Puzzle Finance Blog
Not much value in rewards credit cards
A study by researcher Mozo shows for most people, credit card loyalty schemes are hardy ever worthwhile.
Marketers' prey on the fact that we all like to think that we are getting something for nothing. However, among the 119 rewards cards covered, a third of them are hardly worth having, delivering less than $20 in rewards value each year, says Mozo director Kirsty Lamont.
Mozo ranked the reward credit cards assuming that $17,000 a year was spent on the card, which is the typical spend.
And one in four rewards credit cards lose you money each year because the rewards, which can include flight, gift cards and cashbacks, were worth less than the annual fees. "What's more, some rewards cards have such high annual fees that you need to spend more than $40,000 a year on the card just to break even," Lamont says.
However, the researcher has identified 34 cards from among the 119 that return more than $100 in rewards, after accounting for fees, each year.
The best card for the typical user delivering an annual net value of almost $300 and no annual fee is the American Express Velocity Escape Card. For big spenders, those spending $60,000 a year, the best card is the NAB Velocity Rewards Premium Card with a net annual rewards value of $1415.
With annual fees as high as $749 and the most generous points schemes reserved for the cards with the highest annual fees, consumers need to choose a rewards card carefully to ensure they get bang for their buck, Lamont says. Rewards cards are a massive industry and many people become obsessed with earning points.
"These points can be wildly overvalued and quickly eaten away by sky-high fees unless you are spending big on your card," Lamont says. There are other potential traps with rewards card. If the card holder does not pay off the debt, in full, within the interest-free period, the interest rates charged on the outstanding amount is usually much higher than non-rewards cards.
Kirsty Lamont says that the average interest rate on rewards cards is almost 20 per cent compared to an average rate on non-rewards cards of about 14.5 per cent. And the average annual fee is about four times higher at about $160 compared to just over $40 for non-rewards cards.
Those who are not disciplined in their use of credit cards should not be using rewards cards, Lamont says. "If you are paying interest on your card it makes no sense at all to have a rewards card because the cost of the interest will far outweigh any rewards you earn," she says.
Posted by John Collett - Money Manager (Fairfax) on 27th August, 2014 | Comments | Trackbacks | Permalink
Concerns growing towards buying real estate in a self-managed superannuation funds
IT seems that everyone wants to worry about the growing practice of buying real estate in a self-managed superannuation fund. From the government to financial planners to the Reserve Bank, the warnings have been getting louder in saying that this is an area that can severely damage your life savings.
Some of the concern is justified, and is necessary to combat the rise of property spruikers who use slick sales tactics to coerce people to borrow heavily in super to buy overpriced real estate.
But property investment in superannuation should not be avoided just because of warnings about some dodgy players in the self-managed superannuation advice industry.
The tax breaks offered by our super system are huge for property investors, particularly the tax-free nature of super after aged 60.
If someone aged in their 40s or 50s buys a $500,000 property inside their super fund and it doubles in value before they retire at 60 or later and sell it, they pay no capital gains tax on the sale.
GIVE YOUR MORTGAGE A HEALTH CHECK
If the same property is held outside super, $250,000 of the gain gets added to their taxable income – which would result in a tax bill of tens of thousands of dollars.
The same tax breaks are available for other investments such as shares and managed funds, but they can be sold in smaller parcels than property so the tax burden can be spread more evenly.
However, groovy tax benefits should never be the main reason for an investment. The numbers should stack up without the tax benefits, and if you would not buy an off-the-plan apartment in Queensland from a property spruiker outside of super, you certainly should not be considering it inside a super fund.
There are other risks, including:
· - Putting all your eggs in one basket: If you already own a home and an investment property, is it really a good idea to invest your super nest egg in the same class of asset? Shares have historically been just as good a long-term investment as property – just don't mention the GFC, where they more than halved in value and are still not back to their 2007 highs.
· - Government tinkering is frustrating. The tax benefits of super were set to be severely watered down last year, but it didn't go ahead. However, you can bet your nest egg that there will be more changes in the future.
· - Super is supposed to pay a retirement income, and if an investment property is unable to provide that to a retiree because tenants stop paying rent, their fund can be in breach of the rules and suffer big penalties.
If you can manage the risks, avoid marketing schemes and don't borrow too much, property investment in super should not be ignored completely just because the voices against it have grown louder.
Posted by Anthony Keane - News Limited Network on 26th August, 2014 | Comments | Trackbacks | Permalink
How almost 300,000 SMSFs avoid paying income tax
Only a fraction of Australia's half-a-million self-managed superannuation funds pay any income tax, experts say, because of generous super concessions and franking credits that are undermining the federal budget.
Tax Office statistics show almost 300,000 self-managed superannuation funds eliminated or reduced their tax bills through exemptions on super and $2.5 billion in franking credits in 2011-12. These are the most recent records available, although experts say the surge in dividend payments since then has further reduced the small amounts of tax paid by these funds, which are often the primary income of wealthy retirees.
At the time, 424,360 funds generated gross taxable income of $32.9 billion. About $15 billion of that was entirely exempt from income tax because the funds were in the pension phase, which doesn't incur income tax.
Self-managed funds contribute little to the tax system – because about half of the funds' assets are already in the pension phase, Tria Investment Partners principal Andrew Baker said. Also, most self-managed funds receive franked dividends, which cuts the tax bill of many other funds to zero.
"It's a problem isn't it?" Mr Baker said. "It's unlikely SMSFs are ever going to pay a substantial amount of tax as a segment."
The loss of revenue will rise because of an ageing population shifting assets into pension phase and the greater payment of dividends, he said.
Pressure is growing to focus on superannuation tax breaks in the Coalition's planned review of the taxation system. The government is desperate to find ways to reduce the budget deficit.
There have been frequent calls for the government to stop the concessions. The head of the Financial System Inquiry, David Murray, recently suggested Australia's dividend imputation system, which SMSFs are also capitalising on, needed to be looked at.
The roughly 1 million Australians with investments in self-managed super funds argue that having spent their careers paying income tax and following the rules they shouldn't be penalised for saving for retirement.
"Super funds, including SMSFs, are taxpayers, and franking credits should be available to all taxpayers," SMSF Professionals' Association of Australia's technical and professional standards director Graeme Colley said.
Experts say it would be better to tax the earnings of superannuation funds in pension phase at 15 per cent, rather than try to get rid of franking credits, which could see share prices plummet.
A fundamental change
Australia and New Zealand are now the only two developed countries that have full imputation of dividends.
Mr Baker said scrapping Australia's dividend imputation system, would involve "a fundamental change to the taxation system" that would be hard to implement. He said a better way to address the problem was a 15 per cent earnings tax for those in the pension stage. Another option was to copy the United States' minimum taxation rate, "that in short says everybody pays an amount of tax".
Ending franking credits could trigger a political backlash from investors and "would be reintroducing double taxation, so there are enormous problems with it", Mr Baker said.
"The UK did a similar thing 15 years ago, denying pension funds franking credits, and they got away with it . . . despite the protest." He said a tax rate on the pension phase would also stop gearing by SMSFs.
Tax Office data shows SMSFs have an interest expense bill of about $375 million a year, but Mr Baker said that's just the tip of the iceberg.
The data comes from SMSF tax returns, but it is common for SMSFs to achieve gearing outcomes by investing in private property trusts. He estimated the overall interest expense for the sector would be about $500 million annually.
Grattan Institute chief executive John Daley said any change to dividend imputation would have to be part of a package that also reduced the company tax rate and personal tax rates.
He said the difficulty with scrapping imputation was that it would "create incentives for companies to hoard capital rather than returning it to shareholders, which may reduce the efficiency of investment decisions".
Instead, the government should wind back superannuation tax breaks for the old and wealthy. "The easiest way to do this would be to tax the income and capital earnings of super funds in pension phase at 15 per cent," Mr Daley said. "These funds would then pay tax on earnings at the same rate as the super funds of those aged under 60."
He said there was no reason to grandfather this change.
"Anyone who is in pension phase can withdraw the entirety of their super fund tomorrow, and if they think they can find an investment on which they will pay less than 15 per cent tax, good luck to them," Mr Daley said.
"I'm guessing that there will be very few withdrawals."
'It ain't going to happen'
At the end of 2012, the average SMSF had $920,000 (typically funds are made up of more than one person: couples).
According to a 2012 ASX study, about 52 per cent of SMSFs directly hold Australian shares. Tax Office data shows of the $550 billion invested in SMSFs, $180 billion is directly invested in Australian-listed shares, which is already higher than the average of APRA-regulated funds.
Leading economist Saul Eslake said he was "undecided" about whether dividend imputation should be scrapped, although he had previously mentioned it is a costly tax break that the wealthy use to lower their marginal tax rates.
He said that like negative gearing, there are now so many who benefit from franking credits – SMSFs, investors and members of larger public or industry super funds – that "no matter what the intellectual merits of getting rid of it, it ain't going to happen for political reasons".
"Almost certainly, the benefits of franking credits are capitalised into the share prices of companies that have high franked dividend yields, so it seems almost inevitable that abolishing dividend imputation would cause share prices to fall, unless there were an equivalent reduction in the company tax rate," Mr Eslake said.
David Murray said in his review of the financial sector the imputation system – first introduced in 1987 and estimated to cost about $20 billion a year – had created a bias where individuals and super funds preferred shares and this had hindered the growth of the domestic corporate bond market.
PwC's submission to the Murray inquiry said "careful consideration should be given to whether there would be benefits to be obtained from modifications to the imputation system".
Read more: http://www.smh.com.au/business/the-economy/how-almost-300000-smsfs-avoid-paying-income-tax-20140826-108dpu.html#ixzz3BUcBtjWW
Posted by Nassim Khadem - The Age on 26th August, 2014 | Comments | Trackbacks | Permalink
Can you afford it? Can you afford to ignore it?
Our home prices are among the world’s highest and still haven’t peaked.
But if you’re thinking of buying there’s no need to rush, because from here on the rises are expected to be more sedate as the surge in building approvals kicks in and real incomes falter.
At the same time, rents for units are more than keeping up with inflation in Sydney and Melbourne though at best are flat in the other capitals.
Independent property commentators are tipping values will rise an average 6 or 7 per cent in the next year, compared with about 10 per cent last year.
‘‘Normally property prices keep going up until interest rates start to rise. There’s more upside ahead with very low rates, in fact fixed rates have been coming down but the gains will slow down a bit,’’ Shane Oliver, head of investment strategy and chief economist at AMP Capital says.
So when might rates rise?
Not for ages. Economists don’t expect the Reserve Bank to lift rates before its US counterpart, the Federal Reserve, which is planning to but hasn’t set a date as such, apart from making it clear that it won’t be until well into next year. In any case the smart money is even gambling that the Reserve has another cut in it.
Despite (or by pushing up prices perhaps because of) record low rates, affordability is a real issue.
Then there’s Sydney, described as ‘‘one out of the box’’ in the past year by Andrew Wilson, senior economist at Australian Property Monitors. ‘That has been due to low interest rates and investor activity, which is half the market,’’ he says, predicting 2 per cent price rises in each of this and the next quarter for Sydney.
‘‘Pent up demand has been released through lower interest rates, especially for investors in Sydney. Once it works its way through the system it wanes in impact,’’ Wilson says.
The other places to be in the next year are Adelaide and Brisbane, mainly because they have some catching up to do after last year’s under-performance. ‘‘Melbourne is likely to record half the growth it did last year – so that will be about 4 to 5 per cent,’’ Wilson says.
‘‘Perth is looking flat this year,’’ he says, and it wasn’t a reference to the city's topography.
Just as record low mortgage rates have boosted demand, an unusually long home building slump has limited supply. No wonder prices have been shooting up.
Although there’s a boom in housing construction under way it still has a lot of, um, ground to make up.
‘‘It’s the strongest in more than a decade but isn’t enough to make up for the under-building in the previous 10 years,’’ Oliver says.
In fact the adult population is still growing faster than new homes are being built, especially in Sydney, Melbourne and Brisbane.
St George Bank estimates the housing shortage is running at 101,300 dwellings a year.
Even so, there’s no getting around the problem of affordability.
Caught in the middle between low rates and high prices, both records, are household incomes. Wages fell in real terms over the past year and rising unemployment isn’t about to turn that around for a while.
Over time property prices rise on average by the growth in household disposable incomes.
These rose strongly after the global financial crisis as Australia’s export revenues soared thanks to China’s massive spending program, which concentrated on resource-hungry infrastructure. This filtered down to the neighbourhood as jobs, cheaper manufactures and wage increases.
Those days are over, though property prices have been the last to adjust to the new reality.
That’s why once interest rates start increasing, it seems around 5 per cent annual average rises will be the best that can be expected. That suggests real growth of only 2 per cent a year.
The return for investors will be higher when you add a gross rental yield of about 4 per cent on average. This probably won’t change much because even though prices are expected to rise, which would reduce the yield, rents will also be going up.
But remember costs such as maintenance, council rates and strata levies typically knock 1.5 per cent off this.
Also more than half of recent building approvals have been for units, suggesting a looming localised glut, since new apartment blocks tend to be built near each other. Buying off-the-plan also means you’re paying a developer premium.
Anyway there’s no chance of a property bubble while affordability is so constrained – potential first home buyers are staying away in droves – and bank lending is subdued.
The latest QBE annual survey of intending buyers in the next five years found a distinct cooling in sentiment.
Taken in late June, it showed 36 per cent thought the next 12 months would ‘‘be the best time to buy’’ compared with 42 per cent at the same time last year, mainly the result of the budget.
But come to that nor is a correction likely. The market is underpinned by interest rates that will remain low into the foreseeable future, because economic growth is relatively subdued and the housing shortage will take years to overcome.
Case study: Property performers
- Get your finances in order before you see the bank.
- Save for a deposit with the same lender for the best deal, or see a mortgage broker.
- Don’t be fooled by a cheap interest rate. Check the comparison rate that will take into account fees.
- Choose a mortgage with an offset account and use it.
- Fix some of your mortgage as protection but not all of it.
- Have your loan approved before you buy.
Paying rent can be dead money but sometimes so can earning it.
Yet doing both may be the easiest way of building a property portfolio.
Former pre-school teacher turned flight attendant, Melinda Lee, and store manager partner, Kabe Franklin, are looking for their fifth property, while renting themselves.
Nor do they do negative gearing - all four properties pay for themselves.
To refinance one of their properties they even broke a fixed-rate, two year loan with eight months left to run that dropped the rate from 6.33 per cent to 4.69 per cent for three years. Although this cost $1500, it only took five months to make up from the savings in interest.
Lee, 29, bought her first property – a two bedroom unit in North Parramatta – at 22 putting to good use the fact her father Kevin Lee is a buyer’s agent and doubles up as a mortgage broker. Its value has since doubled.
Originally it was an interest only loan but she subsequently switched to a normal one, which has become a winning strategy.
‘‘I lived there for a year because of the first home owner grant. After I moved out and when the rent was high enough to cover the whole mortgage repayment, I switched to a principal and interest loan. That way the tenants pay it off.’’ She and Franklin have been renting ever since, though they tried living in one of their properties but found they didn’t like the area.
‘‘It’s rented by uni students. They pay $530 a week and we pay $545 a week for which we get tax benefits and get to live in a nicer area,’’ Lee says.
The couple use the equity in one property as collateral for the next.
Their cardinal rule is that the rent must at least cover the monthly principal and interest on the mortgage.
‘‘It must cover the whole repayment. A lot of investors buy to just cover the interest payment and rely on capital growth but I don’t think values will double again like they did for my first unit, because wages won’t be going up as much,’’ Lee says.
They prefer two bedroom units though number four was a house in Albury.
‘‘There’s a bigger range of potential tenants with two bedroom units. We wouldn’t live in a one bedroom flat – there’s no space or storage. It wouldn’t suit a single mum with a kid for instance,’’ Melinda says.
They always fix. ‘‘The tenants are paying off the loan and it’s a long-term investment, so the rate doesn’t matter. It’s just good to lock in,’’ she says. Financing your dream
Lining up a home loan starts well before you set foot in a bank, let alone look for a property. ‘‘It takes the average couple 4.1 years to save a 20 per cent deposit for their first home, if they save 20 per cent of their joint income,’’ Kevin Lee, director of Smart Property Adviser says.
‘‘The best way to develop a savings plan is to allocate two weeks to keeping a detailed record of what and how you spend,’’ he says.
That 20 per cent wasn’t plucked out of the air either. Lenders want to see an 80 per cent loan-to-valuation ratio. And yes, the first home buyer grant counts as saving.
While you can get a loan with a slightly lower deposit, you’ll pay for the privilege.
That comes in the form of mortgage insurance, widely misunderstood as protection for you. It’s anything but.
In fact mortgage insurance protects the lender against you. Since you have to buy it upfront it’s usually spread over your loan, which lifts the cost again because you’re paying interest on it. So you end up with higher repayments.
The premium escalates exponentially for every dollar you’re above the 80 per cent.
‘‘Budget for costs such as stamp duty (about 2.5 per cent to 3 per cent of the purchase price) as well. If your parents can give or lend you a few thousand that can save $10,000 in mortgage insurance,’’ Tony Harris, director of themoneystore.com.au says.
And don’t forget properties have to be maintained. Even units come with ready made expenses such as strata levies and sinking funds.
Loyalty is the new black for banks.
‘‘You look more favourable to a bank if you have an account or a credit card with it. Pick one and build up a history with it,’’ Harris says.
And get your house in order so to speak, before you see a lender.
‘‘A loan will be knocked back on one overdue payment on a credit card in the past three months. And don’t swap jobs half way through the application,‘‘ he says.
Then there’s the question of which loan will suit you best. Mortgages come in all shapes and colours.
That’s easy: pick the one that you can pay off fastest. Oddly enough it may not be the one with the lowest rate.
‘‘Non-bank lenders can look cheap on the surface but there are establishment, valuation and solicitor fees. Banks charge an annual $395 package fee only,’’ Harris says.
As well, a basic no-frills loan will be very restrictive when it comes to paying it off sooner. A more expensive one with an offset account may have you debt free sooner.
Offset accounts are up there with the magic of compounding. In fact, there’s a connection. Extra repayments go in a special account earning the same rate as the mortgage costs. One cancels out the other, so the mortgage falls and you’re not taxed on the interest you earn.
The beauty is you can re-draw the money if you need it again.
This is also why you shouldn’t fix the whole loan; most fixed rate loans don’t have offset accounts or allow extra repayments.
Even so, when starting out there’s a case for an interest only loan just to get you on your feet.
‘‘The repayments are lower and you can swap to a principal and interest one any time. It gets you started but don’t stay on it,’’ Harris says.
Read more: http://www.theage.com.au/money/investing/can-you-afford-it-can-you-afford-to-ignore-it-20140815-1032kc.html#ixzz3As9NCyVc
Posted by David Potts - The Age on 20th August, 2014 | Comments | Trackbacks | Permalink
Bold approach solves the rent or buy conundrum
The great Australian dream is to own your own home. There are countless books and articles written about how to achieve it and even a movie about saving it. It’s the largest purchase many of us will make in our lifetime and owning it is a rite of passage: proof you have finallygrown up and are putting down roots.
However a growing number of people are questioning whether we should bother. With the price of homes rising and median home prices in some suburbs well out of reach of many potential homebuyers it is certainly a dream worth reconsidering. The problem with the alternative however is you’re simply paying down someone else’s mortgage and not accumulating any assets of your own. That is unless you consider a third option which is renting where you live and buying property as an investment only.
It’s an interesting alternative and one worth considering if you are able to remove the emotion around owning your own home. So what are the pros and cons of renting where you live and purchasing properties to invest instead?
The obvious down side of this strategy includes not owning your own home which is something many people are emotionally connected to. However if you can put that aside, there are a few more cons to this strategy:
- Instability: Being a perpetual tenant means you are at the whim of your landlord who may decide to sell the property, renovate it or move into it themselves. This might be a deal breaker if stability is important to you, especially if you have a family and don’t want to move around.
- Any Improvements are lost. Many people like to put their own stamp on a place however if you’re renting any material changes invariably needs landlord improvement and often can’t be taken with you when you go. So money spent on a home you’re renting is often a wasteful exercise.
- Capital Gains Tax Unlike owning your own home which is a capital gains tax exempt asset, when you sell an investment property you will almost always have to pay capital gains tax.
Of course with any downside there is usually an upside. With this strategy the pros include:
For many of us, owning our home is a decision we make as much with our head as with our heart. It is truly a mindset shift to consider renting instead and choosing to purchase properties that will only ever be for investment. However if you can remove the emotion, it’s an interesting strategy and certainly one worth considering.
- Rental deductions If you run a business or aren’t provided somewhere to work by your employer you may be able to claim a percentage of the rent you paid during the year. If you claimed a percentage of your ownership expenses and you owned your own home there would be capital gains consequences however with a rental, there’s no such problem.
- Costs are deductible Many of the costs associated with owning and renting out an investment property are deductible including interest. This means the cost of owning the property is reduced by the tax deduction you receive. With most people purchasing their own home today having a fairly high mortgage this means the true cost of ownership is often hundreds of thousands of dollars more than the purchase price which is often not factored in when they’re working out the profit they’ve made.
- Asset is income producing: Your investment property is income producing which in many circumstances means there is not a significant shortfall each week. This may mean instead of only being able to afford one asset, which is often your home, you can afford multiple investments as they are not reliant on you to pay the bills. This may mean you can leverage growth and diversify your risk in different suburbs or with different types of properties
- You are not tied down to one asset. This may seem like a strange one but there appears to be a growing trend especially amongst younger people not to be tied down for years to one location. They want to experience multiple locations or be able to move if their job requires it. Renting your home and having investment properties means you’re still building wealth but you’re not restricted to the one location.
- You don’t have to pay maintenance costs and if you do they may be a tax deduction. As any home owner will tell you, the purchase price is only the start of putting money into your pocket. There are the costs to maintain your property as well as the costs to upgrade as things wear out. If this is your home there is no tax deduction but if it is your investment property you may be able to claim these costs either in full or over a number of years. Of course, with the home you’re renting you generally don’t need to put your hand in your pocket at all for any maintenance or repairs.
- You need to sell your home to realise your gain. Most people can probably tell you, quite proudly, how much their home has gone up in value and how much equity or profit they have made. The thing is, the only way they can realise that profit is to sell their home which, let’s face it, most people would be fairly reluctant to do.
Posted by Melissa Browne - Money Manager (Fairfax Digital) on 20th August, 2014 | Comments | Trackbacks | Permalink
Tags: Purchase or Rent
Time to cut back debt, not lock in more
Predicting interest rate movements is a bit of a national pastime and while this can be an obsession for some, they are well worth thinking about.
Most economists believe rates are unlikely to go much lower. While some are predicting small rises starting from the fourth quarter of this year, others believe it will take until the first quarter of 2016 for the Reserve Bank to raise rates from the current 2.5 per cent a year level.
The policy of keeping interest rates low encourages greater borrowing and spending. However, it's often beneficial to do the opposite of what the herd does.
With rates that have been low for such a long time it’s easy to become desensitised to and complacent about debt.
During the past decade there has been a move away from principal and interest lending (which requires some repayment of principal with each monthly payment) to a predominance of "interest-only" loans.
The flexibility of these loans are attractive yet there’s often a risk that principal repayments are indefinitely deferred, with borrowers forgetting that making the monthly interest payment is getting them no closer to being debt-free.
Knowing that rates can’t stay low forever, one strategy is to lock in a fixed rate for a longer term, with some institutions now offering five-year fixed rates at less than 5 per cent a year. However, paying off debt is an even better approach.
While it may seem counterintuitive, it offers many benefits including inbuilt protection for when rates start to go up. Making additional principal repayments gives you greater ability to absorb the increasing cost of interest, as you can keep your repayments the same and have a lower proportion allocated to the principal (which will naturally absorb the higher interest costs).
This strategy will also give you a greater sense of control over your finances when interest rates inevitably begin to rise. Furthermore, cheap credit often fuels asset price expansion, and this is one of the reasons it’s currently difficult to find compelling value in either the equity or property markets.
Rather than borrowing more to buy over-valued assets, a better way to create equity in your current investments is to reduce debt. If your debt is mainly consumer debt (personal loans or credit cards) then avoiding the high cost of these types of lending products is a good idea at any time, however now is a better time than ever.
By reducing consumer debt you’ll be in a strong position to use your cash flow to buy well-priced assets as opportunities present.
Rates will not stay low forever, so take advantage now, reduce your debt and don’t acquire more.
Posted by Catherine Robson - Money Manager (Fairfax) on 20th August, 2014 | Comments | Trackbacks | Permalink
Developments for the early bird
Securing property in the initial phase of development can be a wise investment, provided you have purchased at the lower end of the market and locked this away at today’s price. In some cases, settlement can take as long as two years, allowing the owner time to save money and reduce the amount for a mortgage. Depending on the state or territory where you have purchased, there are added government incentives on brand new properties such as stamp duty concessions. While these benefits are enticing, there are a few hiccups that come from buying off the plan.
Winner Partnership's accountant and principal Susan Wahhab has secured numerous off-the-plan purchases for her clients. She says a common hiccup occurs if the owner's circumstances change over the lengthy settlement period and they cannot secure finance.
‘‘We recently had a situation where a client purchased a property off the plan some 18 months prior to settlement. Unfortunately, two months away from settlement, he lost his job,’’ said Wahhab. ‘‘We quickly had to come up with a plan. Thankfully, the property he purchased was in a popular development and we were able to find a buyer for his property. But, luck was on his side, just as we were about to get the property transfer under way, the owner found a job, and he was able to secure a mortgage for the purchase.’’
Wahhab offers these tips for off-the-plan purchases:
1. Find out if the bank will approve the loan earlier rather than later.
Get pre-approval from the bank. Even though pre-approval lasts for six months and the property might take 12 to 18 months to finish, it is worth going through the hassle of applying for a bank pre-approval to make sure finance won’t be an issue.
2. Do your numbers if you are buying an investment property.
Before you commit to paying the 10 per cent deposit, you will need to work out the numbers for cash flow, tax benefit and exactly how much the property will cost you after tax every week. Buying an investment property is a long term strategy. Without knowing the cost after tax and knowing whether you will be able to afford it, you will not be able to hold the investment over time to enjoy the long term capital gains.
3. Get a good lawyer who will read the contract from beginning to end.
Most property contracts are standard, but it is important to check for things such as the settlement period from date of plan registration. A standard contract has two weeks for final settlement. Ask for at least three weeks to cover any delays. Check the clause for changes that the developer can make to the plans or size of the apartment. Most states allow either a plus or minus 5 per cent variation for changes.
4. Ask for more.
The developer is keen to get the pre-sales done as soon as possible so they can get the bank approval to start building. Some marketing agents offer incentives to finalise sales. Make sure you get the developer to pay for the depreciation schedule and blinds, and if it is an investment property, ask for a rental guarantee for at least 3 months. It is worth asking.
5. Deal with the right people
Make sure you deal with professional advisers who can negotiate with the developer, the agent, and the bank on your behalf. A well known property adviser has a database of clients to market to if the need arises and you cannot go through with the settlement.
Sydney conveyancer, Cindy Warbuton says one the biggest challenges facing some of her clients, other than changes in financial and personal circumstances, is separating the differences between the agent’s marketing spiel and the contract terms. Also anything important to purchasers such as amenities and views must be included in the contract.
‘‘It can be hard to visualise what you are purchasing even with plans and models. This can lead to disappointment in the final product as can waiting months after settlement to have minor defects fixed,’’ Warburton said.
‘‘Purchasers should be clear on the longest date possible for completion - the ‘sunset date’ - as delays in expected completions are common. Another important issue is to check to see if you are entitled to any interest earned on your initial 10 per cent deposit as this interest is sometimes shared between the buyer and seller.’’
Read more: http://www.theage.com.au/money/borrowing/developments-for-the-early-bird-20140814-10413b.html#ixzz3B58mUmHa
Posted by Emily Chantiri - The Age on 20th August, 2014 | Comments | Trackbacks | Permalink
How to bargain for a better mortgage
DEAL Or No Deal, Wheel of Fortune, The Price Is Right, and Sale Of The Century – Aussies have had a long love affair with TV game shows. It’s almost as long as our love affair with real estate.
Well, come on down, homebuyers and property investors! It’s time to play Wheel and Deal for the Price of the Century!
The price of your mortgage, that is.
While the Reserve Bank keeps the official interest rate low and steady, perhaps for many more months, lenders have been busy slashing fixed-rate mortgages and being more generous with variable rate loans than they have in years.
Surveys say three-year fixed-rate home loans have dropped by up to 0.8 of a percentage point in recent weeks and many now sit below 5 per cent.
If you don’t want to lock it in, there are also some great variable rate deals available. However, these you will have to ask for.
Variable rates haven’t officially moved for 12 months, but the discounts offered by lenders through package deals and other negotiations have jumped from 0.7 per cent a few years ago to around 1 per cent in many cases today.
If you haven’t reviewed your mortgage for a couple of years, you should be worried about missing out on savings, says Smartline Personal Mortgage Advisors executive director Joe Sirianni.
“The cost of funds has reduced significantly for the banks in recent times and they are enjoying healthy margins, which gives them room to move when it comes to the rates they offer,” he says.
“Competition is at an all-time high and most lenders are more than prepared to sharpen their pencil.”
Sharp pencils mean sharp deals for borrowers, but your bank is not going to willingly cut another 0.2 or 0.3 per cent off your mortgage rate just out of the goodness of its heart. Negotiating an extra 0.3 per cent discount will save you about $50 a month and cut a typical $300,000 mortgage’s overall interest cost by more than $15,000.
The keys to bargaining for a better mortgage rate are:
Know what other rates and offers are available and how your existing loan stacks up. There are plenty of comparison sites and mortgage brokers willing to help you with research.
If you can show your lender that you can get a cheaper rate elsewhere they are more likely to listen.
Be prepared to walk if they don’t come to the party, but have another lender lined up.
When it comes to getting the best price on your mortgage, don’t be the weakest link.
Posted by News Limited Network on 19th August, 2014 | Comments | Trackbacks | Permalink
Simple saving solutions
We’re well into a new financial year and having got your taxes out of the way it’s time to think about making your money work harder for you.
Saving sounds good in theory, but where do you start and how do you boost your cash? Here are some simple tips:
- Set a goal. Know what you want to do with your money, how much you’ll need and what you need to do to get there. Goals don’t only give you a target to aim for, they also produce a reward. It may be a holiday you’re saving for or a house deposit or the down-payment on a new car. Whatever your savings goal, name it and give it a monetary value.
- Reduce or eliminate your credit card and store card balances. These facilities charge as high as 20 per cent a year – much higher than you can earn for your savings. To have your cash working for you, direct your windfalls such as tax refunds and work bonuses to eliminating your credit card debt.
- Compare short and long term deposit rates to find the best rate for your savings. Also, make sure you compare savings account products with term deposits, and don’t forget to compare fees and charges.
- Use savings calculators to see how much more your savings can earn with slightly higher interest rates and/or bigger deposits. Have a look at a calculator like the one on Canstar.com.au: it allows you to calculate different scenarios for reaching your goals, by changing the interest rate and the term deposit or savings account.
- Look further afield than your transaction bank. Many Australians save in an account at their current bank, but the higher yields are often at second-tier banks and other institutions.
- Negotiate directly with institutions and find the highest interest rates for your money, not just the advertised rates. Decide what rate you should be earning and ask for it.
- Identify alternatives to savings accounts and term deposits: alternatives that offer higher yields but with similar risk profiles. For instance, managed funds, cash management accounts, and ‘active’ cash accounts can give you as much as 1 per cent a year interest more than the online savings accounts.
- Establish a set-and-forget approach to meeting your goals. You should look at an automated direct debit to create forced savings, and think about strategies such as diverting the extra income you get from a pay rise into savings. Have a predetermined plan to put windfalls into savings.
- Talk to a professional. If you’re confused about interest rates, terms or strategy, seek advice from a professional, such as a financial planner or accountant.
There are so many resources that allow you to be fully informed and reach your goals, but you have to use them and you have to be prepared to act. Saving is always a good discipline – no one ever regretted having a nest egg. So do your homework, set your goals and get your money working as hard as you do!
Read more: http://www.theage.com.au/money/saving/simple-saving-solutions-20140814-103vie.html#ixzz3Ak76ElWx
Posted by Mark Bouris - The Age on 17th August, 2014 | Comments | Trackbacks | Permalink
Loan the best way to lend offspring a hand
The constant news of how unaffordable the Australian housing market has become is a major cause of concern for first home buyers and parents.
There are a number of ways that parents can help their children buy their first home. However, if the wrong method is used capital gains tax can be payable or the financial help can be wasted.
One resource that in most cases cannot be used is superannuation. This is because super must be used to provide retirement benefits and cannot be accessed unless a condition of release has been met, such as reaching 65 or retiring from full-time employment. Also a super fund cannot lend money to, or purchase a house for, members or their children. Parents wanting to help children buy their first home, but who want to retain control, can buy a property in their name or that of a trust. The problem is at some point the property must be transferred into the son or daughter’s name. In this situation the child lives in the home and either becomes the owner upon the death of the parents or when title of the property is transferred to them.
Using this method can protect the parent’s investment in the event of a divorce, but when the house is transferred capital gains can be payable. Once ownership of a property transfers, either upon death or transfer, a capital gains tax event occurs. This results in the parents or their estate paying tax on the increase in its value.
Another method of providing financial assistance is for the parents to give money to assist with the purchase of the home. This could be an amount for the deposit, or it could be enough to fund the full purchase price of the property.
Using a gift can result in a transfer of wealth out of the family in the event of divorce. When parents make gifts to children the resulting asset, whether it is cash or property, becomes an asset counted by the Family Court in the event of a relationship breakdown. Parents can then see more than 50 per cent of the gift ending up in someone else’s hands.
The best way for most parents to help children, and not face the risk of their financial assistance going to their son or daughter’s ex-partner, is to treat the amount provided as a loan. For this to be effective it is vitally important that the loan be properly drawn up.
Neil Collins, a family law specialist with Westminster Lawyers, said, ‘‘Preferably the loan would be in writing with the document signed by all parties and setting out the terms of the loan, such as the interest payable and the mode of repayment. The loan may be repayable in full or in part on demand. Binding Financial Agreements, drawn pursuant to the Family Law Act, are also an excellent way to remove doubt as to the existence of the advance and how it is to be treated in the event of a separation’’.
As a part of drawing up a loan agreement the parent should also consider having some form of charge over the property. This could be done as a mortgage, if it will not affect the chances of getting a loan, or as a caveat.
No matter what choice of financial assistance will be used it is vitally important for parents to get professional advice before the funds are advanced.
Posted by Max Newnham - Money Manager (Fairfax Digital) on 14th August, 2014 | Comments | Trackbacks | Permalink
When to set up an SMSF
A self-managed superannuation fund (SMSF) offers control and flexibility not found in any other type of super arrangement. But how do you know when you are ready for an SMSF?
A key deciding factor will be how interested you are in super and investing. Savers who want to focus on building retirement wealth and take control of their super also need to accept the additional responsibility this brings. Taking control of your super can sound like a great idea and many SMSF trustees/members revel in it, but it can also be an administrative burden and introduce risks. There are two broad types of SMSFs: those where the trustees make all the investment decisions and manage the fund’s investment portfolio and those where a financial adviser is engaged to provide investment advice and manage the fund’s portfolio.
The advantage of the trustees making all the investment decisions is that they have full control over the portfolio. But with this comes considerable responsibility and the risk of poor investments being selected.
The advantage of using a financial adviser is that the investment portfolio is professionally managed, making it less likely that rash decisions will be made when markets fall. An adviser can also provide strategic advice on related aspects such as contributions planning and pension payments.
Regardless of whether you manage your own money or have an adviser help you, all SMSFs need annual accounts prepared and an annual audit completed.
The size of your super balance also needs to be taken into account. The amount in super required to justify establishing an SMSF depends on the anticipated cost of running the fund.
As a guide, we believe about $200,000 is required to set up an SMSF for which the trustees make all the investment decisions. This is based on an estimated minimum annual accounts/ audit cost of $2200, which represents 1.1 per cent of the fund value. A balance of about $400,000 is required where a financial adviser is managing the investment portfolio. The financial adviser’s fee is likely to be about 1 per cent p.a., giving a combined compliance/advice fee of about 1.55 per cent p.a.
There are also special circumstances that necessitate a fund member needing the flexibility of an SMSF, such as the purchase of office premises to rent to a related business. No other super fund type can accommodate this.
It’s also worth noting that insurance options are more flexible and can be more cost effective for an SMSF than those available through other super arrangements.
Age is not a major factor in the decision process. Commencing an SMSF may be equally appropriate for a 25-year-old executive as a 65-year-old retiree.
Posted by Michael Hutton - Money Manager (Fairfax) on 12th August, 2014 | Comments | Trackbacks | Permalink
The big banks in a mortgage war — should you fix your loan?
IT’S the one question I get asked more than any other as an economics commentator: should I fix my mortgage?
The question has become more pressing thanks to the eruption of a mortgage war between the big banks on their fixed-rate loans. Commonwealth Bank fired the first salvo last week, slashing its five year fixed rate to 4.99 per cent. Westpac and NAB quickly followed suit.
Make no mistake, that’s cheap. Variable mortgage rates have averaged around 7.5 per cent over the last two decades, so anything with a “4” in front is good news for borrowers.
It’s unusual, too, because usually borrowers pay a premium for being fixed — you pay a higher interest rate for the certainty of knowing what your repayments will be. But today, the fixed rates on offer are substantially below the bank’s advertised standard variable rates of around 5.9 per cent (of course, most borrowers can negotiate a discount to that headline rate).
On the face of it, banks are essentially taking a punt that interest rates won’t rise from their current record lows for half a decade. That would be unprecedented. More likely, rates will rise during that time.
So just what are those banks up to?
First, banks can afford to discount rates because their funding costs have fallen dramatically recently as international investors have begun betting on lower interest rates for longer (unlike during the GFC when borrowing rates shot sky high because of fears about the stability of the entire financial system).
And let’s not forget those multi-billion dollar profits our banks have been reaping in. Even if the banks end up wearing some losses on these fixed loans, they may deem it worth it to dip into some of those fat profits to steal new customers.
And finally, with the federal government considering the recommendations of the David Murray financial system inquiry, now seems like a strategically wise time for a sudden display of conspicuous competition.
So, should you get involved in their war by switching to one of these cheap fixed rate loans?
The first thing to consider is what fees and strings are attached to what you can do with your money.
Fixed rate loans usually include break costs if you want to exit the mortgage before the end of the fixed term period.
And there are often restrictions on making additional repayments, should you come into some money unexpectedly. Overtime, the ability to pay off your loan faster may mean lower interest costs than the cheaper fixed rate.
As a nation, less than one in five Aussies usually opt to fix their mortgage.
This is in stark contrast to many other countries, where long term fixed rate loans are the norm. Traditionally Aussie borrowers have valued the ability to pay off their loans faster. Indeed, one of the biggest economic trends since the GFC has been the rise in borrowers getting ahead on their repayments.
Our historic preference for variable rate loans has served us well, even if it does make us a bit obsessed about interest rate moments. More people on variable rate loans means the Reserve Bank has a tighter grip on the economic reins, being able to influence household budgets more directly.
And before you jump in bed with the big banks, there are alternatives to consider.
Many smaller lenders are currently offering variable rate mortgages below 5 per cent. Before you opt to fix, why not try haggling on a variable rate loan? Many borrowers will be able to get as much as 1 or 1.5 percentage points off the headline standard variable rate just by ringing up the bank and asking — or, more importantly, threatening to leave.
At the end of the day, the decision to go fixed or variable is a gamble on where you think interest rate are heading.
Fixing in will protect you against interest rate rises, but it could also deny you the benefit of any interest rate cuts.
So, to my second most commonly asked (but related) question: where are interest rates heading?
In reality, it’s not possible to know for sure.
Inflation figures released last week showed inflation is at the top of the Reserve Bank’s comfort band at 3 per cent. Markets, which had been toying with the idea of further interest rate cuts, now view the prospect of further interest rate cuts as unlikely. The next move will likely be up, rather than down.
Cue speculation of imminent interest rate hikes!
But there’s another, more likely, possibility: that interest rates are simply set to remain at their current lows for a long period of time.
These are, after all, unusual times we live in. The United States is still printing money to pump its economy and many central banks have their interest rates at near zero per cent.
When it comes to global interest rates “lower for longer” is the new mantra.
So either way you punt, fixed or variable, debt is cheap and likely to remain that way for some time.
Posted by Jessica Irvine - News Limited Network on 28th July, 2014 | Comments | Trackbacks | Permalink
Mix of fixed and variable rates the wisest course
The banks might look like they’re going soft by cutting the five-year fixed home rate below 5 per cent, but there’s more where that came from.
Even so, they'll do just about anything to avoid making an across-the-board cut in the variable rate that most borrowers pay.
Sure, they’ll discount it for new borrowers or existing ones who kick up a big enough fuss, but a far more expensive cut for everybody is something else again.
Mind you, the CBA’s 4.99 per cent isn’t quite what it seems. It comes with a $395 annual fee, but even so.
Frankly, if you’re paying more than 5 per cent, whether fixed or variable, then you’re being ripped off.
And there’s no mistaking the trend in interest rates that, as I’ve been saying for a while, has been down despite the exhortations of the banks’ own economists. Clearly the banks aren’t listening to them and neither is the market.
Come to that the Reserve Bank has little say either. The world is awash with cheap cash and there’s nothing it can do – were it inclined to which it isn’t – about the banks soaking it up.
Just the other day Westpac raised money offshore for less than it had to pay before the GFC.
The days the banks can complain about their funding costs are over, even if this is a bleak turn of events for savers. Watch term deposit rates as the banks quietly drop them further.
If you want to know where interest rates are going you have to follow the smart money that shows its hand in, of all places, government bonds.
That’s probably because there are fewer moving parts to get wrong – the interest rate and maturities are fixed and there’s no credit risk.
But they trade just like shares and the smart money has been ploughing in so the yield has dropped as their prices have soared – just as paying more for a share reduces the return from the dividend even though the amount is fixed.
Without fuss or fanfare there has been a rally in bonds for months.
It’s mostly foreigners buying, including smarties who can borrow at less than 1 per cent and invest it in Australia at over 3 per cent. But so what?
Money talks and I’d be wanting my super fund to moving cash out of the bank and into bonds which pay more, plus come with the juicy prospect of a capital gain.
So should you fix for five years?
Well don’t let me stop you but bear in mind the end game is to pay off the mortgage as fast as you can. Some fixed rate loans let you make additional payments and even have full offset accounts, but they aren’t offered by the banks. And they’re more expensive.
No, it’s safer to mix and fix. Leave some of your loan variable, especially when the rate happens to be lower to begin with and isn’t going anywhere in a hurry, while fixing the rest.
Posted by David Potts Sydney Morning Herald on 27th July, 2014 | Comments | Trackbacks | Permalink
Fixed interest rates too good to pass up, say experts
Home loan customers should take advantage of low fixed interest rates and lock in now, experts say.
The Commonwealth Bank, National Australia Bank and Westpac on Wednesday cut their longer-term interest rates to below 5 per cent.
CBA was the first to lower its five-year fixed mortgage rate to 4.99 per cent. NAB and Westpac followed suit.
“Competition in this market has finally bred benefits for consumers; 4.99 per cent on a five-year home loan is very sharp. It is an excellent deal,” said Alex Parsons, chief executive of interest rate research company RateCity.
“Will rates keep coming down? No. Non-banks have had below 5 per cent for a while. Now banks have joined in.”
Interest rate advisers all agree conditions are ideal for a switch to fixed rates.
“Our monthly Reserve Bank surveys say the interest rate is due to rise in the next year. It is likely that the interest rate will drop before rising again to normal levels, but at the moment this is a good rate,” Finder.com.au spokeswoman Michelle Hutchison said.
“Historically, cash rates have been around 5 per cent and interest rates another 2 per cent higher. So we are now near the bottom of the cycle.”
Rates may drop before they rise, but borrowers are better off locking in the rate now rather than speculating.
“Even with a possible rate reduction you still get comfort from hedging your bets against the possibility of rates eventually going up,” 1300 Home Loan managing director John Kolenda said.
AMP Capital’s chief economist Shane Oliver, agreed, saying economic indicators showed borrowers needed to take advantage of the low rates.
“Fixed rates are normally higher. Average inflation tells me the RBA will not stay at the current rate,” he said. Rate rise likely in nine months
Dr Oliver predicted a rate rise was likely to be about nine months away, around the June quarter next year.
“The banks are offering this deal because they can. Costs of borrowing have dropped and are consistent with Australian bond yields falling.”
A combination of economic factors including improvements in the global capital market with lower spreads have resulted in the cheaper cost of money.
“Last year some mortgage providers were already doing 5 per cent. So to avoid losing market share, the big banks have joined in,” Dr Oliver said.
He cautioned the low rate deals may not last because banks would have only a limited amount of money at low rates.
But Mr Kolenda said borrowers must be sure they are switching for the right reasons, such as certainty of repayment and peace of mind rather than as a speculative play on where rates are going to move.
“Many committed to fixed rates just before the global financial crisis and watched the rate drop to a low of 3 per cent,” he said.
Fixed rates are also not ideal for people on high salaries.
“If you lock it in now, and want to repay chunks of the loan, you may have break costs. Also, are you upgrading your loans, or having another child?” Canstar research manager Mitchell Watson said. He recommended splitting loans between variable and fixed rates to “get best of both worlds”.
Interest rate adviser Mozo is more conservative, saying consumers must watch the rates for the next few weeks.
“We may not be at the bottom yet,” director Kirsty Lamont said. “This is the start of what will be more pressure on fixed rates. Other lenders will match if not undercut the rates.”
Posted by Su-Lin Tan - Sydney Morning Herald on 25th July, 2014 | Comments | Trackbacks | Permalink
Australians would rather float than fix on mortgages, despite low rates
The country's biggest banks may have slashed their fixed mortgage rates, but historically home buyers prefer to try their luck when it comes to borrowing costs.
Unlike most other countries, we are a nation of risk takers who opt far more for the flexibility of floating loans rather than the certainty of a set interest rate.
The Commonwealth Bank, NAB and Westpac are engaged in a fixed mortgage war, yet on average only about 12 per cent of home loans have been fixed during the past 22 years.
While this new chance to lock in record low interest rates at less than 5 per cent may whet the appetite for fixed home loans, they have never dominated the Australian market in the same way as in the US and Europe.
The proportion of fixed rate mortgages reached its peak at 25.5 per cent during the global financial crisis, according to Australian Bureau of Statistics data, as home buyers feared rates would keep rising and squeeze household budgets. It stood at 14.9 per cent of home loans in May, having stayed close to that level for the previous four months.
Australians' preference for variable rate mortgages proved helpful during the GFC, as it gave the Reserve Bank of Australia a direct way of stimulating the economy when needed.
Variable loans fluctuate with the cash rate, which has been set at an unprecedented low of 2.5 per cent for almost a year. Fixed loans reflect the outlook for the cash rate and bet on it being increased.
Mortgage and Finance Association of Australia chief executive Phil Naylor said there is "something in the Australian psyche" that leans towards being carried by the market rather than fixing against it.
The possibility of making a saving if interest rates drop and of being able to pay the loan out early entices home buyers to variable rates, he said. Until recently, it was also variable rate loans that were flogged to homebuyers rather than fixed.
"It's always been the case. It's just been traditional in Australia that Australians have opted for variable rates. They prefer that flexibility rather than being caught in a fixed rate mortgage when rates go down," Mr Naylor said.
Another reason home buyers might prefer variable rates is because mortgage rates are mostly only fixed for up to five years in Australia, HSBC Australia and New Zealand chief economist Paul Bloxham said.
The longer term rates, of 10 to 15 years, tend to be higher and this makes it more attractive for home owners to stick to variable or only short fixed rate mortgages, he said. Unlike in Australia, in the US fixed rates have little or no break fees making them more flexible for consumers and increasing competition between lenders.
"In Australia you mostly have fixed mortgages of one, three or five years available. If you compare it to the US, for example, the bulk of mortgages that households there have are 30 years. The Australian market doesn't have that sort of product on offer," Mr Bloxham said.
But the latest move by the big banks, combined with the possibility of a interest rate rise in the future, could encourage more punters to place their chips on a fixed loan.
Michelle Hutchison, from online loan comparison service Finder, said she would not be surprised if home buyers started to pay fixed rates more attention.
"Borrowers know that an interest rate rise is on the horizon and fixed rates are still dropping and becoming competitive with variable rates," Ms Hutchison said.
"It could also be possible that these fixed rates may not last long, in a weeks time they might be up again. Fixed rates do move more than variable."
Rate City chief executive Alex Parsons said the move by the big banks to drop their fixed loans made it a "super exciting" time for Australians home buyers. "This change is significant and it spells out a new round of competition. It spells out that banks are prepared to fight for consumers and that's great," he said.
Posted by Melanie Kembrey - Sydney Morning Herald on 24th July, 2014 | Comments | Trackbacks | Permalink
Offset accounts can save you thousands
For those who have worked and scraped to save a mortgage deposit, there is a strong instinct to find the best value loan, and repay it in the most efficient way possible. If this is you, I suggest you take a look at a product called the offset account loan. When they’re used properly they can save you thousands of dollars and accelerate the paying-down of the mortgage.
An offset account is a transaction account directly linked to your mortgage account. The balance of funds held in the offset account serves to reduce the balance of your loan account for the purposes of calculating interest. These calculations are carried out on a daily basis, so each day you have a credit balance in your offset account, it is saving you interest. Here is an example. If your mortgage balance was $300,000, and you put a $5000 tax refund into the offset account, interest would only be charged on $295,000 for the period the offset account is maintained at a $5000 balance.
The longer you can keep the balance high in your offset account, the lower you keep the interest bill and, therefore, more of your money is paying-down principal rather than interest. This is how you speed up the repayment of the loan.
It can work this way: all income goes into the offset account and fixed costs (mortgage, power, phone, internet, gas, car finance) are direct-debited from the offset account automatically. For those without spending discipline, weekly spending money (including grocery budget) can be deposited into separate bank accounts, and an allocated amount goes into debt reduction or investments, including super. The trick is to never have an ATM or credit card attached to the offset account, especially if you are likely to take yourself on a spending spree. Have one for your weekly spending account, but not the offset.
An offset account is a do-it-yourself tool because you can set it up yourself, fine-tune it as you go and use it as both a budgeting and wealth-building system. It’s worth noting that loans with an offset account are often marginally more expensive than your typical basic loan. However, by adopting strategies for aggressively paying down home loan debt, you can potentially be better off in the long term.
If you have the discipline and the focus to make this work – and many Australians do – you’ll find you can better control your money and you can make your income work harder for you. You’re also potentially ahead tax-wise because the money you save on paying less interest is tax-free, whereas if you put the $5000 tax refund in a savings account you would potentially have to pay tax on the earnings.
Offset account mortgages are not a magic bullet and they don’t suit everyone. But for focused, disciplined people who want to be smart about their mortgage and finances, this is something worth investigating.
Posted by Mark Bouris - Sydney Morning Hearld on 24th July, 2014 | Comments | Trackbacks | Permalink
Turning a home into an investment
As life inevitably changes, a property may need to fulfil a variety of purposes. Evolving circumstances, like a new relationship, a baby or a job transfer can cause buyers to re-evaluate a purchase.
Therefore it may be ideal to buy a primary residence that can be rented out and converted into an investment.
An investment property that has a strong rental yield is always underpinned by the qualities that made it a desirable owner-occupied home in the first place, according to agents.
Agent and auctioneer Greg Hocking said renters wanted the same characteristic in a property that was sought by an owner-occupier.
"People buy a house for a personal reason, so is it suitable [as a rental] is the question," Mr Hocking said.
"Location is first and foremost, then, will it require significant ongoing maintenance? And generally speaking, the closer it is to the inner-city rim, the better capital growth."
Swimming pools and verdant gardens, as well as decorative exterior finishes, can marginally boost the rental value, but at the same time add enormously to the cost of upkeep, he said.
The combination of capital growth and solid rental return is the Holy Grail of acquiring a home that will later be a rental investment
Agents say a position near schools, shops, doctor surgeries and public transport, as well as a property that is easy to maintain, is a recipe for a good rental return.
But perhaps the most important factor - and the least known - is that two bedrooms, no more, no less, will attract the right sort of renter. It's the real estate baby bear equivalent in the Goldilocks story - two bedrooms are just right.
Kay & Burton senior executive portfolio manager Mikhala McCann said two bedrooms was the magic number that translated to keen interest from an ideal demographic.
Three bedrooms often attracted groups of young singles and one bedroom was limiting in its appeal, Ms McCann said.
However, two bedrooms will attract young professionals and couples who require room for a study or are planning to have a baby, and therefore tend to be long-term renters who look after the property.
Ms McCann said a neutral colour scheme would also be in demand with tenants who, unable to make alterations, were often unwilling to put up with flamboyantly toned feature walls or other flourishes that reflected an owner's personal taste.
"When you are a tenant, the legislation says you cannot change anything, so those little things that as an owner wouldn't worry you because you can eventually change, will impact tenants," she said. "They want something neutral that they can bring their own style to.
"If you do have a garden or a pool, the cost of upkeep should be built into the rent so it is protected and maintained."
Rae Tolley, manager of the property management department at Beller Real Estate, said owners should ideally refresh an investment house between tenants.
She said older properties were competing against the glut of glossy new apartments on the market.
"The average tenant stays for two years-plus, so things do wear out over that time," Ms Tolley said.
"There is an abundance of new properties, so you have to keep refreshing your property and adding to it, and you should have an improvement plan.
"Going back to that oversupply, properties that don't have a freshen up at the change of tenant are often vacant for longer, and a good property manager will come up with a plan of things that need to be done with the change of tenant so the owner can draw up a financial plan."
An easy-to-care-for property will tick the boxes of tenant appeal and ensure a hard-earned investment does not deteriorate.
"It is very hard for tenants to maintain it in the way you would because there is an element of disconnect, that aspect of separation," Ms Tolley said.
Bayside Frankston, at the gateway to the Mornington Peninsula, and inner-city Footscray and Seddon have been nominated by agents as smart-buy suburbs for residences-cum-investment properties.
Coburg and East and West Brunswick, as well as working-class Glenroy, also offer strong rental returns. Those suburbs have older, larger blocks - tenants love space - and don't experience long periods of vacancy.
Jesse Linardi, design director of dKO Architecture, said renters were chasing a lifestyle as much as buyers.
Mr Linardi designed and built a two-bedroom townhouse on South Street, Preston with the intention to live in it and then use it to kick off an investment portfolio.
He lived in the urban-style townhouse for about three years, and then moved on to his next residential project.
Mr Linardi, who rents a home in North Melbourne, has welcomed two sets of tenants in Preston over the past four years.
He said the contemporary features he valued as an owner and occupier, including open fireplaces, courtyards off the bedrooms and an abundance of natural light, have been as much in demand with his tenants.
"I always wanted to build my own house and I wanted to keep whatever I built for the future, so I always knew it would be rented out," he said. "I got to the point where financially I knew that if I moved out and rented it out it would be self-sufficient.
"In the area where the house is in Preston, there is not a lot offering that is architecturally designed. They want to enjoy the space, whereas a lot of older properties on the market don't offer those natural things like light and sun.
"Whether a home costs $300,000 or $3 million, people fundamentally want the same things."
Mr Lindardi is building a five-storey townhouse for himself in Collingwood, with the aim to rent it out and continue to grow his property portfolio.
* A top-notch investment property needs to have mod-cons, a good floor plan, generous living space, fresh paint and carpets and be easy to clean, said Rae Tolley. "It is important to have a dishwasher and air conditioner - a lot of properties that don't have features like split system air conditioning are lagging behind in the market," she said.
* Scarcity factor is key, according to Greg Hocking. Dime-a-dozen off-the-plan apartments are a danger zone. Mr Hocking said buyers could lose 10 to 15 per cent of their purchase price when the property was completed, but a period cottage or an art deco apartment would have the greatest capital appreciation.
* A garage or storage cage will add to the attraction, as transient renters need somewhere to stash their stuff, said Mikhala McCann.
Posted by Emily power- Domain (The Age) on 20th July, 2014 | Comments | Trackbacks | Permalink
Family ties a plus with property
For some people the rivalry never ceases, but a growing number of home hunters are now turning to their siblings to make the biggest purchase of their life.
With first home buyers having to save harder and longer than before, joining forces with a brother or sister is the only way to get a foothold on the property ladder. The median house price jumped 10 per cent to $600,000 over the year to May, while the median unit price rose 6 per cent to $422,000, Domain Group data shows.
Sisters Helen, 20, and Anna Shaw, 23, started funnelling their savings into property when they were teenagers.
But it certainly wasn’t easy. They started working in part-time jobs when they were in high school and continued throughout their law degrees at university.
The sisters built up a deposit together - with some help from their family - and bought a solid brick two-bedroom Victorian house in Cremorne.
“At about 15, we had an informal discussion and agreed that it was a waste of money to rent,” said Anna, who shares the house with a flatmate while her sister lives at home.
“We worked out that if we borrowed an amount of money between the two of us – if we just paid a little bit more than what people our age were paying for rent – that we could make the repayments at a rate that was enough to make it worthwhile.”
There could be challenges if personal circumstances changed, she admitted, but they wrote a contract that “covered every possible scenario”.
“If one of us wants to sell, the other one would have to buy them out. We couldn’t sell to a third party,” she said.
And just like these sisters, a growing number of first home buyers are looking at this option. A survey by Mortgage Choice in 2013 shows 3.8 per cent of first time buyers bought with a sibling, compared with 1.8 per cent five years ago.
The senior economist from Domain Group, Andrew Wilson, said there had also been a shift, over a long period, from one wage being able to support a mortgage to two significant full-time wages.
“There’s nothing that will stop the underlying demand and aspiration for home ownership, but it will require a longer wait in the queue or other means of saving faster to be able to get into the queue or to be able to borrow more to get the loan,” he added.
Rob He, 26, a sales agent at LJ Hooker Hampton Park, said he bought an off-the-plan two-bedroom apartment in Abbotsford as an investment with his sister Michelle, 24, because shouldering monthly mortgage repayments by himself would challenging.
“With the one income, it is a big commitment. Now I’ve got my sister in the picture, the risks and also the pressure is shared among the two of us,” he said. “What better person to enter into [the market] with than your own sister?”
Kelly McBean, 22, and her brother Mark, 20, share the same thoughts.
They recently paid the deposit for a 375-square-metre block of land just five minutes’ drive from their family house in Berwick, and plan to build a three-bedroom house when it settles next month.
“We decided to purchase together because neither of us would be able to do it ourselves,” she said.
“We both want to move out but neither of us want to rent, so this is a long-term investment and we can move out at the same time.”
Posted by Christina Zhou - Domain (The Age) on 11th July, 2014 | Comments | Trackbacks | Permalink
No need to be negative - it's high time to fix
Economists have changed their tune about interest rates and you won’t like it if you’re trying to save.
But here goes anyway. Having cried wolf all year about a rate rise being just around the corner, despite the Reserve Bank (in whose hands the decision rests) saying it wasn’t planning on doing anything, they’ve finally accepted it’s being fair dinkum. Or rather that it doesn’t know so neither do they.
Goodness knows which bit about “a period of stability” in rates meant an imminent rise but there you are. Those who’d been predicting a rate rise as early as this very quarter are now eyeing-off Christmas.
But most tip next year and some toward the end of it according to a survey by finder.com.au of economists including, tellingly, those at the big four banks.
Take it from me that if the Reserve Bank were to do anything before the year is out, it would be to cut rates and frankly that’s only a bit more plausible than a rise.
After all it’s not going to do anything that might push up the dollar, which a rate rise would do by attracting more of the hot money the world’s central banks are so helpfully printing, while commodity prices are on the skids.
Meanwhile, much to everybody’s surprise, government bond yields are falling, apparently due to buying by China’s central bank which would also explain the stronger dollar, so it’s even possible the banks might trim their fixed rate offerings.
Hmm, perhaps not. Don’t want to draw attention to the fact that their economists are predicting a rise in rates which in the real world are falling, do we?
Either way you don’t want to wait until rising rates seem a dead cert before you fix because by then all you’ll be doing is locking them in early. The banks will have already built the rise into their fixed rates making the whole exercise self-defeating. You don’t want the bank to have the last laugh, do you?
Speaking of which, think twice about fixing the whole mortgage. You want to retain some flexibility and, besides, I could be wrong.
But it’s savers I feel sorry for.
Falling yields on bonds, which are the risk-free benchmark for all other deposit and lending rates, not to mention the cheaper money the banks can get offshore, are squeezing whatever juice is left out of term deposits.
After tax and inflation a term deposit leaves you with three-fifths of five-eighths of nothing.
Unless businesses and first home buyers go on a borrowing binge, some way off judging by the lack of investment intentions and unaffordable home prices, the banks just don’t need to be nice to savers anymore.
That’s why term deposit rates have been edging down even though the Reserve Bank hasn’t been doing anything.
More to the point, there’s no reason to expect this to change anytime soon. My guess is that a 12 month if not longer maturity would be better than parking your money in an online account while waiting for term deposits to offer a decent rate. You’ll eventually get a higher rate if you sit there long enough but think how much it will have cost you in the meantime.
The only thing that would prod the Reserve into lifting rates would be inflation picking up.
Nobody expects that, but then as all those bogus rate predictions showed that doesn’t mean much.
Even then, inflation-indexed Commonwealth-guaranteed bonds, which conveniently trade on the ASX, would be arguably better than term deposits.
Unfortunately the interest rate is nothing to write home about but it increases over time with inflation. Even better, the face value of the bond is indexed as well.
Posted by David Potts - Money Manager (Fairfax Digital) on 2nd July, 2014 | Comments | Trackbacks | Permalink
Help with the nightmare of buying
Are lost weekends the worst part of house-hunting? Suffering endless open for inspections, an over-loaded in-box of listings and sales-driven real estate agents?
For some buyers, the experience is clouded with fears: of missing out for a lousy $1000; of paying more than it's worth or more than the vendor’s bottom price; of buying a property that might prove to be unsuitable and paying for the mistake forever.
For a novice, bidding at auction against tactical adversaries and aggressive auctioneers is a nightmare, as is dealing with the rules of submitting offers for private sales and expressions of interest.
It surprises many that buyers' agents (or buyers’ advocates) don't have a bigger presence in Australian real estate, handling all of the above and more to varying degrees, depending on the client’s brief, and being able to source properties off-market, often from selling agents whose vendors want privacy or a quick sale.
And it surprises buyers’ agents that people who wouldn’t consider cutting their own hair or laying their own carpet hand over the biggest sum of money of their lives, with no expertise and sometimes with the selling agent as their only advisor.
“Not only should a seller have good representation in the transaction, but also buyers,” said Janet Spencer, vice-chair of the buyers’ agents chapter of the Real Estate Institute of Victoria, and a founding member of the Real Estate Buyers’ Agents of Australia (REBAA).
Janet, who was a selling agent before becoming a buyers’ agent in 1995, said statistics were lacking and buyers’ agent sales were not specified in transactions, but it was an important growth industry, especially in a high-priced and rising market.
The fee, however, can be an obstacle. Adding between one and 2.5 per cent of the purchase price — that’s $25,000 on a million-dollar property — on top of stamp duty, legal fees and bank costs is a big consideration.
“People can be quite sceptical about it,” Janet said. “But mistakes are costly in real estate. There’s a 13 per cent transaction cost in buying a mistake, then selling it and rebuying, plus the stress and the time factors.
“I frequently see people emotionally engaged at auctions, caught in the competition, and bidding beyond their limit. That’s what an auction thrives on, people competing for the property.
“When I started, a two-bedroom flat was $35,000, now it’s around $500,000. If you’re borrowing 80 per cent of that you want to be buying well. That’s what [is] driving consumer interest to get a professional.”
The fees, negotiable by law in Victoria, are paid after purchase – a buyer’s advocate cannot deduct commission on the transaction. An upfront retainer can also be added.
Michael Ramsay, REBAA inaugural president and a buyers’ agent since 1998, said it created “an equal playing field”.
“The main thing is that we’re in their corner,” he said.
Michael has acted twice for Linda Cantan – a decade ago for a Richmond investment property, and last April for a house in Malvern. Both were bought before auction.
“I would look at places and they would go for way more than what was quoted initially,” said Linda, who works in project finance. “I started to question, am I looking at the right properties?
“Michael has a good relationship with the estate agents and gets provided with information I had no access to. He got the Malvern house $100,000 to $150,000 cheaper than what it would have sold for. People can debate about fees but I’ve made that back and more.”
Michael said securing the right property and assessing future prospects was as important as getting a price below the buyer’s expectations. He speaks to neighbours about extension plans, seeks out structural problems and analyses renovation potential as required.
“Buyers can be highly educated people and very savvy and have a high net worth but be very lost in the property market,” he said.
James Buyer Advocates principal agent Kristen Hatt said it was a growing industry, and especially strong in Boroondara and Stonnington.
“The art of buying and selling has changed significantly since pre-internet days,” Kristen said.
“Agents keep track of what you’ve looked at, your price points, what you might bid at, and in an auction they might pass it in rather than put it on the market when they know your budget. They are storing and accessing so much more information.”
There is no typical client, but they include time-poor professionals, often with a young family; investors and developers; high-profile clients; and people moving to Melbourne from interstate or overseas.
Janet Spencer said each job had to be tailored to meet a buyer’s needs, which could be constrained by time, budget or specific needs.
Levels of engagement varied from a full property search, negotiation and purchase, to a simple auction-bidding service.
She recommended engaging agents who were licensed estate agents or agent’s representatives, members of the REIV (which ensures they have at least $2 million professional indemnity insurance and on-going professional development) and members of the REBAA, which sets guidelines for professional conduct and has a minimum standard for accreditation.
“You’d be wise to do due diligence; don’t assume anything,” Janet said. “If someone is offering the service for free they’re not working for the buyer, they’re working for and being paid by the seller.”
Case Study: A family crisis
Margaret Steel had engaged a buyers’ advocate countless times over many years for her property-development company and for corporate investment, but a family crisis showed her the full benefit.
Her elderly mother was in temporary respite care as the family prepared to downsize her out of the big family home. “She hated it and we were desperate to get her out but we had very specific requirements because she was in a wheelchair,” Margaret said.
The four siblings charged Janet Spencer’s Buyer Solutions with finding a suitable unit with disabled-conversion possibilities, in a pocket from Balwyn to Templestowe.
“Mum put pressure on us and we put pressure on Janet,” Margaret said. “She found the place and signed up within 10 days of the brief. We managed to get it off-market, and it worked out cheaper making a quick decision, as it didn’t go to auction or a heavily contested private sale.
“It saved us at least three times her fee, getting in ahead of other prospective buyers, and I don’t think we would have even found this,“ she said.
Posted by Jacqui Hammerton - Domain (The Age) on 2nd July, 2014 | Comments | Trackbacks | Permalink
Categories: Auctions, Purchasing Property, Buyers Advocate