Puzzle Finance Blog

Why stamp duty is good for us

OK, everyone, rotten tomatoes at the ready. I'm about to commit "Barbecue stopper" heresy, and I fully expect to be set up in the stocks in the town square. 

You see, stamp duty isn't the evil tax that many – but particularly politicians, real estate agents and home builders – think it is.

A cook's tour

There was a time, before focus groups and 24-hour news cycles, when income tax wasn't even a twinkle in a Treasurer's eye. Back then – as early as the mid-late 1600s – governments raised revenue by charging a combination of property taxes, import duties and "stamp duties" on financial transactions. Before such a transaction could be valid, it needed to be literally stamped by a government body, which cost money.

Fast forward about 350 years, and most stamp duties have been abolished. Certainly, income taxes and consumption taxes (such as GST) have taken over as primary revenue raisers for governments to finance their spending.

But notably, stamp duty remains on most property sales, levied by state governments. It's a significantly large amount, but particularly so during a good old-fashioned property boom! So state Treasurers are particularly fond of this version of revenue raising.

The tax to remove all taxes

It seems a long time ago, but it was only in 2000 that the then-Howard government introduced GST. The new tax was designed to give state governments a steadily increasing flow of revenue (the federal government promised that all of the revenue raised would be shared among the states) and allow the states to remove stamp duty as well as other so-called inefficient taxes, levies and duties.

These "inefficient" taxes, it was also claimed, were "frictional" in nature – they influenced the free flow of economic activity.

That was the plan, but you probably won't be surprised to know that the state governments didn't exactly deliver on their promises, and stamp duty remains, in various forms, across the country.

Now, I could spend another column (or two, or three or four…) talking about government promise-keeping and breaking, but the states' recalcitrance might have worked in favour of home owners.

Careful what we wish for

To see why, let's look at the US precursor to the Global Financial Crisis. Until 2008, Americans were enthralled by their ability to borrow money at low rates, buy a heap of houses, wait for prices to skyrocket, then sell for a tidy profit. Rinse and repeat.

Books, courses – even television programs – were devoted to this "can't-lose" strategy called flipping. Americans bought, waited for prices to rise, then sold. It was like taking candy from a baby.

Now there are significant differences between the US and Australia. But one important element is those so-called "frictional" costs. In the US, they don't exist – at least not in any material way. There was no reason not to roll the dice. In Australia, those costs make buying and selling a little harder.

If you're going to sell your house and buy another, you have to pay stamp duty. Want to flip it? Then you'll need another whack of stamp duty for the next place. And in the process, if house prices rise anyway, at least a decent (though still very small) chunk of the gains goes to government – acting as an "automatic stabiliser" for the economy and government spending.

Foolish takeaway

In short, stamp duty provides a reasonable source of government revenue and acts as a handbrake for speculation. It might be what economists call "inefficient", but I'd call that a public service.

Let the tomato throwing begin!

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Posted by Scott Phillips - Money Manager (Fairfax) on 25th August, 2015 | Comments | Trackbacks | Permalink

Consumers downbeat on housing outlook

As house prices scale new heights in Sydney and Melbourne, consumer attitudes towards the property market appear to be getting much gloomier.

If history is any guide, this could translate into softer demand from many buyers over the coming months, at a time when regulators are also working hard to rein in a surge in mortgage lending. 

That is worth remembering if you're someone looking at buying in Sydney or Melbourne's property markets at a time like this, after a period of strong price growth.

The closelywatched Westpac Melbourne Institute consumer sentiment index this year has reported a steady decline in the share of respondents who believe now is a "good time to buy a dwelling."  

The sub-index for this topic last month dipped to a reading of 94.8 points, where a reading of 100 means pessimists balance optimists. That is its lowest level since mid 2010.

As the graphic shows, this measure has declined from more than 140 points in the last two years or so – the same period in which house prices have gone through the roof.

The decline has been especially sharp in NSW and Victoria – which makes sense when you consider prices have leapt 18.4 per cent in the last year in Sydney and 11.5 per cent in Melbourne.

What is the significance of the decline?

Over the several decades these researchers have been asking this question, some clear correlations have emerged.

When people become more pessimistic about property, it tends to be followed by softer period of housing demand, reflected in lower turnover and home loan approvals.

Westpac economist Matthew Hassan says it is a signal that demand from buyers, especially owner-occupiers, is likely to come off the boil over months ahead.

"It's sending a pretty clear message that the cycle has peaked and we are moving into some sort of downturn," he says.

There are also some reasons to think there will be softer demand from the group of buyers that has put a rocket under prices recently: housing investors.

Banks are being forced to curb growth in their housing investor loan books to less than 10 per cent a year. These rules have prompted them to raise interest rates for investors and tighten loan policies.

Over the coming months, economists expect this clampdown will slow housing investor credit growth, taking some of the heat out of the market.

What might softer demand mean for someone thinking about buying a home?

It could mean auctions are not quite as competitive - there have already been tentative signs of lower clearance rates in Sydney and Melbourne in recent weeks.

Hassan says there is no evidence yet to suggest there will be outright price falls.

He says that would probably require some other factor aside from softer demand, such as rising interest rates, a sharp economic slowdown, or an oversupply of properties.

Nonetheless, the prospect of softer demand from owner-occupiers – at a time when investors are also likely to find it harder to get credit – is a reason for caution from buyers.

Posted by Clancy Yeates - The Age on 25th August, 2015 | Comments | Trackbacks | Permalink

Don't let debt fears paint you into a corner

In a time of low interest rates, we can be swept up by the notion that we need to pay all of our debt down as quickly as we can. Particularly if we've just bought a property and have the big mortgage to go with it, or we're about to go spring property shopping and buy an investment property.

But what if I was to suggest to you that paying all your debts down at once is not as smart as you think? As Australians particularly, we've been taught that all debt is bad and you need to get rid of it as quickly as you can. 

However, it's important to understand the different types of debt you have because while some debt might in fact be bad debt, some debt is actually good debt.

It's a strange concept I know, but stay with me while I explain. Let's say you have a mortgage on your home of $300,000, an investment property loan of $400,000, credit card debt of $10,000, a HELP loan of $15,000 and a car loan of $25,000.

Most people would generally be making at least the minimum principal and interest payments on all of these loans which means each individual debt is gradually reducing each year.

Now that might seem like a reasonable solution to gradually paying down all of the loans. However,  when we understand the difference between good debt and bad debt we can make strategic decisions around what should be paid down faster and perhaps what debt shouldn't be paid down at all. I know that might be an odd concept but it's one that can save you potentially tens of thousands of dollars in the long run.

So if you're off to buy a property in the spring sales and will end up with a mortgage or an investment loan, how do you know if it's good debt or bad debt? What debt should you be paying down and what should you be paying interest only on or maybe even making no repayments at all?

Bad Debt

Bad debt is generally any type of debt that you won't receive a tax deduction for. So in the example above it would be the mortgage of $300,000, the credit card debt of $10,000, the HELP loan of $15,000 and potentially the car loan of $25,000.

Of course, just because all the debts are bad debts doesn't mean they're all equally bad. It's important to look at all of your bad debts and work out which ones should receive the most attention in the form of extra repayments rather than just paying them down at the same rate with maybe a little more added to your home loan.

How you determine which is bad debt and which is worse debt is by looking at the loans themselves. So for example the mortgage of $300,000 might seem the scariest because it's the biggest but if it's at an interest rate of 5 per cent and your credit card debt of $10,000 is at an interest rate of 15 per cent then it makes sense to pay the credit card debt off first.

Similarly, HELP debts generally only increase with CPI, so while this is low, it makes more sense to pay off the credit card, car loan and mortgage first than make additional repayments here only once they're gone.

OK Debt

If the car loan of $25,000 was for a certain type of ute you're using for work or you've kept a log book on the car and can prove business use, then this loan may convert from bad debt to OK debt. Now I call this OK debt and not good debt because it's still for an asset that is going to depreciate in value so you still want to pay it off even if you do receive a tax deduction for it.

However, if you have a mortgage, credit-card debt and other loans then it would make more sense to make additional repayments to your bad debt first rather than making additional repayments to your OK debt.

In some cases, your mortgage might fall in the OK debt category, particularly if you're going to retire in a few years' time and you're still working. That's because with the current low interest rates, it may make more sense for you to make the maximum contribution to superannuation and receive a tax break then it would to be making extra contributions to your home loan. Of course, once you retire you can then withdraw these extra super contributions in a lump sum and dump them straight on to your home loan.

Good Debt

Investment loans almost always fall into the category of good debt which in our example is the investment property loan of $400,000. Some people may want to pay this loan down first because it is the biggest loan and psychologically the scariest one. However, the interest on this loan is a tax deduction which means it's effectively cheaper than your home loan.

If you still have bad debts then it almost always makes sense to convert good debts like investment loans to interest-only to maximise any interest claim you can make. This might seem strange to not want to pay down a loan – of course you want to reduce your debt, right?

However, this strategy only makes sense if you take the extra money you saved by switching to interest-only and putting them towards your bad debt. That way the entire debt amount is still reducing, but you are maximising any tax advantages you might have.

It might seem like a strange concept to think of debt in terms of good and bad when we're conditioned to think of all debt as bad. However, by being strategic with your debt you can ultimately ensure that your entire debt disappears faster, simply by choosing the rate at which your individual loans are paid off – and that's always a good thing.  Melissa Browne is an accountant, adviser, author and shoe addict.

Posted by Melissa Browne - The Age on 25th August, 2015 | Comments | Trackbacks | Permalink

How to make a flipping profit

Sydney's outer suburbs and Melbourne's middle-ring are the most popular for real estate "flippers" – those who hope to buy property and reselling it quickly for a profit. 

An analysis for Money by researcher CoreLogic RP Data shows Sydney's outer west and south west are sweet spots for properties resold within two years.

Edmondson Park and Busby in the city's south west and Jordan Springs, a new suburb near Penrith  in the west have resale rates of about 20 per cent.

Leading suburbs in Melbourne for flipping are Seddon, Box Hill North and Yarra Junction with two-year resale rates of about 10 per cent.

Seddon and Box Hill North are close to Melbourne's centre. Sydney's flipper suburbs are generally further out because Sydney's inner and middle suburbs are just too expensive.

Another factor behind flipping closer-in to central Melbourne is that in Victoria, off-the-plan purchases attract a discount on the stamp duty.

With strong price rises, particularly in Sydney, it seems like money for jam - speculators have been able to buy houses without doing much to improve them before selling for a profit.

"Dwelling" prices, which includes houses and units, rose 18.4 per cent for the  year to July 31 in Sydney and Melbourne prices were 11.5 per cent higher over the same period, figures from CoreLogic​ RP Data show.

Louis Christopher, the managing director of specialist property researcher SQM Research, says given the high transactions costs of real estate, the market needs to be moving up strongly for flippers to make money.

"The only place flipping really works is in strongly-rising markets, such as Sydney," he says. Even there, flipping is confined to the relatively cheaper regions of the city, such as western Sydney, he says.

As flippers will usually claim the property as their principal place of residence, there is no tax on profits. However, there is no avoiding the  transaction costs, such as stamp duty.

There is little evidence of much flipping at the "upper end" as the purchase prices and transactions costs are too high, Christopher says.  

Experienced property analysts say flippers who choose well and manage the risks will continue to make money as long as price rise remain strong. But at some point, the big surges in prices will end.

In June, the Treasury secretary John Fraser said Sydney and some parts of Melbourne were "unequivocally" in a house price bubble. 

Given it may take at least 12 months to flip a property, the risk is that interest rates rise in the interim and prices cool.

Robert Mellor, BIS Shrapnel managing director, says he is "getting a bit more concerned as we are in unchartered territory with annual price rises of about 15 per cent in Sydney".

"There will be higher interest rates in 12 months' to two years' time; although they could be only a bit higher," he says.

Kevin Lee, the principal of Smart Property Adviser, says many people have become seduced by the thought of becoming an "instant hero"; that they will make a killing simply by signing a contract to buy a property.

"It used to be called greed; now it's normal," he says.

Lee says flipping is a risky game. There are many risks that have to be managed and only some people are good at it. It takes tenacity and perseverance to be successful, he says.

 Buying a "renovator's delight" cheaply may turn out to take a lot more time and money than the renovation TV shows make it seem.

Financial pressures that often come with flipping can put relationships themselves at risk, he says.

Lee knows of someone who had three successful flips; but went "horribly wrong" on the fourth flip when during the last interest rate cycle, rates rose and the market cooled.

Posted by John Collett - The Age on 25th August, 2015 | Comments | Trackbacks | Permalink

Are four walls still safe as houses?

When the stock market experiences its worst run since the GFC it's no wonder many investors prefer property. Its virtue is that in a bad market, home owners tend to pull up the drawbridge and refuse to sell, disguising any fall in values.

So although you can rule out property prices dropping 7.5 per cent in a day – as shares in ANZ did the other day – whether they can keep on rising in Sydney and Melbourne is the question.

Surely there's a natural limit where houses just become too expensive? Yes, but not while rates are so low, there's a building backlog, jobs are safe and the cheap dollar pulls in foreign buying. And perhaps most of all, the sharemarket has seemed a non-event, though after taking dividends into account it's been doing far better than it looks.

Take Sydney because it seems the most bubbly and prompts all the hand-wringing in the Reserve Bank. Yet which is stranger: the double digit annual increases of the past three years, or the fact values were stable for the previous eight years and fell in real terms?

You can see the connection. Little was built when prices stagnated because developers couldn't see a buck in it – and were hard pressed to find labour, thanks to the mining boom – so there was no new stock for the increasing numbers of migrants. Just last year NSW attracted more than 70,000 migrants but built only 20,000 homes, according to Andrew Wilson, Domain Group's senior economist.

This housing shortage, also shown by unusually low vacancy rates, will only slowly be filled by the building boom that's under way.

Melbourne had the opposite problem of a later but deeper slump, due to an oversupply of apartments but recently house price rises in the suburbs have been outstripping even Sydney. 

If record low interest rates are here to stay then homes are affordable and jobs safe. The bond market, a usually reliable witness in these things, can't see rates rising for at least three years.

The market is "being driven by the very few alternatives for people who want to diversify or don't like the sharemarket", property expert John Wakefield says.

"There's the chance of a capital gain and roughly the same yield as a long-term deposit so why wouldn't you invest?"   

Rental returns

The rental returns from property have rarely been higher and never so competitive with term deposits.

"The whole nature of property investing has changed. It will be driven more by yield than capital growth," Domain's Wilson says.

That's why you need to look beyond your own, er, backyard. Go bush or interstate and the yields reach 8 per cent in parts of Adelaide and Tasmania. Investing interstate also escapes land tax.

Even if property is becoming more a hunt for yield than capital gains, no doubt most investors would still expect some of those too.

Either way, the old rules about location haven't changed, especially being close to transport, having a growing population and jobs.

You want properties with potential, not ones you'd necessarily want to move into yourself.

"Look for things that need a spit and polish that will give you value, not something that's been milked already," says Wakefield.

Buying off-the-plan makes it easier but what you save on stamp duty can be more than offset by the developer's premium.

Besides, what Wakefield calls the "mass concrete block stuff" typically means at least one-fifth of the apartments are sold to investors so the chances are they'll be renting them out just when you're also looking for tenants.

"You're competing with too many others with the same logic," he says.

In Wakefield's experience, two-bedroom units are best because they attract young couples who are likely to stay put for a while before starting a family and buying their own place.

That's another thing. Property investing is becoming self-sustaining as investors push up prices, elbowing out first-home buyers who, with no choice but to rent or stay in the family home, provide a captive market.

That's why rents and prices are rising simultaneously, keeping investors in the game.

Wilson says recent auction results show Sydney's "prices growth is flattening" but tips rental yields will stabilise at 3.5 per cent to 4 per cent. Melbourne is seeing a price "resurgence".

Not even the banking crackdown on investors is expected to make much difference.

Rather, it's just squeezing out first time investors – a double whammy for the often frustrated would-be first-home buyers driven out of the market – but not those who already own a home.

"The reality is, most investors are already owner-occupiers and have a lot of equity in the home. They can use this to get their loan to valuation ratio down," says Tony Harris, principal of Easy Living Finance.

"You can secure an investment loan against an owner-occupied property and still claim the tax deduction on the interest," he says.

As for higher rates on interest-only investment loans, these can be passed on to tenants or absorbed by negative gearing. Metropolitan rental markets, apart from Perth and Darwin, are tight.

"I don't think the market will decline but I don't know how much more it will rise," says Wakefield.

But commercial real estate "is where people should go. Yields have moved up very strongly in the last couple of years and leases are much longer."

 'I've lived in a building site for 25 years'

Buy a dump, live there while you renovate it yourself and you'll make a motza out of property, Dean and Sally Lewis will tell you.

Although only in their late 40s with two children, the couple have lived in seven houses at last count, renovating all but one which had risen so quickly in value they sold it anyway.

"I've lived in a building site for 25 years," Sally, who runs Events and Beyond, says.

Along the way they've tried a project home builder and even a short-stay accommodation unit though they'd never do either again because of the hassles and costs.

As for some of their tenants… well, you wouldn't want to know.

Dean bought his first six-unit block of flats in Geelong when he was 21 - before he became a qualified architect and builder. He did them up at night and sold them one by one while he had a day job at Village Roadshow. And that was when mortgage rates were a record 17 per cent.

"I lived in one, did it up and then moved to another," he says.

The block cost $60,000 and he sold each for about $250,000.

By doing the renovations himself, Dean keeps the costs well down.

Since he lives in the properties there's no tax on his sometimes spectacular capital gains either.

"I look for rundown places that I can add value to. I never buy someone else's refurbishment. The bigger the dump the better," he says.

He looks for properties in what he calls the "gentrification corridor" where there's population growth.

But serendipity plays a role too. The couple overpaid $20,000 on an inner city house bought over the phone by a friend on their behalf when they were on holidays. But after the magic touch, the $220,000 home in what was in "a very original condition" was sold for $750,000 four years later.

And the eight-unit block in Perth they snapped up when they saw it on the way to the airport has been such a rental success that 16 years on they still can't get in to renovate it. It's near a university, on a bus route, close to shops and opposite a park.

"They're mostly long-term tenants. One still pays his rent with a postal order," Sally says.

Their properties are funded by interest-only loans because Dean says "it lets me buy and sell without onerous paperwork."

Here they got lucky. A former workmate turned Smartline​ adviser, Julie Deppeler, re-financed his Westpac loan with Macquarie "which saved me $10,000 a year", Dean says.

Property investing isn't for the faint-hearted. They've had to evict bikies manufacturing ice "and we get calls on Christmas Day that the hot water has gone or somebody has been locked out", Sally says.

While their Byron Bay acreage "will be a place to put our feet up and grow avocados," according to Sally, Dean says "this will do me for a couple of years - but I'm always looking for a bargain".

'It's easy to get tenants'

Frustrated first-home buyers are getting a foot in the Sydney and Melbourne property markets through the backdoor.

Instead of living there they're renting their properties so the tenants help pay off the mega mortgage.

But Joseph Radd, a financial planner at Mortgage Choice, has gone a step further. The 29-year-old has bought a home in Sydney's west where he says "it's easy to get tenants". In fact, within a week of settlement he'd found someone.

His novel solution is to build a granny flat in the back as well.

"The frame went up last week. It'll be my home. I wanted assistance to pay off the mortgage," he says.

When he eventually gets married, Joseph says he and his partner will buy a home together and keep the property which will then have two lots of rents coming in.

Joseph saved furiously for the deposit using a high-interest online savings account "that I can't touch" although "the increase in prices was faster than I could save, so I wanted to purchase sooner rather than later".

But living at home kept expenses to a minimum.

He had no trouble getting finance since his brother-in-law is a mortgage broker, finishing up with splitting the mortgage between a five-year fixed-rate loan at just under 4.5 per cent and a variable, interest-only component.

Posted by David Potts - Money Manager (Fairfax) on 25th August, 2015 | Comments | Trackbacks | Permalink

Is an SMSF property investment worth it?

If you're dead set on investing in property through your SMSF make sure you know what you could be in for, writes Richard Livingston

Residential property investing through an SMSF is a fertile ground for deception. Type the words 'SMSF property misleading' into your Google search bar and you'll find pages of articles and notices about ASIC fines, investigations and actions against financial advisers, property promoters and assorted spruikers.

If you're going to play in this space it's important that you understand the rules, what needs to go right and what could potentially go wrong.       

Keep in mind that investing in residential property through an SMSF can be a pain in the neck and wallet, compared with buying the property in your own name. In addition to the usual hassles – bad tenants, unexpected bills and strata fights – there's an additional layer of rules around what you can and can't do.

Members of the SMSF can't use the property, nor can they lease it to family members. Employing related "tradies'' can lead to unintentional breaches of the SIS Act (the governing legislation for super funds) by the SMSF trustees.

If the SMSF is borrowing, you'll need to set up a costly limited recourse borrowing arrangement and ensure you don't spend borrowed money on items the Australian Tax Office might classify as improvements. Properties on multiples titles and property development can also cause SMSF trustees to breach the SIS Act.

For the most part, SMSF property investing is all negatives. So why do people do it?

The answer is tax. A super fund only pays 15 per cent tax on its ordinary income and 10 per cent on capital gains. If the fund is in pension mode, it pays no tax at all. This means if you make a bundle, the taxman sees very little (or none) of it.

But you need to be confident that the profit and tax benefit will ultimately be worth it. Your financial adviser may show you a nice looking set of numbers but that's of little help if reality doesn't follow suit.

If you're able to buy an SMSF investment property without borrowing, your main worry is whether it's a good investment. But if you're borrowing – especially if you're borrowing a large part of the purchase price – the success of your "SMSF punt" hinges on two key factors: the capital growth rate of the property and the future for SMSF loans.

When you're borrowing to invest in property, the interest on the loan typically offsets the rental income or if it's greater, creates a "negative gearing" deduction. As a result, in the early stage of the investment there's little benefit in using an SMSF, and if it's negatively geared, you may be worse off than if you bought the property in your own name.

In these cases, whether you get an overall tax benefit from investing through an SMSF will depend entirely on the capital growth achieved. You'll save a lot of tax if you make a big profit on sale, but if you're borrowing a large amount and achieve low (or no) capital growth, you may find the pain and hassle of investing through an SMSF was pointless.

SMSF property investing may also be a bad option if differential pricing on property loans becomes the norm, or if SMSF lenders withdraw from the market altogether.

AMP recently announced it was increasing the interest rate on investment property loans by 0.47 per cent. If you have the ability to draw down on your home mortgage to buy an investment property, then by using an SMSF you'd be paying half a per cent extra every year you have the loan.

The trend towards differential pricing could in the future see SMSF loans charged an even higher rate. It's a grim scenario, and one that could become worse if lenders start exiting the SMSF lending business altogether.

National Australia Bank stopped writing SMSF property loans earlier this year and as regulators tighten capital requirements or the market slows, other lenders may decide to follow suit. Remember, SMSF loans aren't as "locked in" as regular home loans. They typically include "review events" that allow the lender to reassess (and potentially terminate) the loan for things as simple as the fund switching into pension phase.

Imagine going through the hassles of an SMSF property investment only to find you're paying a higher interest rate down the track or your loan is pulled, forcing you to sell the property?

Of course, in addition to whether you achieve enough capital growth or the SMSF loan market changes, you've got the politicians to worry about. The budget can only cope with so many forest fires at once, and down the track we could see higher taxes on capital gains or super generally.

Borrowing within an SMSF to invest in property is a bet on strong capital growth and no adverse changes to the SMSF loan market or super rules. Make sure you understand this reality, and the consequences – before you start out.

Richard Livingston is a founder of Eviser.

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

Posted by Richard Livingstone - Money (The Age) on 25th August, 2015 | Comments | Trackbacks | Permalink

What to consider when buying property with friends

As we all know, getting on the first rung of the Australian property ladder these days is tough. Astronomical prices, tightened lending and competition from cashed-up investors means fewer first-time buyers are able to enter the market, and those who do are having to take on crippling mortgages to make it possible.  RBA's May 2015 Housing Finance Commitments report showed an 11 per cent drop in the number of first-time buyers, adding to what was already a record low for first home buyer loans. In short: house price growth has dramatically exceeded wage growth and the disparity is almost definitely going to continue.

Although the dream of owning bricks and mortar may be elusive to many, smart wannabe investors are looking at other options, and one in particular: buying with friends, otherwise known as "co-owning". Most of us are used to the idea of buying property with our spouse or partner, but co-ownership is where two or more people buy a property and own separate and defined shares, which can be equal or unequal depending on the agreement reached. In addition, if one party dies, their share of the property can be passed on or left to whomever they like. Sounds simple, right?

"One of the biggest advantages is that you can combine and pool your financial resources to significantly increase your purchasing and borrowing power." Says Peter Boehm, financial editor at Onthehouse.com.au. "This will help you buy in more established and/or expensive areas where price growth potential and longer-term profitability is likely to be greater.

"You're also able to enter the market earlier. For instance, you won't have to wait to save the full deposit or cover all the purchase costs (because your friends or co-owners are covering any shortfalls), which enables you to become a property investor or owner-occupier sooner."

The benefits of purchasing in a group are obvious. Firstly, increased finances, which equates to a strengthened loan application and an increased deposit. Secondly, the day-to-day costs associated with owning a property are shared.

Despite buying in a group being advantageous, it doesn't come without potential pitfalls. Firstly, each co-owner will be individually and collectively responsible for meeting all loan repayments and other obligations. The fact that you may own a greater or lesser share of the property than your partners is irrelevant. If one or all of them skips town, unfortunately you'll be left holding the bag. And though you may be BBFs when you sign on the dotted line, further down the road that may not be the case. As with financial woes being a big contributor to marital breakdowns, the same principles apply when it comes to friends in a co-ownership arrangement. And exiting such an arrangement is problematic, as Boehm warns: "In a worst-case scenario the property may have to be sold, even if it's not in the best interests of everyone involved. Remember, you're financially committed to the venture and to your co-owners as well."

So, before you schedule a house hunt with your posse of friends, tread cautiously; buying together is a big commitment and as such, there's a lot to consider.  To safeguard both your investment – and your friendship – Boehm advises any potential co-owners to consider five key points before making the leap:

1. Buy with as few friends as possible

"Keep the numbers to a minimum – no more than three or four – to help reduce complications and complexities."

 2. Choose your partners carefully

"Look for those you can trust and who share your views and passions about property (if you're investing), or that you could live with if the plan is to become an owner-occupier. Always look to protect friendships and relationships."

3. Take the emotion out of the equation

"You have to be objective and think with your head and not your heart. Make sure everyone gets independent legal advice and draw up an agreement that sets out everyone's expectations, rights and obligations. A formal agreement is a great way to put issues on the table, identify problems you may not have considered, and to map out the way forward if things go bad."

4. Consider the risks

"There are a number of things that could go wrong and you need to be comfortable these problems can be dealt with amicably and sensibly. What happens if someone wants to sell and you don't, or someone doesn't meet their share of the mortgage payments and you're the one who has to pick up the slack? These can be serious issues not easily resolved that could put you in a great deal of difficulty both personally and financially."

 5. Buy and borrow sensibly

 "As with any property purchase, choose wisely and borrow wisely. The same rules apply whether you're buying on your own or with others."

Posted by Paul Ewart - Domain (Fairfax) on 23rd August, 2015 | Comments | Trackbacks | Permalink

Banks target owner-occupiers with interest rate deals

As banks put the brakes on lending to property investors, borrowers buying a house to live in are being offered some of the sharpest deals in the market.

Owner-occupiers are being targeted with lower advertised interest rates and cash-back offers, and mortgage brokers say these customers can also negotiate bigger interest rate discounts.

RateCity figures show a significant gap opening up between the interest rates charged to owner-occupier and investor customers of most banks. 

More than 15 lenders, including Commonwealth Bank, Westpac and ANZ Banking Group, are offering owner-occupiers rates that are at least 0.22 percentage points lower.       

"While the providers are trying to curb investor lending they are looking to rebalance their book back towards owner-occupiers," says RateCity spokeswoman Laine Lister.

"The flipside of investors paying more is that owner occupiers are getting a better deal in some cases."

For example, HSBC has variable rate of 3.99 per cent for owner-occupiers, and Loans.com.au is offering 4.02 per cent.

Larger lender Suncorp has an advertised rate of 4.15 per cent for owner-occupier customers who are borrowing more than $750,000, with a deposit of more than 20 per cent.

Beyond their advertised rates, banks are also scaling back interest rate discounts for investors and offering deeper discounts to owner-occupiers. The exact size of the discount will depend on the bank and the customer's financial circumstances.

A mortgage broker in Sydney, Andrew Woods, says investors taking out loans are generally paying interest rates about 0.27 percentage points higher than what owner-occupiers pay, but the gap is wider for the most sought-after customers.

"Even larger discounts than that are available for owner-occupiers who are strong clients with larger loans," Woods says.

The principal of consultancy Digital Finance Analytics Martin North says his surveys of customers have shown that typical interest rate discounts offered to owner-occupiers have climbed from between 0.35 to 0.4 percentage points to 0.6 to 0.7 percentage points in the past few weeks.

"There's no doubt in my mind that the battle ground now is absolutely owner-occupied loans," North says.

Banks are also offering "cash back" offers targeted at owner-occupiers. For instance, Westpac-owned Bank of Melbourne, St George and BankSA are offering $2000 cash back for owner-occupiers borrowing more than $200,000.

As well, a two-tier market has emerged in fixed-rate mortgages. Commonwealth Bank, Westpac and ANZ have all raised fixed rates for investor loans in the past month, while at the same time cutting various owner-occupied fixed rates.

Posted by Clancy Yeates - The Age on 21st August, 2015 | Comments | Trackbacks | Permalink

Victorian government announces review of property laws

The state government has announced a review of Victoria's property laws, including those covering prices and conduct of real estate agents, on the cusp of the peak spring selling season.

The main acts that cover real estate transactions will be scrutinised, as buyers' tensions simmer around suspicions of underquoting, rocketing auction prices and the presence of international buyers in the market. 

The laws covering estate agents, land sales, conveyancing and owners corporations are outdated and need to be modernised to avoid inconsistencies, according to the Andrews Government.

Consumer Affairs Minister Jane Garrett said in a statement that the three broad areas of review will include land and real estate sales, the powers and functions of owners corporations, and licensed agents and owners corporation managers.

The public will be invited to comment on how the laws can be improved.

Of the four acts that will come under review, the Sale of Land Act is 52 years old and the Real Estate Agents Act was introduced in 1980.

Rules around agents giving price guides and estimates to prospective buyers and sellers is covered in the Real Estate Agents Act.

Buyers advocate Mal James said the current laws were working well, save for some issues around under quoting.

A more pressing issue than pulling agents into line was offshore buyers and their impact on young people trying to enter the property market, Mr James said.

The Real Estate Institute of Victoria chief executive Enzo Raimondo said the review was timely.

"Certainly in the last decade there has been enormous change in the property sector in terms of new technology and business processes, which will need to be considered in light of the review and the way the industry conducts itself compared to how it has in the past," he said.

A spokeswoman for Consumer Affairs Victoria said the review was proposed to ensure the acts "meet the needs of the modern market".

"As the older Acts were introduced at a time that pre-dated modern drafting techniques, they lack clearly-stated purposes by which we can measure their effectiveness. They have also both suffered from the passage of time, and many amendments."

The issues papers for public consultation will be released later this year, ahead of a public options paper next year. 

Posted by Emily Power - Domain (Fairfax) on 21st August, 2015 | Comments | Trackbacks | Permalink

How to choose an agent for your spring campaign

Hooked on The Bachelor? Forget it. There's a much bigger challenge than finding love: finding your ideal real estate agent ready for a spring sales campaign.

But just like true love, there's "something you just can't quantify" when you're looking for your perfect agent, says Ray White Double Bay director Elliott Placks. "It's often about how you feel.

"You want someone you feel isn't going to undersell your property, will get the maximum price for it and will communicate with you throughout the whole process. Everyone has different wants when they're selling – do you want someone who'll consult you about every aspect of the sale, or who'll work hard behind the scenes and understand what you only want to know?"

An excellent agent will really have many of the best traits of a good potential husband or wife, according to LJ Hooker Mosman settlement specialist Mary-Jane Hamer. 

"You need someone who's a good listener, someone who follows through on what they say they're going to do, is dedicated to you, knows all your good qualities and is hard-working," she says. "People often think they can go it alone but what you need is a good result with someone who can squeeze the last cent out of a buyer; not just a result."

It can be a false economy to try to save on a good real estate agent's fee, she advises. "Yes, you can buy a cut-price suit in Target, but you can also buy one in David Jones, and which one will you remember?"

There's little as seductive as a suitor who completely focuses on your wants and needs, and with agents it can be pretty similar. Alison Coopes, of Agency by Alison Coopes, says, "I think the agent has got to have a sense of complete focus on your intentions.

"They have to ensure that the vendor has had every possible door opened to allow them to close, which includes attention to detail in the presentation [of the property], the consistency to be 100 per cent there at every inspection."

They also have to be there for the long haul, for better or worse. "It's absolutely non-negotiable that they'll give up if it doesn't pan out quickly," says Coopes. "A client needs to know you'll hang in there even when it gets tough."

Relationships are often all about negotiation and sales are no different. "An agent needs to be a very good professional negotiator," says Christian Payne of Payne Pacific. "You want someone who'll achieve the highest price, and takes pride in doing that, rather than someone who's just looking for commission."

It's all about looking as good as you can, too. "An agent also needs to understand marketing – not just advertising – but marketing," he says. "That's why someone will pay $14 in a restaurant for a bottle of water when they could have got the same thing for free from the tap. It's about a perception of value."

Finally, choose someone with an attractive twinkle in their eye. "You want someone who looks hungry and driven with a bit of a spark in their eye," recommends Santos Sulfaro of Richardson & Wrench Leichhardt.

"If they present themselves well, then there's also more of a chance they'll present your property well too."

But in one important aspect, finding the perfect agent is completely at odds with hitching up with the best bachelor – or bachelorette. While you wouldn't want either of them to have a bulging little black book, an agent with a large database at their fingertips, says Rebecca Harrison of Raine & Horne Chatswood-Willoughby, can only add to their attractiveness. The Top Ten Questions To Ask Prospective Agents

1. What do you like about my property?

If an agent can't look around your property and assess, in five seconds, its best qualities, then maybe he or she shouldn't be a candidate for your sale, says Santos Sulfaro.

2. What's your track record with previous sales in the area?

Elliott Placks believes the answer will show whether the agent really is an area specialist – or just saying they're one.

3. What are your fees and what are you offering for them?

We all need to know, but Mary-Jane Hamer says she admires an agent who'll stand by the fee they charge. If they can't back themselves on their fee, and negotiate their own price with you, what chance do they have of   successfully negotiating  a great price on your property?

4. Will you be attending every inspection personally at all times?

It's completely unacceptable for an agent to send their PA or a secretary to an open-home, says Alison Coopes. They need to be completely focussed on selling your property.

5. Can you unlock a value for my home beyond comparable sales?

You need to find this out, otherwise you may as well go with a cheaper agent, says Christian Payne.

6. How well do you know the area?

It can be a big advantage if your agent actually lives in the area, says Kate Webster of McGrath Inner West. They'll then know the neighbourhood intimately and all its plus points.

7. Do you have a good database of potential buyers?

Already knowing people who'd be interested in your property, and who trust the agent's advice, is a major advantage, says Rebecca Harrison.

8. What do you see as the negatives about my property, and how will you overcome them?

A good agent will know and be confident about that, says Sulfaro.

9. How can you guarantee that you won't undersell my property?

An agent will then go through their pricing strategy to show how they deal in the realms of possibility, rather than what neighbours received, says Payne.

10. If we require a conjunct agent, will you be dealing with them fairly?

Some people like to list their property with two agents, but sometimes the main agent might play games with the other in order to try to win the sale for themselves. "Get a confirmation in writing that will allow the 50 per cent conjunction fee," recommends Coopes.

Posted by Sue Williams - Domain (Fairfax Digital) on 15th August, 2015 | Comments | Trackbacks | Permalink

Buyers should pay bigger deposit for off-the-plan apartments

 BUYERS should have to pay a bigger deposit for an off-the-plan apartment and make payments during construction of the large-scale complexes, one of the major banks suggests.

That would reduce the risk for developers and increase the likelihood that projects go ahead, ANZ argues.

Buyers in all states except Queensland currently only require a 10 per cent deposit for an off-the-plan purchase, with the remaining 90 per cent paid on practical completion of the development.

ANZ deputy CEO Graham Hodges said there was a reasonably substantial risk that conditions could change during the approximately four-year period and the value of an apartment purchased off the plan today could be worth 10-20 per cent less.

ANZ says the 10 per cent deposit has proven to be an inadequate pre-estimate of the loss a developer suffers if a buyer does not complete a contract, and banks therefore require high levels of equity from developers to finance apartments given the presale settlement default risk.

Other markets require purchasers to make payments during construction, ANZ’s submission to a federal parliamentary inquiry into home ownership also noted.

“In Queensland they looked at not requiring but having up to a 20 per cent deposit which derisks the project for the developer to some extent, enables easier finance for the project and therefore contributes to a likelihood that projects would go ahead,” Mr Hodges told the inquiry on Friday.

He said one of the factors constraining housing supply was that risk on bigger developments was being borne by the developer and not shared as equally as under a normal home build.

“To ensure the sustainability of the supply chain, and to protect the industry against a downturn in Melbourne or Sydney, consumers should carry more of the risk,” ANZ’s submission said. “This is likely to lead to increased funding availability, reduced funding costs and earlier funding of projects.”

Posted by Megan Neil - AAP on 15th August, 2015 | Comments | Trackbacks | Permalink

ANZ says proposed bank capital rules to push up mortgage costs for first-home buyers

ANZ Banking Group says proposed rules being negotiated by global financial regulators could force up the cost of loans for customers with smaller deposits, especially first-home buyers.

Deputy chief executive Graham Hodges on Friday said changes under discussion dealing with how much capital banks would have to carry could disadvantage borrowers who had smaller deposits.

Mr Hodges made the comments before a parliamentary inquiry into housing affordability, which is also scrutinising the banking regulator's clampdown on lending to property investors.

"We are working within the new regulatory framework to adjust lending requirements, especially for investment loans in a market that's moving quickly," Mr Hodges said in Melbourne.

"Looking further ahead, the committee needs to be aware that proposals under consideration by the international Basel committee could lead to further significant changes to bank capital requirements applying to housing."

"This could have the effect of increasing the cost of finance, particularly for those customers borrowing at higher loan-to-valuation ratios.

"Over time, this will likely disadvantage those buyers, namely some first-home buyers, with smaller housing deposits."

The changes Mr Hodges was referring to are being considered by the club of global banking regulators known as Basel, after the city where it meets in Switzerland.

Local analysts have previously said the changes, which are not expected to be implemented for several years, might force banks to put greater weight on loan-to-valuation ratios when determining the riskiness of a loan, and how much capital is held against it.

That compares with the current approach, in which the banks determine a risk weight, which measures the riskiness of a loan, by "probability of default" 

JP Morgan analyst Scott Manning said in a June report that "first home buyers may further be locked out of the market" if the changes went ahead.

Such a policy is by no means certain, and Mr Hodges outlined various steps the bank had taken to slow its growth in lending to property investors in response the Australian Prudential Regulation Authority's 10 per cent a year speed limit in this part of the home loan market.

As well as requiring new investor borrowers to have a 10 per cent deposit, he said the bank used a higher minimum interest rate to assess whether borrowers would cope if interest rates rose.

He said ANZ used a minimum interest rate at 7.25 per cent – up from its previous practice of adding 2.25 percentage points onto the actual rate the borrower paid.

ANZ is one of several lenders that was growing its investor loan book at a faster pace than APRA's 10 per cent speed limit at the most recent figures from June.

Mr Hodges indicated APRA wanted banks to demonstrate within the next few months that their investor financing had slowed.

​The regulator's cap on housing investor credit, which was announced last December, became a "hard limit" only around May, as opposed to a "guideline", he said.

In its submission to the committee, ANZ argued the "fundamental" reason housing prices in Sydney and Melbourne had surged was a mismatch between supply and demand.

Mr Hodges said it was not yet clear what the effect of recent changes for investor borrowers would be, because banks had not faced such credit restrictions in decades.

"This is the first time, I think, since the late 1970s, that we've actually had a quantitative restriction on what we can lend," he said.

"There may be some investors who would like to get an investment loan from the banks, but the banks are not overly happy to lend to it.

"I presume it will force some investors outside the regulated market into the non-regulated market."

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

Why ordinary Australians are investing in commercial property

 RETIRED Adelaide doctor and grandfather Prahbash Goel is a family man.

That’s why he paid $10.95 million for Bunnings warehouse in Swan Hill last week, bought to set up his two daughters and five granddaughters for life.

He is one of a large number of mum-and-dad investors turning to the commercial property market, snapping up everything from pubs and bottle shops to childcare centres and even digital billboards.

“A lot of these properties in the $10 million range are being bought up by small people,” Dr Goel told news.com.au

“It is very risky, but a lot of people are getting into it.”

Unlike with residential property, the benefit of being a commercial landlord is the tenant must pay rates, land tax and insurance.

And while commercial properties tend not to dramatically increase in value the way houses do, low management input and overheads mean that net rental yields are higher.

An old hand at commercial property sales, Dr Goel said the Bunnings purchase had been “very highly contested” at the Burgess Rawson portfolio auction in Melbourne.

The reason for its appeal, he said, was a combination of reputable brand, strong business model, a 12-year lease and the relative ease of managing a passive investment with low overheads.

“Bunnings is a good, stable business,” he said, putting great store in the fortunes of a company that services Australia’s national pastime of home improvement.

“I find that it is a good investment. We used to have hardware store around the block; not anymore. You want to buy a packet of nails? You go to Bunnings.”

The tenant will pay Dr Goel’s family $558,450 a year in rent, a yield of 5.1 per cent, which although historically low is significantly higher than residential rents.

“I’ve got residential properties and the yield is 3-3.5 per cent after rates, tax etc,” Dr Goel said.

“And then you pay capital gains when you sell them.”

It is not the first time the retired doctor and aged care entrepreneur has splashed out on a hardware superstore.

Dr Goel paid $21.3 million for a Bunnings in Ballina last year, also for his family.

“I might be buying more,” he said.

But for those who want to dabble in the sector, factor in the possibility that interest rates will rise, cutting into rental yield.

Burgess Dawson director of valuers Tim Perrin said poor returns on cash and bonds made commercial property extremely appealing to mum-and-dad investors in today’s economic climate.

“There are a lot of private investors in the market looking at commercial property, and

that’s being encouraged in part by self-managed superannuation,” he said.

“People are buying them for long term security, so ‘it’s in my super fund and I know every year it will pay me $400,000’.”

Whereas locking up cash in a 10-year bond account once yield 16 per cent interest, these days it’s below three per cent.

And with housing prices at record highs, “you can’t get a five per cent rental yield on residential”.

“We sell commercial properties from the low $100,000 range to the tens of millions of dollars. There are an amazing number of investors with that kind of money.”

From corner shops to convenience stores, supermarkets, bottle shops, hotels, childcare centres and cafes, the possibilities are endless.

But commercial properties can be a risky investment, so do your research to establish the viability of the tenanted business.

The biggest risk is losing a tenant, because it can take months or more than a year to find a new one.

And commercial properties do not quickly double in value the way houses do; they are purchased for cashflow, not capital gains.

Properties with long-term leases to major retailers like Coles, Woolworths, Bunnings and Dan Murphy’s were highly sought after, Mr Perrin said, and investors should expect to pay at least $4 million for one of these prime assets.

On the riskier side of the equation, unusual properties — like a digital billboard overlooking Melbourne’s Flinders St, which sold for $3.05 million to a private investor in Melbourne — could pay off big for those willing to gamble.

Mr Perrin said the sale price for the billboard “was always going to be an interesting question — we hadn’t sold a sign before.”

With a whopping 11.7 per cent rental yield, the sign’s new owner will rake in $357,000 a year from their new tenant, a major advertising company, no further effort required.

Posted by Dana McCauley - News Limited Network Australia on 12th August, 2015 | Comments | Trackbacks | Permalink

Learn rules before fund builds up

Australians don't necessarily love or understand superannuation or the stock market but they have a love affair with property. Which is why many of us are using the negative-gearing rules to our advantage and building up property outside superannuation as part of our retirement plan.     

What more and more people are realising is that you can now borrow to buy property through your self-managed super fund (SMSF), which means suddenly super is attractive once more.       

It's important to understand that you can't just sell all your property to your SMSF, sit back and start benefiting. SMSFs have different, far stricter rules, regulations and restrictions to borrowing in either your own name or another entity. So what are the rules you need to be aware of and the pros and cons for borrowing property in your SMSF? I'm so glad you asked. SMSF property rules

Monica, from the TV show Friends, once said rules are there to make the game more fun but that's not necessarily the case when it comes to property and SMSF. If you breach a rule the consequences are expensive and potentially irreversible, so it's important to know what they are and to follow them to the letter.

The most important rules to understand when it comes to property and SMSF are:
  • The property must not be acquired from a related party of a member (unless it's commercial property).
  • The property must not be lived in by a fund member or any fund members' related parties.
  • The property must not be rented by a fund member or any fund members' related parties (but a related business can rent a commercial property).

The exception is with business premises, as a related business owner can sell to and/or rent a commercial property owned by an SMSF.

This means your SMSF can potentially buy your business premises, allowing you to pay rent directly to your SMSF at the market rate. It's often an attractive option and one of the most common ways to own property in an SMSF.

SMSF borrowing rules

An SMSF is allowed to borrow to acquire property if, once again, specific and strict criteria are met. What's important to understand is that banks are becoming more and more stringent with both the criteria they are following and the size of the deposit required.

That's if they're willing to lend to an SMSF at all. Some of the borrowing rules include:
  • The property must be held in a bare trust whose trustee must be different to the SMSF trustee. A bare trust is a trust where the title holder holds the property for a specified beneficial owner (in this case the SMSF trustee).
  • Each borrowing arrangement must only be used to buy a single asset, for example a residential or commercial property.
  • The borrowing must be non-recourse, which means the lender cannot go after any other fund assets other than the property that was bought with the funds borrowed.
Once you understand the rules it's still important to weigh up the positives and negatives of following this particular strategy. And there are quite a few of both. The main negatives when it comes to SMSF and property are:
  • Higher Costs SMSF Property loans tend to be more costly than other property loans (unless you are borrowing personally and on-lending to the SMSF).
  • Cash Flow Loan repayments must be made from your SMSF, which means your fund must always have sufficient funds to meet the loan repayments.
  • Hard to Cancel If your SMSF property loan documentation and contract is not set up properly, unwinding the arrangement may not be allowed, which means the property must be sold.
  • Can't borrow to improve the property Borrowed funds can be used to maintain a property but can't be used to improve a property.
  • Lower LVRs (loan valuation ratios) If borrowing directly from a bank, there are lower LVRs that banks will use, which is typically 70-80 per cent for residential and 60-70 per cent for commercial properties, so a bigger initial deposit is required.
  • Arrangements must be commercial If your business is renting commercial premises owned by your SMSF and you are unable to pay rent, you may need to evict yourself in order to remain a complying fund.
  • Equity not available You can't use the equity in one property as a deposit for another property or to reach LVRs, as each property must stand on their own.
While the main advantages for holding property in an SMSF are:
  • More money into super All Australians are limited by the amount of contributions they can make into super but particularly by buying your business property in the fund, there is the opportunity to contribute more to super through rents paid.
  • Capital gains free asset This is one of the biggest and most attractive advantages. If a property is sold by an SMSF after fund members have retired, then all profits made on the sale of the property are CGT free.
  • Rents are tax free If a property is kept by an SMSF after fund members have retired, then all profits made on the rental of the property are tax free and monies drawn by the member of the fund as income are also tax free.
  • Lower income tax rate If properties bought in the fund are positively geared, the profits are taxed at the fund's income tax rate, which is a maximum of 15 per cent (or 30 per cent for high-income earners).
Still interested? Make sure you don't just rush in but instead talk to an accountant or planner who is a licensed SMSF specialist before making any decisions.

A great accountant will be able to financially model for you the best place to hold your property so you can make an informed decision as to whether SMSF and property are right for you. Melissa Browne is an accountant, adviser, author and shoe addict.

Posted by Melissa Browne - The Age on 12th August, 2015 | Comments | Trackbacks | Permalink

Should I use debit or credit cards for overseas travel?

Debit cards are for withdrawing funds from ATMs, and depending on which card you're using, you'll usually get a more favourable exchange rate, but in many other instances you're better off using a credit card.

When you check into a hotel or hire a car, the agent will usually ask for a card in order to put a stranglehold on some of your funds as a security deposit, known as a pre-authorisation.

The amount is typically several hundred dollars.

When you check out or return the vehicle the hotel or agency cancels this hold; however, the bank does not always release the funds straight away.

It can take several days for the funds to be credited back to your account.

If you've handed over your credit card that shouldn't be too much of a problem, and contacting your card provider should fix it, but if it's your debit card your available funds are reduced for the interim and you might find yourself caught short.

The re-crediting process takes even longer if you don't use the same card for check-in and check-out.

Another reason to use your credit card, your transaction should earn loyalty points which can be redeemed for future travel or goods.

Finally, if your credit card details are skimmed or if your card is stolen, most credit card providers limit your liability.

If that's happened against your debit card, chances are the loss is your problem.

Posted by Michael Gebicki - Traveller (Fairfax) on 11th August, 2015 | Comments | Trackbacks | Permalink

Easy tax reform: axe capital gains discounts

It appears that capital gains and negative gearing tax concessions are on the nose with everyone except the Prime Minister. 

How on earth did we come to be lumbered with a tax rule so bad it is disliked by the Treasury, the Reserve Bank, the Business Council, the Council of Social Service, the Organisation for Economic Co-operation and Development, and both of Tony Abbott's most trusted business advisers?

And why on earth is Abbott still clinging to it?

The  story of how we came to be saddled with a system that taxes wages at twice the rate of profits made from trading real estate is an epic tale of revenge, incompetence, bloody-mindedness and gullibility. Along the way it has forced Treasurer Joe Hockey to set income tax rates higher than he should and fed an explosion in house prices by supercharging negative gearing. 
It is, as economist Rory Robertson told his clients in the early 2000s, "almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries".

The tale begins in 1985 with what now seem two unremarkable decisions.

As part of the tax white paper process, Labor treasurer Paul Keating made fringe benefits and capital gains subject to tax. Remarkably, up to that point they hadn't been. It meant that if you were paid half your salary in benefits you weren't taxed on it. If you made half your income buying and selling property or shares, you weren't taxed on that. Only ordinary wage earners paid full tax.

These days the Coalition claims to have supported Labor's reforms of the 1980s. But it didn't support those two. The then opposition leader John Howard fumed. "Both should be scrapped – lock, stock and barrel," he said.

Labor made a generous and unnecessary concession. Instead of taxing the entire profit on the purchase and resale of shares or property, it taxed only the profit over and above the rate of inflation. This meant a negatively geared landlord could deduct from their taxable income all their interest payments (including the inflation component) but would have added to their taxable income only their "real" profit (excluding the inflation component).

But over time the rate of inflation fell. More than 8 per cent when Labor introduced the concession, it was heading to 2 per cent by the time Howard took over as prime minister in 1996. Speculators were close to being properly taxed. So under cover of introducing the goods and services tax, he asked his friend John Ralph to conduct a review of "business" taxation, sneaking in a very specific reference to personal tax.

The panel was to examine "capping the rate of tax applying to capital gains for individuals at 30 per cent".

The stock exchange lobbied hard. It commissioned a US economist associated with Reagan-era tax cuts to produce modelling showing that cuts to the capital gains tax rate " would be close to self-funding".

They would "yield large revenue feedbacks as holders of relevant assets are provided a greater incentive to sell". Really.

The stock exchange put (rough) numbers on it. At the time capital gains tax collections amounted to 0.4 per cent of GDP. If Australia cut the rate to near where it was in the United States, collections could climb to 0.7 per cent.

Ralph bought it. Under the heading "Rewarding Risk and Innovation", he told Howard to tax only half of each capital gain, and found that on balance the change would bring in more money than it lost.

Fifteen years on, it's possible to assess that claim. Before the cut, capital gains tax accounted for 0.4 per cent of GDP. In the latest year for which we have figures (2012-13) it brought in just 0.2 per cent.

Had capital gains tax been as effective as it was before Howard cut it, it would have brought in an extra $3 billion.

Ralph thought the cut would "encourage a greater level of investment, particularly in innovative, high-growth companies". Instead, it delivered windfall gains to those who had already bought real estate and encouraged everyone else to dive in.

Labor's Kim Beazley waved it through. Only Labor's Mark Latham was prescient, telling a largely uninterested Parliament the cut would "add to the great Australian disease of asset and property speculation, particularly in our big cities".

Reserve Bank official Luci Ellis told a parliamentary hearing last week that the capital gains tax cut boosted property prices more than share prices because property was easier to borrow against.

"It is just more profitable to negatively gear property, because you can gear it more," she said.

The Bank's submission to the home ownership inquiry fingers the capital gains tax cut as one of the key reasons borrowing to buy investment properties exploded from 1999. These days more than half of all the dollars lent to buy houses are snapped up by investors.

Tony Shepherd, handpicked by Abbott to head his commission of audit, says he would scrap the discount. "I can't see any reason for treating capital gains any different from income tax," he told a conference in June.

David Murray, picked by Abbott to head his financial systems inquiry, came out in favour of cutting the capital gains concession. The Business Council has called for a rethink, saying such concessions " distort investor behaviour, particularly at a time of rapid capital gains". The Henry tax review wanted the discount to be cut to 40 per cent and applied to all forms of saving. Labor said no. The Treasury uses its latest tax discussion paper to pose a simple question: to what extent do the benefits of the concession outweigh the cost?

Axing the capital gains tax discount would render negative gearing impotent. It would fund a cut in income tax and take the heat out of the property market. Just about everyone in Abbott's corner agrees, apart from Abbott himself, who's stopped listening.

Peter Martin is economics editor of The Age.

Posted by Peter Martin - Sydney Morning Herald on 11th August, 2015 | Comments | Trackbacks | Permalink

The mortgage traps to watch out for

 MORTGAGE customers often home in on the interest rates on their loan but they fail to consider other fees and charges. Upfront fees, ongoing fees and discharge fees are among the most common charges customers will frequently get hit with throughout their loan term.

Canstar's research manager Mitchell Watson says these costs should be considered before signing up to a loan because they can quickly add up.

“There are a number of loans out that won't have any fees but the vast proportion will have a fee involved whether it's on application or ongoing fees,'' he says.

“Upfront fees can range from zero up to nearly $500 so it's a considerable upfront cost.

“But the real cost people should be focusing on outside of that is the ongoing fee, it could be the equivalent of paying a few extra percentage points on your interest rate, that's how much a difference those fees can make.”

Figures from Canstar show ongoing fees range anywhere from $60 to nearly $800 a year and can be charged as frequently as monthly.

Discharge fees may also be charged when the loan is paid out in full.

The Reserve Bank of Australia has kept the cash rate on hold at a record low of two per cent.

Rates remain low — many fixed rates are below four per cent and many variable home loan deals are slightly higher prompting many borrowers to review their home loans and look to switch to a better deal.

But Mortgage Choice spokeswoman Jessica Darnbrough urges customers not to just focus on the interest rate when taking out a new home loan or refinancing.

“There are other things you need to consider such as loan application fees, registration fees, stamp duty, lenders' mortgage insurance and bank fees and charges,'' she says.

“If you are refinancing you need to know all the fees and charges that you are paying so you know you are getting a better deal.”


— Upfront fees — a one-off fee charged at the time of taking out the loan.

— Ongoing fees — charged every month or year for administering the loan.

— Discharge fees — charged when the mortgage is paid out in full.

— Break fees — these apply if you exit a fixed-rate loan early and they can be costly.

— Refinancing fees — when jumping lender you may be charged a range of refinancing fees by your new lender.

Posted by Sophie Elsworth - Herald Sun on 10th August, 2015 | Comments | Trackbacks | Permalink

Want zero card fees? All you need do is ask

Don't feel like paying your card providers' annual fee? Tell them you'll walk away and see what they do, writes John Collett.

Rather than blindly paying credit card fees when the bank holds out its hand, customers might be better off saying, "No". Rewards credit card holders who spend up on their cards and have good credit histories can get their card providers to extinguish their cards' annual fees. 

A shadow shop using real consumers of card providers carried out for Sunday Money by financial comparison site Mozo shows most providers will offer incentives to stay if the cardholder threatens to walk away.  

Six consumers with cards from a variety of providers threatened to close their accounts if they did not get their fees waived or reduced. 

Of the six shadow shoppers, four were offered sweeteners. A NAB rewards card-holder implied he was going to cancel the card and switch providers. NAB waived his $200 annual fee for 12 months.

Another with an NAB Qantas Rewards Premium card with a $250 annual fee had the fees waived for a year after she said she was looking to close the card to switch to one from another bank with a lower fee. Cardholder offered points

A cardholder with an AMEX Platinum Reserve card, which is no longer available to new customers, with a $395 annual fee was declined a reduction in the fee but offered an extra 25,000 bonus points or a lower interest rate on the debt on the card for three months.

One of our shadow shoppers, rewards card holder Chandan Sharma, called his provider, a major bank, and implied that he would switch to another provider if he was not given a better deal.

The 34-year-old public servant was offered another of the bank's cards with a lower annual fee, with the same benefits as his current card.

"I really did not expect to be offered a card with a lower fee," Chandan says.

"When I received the offer I was surprised," he says. It shows that you will not get sweeteners unless you ask, he says. Premium cards can negotiate

Premium card holders are in a much better position to negotiate than those with standard cards.

Credit card providers have always offered an array of incentives to new customers, but have not offered much to loyal customers, says Mozo director, Kirsty Lamont.

"But we are now seeing sweeteners being offered to existing customers," she says.

Those with standard cards are much less likely to be offered sweeteners, she says. "Not all of our shadow shoppers were successful," she says.

"It is not a situation where the same sweeteners are offered to everyone," Lamont says. "But anyone with a premium credit card could, by just spending five minutes on the phone with their card provider, save a couple of hundred dollars a year," she says. 

Mozo has compared the dollar value of flights, cash-backs and gift rewards of the 115 rewards cards to find those offering the most value.   Annual spend is $18,000, rewards $88

The typical annual spend on all types of credit cards is about $18,000. On this spend, the average rewards card delivers just $88 in value each year, the analysis shows.   

One in five cards have such high fees and low value in rewards that the average spender will not earn enough in rewards value each year to outweigh the cost of the annual fee.

Lamont says rewards cards are marketed as delivering huge benefits, such as international flights and luxury hotel stays, but card-holders would need to be spending huge amounts receive these rewards.

With one rewards card, the card-holder would have to spend $64,000 a year to earn enough points to receive a $100 gift card, Lamont says.

She says card-holders should not be fooled by how many points each dollar of spending on the card earns.

Lamont says it is all about how the card issuer values its points and how many points need to be redeemed to get the reward.

For example, 50,000 points gives the card-holder 7.2 return flights from Sydney to Melbourne, but just 1.3 return flights on another card.

She says consumers should look for rewards cards aligned to an airline's frequent flyer points' scheme as they tend to deliver the best bang for the consumer's buck.

Posted by John Collett - The Age on 8th August, 2015 | Comments | Trackbacks | Permalink

First-home buyers' dreams alive, but harder road ahead

The dream of home ownership is still alive for Victorian first home buyers who are making a comeback in the property market.

Figures released by the Australian Bureau of Statistics on Friday revealed the number of loans by young buyers was up 13 per cent over the year to June. 

The increase comes after a second rate cut this year by the Reserve Bank in May and increased confidence in the marketplace. 

On top of what is reported by the ABS, there is also a growing number of first home buyers such as Sue Qi who are looking at other avenues to home ownership, such as breaking into the property market as an investor.

The 22-year-old has been living at home with her parents while saving a deposit for an investment property, ideally in the south-east, where she grew up, or in the outer east.

Miss Qi said she would also be receiving help from her parents, and that investing first allowed her to get a foot in the property door even when she wasn't ready to buy a home to live in for another couple of years. 

"I would probably be going for something more affordable than what I would want for myself," the senior account manager said. 

"I'd be investing in something...that I don't have to be as picky with and in an area where I don't mind just having an investment.

"I can just sell [it] later on to help me with my own property, as well as being able to do that before the prices keep going up because it doesn't seem like it's ever going to drop." 

But the number of first-time investors is expected to fall as banks put the brakes on lending to landlords to take some of the heat out the housing market. 

Those looking at the alternative avenue, along with other investors, now face a roadblock with higher interest rates and stricter borrowing rules. 

All four big banks have recently targeted investors with interest rate rises of between 0.27 and 0.29 percentage points. 

AMP chief economist Shane Oliver said first-time buyers would be "hit the hardest" by the macro-prudential controls.

"One of the things you want to see out of any reforms that run through the housing market is to make life easier for first home buyers, but this certainly doesn't do that," he said.

"They get hit by the lower loan-to-valuation ratio because they have a smaller deposit and they get screened out because of they've got a lower income."

Dr Oliver believed an increasing proportion of investor share was being made up of first home buyers, many squeezed out of the owner-occupier market. 

But with the tightening of investor loans, he said, first home buyers might benefit from entering the market as an owner-occupier with banks slicing fixed rates for these borrowers. 

"Or you might find the bidding at auctions is less intense," Dr Oliver added. 

LJ Hooker research manager Mathew Tiller expected the tougher policies, primarily the loan-to-ratio cap, would slow down the trend of "rentvestors" - people who buy where affordable and renting where they want to live.

"First home buyers and rentvestors would have saved a deposit over a number of years, thinking that they could probably get away with a 5 or 10 per cent deposit," he said. 

"And now obviously that goal has probably doubled, and that's what's going to take time for them to re-evaluate their budgets."

Mr Tiller said those who want to maintain their lifestyle, being close to transport and amenities in the inner city, might choose to rent a little bit longer while they saved a deposit or scale back what they were looking for. 

But Domain Group senior economist Andrew Wilson said the inner city was where rents were higher and the queue of prospective tenants longer. 

He believed the negatives of entering the market as an investor outweighed the positives. 

First-timers would not be eligible for the first home owner grant, which could contribute towards the deposit, he said, and they would need to pay rent and mortgage at the same time.

They would also miss out on the stamp duty concession of 50 per cent for a new or established property valued up to $600,000. 

"And then you actually become the landlord, so there's no guarantee that you would get a tenant and you have to pay all the [landlord's] costs," Dr Wilson said.

Posted by Christina Zhou - The Age on 7th August, 2015 | Comments | Trackbacks | Permalink

Deposit a bar that's set too high for too many

Saving a decent deposit may be the biggest hurdle facing people trying to buy their first home.

However, the current mix of ultra-low interest rates and government policies that favour homeowners is making life especially hard for people saving a deposit, as opposed to those who already own a property and are paying off a loan. Advertisement

For a household with average income, it takes a record eight years to save up a 20 per cent deposit for a typically priced Melbourne home, recent ANZ analysis found.

It is even worse in Sydney, where it takes a whopping 9.2 years, a near record for that city.

Expressed another way, the share of annual income needed for a deposit for a median-priced home is at a record high, as this week's graph shows.

It is a different story for people who already have a home loan, thanks to the plunge in interest rates.

The RBA has said households with new home loans are spending a lower share of their income on mortgage repayments than the average over the past decade.

The uphill battle facing people trying to save a deposit is being made worse by record low interest rates, and a tax system that tends to favour home ownership.

Not only have record low interest rates put a rocket under house prices in Sydney and Melbourne, saving is harder because bank deposit interest rates have been slashed.

Making things even tougher, the interest earned on a savings account is taxed at the marginal rate, so after inflation there's a good chance you're going backwards.

Someone who already has a home loan, in contrast, can use an offset account to, in effect, earn an interest rate equal to their mortgage rate. This will inevitably be higher than a bank would pay on deposits.

The money held in an offset account is deducted from the mortgage when the bank is calculating monthly interest repayments.

In effect, it means a homeowner can earn an interest rate equal to their mortgage rate, which might be a bit less than 5 per cent today. What is more, that is an after-tax return.

There have been some attempts to help people save deposits more easily, such as first home saver accounts, a Rudd government initiative that gave people saving a deposit tax breaks and co-contributions from government.

However, these were scrapped from July, after disappointing take-up rates.

Groups such as the Customer Owned Banking Association argue policymakers should look at revisiting some sort of scheme to help first home buyers save up a deposit more tax effectively.

With home ownership and all the financial advantages it brings moving more out of reach for many, it is a good argument that deserves serious consideration.

Posted by Clancy Yeates - The Age on 5th August, 2015 | Comments | Trackbacks | Permalink

Here's how to cast off the chains of debt

Two weeks ago in this column I talked about the wisdom of our children following in our footsteps and committing themselves to a debt-funded gamble on the property market.

I spent 30 years as a slave to interest payments and I asked whether we should really encourage our children to do the same, whether the formula will work for them.

It worked for us, sort of, mostly because it was a forced saving, a discipline, but also because we were lucky, because for the 33 years before the global financial crisis the share market and the property market was underwritten by a previously unknown explosion in debt-funded asset appreciation, which, depending on which index you believe, delivered a compound growth of somewhere between 9 and 10 per cent in both share and property prices before dividends and inflation, the two of which just about cancel each other out in real terms.

The question now is whether those returns will continue and my contention is it is a gamble, a gamble our children need to think very hard about.

The All Ordinaries returned an annual compounding 11.7 per cent in the 33 years from 1974 to 2007, but in the 33 years before 1974, before the explosion in debt, the All Ordinaries index returned just 2.9 per cent a year. In other words, for leveraged investment to make any sense in the future the debt culture has to continue and the hot potato of asset price appreciation has to stay hot.

The risk of course is that it doesn't and I despair at the concept of my 19-year-old daughter enriching someone else with her bad timing and good intentions and having to work for decades just to make good on the mistake with no value to show for it at the end.

It's not much fun losing money you have, but it does matter if our children lose money they don't have, and spend their lives paying for it; that's a whole new level of long-term slavery and dissatisfaction I cannot imagine.

So what can the younger generation do to avoid getting trapped by our debt culture? What should I be telling my daughter? How do they progress without borrowing a lot of money and taking a gamble on asset prices continuing to do what they did and interest rates not going up?

Here are some ideas, and while there are no golden bullets, hopefully some of this provokes you to think outside the square of doing what we did, before it's too late:
  • Challenge your assumptions. And challenge the assumptions of older people who lived through the golden era of the debt boom. Their advice assumes the perpetuation of history but at these prices, it's not guaranteed, it's a gamble. Assumptions are the mother of all you know whats.
  • Don't borrow money. Simple. Debt means committing yourself to the power of compounding returns working against you. The opposite of all the Warren Buffett advice. Debt enslaves you, changes your risk profile and pushes you to accept a low-risk career. It subdues entrepreneurism, it restrains risk taking and it forces people to make compromises. Compromise guarantees mediocrity. Before you commit yourself to mediocrity, to paying someone else a compound return for 20 years, have a bloody good think about how you can do it differently.
  • Plan to build wealth without buying assets. Most really wealthy people got there by building businesses. Why not attempt that now, without encumbrance, without the responsibility of debt, while you have the energy and the courage to step over the line. Step straight into the rat race instead, into a job, a mortgage, a family, and you lose that opportunity. Do it now.
  • Invest in your career. The best investment in the whole world is not in shares, or property, it's in yourself, your brain, your knowledge, your skills. Focus on that and you will create more wealth than any property market. Your earning capacity is the best long-term investment you can make.
  • Value your state of mind above all else. Debt comes with more than an interest cost. Over long periods it can impair your psyche and it can do so on a daily basis. Your frame of mind has tremendous value and in the long term it is worth more than any asset. Don't gamble with it, preserve it. Normal is great, but you'll only realise that when things are not normal.
  • Rent. There is not enough space to expand this subject but there is a body of work about the long-term benefits of renting versus property ownership, look it up.

The other option of course, and I hesitate to tell you this, is to sponge off the people who have the money for as long as you possibly can. You already know this of course but don't abuse it. We don't need the internet as much as you do and we're the ones paying the bills.

Marcus Padley is the author of the stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au

Posted by Marcus Padley - Money Manager (Fairfax) on 5th August, 2015 | Comments | Trackbacks | Permalink

Many property investors still keen to buy

Many investors are undeterred by lenders making it harder for them to get a property loan although some off-the-plan buyers may end up unable to complete their purchase.

A Mortgage Choice survey shows that 54 per cent of potential investors would still go ahead with their plans despite lenders making sweeping changes to their lending policy and pricing.

Many lenders, including most of the major banks, have hiked interest rates on investment property loans in the past week but Mortgage Choice chief executive John Flavell says the majority of investors still view property as a lucrative investment strategy.

"When we asked potential investors whether or not now was a good time to invest, more than 70 per cent said yes, which goes some way to explaining why so many potential investors are not deterred by the spate of pricing and policy changes being made by many of Australia's lenders," he said on Thursday. 

But, Mr Flavell said, the changes did represent a fundamental shift for people who had purchased property off the plan and had their loans approved on the basis of lending policy and pricing at that time.

"There's potentially some issues in relation to people not being able to complete transactions by virtue of the shifting sands," he told AAP.

Smaller mortgage player AMP Bank has temporarily stopped lending to new property investors and has raised rates on its existing loans to landlords by 47 basis points. That's well above Commonwealth Bank, ANZ and Macquarie's 27 percentage point increase.

National Australia Bank hiked variable rates on interest-only home loans - the predominant structure for investors - by 29 basis points, leaving Westpac as the only major bank not to have raised investment loan rates.

Ratings agency Moody's Investors Service expects Westpac, Australia's largest lender to landlords, to follow its peers in repricing its investment mortgage book.

"Increased lending rates are credit positive for the banks because they rebalance their portfolios away from the higher-risk investor and interest-only lending toward safer owner-occupied and principal amortising loans," Moody's vice president Ilya Serov said.

"They also help preserve net interest margins and profitability amid higher capital requirements and increased competition from smaller lenders."

Posted by Megan Neil - The Age on 4th August, 2015 | Comments | Trackbacks | Permalink

Five Steps to refinance your home loan

INTEREST rates are at record lows and banks are hungrier than ever to get your business but many borrowers don't bother to refinance.

One in three Australians are mortgage customers and for many a home loan check-up is well overdue but it's the only way to ensure you are getting the best deal possible.

The cash rate is resting at a record low of two per cent so lenders have been rolling out the best home loan deals in living memory but it won't stay like this forever.

Here's five simple steps to making the most of bargain interest rates by refinancing.


The first thing you should do is check the current fees and charges associated with your loan including the interest rate.

Comparison website Mozo's database shows the lowest home loan rate for a $300,000 30-year loan is 3.98 per cent.

For a three-year fixed it's 3.94 per cent, so if you're paying much more than this then it's time to shift lenders.


Mozo spokeswoman Kirsty Lamont says getting a valuation on your home is always important if you are looking to change your mortgage.

“Get your property valued to work out what it's worth, your local real estate agent could do this for you,'' she says.

“It will determine the loan-to-value ratio of your property and if that's over 80 per cent you could be up for paying lenders' mortgage insurance.”

This is a one-off charge that can cost thousands of dollars and it may not make switching worthwhile so it's important to check it out.


If you've got this far and you think you are in a good position to jump lenders then seek advice.

Contact your bank and find out if you can get a better deal from them without having to move or alternatively use comparison websites to compare home loans offered by other lenders.

Mortgage brokers can also be useful, they can scan through thousands of mortgage products and help you find one that best suits you.


Don't just get sucked in by low interest rates.

Look at the comparison rate on loan products to work out what the true borrowing cost — this rate includes all the fees and charges associated with the loan.

It allows the customer to compare apples with apples.

Mortgages have lots of attached fees and charges including loan establishment fees, annual fees and exit fees and charges.

These add up so make sure you factor these costs in before jumping lender.


Once you've done your homework if you've decided to jump lenders then you'll be on your way to paying back your loan sooner.

On a $300,000 30-year loan your monthly repayments could fall by $125 per month by making a simple switch from the average variable rate of 4.69 per cent to the lowest rate of 3.98 per cent.

On a fixed-rate loan the average rate could fall from 4.47 per cent to the lowest rate of 3.94 per cent and save you $93 per month.

Posted by Sophie Elsworth - News Limited Network Australia on 4th August, 2015 | Comments | Trackbacks | Permalink

Last of the rate cuts for home owners

The markets are tipping one final fling by the Reserve Bank with a rate cut in April next year.

And credit where it's due, since it was entertaining an official cash rate of 2 per cent, where it is, when economists were predicting it would rise this year.        

But if it is right again the banks won't be following suit because, frankly, they don't have to.

Did you notice there hasn't been a peep out of politicians since some banks lifted their investment loan rates by 0.27 per cent across the board? Reserve Bank governor Glenn Stevens even gave them a tick.

They didn't even have to hide behind new borrowers by only increasing their rate, though they'll still be hit harder than the banks are letting on.

As the cost of an investment loan rises 0.27 per cent, the banks are simultaneously cutting the discount on the advertised rate by the same amount for new borrowers. That's a rate rise of 0.54 per cent on new investment loans without so much as a by your leave.

All investors are being slugged, but then the banks probably figure who likes landlords anyway? Except them, of course.

The banks also have a nice line going when lending to DIY super funds. These have to be non-recourse loans, so they have less security for the banks. Fair enough, the rate is higher again.

But the sneaky thing is if the property is negatively geared in the fund the banks will also ask the trustee to be guarantor – in effect making it a normal, safe as houses, loan. Or as a mortgage broker put it to me, "They get their hooks into members' assets outside super".

Anyway, the banks are plugging a potential leak from their profits arising from the new capital regulations to bring them up to scratch against their international peers.

The more capital they have to hold, which earns next to nothing, the less they can lend at a typical profit margin of 40 per cent.

But the real problem for borrowers is further afield. There's a race between when the Federal Reserve in the US will raise its rate and the Reserve lowers its, the outcome of which will affect the banks' funding costs.

Money markets are, um, banking on the Fed lifting in December, though economists are opting for it at the September meeting.

Unlike the Reserve the Fed publishes its interest rate forecasts. They're higher than the market is pricing so one of them is going to be wrong, a potential problem in itself.

If the markets have it wrong – as the most recent economic statistics suggest – on their past form they'll panic and push yields higher than even the Fed intended. The damage wouldn't stop there either. The shockwaves would spread to sharemarkets as well.

Since the US bond yield is the rock bottom, risk-free benchmark for all, other rates need to rise at least as much as well.

It'll be the perfect cover for the banks to avoid a rate cut next year.

Posted by David Potts - The Age on 3rd August, 2015 | Comments | Trackbacks | Permalink

Learn from the wealthy and invest like a pro

In Australia, the investment environment is changing. For investment choices, people often select either property or shares, and of course you can do both.

As a nation, we have enjoyed prolonged periods of low interest rates, spurring hot property prices. Many people are looking to balance their investments, as some property prices are becoming unaffordable.       

The sharemarket is often shrouded in misconception. Some people believe that it is purely the domain of the wealthy, or that you have to be a trader to invest in the markets.

When you invest in the sharemarket, your profits can be greater than property, but you have to weather the storms of volatility. So the question becomes: how do I achieve the returns from shares and avoid the effects of the downside?

Let's take a leaf out of the professional investor's guidebook to understand their techniques. Smart investors learn these techniques.

Professional investors take gains from the upside cycle of the market while minimising losses on the downside. They understand their investment time frames and expected returns; establishing their appetite for risk; creating a diverse fixed portfolio; rigorous monitoring and knowing when to act (and when not to).

Inexperienced share investors break these rules and in times of volatility they can lose a lot of money. The professionals set themselves targets, commit to time in the market and diversify their investments across different industries and company sizes. This means they don't change horses too often, and it also means that solid-performing investments can offset the investments that are weaker.

If you don't have up-to-the-minute knowledge about sharemarkets, or the time to become informed, there are two main ways to gain professional expertise. Firstly, you can invest in a fund. Most funds pool their resources and invest in a variety of stocks. There are some funds that give you a multi-manager investment option.

With this option, your fund manager invests in a combination of five or six other specialist managers, who have distinct areas in which they invest (eg. yielding stocks, growth stocks, merging etc.) and distinct styles.

These multi-manager funds are designed so that when some of the funds are underperforming, their losses are buffered by the other well performing funds (all managers don't usually perform well at the same time).

You can look for funds that are focused on minimising the impact of market corrections. The other option for investing like a pro is to find an adviser or broker.

This way of investing requires more hands-on decision-making. But it means you gain the expertise and "coaching" of a professional, and when it is needed they can act quickly on your behalf.

The important thing to remember is that when you buy shares listed on the ASX, you're in a market that is predominantly used by professionals. So if you're going to make the most of your investments, and reduce the risk, you have to think like a pro. Mark Bouris is executive chairman of wealth management company Yellow Brick Road. www.ybr.com.au

Posted by Mark Bouris - The Age on 2nd August, 2015 | Comments | Trackbacks | Permalink

Real-estate myths busted

With Melbourne's property market sizzling, competition fierce and prices rising higher than the mercury in the Bahamas, it pays for buyer and sellers to know the nitty gritty of dealing in bricks and mortar.

The Sunday Age addresses some common real estate misconceptions and home truths.

Don't buy and sell in spring. FALSE

Property always dazzles in the warmer months, with tendrils of wisteria, glistening swimming pools and verdant lawns. But autumn and winter is when buyers can really gauge a home's appeal, minus the sunshine and artifice. For vendors, spring is highly competitive. Advertisement 

You should make an offer before auction. TRUE

A vendor can instruct their agent to alert them to offers, so a shot. But don't play games. A cooling-off period does not apply when the property is bought within three clear business days before a public auction, according to Consumer Affairs Victoria. A change of mind or second thoughts can be a risky, costly business.

Stage with fresh flowers, hot coffee brewing on the stove and bread in the oven. TRUE            

Human nature is to be enamoured by finer things. A cookbook laying open on a mouth-watering recipe, besides branches of dried spaghetti at the ready in the pot, will set the scene. Think of it as dating, says buyers advocate Mal James - would you want someone who smells of cologne and comes bearing a bouquet? Or the one who didn't shower nor floss their teeth?

You cannot afford to buy anything, anywhere, because of Chinese investors. FALSE

Low interest rates mean people can borrow more and therefore stretch themselves further during bidding. Favourable tax conditions make investing appealing, and this increases competition under among owner/occupiers and investors. More bidders can afford to come to the table.

You should hire a stylist. TRUE            

A well-dressed home will generally fetch a higher price, experts say. Agents have preferred stylists on speed dial for vendors who need advice on a fancy throw rug or a fresh coat of paint. Agents are eager for vendors to imbue their home with the sort of finesse that gets a buyer's heart racing and their finger twitching for a cheque book.

Some agents underquote. TRUE 

Some give the industry a bad name, so do research on homes in preferred suburbs advertised within a budget, and keep notes on sale price versus the pre-auction price guide, comparing land size, bedrooms and condition. And in the current market, be prepared for competition on auction day to blow price expectations sky high.

You cannot interrupt the auction to ask questions. FALSE           

One brazen buyer at a recent auction in Hampton stopped the auctioneer to cheekily ask about an "asbestos problem". Anyone attending an auction is entitled to ask a reasonable question at any time before the hammer falls, so long as they are not doing so to be a disruption to their rivals - which arguably the asbestos buyer might have been. Equally, the auctioneer can decline to answer.

Eyeball the auctioneer and stand front and centre. TRUE

Buying a dream home is no time to play hard to get. Standing behind a tree in a trench coat and sunglasses won't help the cause. Confidence is more intimidating to rival bidders than lurking like a Bond villain at the back of the crowd. Buyers' advocates, bidding for clients, are not afraid to stand in pole position and make their intention known through confident body language.

Get a friend to bid for you. TRUE Eliminate emotion from the auction process for a greater chance of success. The energy the auctioneer creates, the sense of urgency and fading opportunity, can push a lot buyers past their budget. Anyone can bid on a buyer's behalf - a friend or a relative, or for a fee an agent from a different firm to the listing agency, or a buyers' advocate - and they can be trusted to stick to a prescribed limit. 

If you are the successful bidder you legally have to sign the contract. FALSE

If you scratch your nose and accidently buy a house, you can do a runner. The auction system relies on trust and goodwill. The sale is only binding once the contracts are signed. But if a buyer signs the contract and changes their mind before handing over the deposit, they can be sued. It is unusual, says the Real Estate Institute of Victoria, for a successful bidder not to sign the contract.

You need to have a deposit cheque filled out and in your pocket at the auction. FALSE 

A buyer can bid and sign the contracts without a cheque, but agents often try to execute the contract within 15 minutes of the hammer falling. Some are content to accompany a buyer home to collect the deposit, others will ask them to sign a promissory contract, and some will be willing to wait until the Monday after a weekend auction.

Bid late to gauge your competition. FALSE

If a buyer is doing this to give rival bidders a fright, it likely won't work, experts say. It's far scarier and better for momentum to bid with confidence. Strong bidding and decisiveness will leave rivals wondering just how deep their competitions' pockets are, and is far more unsettling than waiting until the third and final call. Set the pace - don't enter the fray at the last second.

The highest offer will always win the keys. FALSE 

In cases of private or off-market sales, a buyer who can settle quickly and has their affairs in order can be enough to tempt a vendor. Private sales in particular will have conditions set out in the contract, and it can come down to the right sort of buyer whose own conditions fit the bill, not just the right price. A cooling-off period, within three business days, exists for residential private sales, but not public auctions.

Add zeros to the weekly rent amount and that is the value of the property. TRUE, kind of.

This crude formula seems to work for some newer apartments, especially around the inner-city suburbs, in which a modern $400,000, one bedroom pad is able be leased out at roughly $400 per week. However, at the higher end of the market, the maths definitely doesn't add up. Properties leased out at around $2000 a week - considered a luxury rental in Melbourne - would set a buyer back much more than $2 million. Leave this strategy for a pub game - where we've heard this thrown around - not the bargaining table.

The reserve has to be set 24-48 hours before the auction. FALSE            

A vendor will often set the reserve on the day of auction. This is generally because if they tell their agent their reserve price during the campaign, then the agent cannot advertise the property below that price. Not wanting to be locked in, a vendor will keep the price possibility fluid until the eleventh hour, if they wish.

You have to renovate and spend money to make money. FALSE            

Homes in sought-after streets or with scarcity factor - for example, an unrenovated terrace on Beaconsfield Parade in Middle Park, which are becoming fewer and far between - doesn't need a tart up to command top price. Call it putting lipstick on the pig. With apartments booming, developers keen on big blocks of land also don't care what state the house is in - knock down jobs are just as coveted, these days.

If any agent says your offer - prior to auction or by private sale - has been verbally accepted by their vendor, the deal is as good as done. FALSE

Until buyer and seller have signed the contracts, the sale is not legally binding. If a more appealing offer is put forward before contracts are inked, it's no more than bad luck that a buyer that thought they had the keys to their dream home in the bag can be gazumped.

Posted by Emily Power - Domain (Fairfax) on 2nd August, 2015 | Comments | Trackbacks | Permalink

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

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