to 8 per cent and the property value remains flat.

In this scenario, as you might expect, Hugh makes a large (tax deductible) loss. Assuming the interest rate increase was immediate, he'd lose $250,000 over the five-year period. Unfortunately for the ATO, while it doesn't see much of any potential capital gain, it wears 47 per cent of his losses – $117,500.

What the negative gearing rules – the combination of upfront interest deductions and discounted capital gains – create is a financial bet that's skewed heavily in Hugh's favour. If things go swimmingly, the bulk of the profit goes to Hugh and if things go badly, he splits the losses roughly 50/50 with the ATO. With a tax bet skewed in their favour, property prices rising and interest rates at record lows, it's no wonder investors are borrowing large sums to jump aboard the property train.

Negative gearing remains one of the last great Australian tax holidays but, even at today's low interest rates, it's costing the federal budget $4 billion a year. It's unlikely to be sustainable forever.

The talk has been of changing the rules for future investors only, so existing property owners shouldn't be affected. But let the discussion serve as a reminder to keep your mortgage payments where you can afford them, with or without the taxman's help.

Richard Livingston is a founder of Eviser ( www.eviser.com.au).

This article contains general investment advice only (under AFSL 469838).

Posted by Richard Livingston - Money (The Age) on 27th June, 2015 | Comments | Trackbacks | Permalink

Create your home renovation budget

What upgrades is your home crying out for? The scope of your renovation will determine your financial, emotional and time commitments.

So, is it a lick of paint throughout the house, or a bathroom overhaul? Does the backyard need revamping with garden beds and hedging or is paving a patio more in order?

Renovating for sale requires a different approach to renovating for lifestyle reasons. When renovating for sale you need to carefully evaluate your level of capitalisation (how much you invest). It can be helpful to have a real estate agent assess your home to suggest key renovations that will attract buyers and provide an estimate of a renovation’s return on investment. This will help determine the scope of the project and your expenditure.

If you are renovating your home to enhance its livability, consider how your family uses the home and evaluate renovations based on impact. Would adding a bathroom save needless arguments? Could the family room do with an overhaul to make it better for entertaining and relaxation?

Once you have decided on the scale of the upgrade, you need to work through the following steps.

Check with council

This step is numero uno on your renovation checklist. If you are undertaking major works in or around your home – including knocking down walls, building an extension or doing anything that will affect your neighbours – you will require a development application (DA). A DA is normally followed by a construction or building application (BA), which outlines the build details. You cannot begin work without these approvals as they ensure your renovation plans are safe for one and all.

Building legislation differs between local councils, so check with your local planner if a DA or BA is required. This step can save major headaches down the track as unapproved works may be halted or even unceremoniously removed!

Superficial renovations, and most small structures like decks, sheds and fences, are generally deemed ‘exempt developments’ and do not require a DA or BA. At times, exempt developments may still require some level of approval or a licence (think heritage and water-efficiency restrictions). If you are uncertain, contact your council.

Units, apartments or townhouses may be subject to estate, strata or body corporate guidelines that could affect your renovations.

Set your renovation budget

It is important to plan out your renovation costs and create a basic timeline for the project. Most DIY renovations will fall into the exempt developments category and will not require a costly DA or building application (BA). But even exempt developments can require council approval, so check first to make sure your budget is accurate.

If you are undertaking part of the renovation yourself and using a trade professional for the jobs that require qualified help, (for example, a plumber to fix your bathroom pipes while you lay the tiles), divide up your budget estimates.

For the DIY component, estimate the materials and tools required for the job. Ask friends or family for tools you can borrow and enquire about equipment rentals. Second-hand building materials are also worth considering, so compare quotes between different suppliers and between new and used supplies. Reuse where possible for an environmentally friendly reno. It is also important to factor in any reduction in income due to time you may need to take off work.

To find the right tradie, ask friends and family for recommendations and make sure you obtain at least three quotes. Don’t be caught out by hidden costs; ask questions if anything is not clear or if a quote seems surprisingly low.

It is a good idea to incorporate a buffer into your renovation budget for unexpected costs. Ten per cent is usually sufficient.

How to renovate and add value

Some renovations deliver much greater rewards visually, functionally and in value. You cannot go past a coat of paint in terms of return on your investment. This is a relatively cheap renovation that most of us are capable of tackling. It produces big visual results and adds value to your home.

Landscaping, or revamping your backyard, is a close second when it comes to getting a good return for your investment. Materials and equipment are generally cheap, and by adding an outdoor entertainment area you can create real lifestyle value around your home. And don’t forget curb appeal if you are selling your property, potential buyers will assess your home from the street before they buy.

Of all the renovations, remodeling the kitchen or bathroom will add the most equity to your home. Wet areas in the home generally require the largest investment but they also have a significant impact on the property’s salability and price. Domain research shows approximately 35 per cent of all home sellers plan to renovate their kitchen or bathroom in preparation for sale.

Continue reading the DIY Home Renovation Guide with: DIY renovation project management.

Posted by Jacqui Thompson - Domain Blog on 27th June, 2015 | Comments | Trackbacks | Permalink

Experts urge buyers to adopt a tactical response to buying at auction

Buyers are being urged to deploy bidding plans and smarter tactics at auctions amid signs that house prices in some Melbourne areas are starting to pull back.

Few property watchers believe much heat has gone out of the market.

However, there's an expectation that buying by property investors won't be as strong in the second half of the year as it was in the first half. 

Investors have dominated sales below $1.5 million in Melbourne's inner-east as well as sub-$800,000 sales in many other areas this year.

If investors reduce activity, the advantage could swing to owner-occupiers.

Despite the buoyant sales conditions in the eastern suburbs, it's still hard to forecast sales results for some properties.

There is a patchy quality to the market, with some auction properties producing exceptional results, while others just make their price target.

Melbourne property prices grew by 0.6 per cent over the March quarter, according to Australian Bureau of Statistics' price index figures released last week. The modest growth rate, down from 1.3 per cent over the previous quarter, reflects the pressure banks now face from the Australian Prudential Regulation Authority to slow lending to property investors.

Buyer Solutions managing director Janet Spencer said with the variation and the randomness in the market, buyers needed to undertake more research.

"They need to set the limit and be prepared to walk away if the price moves into the emotional side," she said.

Ms Spencer said the market experienced a "weird April" with school holidays and the centenary of Anzac Day disrupting sales. The strong market in May had been bolstered by the difficulties buyers had in finding properties to purchase in April, she added.

Other buyer advocates say "wounded underbidders," who miss out at auctions and then increase their budgets, have spurred this year's higher clearance rates and strong prices in the inner suburbs.

Melbourne-based auctioneer trainer Phil de Fégely said few auction buyers implemented a bidding plan that detailed a starting price and the bid increments a buyer intended to use.

"When you have a plan you know what you are going to do when the property gets to this price and how you will react when it gets to that price," he said. 

He said buyers should gather intelligence about whether a lot or a little bidding was expected. Three price points also needed to be considered before an auction. 

"One is a price you would love to pay," Mr de Fégely said. "Then there is a price you are happy to pay and a price that will hurt."

Price variations at auctions are being seen by many agents.

Collins Simms' Nicholas Corby said some inner-city properties were selling for $200,000 or more above reserve simply because a late, unexpected bidder had bid.

"You can't tell which auctions are going to run or whether the property will stay within the price range," he said.

Saturday's auction market was again strong, with the city-wide agents Hocking Stuart reporting an 81 per cent clearance rate for the third week in a row. Barry Plant, another geographically-spread group, sold 63 from 71 auction properties to notch up an 89 per cent clearance.

The Domain Group posted a clearance rate of 80 per cent from 683 metropolitan auctions. 

A considerable number of off-market deals also took place last week.

Marshall White's John Bongiorno said his company last week sold a property in the Boroondara council precinct for more than $13 million. 

"That's what has been happening with a lot of properties that are scheduled to go to auction," he said. "With the demand out there, we are creeping people through properties that are yet to come on to the market and placing them before auction."

Mr Bongiorno said there were signs the market was reaching a peak.

He said most of the prices his company achieved on Saturday were "around the reserve" 

"Nothing has run away and people haven't got silly," he said.

Mr de Fégely said it was usually a mistake to wait until the end to bid at auctions because in most cases the first or second bidder bought the property. 

"A lot of the time you are able to influence other bidders by showing your strength," he said. 

"You eliminate some of the opportunist buyers and you flush out your competition."

Posted by Chris Tolhurst - The Age on 27th June, 2015 | Comments | Trackbacks | Permalink

First home buyers with no deposit are taking out two loans to buy property

 DESPERATE and deposit-less first home borrowers are among those taking out two loans in order to get their foot onto the property ladder.

As the housing affordability crisis continues to worsen in Australia, aspiring entry-level buyers with little or no savings behind them are relying on their parents to stump up their deposit which they are formally agreeing to pay back — with interest — while also paying off a mortgage.

Parents are forgoing handouts and instead signing their kids up to even more debt by making them sign legal documents to repay back the money they stumped up to help them enter the real estate market.

Non-bank lender BlueBay rolled out “parent assist” loans last year, allowing entry-level buyers to borrow up to a 20 per cent deposit from their parents and take out a mortgage for the remaining balance.

Director Don Crellin said these types of loans were increasing in popularity and it was a way that would work out well for both the parents and the child.

“While we are trying to do is help the kids and we are also trying to help mum and dad in a way that wasn’t exposing them to risks,’’ he said.

“We are bringing both the parent and child together to be able to do it (to buy a first home).’’

He said having a high loan-to-value ratio — the amount of money borrowed compared to the value of the property — does not always means bad risk.

The parent assist loans means the parents are not guarantors and are not gifting the money to the child as it must be repaid.

An interest rate that is half the rate of the home loan rate applies to the loan.

Soaring house prices have continued to squeeze entry-level buyers out — residential property prices nationwide rose by 6.9 per cent in the year to March.

In Sydney they climbed by 13.1 per cent and Melbourne 4.7 per cent.

But consumer finance expert Lisa Montgomery said intertwining a first-home buyers’ purchase with their parents put extra pressure on them because they could be left with massive property debts of up to 100 per cent of the home’s value.

“Borrowing 100 per cent of the home value’s means that if we do have a levelling of the property market you could really not be creating any equity for yourself,’’ she said.

“You could even end up with negative equity depending on what prices do and where you buy.”

RAMS offers a loan that allows first-time buyers to borrow the full purchase price by using a parent or sibling as a guarantor — they use their own home as security so first-home buyers default the guarantor is held responsible.

But RAMS head of product Nathan McMullen said customers who do take on these loans need to fit “strict criteria.”

“Arrears rates are significantly lower on these loans than for comparable loans without a family guarantee,’’ he said.

St George Bank also provides a family pledge loan which allows parents to use their own home’s equity to provide additional security for a portion of the child’s loan amount.

Posted by Sophie Elsworth - News Limited Network on 26th June, 2015 | Comments | Trackbacks | Permalink

Born to spend? Here's how to save

We've all heard the saying, "It takes money to make money". For those looking to build wealth, unless a windfall or inheritance is on the way, the only real way to accumulate money is through savings. There are two types of people in this world: savers and spenders.

Savers naturally seem to live a lean lifestyle. Regardless of income level, they spend less than they earn, and build up savings.

Spenders, on the other hand, struggle to avoid debt, let alone build regular savings. 

There is hope for natural-born spenders to whip their cashflow into shape. The first step is to identify the two types of saving: "saving to spend" and "saving for wealth". Saving to spend involves putting money aside for short or medium-term spending goals, taking a holiday or buying a car. These are not everyday expenses, but unless you save for them, they will either not happen or, more likely, be bought on credit.

To compare saving versus debt, consider this: at 8 per cent a year and with payments of $200 a month, say into a managed share fund, a saver can build up a $20,000 investment in six and a half years. A $20,000 debt however would take more than 13 years to repay. That's the difference when interest works for you, instead of against you.

Saving for wealth is the regular accumulation of money that builds long-term financial health. This is the "money making money". Whether it's saving for a home deposit, regular investment into some shares or a managed fund, or salary sacrifice to superannuation, these are amounts that ultimately add to your personal wealth. The recipe for building wealth is a combination of time and disciplined saving into productive investments.

The trick for spenders is to create a simple system to automatically enforce a set spending limit. First, work out an achievable amount for both savings types  - saving to spend and saving for wealth, even if you start small. Next, set up a regular transfer to an account every pay cycle. This account is off-limits. It's your only means of affording those larger expenses or future investments. Cancel your credit cards, and feel free to use your main bank account as you normally would. By saving first, and spending what's left, you will find you don't really miss the saved amount, yet over time the savings build up.

Once the system is in place, take a closer look at where your spending goes. Do you need to take drastic action? Keep a record of all your expenses for a month and list those that are essentials - rent, mortgage and utilities, those that are likes, and others that are frivolous or luxury. For each item, are you getting value and do you really want to continue spending on these items, compared to achieving your other goals?

There are a number of high-tech tools to help you track expenditure, stick to a budget and send a reminder if you get off track.

Spenders do have options, and being realistic about spending behaviour and taking some positive action can make a world of difference to future financial health.

Alex Berlee is a financial adviser with AMP

Posted by Alex Berlee - Money Manager (Fairfax Digital) on 23rd June, 2015 | Comments | Trackbacks | Permalink

How to give your bankk the flick

 SWITCHING from one bank to another often seems like a painful task and many people simply can't be bothered doing it. But the banks have tried to make jumping financial institutions easier and three years ago introduced a scheme dubbed the “tick n flick”program.

This means the new financial institution chosen by the customer does all the legwork to move their new customer over.

However, since its inception only a few hundred people a week have used the service to jump banks.

Under the scheme, a person wanting to switch banks simply needs to visit their new financial institution, give details of their previous bank and the new provider takes care of shifting all their direct debits and credits from the past 13 months.

Jessica Forbes, 24, who works in the insurance industry, recently switched banks but was unaware of the program and instead individually updated her new banking details with each institution that held her direct debits and credits.

“Setting up the account was a breeze, I was able to do it all from home, I just needed my identification,'' she said.

“I went through my bank statements and worked out what I needed to transfer across and then as it happened, one by one I would phone each company and tell them I have switched banks and could they please change my banking details.

“Surprisingly it's all gone through pretty seamlessly.”

But she admitted it would have been much easier if she knew her new bank could do it for her.

ME's head of deposits and transactional banking, Nic Emery, says there's a “perceived complexity” around switching banks.

He says it's an important product for financial institutions because often customers use an everyday account as a base before signing up to other products.

“When people actually do move they find it a lot easier than what they were expecting it to be,'' Emery says.

“People who have their transaction account with a company are much more comfortable buying (more of their) products.”

The Commonwealth Bank said of their new customers, about 25 per cent switch across from a previous bank.

The Australian Bankers' Association's chief executive Steven Munchenberg says 80 per cent of customers are satisfied with their bank and aren't looking to switch but he says a lot of people are unaware of how easy it is to do.

“There is a low level of awareness of it,'' he says.

“But it would significantly understate the number of people who are switching, they might switch because they are doing it as a broader process such as signing up to a mortgage.

“They may have also been those who have chosen to switch themselves (and not use the tick and flick program).”


— Look for an account that has cheaper fees or a better product.

— Before you open a new account read all the terms and conditions.

— Ask your new bank to help you to switch. They will contact your old bank to get a list of all your direct debits and credits from the past 13 months.

— Your bank will give you this list and you can select which debits and credits you wish to move to your new bank.

— You can authorise your new bank to give all of the relevant payees your new account details.

— Once all these debits and credits have been moved over you can close your old account.

Source: MoneySmart. 

Posted by Sophie Elsworth - Herald Sun on 23rd June, 2015 | Comments | Trackbacks | Permalink

How first home buyers are getting their foot through the property door

As the dream of owning a home fades for young buyers, more first-timers are adapting to new ways of breaking into the market. 

Some are buying off the plan for an extended settlement, and others are investing in an affordable suburb while renting where they want to live. 

LJ Hooker's Youth White Paper highlights six non-traditional ways first home buyers under the age of 30 are getting their foot through the door:

Teaming up 

With price growth increasingly outstripping savings, it is almost necessary to have a dual income to buy a house in Melbourne. 

Teaming up with another person also means being able to share all the costs of buying a property; including stamp duty, solicitor fees, valuation fees, loan application fees and moving costs.  

LJ Hooker research manager Mathew Tiller said a rising number of young buyers were teaming with a family member or a friend. 

"The rising cost of property over the past few years has become a bit of an inhibitor for a single person to purchase a property they they're going to live in, especially in Sydney and Melbourne," he said.

"Teaming up is one of ways of getting around that affordability issue."

Nigel O'Neil, chief executive at Hocking Stuart, has seen more unmarried couples now teaming up at an earlier stage of their relationship to buy a home in order to get a foot on the property ladder.

"As long as there is a clear exit strategy for both parties if the relationship doesn't work out, then that can work out fine," he said.

An individual on an average full-ti me weekly earning of $1455  would be priced out of most popular  suburbs. An average couple with a dual income would open up  dozens of suburbs to choose from. 

Buy now, pay later

Buying off the plan means a young buyer can put down a deposit and not have to worry about mortgage repayments until construction is completed in a few years. 

It allows buyers in an earlier stage of their career to lock in today's price and keep saving over the construction period, where the property may also appreciate in value.

First home buyers should make sure they would be able to make the mortgage repayments when the property settles and hire a professional conveyancer to comb the contract. 

Rise of the first-time investor

A growing number of buyers are now renting where they want to live and buying in another suburb that is more affordable. 

Young investors may be able to take advantage of negative gearing tax breaks and borrow more by generating a rental income. 

Looking for renovation potential

Young families could buy in their preferred suburb by buying an older smaller home and then add rooms and levels as their family grows, or when they are financially able to down the track. 

Beware of buying a renovator's delight that would cost more to do up than buying a ready-to-move-in home. 

Buying new and further out

Young families and first home buyers are increasingly looking at house and land packages in new housing estates as an affordable way to get into the market.

They can also also buy vacant land in their preferred area – if there is any left – and build their dream home on it. 

Leaning on mum and dad

Parents who have built up equity in their homes or own their homes outright may be able to be a guarantor on their children's mortgage or help with the deposit.  

Research by the National Australian Bank found that 6.7 per cent of first home buyers now use the NAB Family Guarantee, up from 4.8 per cent in 2010. 

Posted by Christina Zhou - The Age on 22nd June, 2015 | Comments | Trackbacks | Permalink

Why wait to get a better home loan?

I'm more than a little surprised by the results of a survey we recently completed. We reviewed the situation of 1000 home owners who'd obtained a mortgage more than two years ago.

This is what we learned: 40 per cent of those surveyed said they had never refinanced. Another 19 per cent hadn't refinanced in more than  five years, 6 per cent had refinanced four to five years ago, 8 per cent had done so three to four years ago and 10 per cent had between two to three years ago.

This is the situation: interest rates are at their lowest in more 50 years, yet 83 per cent of Australians with a home loan have not refinanced in the past two years.       

I find it hard to believe that so many people are avoiding action. The newspapers are full of stories about the historically low interest rates and the potential savings available to people with home loans.

It's outrageous that people are still paying high interest when the opportunity to pay less is right under their noses. People take the time to drive to the cheaper grocery store just so they don't pay an extra dollar for milk, yet when it comes to home loans they stick their head in the sand.

In effect, a failure to refinance to the best interest rate means you're just handing the banks extra money. Reserve Bank of Australia data shows the benchmark 2 per cent interest rate is significantly lower than the average of 5.13 per cent that Australians experienced between 1990 and 2015. The all-time peak was at 17.50 per cent in January of 1990.

Because of certain business practices, most bank mortgage rates have not reduced in line with official interest rate reductions. A typical 2010 loan may today be on a current variable rate of around 5.3 per cent, whereas rates are now available at about 4.8 per cent, or better.

Even allowing for fees and transfer costs, it is likely that those on a home loan secured a number of years ago could make monthly savings by switching lender. For those who took out a home loan five years ago, the average rate after reductions would be 5.3 per cent. The potential savings on an average $350,000 loan with 25 years remaining could be thousands. For example, if you refinanced to a rate of 4.8 per cent, you would save $30,660 in interest over the remaining life of your loan.

There are lenders offering rates as low as 4.1 to 4.2 per cent, so your savings could be greater.

According to our survey, people avoided refinancing because they didn't believe they'd save enough money, they thought the fees and charges would outweigh the benefits and they perceived the process to be too much of a hassle.

I just don't buy this. With interest rates dropping to a low that no one in my generation would have thought possible, it's crazy to not find out if you can save. If you don't have the time or the expertise, speak to a mortgage broker and let them investigate a refinancing deal for you.

It's also worth remembering that when interest rates do finally start edging up, those who already have the best home loan deals will have a natural buffer against interest rate rises.

At least our survey found that the younger generation are on the ball: 28 per cent of 25-34 year olds refinanced in the past two years compared with 13 per cent of 45-54 year olds.

Is this because young people are more internet-savvy and accustomed to comparison-shopping for the best price? Perhaps, and good on them.

If you're in the majority and haven't refinanced for years, let me leave you with this: a home loan is the largest monthly outgoing for most households, and if you're paying too much – when interest rates are historically so low – you're burying your head in the sand.

Posted by Mark Bouris - The Age on 19th June, 2015 | Comments | Trackbacks | Permalink

3 common mistakes first-time renovators make

  You might have found the ideal property and confirmed the design blueprints, but rarely does any renovation go perfectly to plan the first time around.

First-time renovators often take missteps before any of the actual renovations begin. Walking into a project without knowing exact costs, the projected value added to the home after modifications or renovation timelines can leave you in the lurch later on.

Before you turn your dream home into a construction zone, here are the common mistakes you should avoid as a first-time renovator.

Letting your emotions make the decisions

Whether this is your dream home or an  investment property, no renovation plan should be so set in stone that you cannot make any necessary changes as the build progresses. Unplanned problems in the home, such as with plumbing or structural issues, could affect your budget, project timeline or encourage you to overcapitalise in areas that will not add value to your home. Remember, being married to your initial design plan is not worth blowing your budget.

Not understanding market pricing

Every suburb has an average housing sale price, which should help shape your design budget. Consider the homes in your street – are you the best house on the worst street or the worst house on the best street? The types of homes in the area, recent sale prices and the types of people who buy in the area will impact on where in your home you should renovate and for how much. Family-dominated areas might appreciate a large backyard and open-plan kitchen, while other features will rank higher in areas populated by professionals or singles.

Not researching your builder

Assuming you don’t take the  DIY approach, the builder you employ for the project will become your  right-hand man. For this reason, it’s important you are entering into a partnership with someone who has a proven track record for timely and on-budget renovations. Builders often ask owners to sign a building contract prior to the renovations beginning. Check that these contracts don’t include huge fees for any changes made during the renovation project, as these will quickly mount up.

By having a clear idea of your budget, researching before the build and keeping a  level head, you’ll be on your way to becoming a seasoned renovator.

Posted by Abbey Ford - Domain Blog on 18th June, 2015 | Comments | Trackbacks | Permalink

Melbourne real estate commissions: what's your suburb worth?

Victorian home vendors pay the lowest real estate agents' commissions in the country, but new research reveals the rates vary dramatically depending on where you live.

LocalAgentFinder data shows the average commission ranges from 1.35 per cent to 1.89 per cent of sale value, with your suburb determining what you pay.

Independent body Australian Real Estate Consulting ( AREC) statistics found both Melbourne's and regional Victoria's fees were the lowest in the country , at 1.6 to 2.5 per cent and 2.5 to 3 per cent, respectively.

In Sydney, commissions range from 2 to 2.5 per cent, edging up to 2.5 per cent to 3.5 per cent in regional NSW.

AREC director Robert Williams said commissions could be affected by the location, value and style of the property, the salesperson's ability to sell themselves and how easy the real estate agent thinks the seller is going to be to work with.

Marshall White director John Bongiorno said commissions were higher in areas where properties were harder to sell.

Most suburbs in the inner east and south-east see agents charge 1.35 per cent to 1.89 per cent.

Docklands was the inner-city exception at 2.81 per cent, while agents in the Hoddle Grid charged 2.31 per cent. Templestowe agents charged an average 2.83 per cent.

Mr Bongiorno said Docklands' high result may be due to off-the-plan sales, which are harder to sell than established property.

An oversupply of properties may also push commissions higher, with agents feeling little need to compete for listings.

"In off-the-plan sales there is a lot of pressure on the agent to deliver, as the developer needs pre-sales to get their financing approved and it requires more detailed selling than the physical home in front of you," he said.

For home sellers looking at agent commissions, one option is to structure the fee in a way that incentivises the agent, said Century 21 Australasia chairman Charles Tarbey .

"There might be a transaction of 1.5 per cent up to $500,000 and 10 per cent on what is achieved over that price," Mr Tarbey said.

This would see the agent achieve $7500 for $500,000, and an extra $10,000 for $600,000 – $17,500 in total.

He warned away from trying to negotiate commissions down too much. Cutting a 2 per cent commission to 1.5 per cent on a million-dollar sale is a $5000 difference but could disincentivise the agent.

The majority of regional agents charged commissions in the highest category – 2.60 per cent to 3.90 per cent.

LocalAgentFinder chief executive Michael Banks said slower markets see agents charge more.

"As a vendor, you're looking for the best net result. If a specific agent will cost you $10,000 more but they consistently achieve $20,000 more for the property, then you are making a net gain of $10,000. The problem is finding a reliable way to identify agents that do a better job to justify the fees," Mr Banks said.

Posted by Jennifer Duke - The Age on 14th June, 2015 | Comments | Trackbacks | Permalink

Victorian first home buyers are borrowing more than ever to get a foot on the property ladder

Victorian first home buyers are borrowing more than ever before to break into the city's  property market.

First home buyers took out an average loan of $335,000 in April, up by $15,900 from March, and now make up 11.3 per cent of the market, according to the Australian Bureau of Statistics. 

Interest rates may be at a record low, but experts say the real hurdle for first-timers remains finding the deposit. 

With prices rising faster than savings, they are staying longer in the queue while others are forced to revise their criteria and look further afield.

Earlier this week, Treasurer Joe Hockey sparked outrage by advising first home buyers to get well-paying jobs in order to get a foot on the property ladder.

But according to Domain Group senior economist Andrew Wilson, this could be difficult as unemployment in Victoria is tracking at around a 12-year high.   Dr Wilson believes this could have a greater impact on job seekers at an earlier stage of their career, such as first home buyers. 

"It's all right to say yeah, get an income, that's all you need, but work's short and there are problems with higher unemployment," he said.  "[Many first home buyers] have to pay HECS and they've got to pay rent."

Based on the average loan size of a 20 per cent deposit and industry experts' observations, it appears that first-timers are typically shopping for properties in the $400,000 to $500,000 bracket. 

Armed with this budget, Domain found a three-bedroom house in  Beevers Street in Footscray that is going to auction for more than $470,000.

Other options include a top-floor, two-bedroom unit in  Hotham Street, St Kilda East, priced between $440,000 and $490,000 and a  three-bedroom house and land package in Point Cook's Parliament Street for $472,306. 

Mortgage Choice spokeswoman Jessica Darnbrough said it was important to remember that there were other costs associated with buying a home. 

"Borrowers need to take into consideration other costs including stamp duty, solicitors fees, valuation fees, loan application fees, moving costs et cetera," she said.

"As a general rule of thumb, most lenders require customers to provide their actual living expenses for all home loan applications. This is known as a Customer Stated Living Expense (CSLE), and this figure should be the amount of money needed to maintain a reasonable standard of living and could include, for example, expenses such as food, utilities, transport, clothing, education and healthcare.

"From there, a lot of lenders will compare the Annual Living Expense Allowance with the CSLE figure provided and use the higher amount to calculate serviceability."

Daniella Viljevac, 22, and her boyfriend Toby Smithers, 26, are looking to buy their first home in the bayside area. 

Miss Viljevac, who is studying a bachelor of arts at Deakin University, and working three jobs in accounting and retail, said their parents would also assist them with the deposit. 

The couple have a budget of about $550,000 and ideally want a renovator's delight between Cheltenham and Mordialloc. But the couple are increasingly being pushed further south. 

"We just want something that's in a good location so we don't have to move later on," said Miss Viljevac, "we can just stay there and build another house when we have the money."

"We want something that we can live in for now."

It's a familiar story for many who are being pushed out to suburbs such as Ferntree Gully, Sunshine and Croydon, according to LJ Hooker's Victoria state manager, George Sattout.

"We're seeing a lot of first home buyers are now unable to afford anything – certainly not houses – within the inner and surrounding areas of the city," he said. 

"They've been pushed out to either consider [house and land packages] in more development-type areas or maybe smaller inner-city apartment-type dwellings."

Despite the incentive for first-timers to buy new, Greville Pabst​ of WBP Property Group said in many cases, established properties would perform better in the short-to-medium term as a new property  depreciated over the first few years of its life. 

Posted by Christine Zhou - The Age on 13th June, 2015 | Comments | Trackbacks | Permalink

We need the right tools to build our financial futures

Is the traditional model of financial planning broken?

There are consistently low levels of people using financial advisers – in 2011 the government estimated 21 per cent of adults had used a financial planner in the previous year. But there are also high levels of wanting a different model of advice.

So if the customer wants something different, why does the model remain the same?       

It's a serious question. Our retirement savings system puts the burden on the individual to make good decisions. Quality of advice has a large bearing on how successful the retirement planning will be, especially when it comes to the tax system.

Yet Australians are wary of a planning industry that cannot provide them with simple, affordable financial advice, regardless of income and assets.

Time and again the financial services industry is told the same story: the financial planning model is too expensive, is skewed to the wealthy and gives control to the adviser. Traditional financial planning means handing over control to someone else – usually at a high price.

Control over decisions and assets is an issue. But cost is factor too. Recent research from Investment Trends found cost remained the biggest barrier to retaining a financial planner. When cost is taken into account, only a small proportion of us would still like to receive the traditional model of comprehensive advice delivered face-to-face.

Knowledge is power and the knowledge is currently held hostage by the adviser until money is exchanged. But considering the availability of financial data and online planning tools, this is an unsustainable position for advisers. I propose a different model: give customers the knowledge they need upfront so they can take action themselves without obligation. And then "coach" them into making good decisions, should they want it.

The platforms already exist where people can use transaction tools for super, insurance, mortgages and shares. It's just that these wrap accounts are controlled by planners.

Once people have the visibility of their own assets, they can use advisers who coach, allowing the customer to run their own finances without hefty adviser costs.

This is likely to appeal to young adults, who are bailing out of the traditional financial planning format.

The KPMG Banking on the Future Report showed 65 per cent of young adults said they would like a financial coach to help them with investment decisions, yet 95 per cent did not have an adviser.

We know young people generally reject financial advice the way the industry tends to serve it up. They prefer coaching to help them make decisions they can implement. They don't want advice with someone who does it all for them. They want to be taught how.

If people must be responsible for their own retirements, we can at least help them help themselves.

Posted by Mark Bouris - The Age on 12th June, 2015 | Comments | Trackbacks | Permalink

Six steps to a rosier future

When uncovering the truth behind the financial gender gap, we need to remind ourselves why it is important to focus on this issue.

Today, women will typically retire on only a third of the superannuation of their male counterparts. Now, we could just say this is a legacy of a generation when education and career opportunities were not as readily available to women. However, the stark reality is that whether at age 19, 24 or 35, women's superannuation balances remain below that of men.

It is not just superannuation where the financial gender gap presents itself. Women are also far less likely than men to take the step to buy an investment property or start a share portfolio. In recent years there has been an increasing number of women taking steps towards financial independence.

Unfortunately, with the pay gap between men and women now sitting at more than 18 per cent, the question is not only why, but what women can do to close this very real gap? Financial independence should be everyone's right. After all, money should never be on your love checklist when choosing a partner.

When we do see financial success by women, often surrounding their success are phrases such as "braving it on their own" and "taking a risk". While it is encouraging to hear their stories told, phrases such as these can make the fear greater to those who have not yet started.

With the stark reality that 90 per cent of women will become wholly responsible for their financial future at some point in their lives, closing this financial gender gap is critical.

What active choices can be taken to close the gap?
  • Get intimate with money matters Knowledge creates confidence. If you are not sure, research, ask questions and seek advice.
  • Set clear goals Your starting goals should be small and attainable. They need to be measurable, and ideally you have someone to keep you accountable.
  • Don't delay Life can easily get in the way, but remember you cannot move ahead until you get started.   
  • Know what makes you tick We all have good and bad financial habits. Learn what makes you succeed and fail. What makes you hold back?
  • Be smart Whether in a relationship or single, protect your financial future and ensure you have adequate insurance. Should you lose your income capacity, insurance can still protect your assets and security.
  • Get the simple things right Whether it be consolidating your super, renegotiating your mortgage, creating a good budget you can stick to, or understanding how you are tracking to retirement, getting the basics right can put thousands of dollars back in your pocket with little effort.

Posted by Dominique Bergel-Grant - The Age on 12th June, 2015 | Comments | Trackbacks | Permalink

Blood, sweat and tears: What it takes to buy your first home

First home buyers are not just willing to sacrifice a few luxuries, but make huge lifestyle shifts to save for a deposit, according to new research.

In fact, 30 per cent choose to move in with their parents or in-laws to save and 33 per cent worked multiple jobs to get a foot in the door, Homeloans Ltd's survey of 500 first home buyers revealed.

National marketing manager Will Keall said first home buyers need to have a plan to build their deposit. Big lifestyle shifts could be part of it.

"It is pretty tough these days with rising cost of living to save a decent-sized deposit, so it makes sense," Keall said.

Four out of five respondents took more than a year to save, while 39 per cent took two or more years.

"A number said it took five years to have enough money for the deposit," Keall said. "This highlights how Australia's high cost of living makes it challenging to save, and that property prices are stretching homebuyers to the limit."

More than 50 per cent of respondents were saving a deposit of less than 15 per cent and the average age of the first home buyers surveyed was 28.

Working 150 hours a fortnight                

David Gunter, 35, and his wife, 37, worked five jobs between them to save up a $60,000 home deposit. 

Purchasing at the beginning of 2014 in Victoria's Mount Dandenong,  David Gunter worked full-time as a social worker, part-time in drug and alcohol social work and a third job as a prison officer.

The couple married in 2010 after living in Queensland, and bought their home eight months after having their first child, Olivia, who is now two years old.

"We wanted to buy in a nice area, we wanted the kids in a nice area," he said.

He also had firm ideas of what they wanted in a house – four bedrooms, a fireplace and other unique features that made them motivated to work for their dream home.

With his wife on maternity leave when they had their first child, he had to compensate by having the extra jobs and was working 150 hours a fortnight.

 He still works two of those jobs.

"As a result, our home is worth $90,000 more than what we paid for it and we're about to buy an investment property," he said.

"There were sacrifices," he said, but letting his social life take a back seat was worthwhile for the home they have today, with their new 15-week-old son settling in.

Putting huge portions of income aside for a deposit

Sydney resident Hannah Espinoza, 32, put aside 65 per cent of her salary each pay day to make a deposit for an off-the-plan apartment.

Her career has since been shaped by her decision to sign on and purchase the $675,000 one-bedroom Newtown apartment in 2013, with a settlement period of two years to take advantage of the growing Sydney market.

Working at a marketing company, she had a three-month trial period after which her salary was increased an expected 10 per cent. After working there for some time, graduating from a masters degree, she expected a pay rise that didn't eventuate.

"I had based this home on my salary increasing," she said. "I thought it was worth taking control by starting my own business."

She did so and moved back in with her father, rent free, to save the funds.

"We then moved in with my dad rent free, then that rent went into the savings. My salary is slightly higher than average and I don't do anything extravagant," Espinoza said, "It is important to sacrifice."

Moving in with in-laws

Bridget Andersen, 21, moved into her boyfriend's parents house in Newcastle to save money on rent.

She moved out of home at 19 into a share house in Sydney with two other girls, then rented an apartment for a year while finishing university.

Realising she'd never be able to save while renting, she moved into her boyfriend's room, sharing the house with his parents and three other siblings.

"The lease to that apartment finished in January this year and as I was in an unstable financial position and hadn't found a job after finishing my degree, my boyfriend's parents offered to let me move in with him," she said.

At $100 per week, she said that it offers them the chance to save for a home while she works as an entry-level public relations consultant. The trade-off is less privacy and space, yet she is grateful.

"It definitely has its ups and downs to share a bedroom when I've never had to in the past and always have had plenty of my own space and privacy which I don't have as much of now," she said.

"However, in terms of saving money, it's definitely a leg-up in what is a really competitive and expensive rental market."

Posted by Jennifer Duke - The Age on 10th June, 2015 | Comments | Trackbacks | Permalink

Buying off the plan: five things you need to know

If you're buying off the plan, there are a number of legal requirements you should be aware of.

Beware of display suites

Spacious, beautifully furnished and well-lit display units are not a representation of your finished off-the-plan apartment. The fine print of the contract will state that you cannot rely on what you see in a display suite. Rather, carefully check the plans for your chosen apartment as specified in the contract. Use a tape measure to measure it out. How does it compare to your current home? What is the orientation of the apartment? Will it have enough natural light? North-facing properties are always preferable. 

Do not rely on rental guarantees Advertisement

These can be provided by companies that are financially worthless or are wound up and closed by the time any purchaser may want to enforce a guarantee. Don't rely on a rent guarantee. Instead, do your homework about the rental market in the area. What rent could you achieve if all or most of the apartments in the building were released onto the rental market at the same time? Always budget for conservative rent receipts.

Be wary of buying with an unconditional contract

Buy "subject to finance". Sign a contract "subject to finance" being approved. Even if you have pre-approval to borrow up to a certain amount, the bank will still need to value the property before financing the purchase. Some small off-the-plan apartments can be very difficult to obtain finance for - generally anything under 40 square metres - and some greenfield estates can be valued very conservatively. Never assume finance will be approved for a property before the bank has conducted its valuation.

Keep a close eye on the sunset period

Even if the selling agent tells you it will be finished in one year, the contract's "sunset clause" could be five years. Yes, the developer will want to finish as soon as possible, but could you wait the entire sunset period if you had to? Especially if the contract will prohibit you from reselling the property before settlement? 

Know your rights

Know your rights regarding fixtures, changes and defects. The developer is entitled to substitute fixtures and fittings for items of similar quality. That's why it's important to specify brands for appliances and airconditioning units. This way, you start with a benchmark and a clear expectation of quality. The developer is also permitted to change the size and design of the apartment to a minor extent. You must be notified of any changes and you can terminate the contract if anything significant occurs, such as the deletion of a car park or balcony, or major changes in a strata or owners corporation liability entitlement. When the property has been completed and settlement occurs, carefully inspect your apartment and notify the developer of any defects during the contractual period (commonly within three months of settlement).

Posted by Kate Ashmor - The Age on 9th June, 2015 | Comments | Trackbacks | Permalink

Too many know too little about loans

Low levels of financial literacy are leaving consumers without the knowledge to get the best deals on home loans.

A survey of 1000 people carried out on behalf of industry super fund-owned bank ME, found almost 40 per cent did not know how the cash rate affects mortgage repayments.

The cash rate is important because it is a big driver in variable mortgage interest rates.

It is set by the Reserve Bank of Australia and is at a record low of 2 per cent. Generally, the lower the cash rate the lower interest rate on variable rate mortgages.

However, there are other factors at play, such as the lenders' cost of funding of the mortgages and competition between lenders. 

More than 40 per cent of survey respondents did not know the right cash rate. Seventy per cent of 18 to 29-year-olds said they did know the cash rate.

"Financial literacy is a valuable asset and one of the biggest money savers over time," says Patrick Nolan, ME's head of home loans.

He says the results show many people do not have a thorough understanding of home loans and how they operate.

"We were particularly surprised that older generations – those who typically have more exposure to home loans – have low levels of home loan literacy."

Only 43 per cent of those aged 30 to 49 years and 51 per cent of those aged 50 and over were confident with their home loan choices.

Survey respondents did not understand how the various features of home loans work.

For example, 55 per cent have no understanding of an offset facility. And 38 per cent have no understanding of interest-only payments.

"Take offset accounts, which are a savings or transactions account linked to your home loan," Nolan says.

"The value of the offset account is deducted from your home loan when interest is calculated, which can save you many thousands over the life of the loan," he says.

Most people are bamboozled by the different types of mortgages.

For example, 45 per cent have no understanding of an interest-only loan and 28 per cent have no understanding of fixed home loans.

"The fact that a large proportion of people don't understand the value of fixing a portion of their home loans is a concern," Nolan says.

"It's a great time to lock in record-low home rates; so people could be really missing out," he says.

As for help, there are plenty of independent sites like moneysmart.gov.au that give basics and can help explain the jargon.

Also, many lenders have online calculators to assist in crunching the numbers.

ME has a "building financial confidence" program at www.mebank.com.au/bfc.

Posted by John Collett - Money Manager (Fairfax) on 9th June, 2015 | Comments | Trackbacks | Permalink

Property investors benefit in quiet times of the market

IN THE cooler months, many people question whether they should be buying property or waiting for later in the year because spring is seen as the prime time for real estate.

I am a huge fan of doing the opposite rather than following the herd.

Spring is the peak season for people to sell property, so there will always be more choice in what you can buy.

It is also a time where many buyers make emotional decisions.

Auctions are held on lovely spring days when buyers can easily let their emotions take over, pushing up prices.

Just as there are more properties on the market, there are more buyers at this time, which means more competition.



Throughout spring, the media often highlights stories of properties selling for large amounts over their reserve price, which isn’t good for you as a buyer.

When it comes to the quieter months of autumn, it is likely that there will be fewer properties on the market to choose from, however there will also be less competition from other buyers.

With less demand in the market, property prices are less likely to be pushed over emotional levels at auction.

This ultimately leads to sellers losing confidence, which is good for you as a buyer.

Not only am I happy to buy in the quieter times of the year, I’m also happy to buy during the quieter periods of the economy, because I know there will be less demand and more chance to buy a better property at a cheaper price.

This was certainly the case in the middle of the global financial crisis when I bought half of my property portfolio.

It was difficult on an emotional level as my friends were saying it was a mistake.

But prices still crept upwards and when the market really started to recover I benefited each day, while others took months to react.

Even the experts never time the market. I am fortunate to have interviewed some of the best real estate experts, including economists who analyse what has happened in the past and try to predict the future.

They don’t profess to know everything perfectly. They buy when they’re ready to buy.

One of my best tips is to buy when you can afford to buy and when you can afford to hold on.

Real estate is always a long-term game and you should at least have a five to 10 year horizon in sight.

Buying at the right price is important, but often when you look back it doesn’t have that much significance.

The profit comes from time in the market rather than timing the market.

There’s always a deal to be made in any market. So whether you’re buying when there are thousands of properties available or just a few, if you know what to look for and are prepared to walk away until you find it, you’ll profit in the future.

- Chris Gray is host of Your Property Empire on Sky News Business channel and CEO of buyer's agency Empire.

Posted by Chris Gray -- NewsCorp Australia Network on 8th June, 2015 | Comments | Trackbacks | Permalink

Investing from afar, is it a good idea?

Buying a property investment in another town or city can help you tap into lucrative markets, but what are the downsides ?

The old saying of ‘don’t put all of your eggs in one basket’ is just one of the reasons why it’s worth considering investing in an area you don’t live in – whether that be another town or city, or – as is often the case – interstate.

Managing director of Property Buyer Rich Harvey often advises clients to look in other states. Harvey, who is based in Sydney, currently favours Queensland as an over-the-border option.

“The reason you buy intestate is you want diversification, you want to have a portfolio in different states, so you’re catching the property cycle,” Harvey says.

“Another reason is to minimise land tax because you’re going to hit the land tax threshold pretty quickly, especially in NSW. You know, $417,000 in land [value], you’re certainly going to exceed that pretty quickly.”

Harvey says concerns about being an ‘absent landlord’ who lives too far away from their property are usually unfounded. “Even when you’ve got a property on the other side of Sydney, it can take you an hour to get there, so it’s [almost] no different to having a property in Brisbane,” he says.

The key to making a property investment interstate work is choosing the right location to start with.

“You don’t just buy interstate because it’s the thing to do,” Harvey says.

“You buy interstate because (there’s opportunity).”

Factors Harvey’s team look for include population growth, jobs, good infrastructure, favourable vacancy rates and a diverse economy. “They’re the things that drive the decision to invest in a particular area,” he says.

If you don’t live close to your investment, it’s more important than ever to choose a good managing agent.

“Make sure they do regular inspections, make sure the rent is accurate and up to date, because when you’re interstate you may not know the local rental market and it can fluctuate up or down, depending on what is happening in the market,” says Harvey.

“If in doubt, just get another appraisal from a different manager in the area, even [if you’ve] got it leased.”

Posted by Carolyn Boyd - Domain Blog on 5th June, 2015 | Comments | Trackbacks | Permalink

New breed of first home buyers make their first home an investment property

 FALLING first homebuyer numbers are not as bad as they appear, thanks to a new breed of young Australians becoming property investors while still living at home with mum and dad.

Many twenty-somethings are cashing in on the tax and other financial benefits of investing, with an eye to moving into the home later or upgrading once its value rises.

The latest housing finance figures from the Australian Bureau of Statistics showed that in March investor loans grew four times faster than owner-occupier mortgages, with the proportion of first homebuyer loans at an 11-year low of just 14.7 per cent.

“I think the official homebuyer numbers are not really giving the true story,” said CoreLogic RP Data senior research analyst Cameron Kusher.

He said cuts to state government first homebuyer grants had reduced the incentives given to owner-occupiers, while negative gearing tax savings and low interest rates benefited investors.

As such, it often makes more financial sense to reject the grant, which in some states requires the buyer to live in the property, and go it alone.

Recent research by Mortgage Choice found that one-quarter of first home buyers said their first property was an investment property. In 2011 the number was below 10 per cent.

Mr Kusher said young investors were either living at home with their parents or renting in an area where they couldn’t afford to buy while investing in a more affordable area.

“It’s definitely becoming harder to get their own home as an owner-occupier, but it’s good to see people looking outside the square and buying investment properties,” he said.

Oracle Lending Solutions director Angelo Benedetti said a lot of young people were paying zero or cheap rent by remaining in the family home while dipping their toes in the property market.

“They realise interest rates will never be as low as this again,” he said.

Investing often made financial sense for young property buyers, Mr Benedetti said. “Someone is paying their rent, the interest is tax deductible and if it’s a new home you get depreciation benefits.”

Claire Madden, a director at social research group McCrindle, said the rising cost of housing, bills, study and digital technology prevented most generation Ys from getting into property as early as previous generations.

“It’s unaffordable for many Gen Ys even though they’re at a life stage where they want to plan and build for the future. They can’t afford to buy where they want to live but it doesn’t mean they can’t afford property,” she said.

“Buying property has shifted from a heart decision to a head decision.”

CommSec chief economist Craig James said young people were renting or living at home while buying cheaper property further away from CBDs.

“Gen Y haven’t given up on property. It’s just that where they would like to be living — near the city, close to their workplace and close to restaurants, the cost of that is too high,” he said.

“Back in my day people were quite content to have the quarter-acre block and live an hour’s commute from the workplace. A lot of Generation Ys don’t drive these days.”

Posted by Anthony Keane - NewsCorp Australia on 5th June, 2015 | Comments | Trackbacks | Permalink

The OECD has warned Australia’s housing market could collapse

 A LEADING authority on the world economy has warned that Australia’s inflated housing market is at risk of a “sharp correction”.

While the Organisation for Economic Cooperation and Development, was forecasting a three per cent growth in our economy next year, thanks to a rise in investment in the non-mining sector and exports, it feared the strength of the country’s property market could result in a “sharp correction” in house prices.

In a report released in Paris on Wednesday, the OECD said if commodity prices continued to fall, it would affect overall revenue and the cutbacks in production could become “substantial”.

Because of this it was advising the Reserve Bank of Australia to not cut interest rates further, given the uncertainties of the outlook.

It also pointed out the May budget did not address the larger-than-expect deficit results and advised fiscal policy should continue to provide support.

“This approach is appropriate given weakening revenues and macroeconomic outcomes in the wake of the commodity price falls,” the Paris-based institution said.

However Treasurer Joe Hockey insisted increasing residential construction was the best way to respond to concerns about a housing bubble.

“You’ve go to get the stock up,” he told ABC radio on Thursday, citing figures showing an 18 per cent increase in the number of construction starts in 2014.

Mr Hockey also dismissed talk about a housing bubble in Sydney and Melbourne, saying the global experience was that only happened when supply exceeded demand and that was not the case in Australia.

“It’s not inflated demand, we’ve got very low vacancy rates in places like Sydney,” Mr Hockey is reported as saying in Fairfax. “We have put in a much stricter regime in real estate for foreign investment.”

“If you look at what happens around the world, bubbles burst in real estate where there is too much supply. We are a very long way from that in Australia.”

The treasurer said high prices existed “mostly in Sydney, and parts of Melbourne” while in Western Australia, houses prices were coming off.

The OECD calls for further tax reform, cuts to red tape and competition-boosting measures.

It said there should be less reliance on personal and corporate income taxes and increased use of the GST and the introduction of a land tax.

Posted by News Limited Network on 4th June, 2015 | Comments | Trackbacks | Permalink

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