Puzzle Finance Blog

Property investors on high alert as hot market attracts scammers

WHEN the property market is hot, the sharks begin to circle; recognising the opportunity to fleece the rest of us out of our money.

The problem with property scams is that they are hard to detect and often perfectly legal. They are marketed convincingly and professionally, unlike the instantly recognisable scams we are used to in other walks of life.

For example, an error-ridden email from a Nigerian prince looking to give us millions of dollars in exchange for a few personal details is unlikely to fool anyone. We also recognise that winning the Mexican lottery without entering or even having been to Mexico is extremely unlikely; as is being notified of the win by snail mail from an Australian PO Box.

Property sharks are harder to pin down. Commonly they are investment spruikers, claiming to be a group or club made up of like-minded investors, looking to help each other out.

In reality, they are marketing companies, helping developers sell overpriced properties to unsuspecting investors. They charge the developer high commissions, in return for quick, hassle-free sales. Such companies are legal simply because they do not charge buyers fees for their advice, but their commission ends up being paid by the buyer anyway, as the developer adds it to the sale price.

The buyer is then behind the eight ball, often struggling to pay off an overvalued property. Mum and dad investors were ruined in such scams on the Gold Coast when values plummeted after the GFC.

The spruikers will approach you through cold-calling, letterbox drops and newspaper ads. They promise unbelievable returns and property secrets that will make you millions. They first ascertain that you have the finances to buy an investment property and then they pounce.

I answered the phone to a cold-caller last week, who embarked on a lengthy spiel. I was told I could attend a free information night, including a three course meal, where I could learn how to build wealth through property investment. I asked the posh sounding British woman on the phone if she was looking for media coverage of the event, to which she paused briefly, sounding confused. I asked her if she knew she had called a real estate reporter from the Daily Telegraph. Suddenly, for once, she was the one trying to get off the phone.

Now, this was a classic case. At such information nights, expect to be subjected to a lot of high fiving and hand clapping; designed to get you emotionally charged. You will be offered a chance to sign up for an investment on the spot. They want you to commit there and then; to stop you going home, sleeping on it and realising it does not make sense. To keep you there, they might offer you a one stop financial shop, featuring in-house solicitors, accountants and financial advisers. They say this is for your convenience, but in reality, it’s to stop you getting independent advice from outside professionals, who would warn you away from the deal.

You don’t find out about great property deals from a telephone marketer. Property data is more accessible than ever before thanks to newspapers, websites and apps; plus advice from real investors on web forums.

You have probably heard about doing your due diligence when searching for an investment property. You should always do the same when considering which company or buyer’s agent to seek help from.

To make sure an investment group or buyer’s agent is legitimate, check their website for company details, including staff and directors. If details are vague, it’s best to avoid them. If there is no evidence that the company has been around longer than a year or two, steer clear. Not only is there no track record, but known fraudsters will often dissolve companies that have developed a bad reputation and simply start over with a freshly registered business.

Testimonials from ‘happy customers’ with only a first name or initial (eg “I can’t believe I became a millionaire, the service was great” — Doris G, NSW), are also dead giveaways. A good company will have testimonials from people who actually exist! With full names, faces and contact details.

Always seek independent advice. Separately engaging solicitors, accountants, financial advisers and mortgage brokers will mean you are safe from being ‘teamed up on’ by a dodgy group. Remember that if it sounds too good to be true, it probably is.

Posted by News Limited Network on 21st April, 2014 | Comments | Trackbacks | Permalink

How to ask for more money

Doing some home improvements or getting a new set of wheels doesn't have to trigger a complete mortgage makeover.

If, like Oliver Twist, you would like some more, consider asking for a home loan top-up. It won't have the dramatic turns of the Dickens classic. A top-up can either be an increase to your home-loan limit, or a separate account set up behind your home loan.

Chloe Brandt, 24, and her fiance, Zach Gadd, 27, took the top-up route this year. The couple bought their Sydney northern beaches house in late 2012, knowing they would eventually need some extra dollars to finish renovations.

"It was a bit of a dump," says Brandt. "We did as much as we could without having to borrow anything."

But by the end of 2013 they needed a fresh injection of funds to hire professionals to build decks and change the roof. "Our goal with the top-up was to get it to a point where we can then rent out another room and get an income from it."

The house had risen in value by $120,000, so they had no trouble getting a $65,000 top-up. About $15,000 went into consolidating debt and the remainder into renovations.

Minor renovations are the most common reason people apply for a top-up, according to Dennis Mrljak, personal mortgage adviser at Smartline Personal Mortgage Advisers.

Debt consolidation, school fees or a new car might also prompt people to go cap-in-hand to their lenders. Paying $300 a month via a mortgage is a lot more cashflow-friendly than the $800 a month you might pay for a five-year car loan.

Others, such as property investor Emilia Rossi, have a longer-term plan. "The main reason I topped up all of my three loans was to be able to use the equity I had in each property to then put towards the deposit for the next investment," she says.

It is a strategy she will use again next month when she tops up her current loan to buy a fourth investment property.

So if a home loan top-up is sounding like a handy tool, what do you need to consider?

How much do you need?

Most lenders put limits on top-ups. "Banks do get a bit nervous above $50,000," says Mrljak. "The majority of them have $100,000 as a threshold and then you've got some lenders who almost have it uncapped, I guess, based on your equity and the affordability they will let you take it out for as much as you really need."

Your lender will run the ruler over your current income and liabilities when you apply for a top-up and possibly require an updated property valuation. "It's almost like applying for a loan from scratch with a lot of lenders," says Mrljak.

How much equity do you have?

"A lot of people are prevented from either refinancing or topping up because they might be staring down the barrel of $7000, $8000 or $10,000 of [lender's] mortgage insurance," says Mrljak. He suggests waiting 12 to 18 months before applying for a top-up, particularly if you bought a property with a deposit of 20 per cent or less.

Why do you want the top-up?

Mrljak suggests thinking twice before consolidating debts or buying a car with your mortgage.

"If you are going to enhance the value of the property or you're going to put it into another property or shares then it makes perfect sense. It's a cheap way of getting your hands on that sort of money.

''But if you're doing it to fund a big family holiday, it may not be the best idea to turn it into a 20-year loan and pay twice as much interest as you normally would."

Unless you make extra repayments, the total interest can make topping up significantly more expensive in the long run. For example, a $30,000 personal loan over five years at 12 per cent will add up to about $10,000 in interest. A $30,000 top-up at 5 per cent over 20 years will result in interest charges of $17,500.

Beware of making a habit of topping up if you want to access equity for wealth-building strategies, Mrljak warns. "It can be quite easy to top-up your mortgage each time you feel you need extra money and this could eat away at your equity."

Read more: http://www.theage.com.au/money/borrowing/how-to-ask-for-more-money-20140415-36o6l.html#ixzz2zYmHujbp

Posted by Christine Long - The Age Money on 16th April, 2014 | Comments | Trackbacks | Permalink

Turn that pile of bricks into gold

If you want to make top dollar off an investment property, then you'll have to make it work for you - with paying attention to details being the key.

Most of us aspire to own at least one investment property. But managing bricks and mortar assets isn't easy. If you want to get the inside track on property investing, you need to do your homework.

Investors who make money, regardless of the prevailing market conditions, pay attention to detail, even when they seek out expert advice. It's vital to cover every base to deal with the ups and downs of the market.

Location, location

A poorly-located apartment or house is an investor's worst nightmare. Avoid secondary locations and streets that have a lot of commercial activity. It's also smart to be close to public transport, restaurants and schools, but preferably in a quiet spot. Veteran estate agent Bill Cook, of Williams Batters, says one of his golden rules is "don't buy on main roads but be close to main roads". This is sound advice: busy roads give quick access to transport and amenities. Investment properties also should appeal to owner-occupier buyers, not just to other investors.

Profits and tax

Australian house prices have grown by an average 11.5 per cent a year since 1926, according to AMP Capital Investors. Unlike other countries, Australia's tax rules positively advantage property investors. To be able to claim deductions through negative gearing for the losses incurred on a property is a major reason why 10 per cent of taxpayers own one or more income-producing residences. Be careful, though. Negative gearing delivers the greatest tax breaks to high income earners and is of little benefit to those earning less than $80,000 a year.

Future wealth

Is it best to buy property that can be expected to deliver a solid capital gain over the long-term or acquire a "cash-flow positive" dwelling that generates high rents but lacklustre capital growth? Property adviser Paul Osborne, from Secret Agent, says those who chase capital growth "always make a forward estimate, so in many ways you are speculating about what is going to happen down the track". Even so, most investors focus on properties that offer sound prospects for capital growth; they see this as the best way to build equity and achieve financial independence.

Think like a tenant

What are tenants looking for? Martine Bannister, who manages rental properties in Melbourne's north for Jellis Craig, says most tenants expect a dishwasher and airconditioning. They will also pay more for places with new kitchens and bathrooms. "People want the mod cons these days and you lessen your vacancy periods if you have them," Bannister says. Security features and open floor plans attract tenants, too. The ideal layout for a rental property is one in which the bathroom or lounge-room is sited between the bedrooms. This maximises privacy and is valued by tenants who share.

Getting the benefit

Tax breaks shouldn't be the be-all and end-all of your investment approach, but once you've bought a property try to get every deduction you're entitled to. The normal deductible expenses of interest, management fees, repairs, insurance and council rates are top-of-mind for many investors, but other allowable expenses can be missed. These include claims for land tax, depreciation and borrowing expenses, such as loan set-up fees, rate lock-in fees and stamp duty on a mortgage.

Hang on to all paperwork. If you buy an established apartment or house, the vendor may not pass on the property's depreciation report, if one exists. You can fix the problem by hiring a quantity surveyor to produce a new report on the outstanding depreciation. Claims can be made for depreciating the building structure of newer apartments as well as for replacement bathrooms and kitchens, heating and hot water systems, even the curtains.

Finance checklist

Before you look for an investment property to buy, run a check on your finances and estimate what could happen if an investment goes pear-shaped.

Your list of worst-case scenarios shouldn't be limited to external factors such as the impact of a fall in property values or an increase in borrowing costs. Consider your personal circumstances, too. What will happen if you lose your job? Will you be able to service a large debt if you move from being a two-income household to a single-income one?

Once you've determined how much you're prepared to borrow, you should build in buffers. It's smart thinking to project that interest rates will go up by 3 per cent. Always assume there will be added costs, such as your property being without a tenant and income for a six-week period. If you plan for these wildcards, you'll cope a lot better if they do eventuate.

Case study: Dad's advice proves a valuable investment

When 19-year-old Lara Stephens bought a rundown single-fronted cottage in Hamilton Street, Seddon, in partnership with her father, Craig, last November, she was doing what many young people do.

Buying an investment property, rather than a home to live in, has become an accepted way for young Australians to get a foothold on the property ladder.

In Lara's case, it helped that her dad is a fourth-generation estate agent, with plenty of property experience.

Craig Stephens, of Jas Stephens, bought the two-bedroom house for $600,000 through another agent at a State Trustees auction. Lara, who is study marketing at RMIT University, has since co-ordinated a modest renovation of the property, which has just been offered to the rental market for $450 a week.

The bathroom and kitchen will eventually need major work and the house will need restumping, Craig Stephens says.

"But a cosmetic renovation to the tune of $30,000 through Bunnings and Ikea allowed us to clean it up and rent it out."

New pendant lights were bought from the Swedish homewares giant, and the cottage has new carpets and fresh paint throughout.

Lara is learning how to handle a mortgage, her father says. "I'm teaching her how to renovate and source various materials and introducing her to various tradespeople."

Posted by Chris Tolhurst - The Age on 12th April, 2014 | Comments | Trackbacks | Permalink

Mortgage rate complacency can cost you dear

THE cost of failing to get the best mortgage interest rate can be a hefty one. New figures show the difference between the cheapest and most expensive home loan is about $400 a month for the average Aussie mortgage of about $300,000, costing $120,000 in extra interest payments over the life of a home loan.

Mortgage experts say a majority of new loans today come with low-rate options, but people who haven't checked their home loan in years risk paying way too much.

An analysis of 1300 loans by research group Canstar has found that the lowest standard variable rate is 4.49 per cent, almost 2 percentage points cheaper than the most expensive at 6.38 per cent.

Mortgage Choice spokeswoman Jessica Darnbrough says the average standard variable rate among the big four banks is 5.91 per cent, but people who push for a better deal get usually get a lower rate.

The key is to do your homework and ask your lender for the best deal.

“Lenders are aggressively competing for your business, but if you go direct to a branch they might not feel the need to compete as aggressively,” Darnbrough says.

Canstar research manager Mitchell Watson says people should not be paying the standard variable rate. If they owe more than $150,000 they should be on a package, and if it's below that they should look for a basic, low-rate product.

“If you are paying more than 5.2 per cent, you most likely are paying too much,” Watson says.

“Don't be complacent with what you are paying. Interest rates have been coming down … people could be saving more than they are.”

Fixed-rate mortgages also vary widely, with a difference of 1.8 per cent between cheap and expensive one-year fixed rates. Canstar found that in the week to March 24, 20 fixed-rate loans had cuts, and just one had a rise.

“There are some lenders who are looking to attract borrowers through their fixed rate offering by dropping their rates well below the rest of the market. Overall fixed rates are at a historical low. However, that is not the case for all fixed-rate loans,” Watson says.

Posted by Anthony Keane - News Limited Network on 3rd April, 2014 | Comments | Trackbacks | Permalink

Joining the rush for property

With lower rental yields and rising vacancy rates, analysts are warning investors to tread carefully, writes John Collett.

FOMO, or fear of missing out, is driving the property market.

Real estate demand in both Sydney and Melbourne is running hot. Net rental yields may be less than 3 per cent on many properties, but that is not dampening enthusiasm for bricks and mortar.

Real estate is tangible, so most people feel they need no special skills to be a successful property investor. And spurred on by apartment price rises of more than 10 per cent during the past year and record low interest rates, investors are leading the charge. They have elbowed aside first home buyers, who compete in the same part of the property market as investors.

First home buyers are taking out just more than 10 per cent of new home loans compared with the long-term average of about 20 per cent.  
With the typical two-bedroom inner-city apartment on a ''net'' rental yield (after costs) of between 2.5 and 3 per cent, even very low mortgage interest rates of about 5 per cent leave investors often losing money, at least in the short to medium term.

Supply of inner-city apartments is being added, especially in Melbourne. Higher dwelling approvals, low rental yields and rising vacancy rates mean would-be property investors need to tread carefully, analysts say.

Cameron Kusher, a senior research analyst at RP Data, says rental yields for units are very low across both cities.

''While apartment prices have risen, rents have not risen as much and rental yields across both cities have fallen,'' he says.

With interest rates and mortgage interest rates likely to stay low and prices likely to continue to rise, ''it seems as if yields will continue to fall across both cities'', Kusher says.

Louis Christopher, the managing director of specialist property researcher SQM Research, urges caution for would-be investors in Melbourne's inner city, in particular.

Vacancy rates in inner-city apartments in Melbourne are already ''elevated'', he says. ''Anyone thinking of investing in these markets needs to factor in the possibility that they may have to lower the rent to attract tenants.''

A vacancy rate of between 2 and 3 per cent is indicative of equilibrium between landlords and tenants. Vacancy rates in inner Sydney apartments are low, at about 2.5 per cent, however Christopher expects vacancy rates to start to rise in the second half of this year. Rising vacancies put pressure on rents to fall.

Melbourne oversupply

Robert Mellor, the managing director of BIS Shrapnel, estimates there could be 2000 apartments in excess of demand in Melbourne's inner city. ''This is a classic cycle where everyone is overdoing it.''

Vacancy rates are high in Melbourne's Docklands, Southbank and around the CBD. Vacancy rates are seasonal, usually peaking in January and falling in February. During the past two years, the trend vacancy rate in Docklands and Southbank has averaged about 7 per cent, data from SQM Research shows.

Mellor says the vacancy rates in Docklands and Southbank could even peak at close to 10 per cent in three years' time - a ''worst-case scenario''.

Vacancy rates may not reach that high because landlords are likely to reduce rents to attract tenants. Mellor's advice to would-be investors in Melbourne's inner-city apartment market is to wait. ''There will likely be bargains for patient investors in two years' time.''

Analysts say Sydney's inner-city apartment market is not as over-supplied as Melbourne's.

Sydney brighter prospect

But there is a lot of supply coming to the southern end of Sydney city, in areas such as Green Square, Chinatown and Broadway, Christopher says.

''We are aware of multi-storey dwellings that are going to be constructed and completed in the next few months,'' he says. ''We are saying to investors who are buying in these markets to be aware that they will be unlikely to increase rents and may even have to lower rents a bit, to encourage renters to their properties.''

Mellor says apartment approvals for Sydney are significantly higher than they were. And the high number of apartment approvals for Sydney during the past six months has surprised him. However, Sydney has been under-supplied for the past five years.

He is expecting further ''solid growth in rents and values'' for Sydney apartments as immigration and population growth remain strong.

Interest rates may start rising in 12 to 15 months' time from their historic lows now, according to Mellor. But rates will only rise if the economy is stronger. And the mortgage interest rate is not expected to rise to more than the ''low 7 per cents'' from just over 5 per cent now.

That would be about equal to the average long-term mortgage rate, Mellor says.

Regional focus

Pauline and Mark Klemm have built a property portfolio of three houses and one unit during the past two years.

The Melburnians buy lower-priced properties in regional centres. They have houses in Whyalla in South Australia, Townsville in Queensland and Orange in NSW and a unit in Toowoomba in Queensland.

Pauline, 50, and Mark, 52, both work in the health industry. Pauline is the driving force behind the couple's property investment strategy. She bought the properties for between $100,000 and $290,000. The investment properties are "cash-flow positive'', meaning the rent coming in is higher than the outgoings after taking account of depreciation.

Pauline could have bought in outer Melbourne, but the competition from other investors is too great. And lower-priced properties produce higher rental yields, on average, than higher-priced ones, she says. She is looking at buying her first capital city property, in Adelaide. She has built-up a network of property contacts, such as the real estate agents who manage the properties.

Pauline and Mark are long-term investors. They will hold on to the properties and, over time, the income from them will increase. It will provide them with income in retirement in addition to their superannuation.

Pauline says running a property portfolio involves a fair amount of work and it is something that you have to be interested in doing. "I really love it," Pauline says. "I have found something that I am passionate about," she says.

Red brick is the new black

"Units are easier to manage," Kevin Lee says. "If something goes wrong inside [the unit] it is your expense, but if it goes wrong outside, the expense is shared."

Lee is referring to "sinking" funds, which are required under strata laws and to which all owners make a financial contribution. Lee says would-be property investors have to be prepared to invest for the long-term and to do their homework, not only on the location of the investment but on whether the numbers stack up.

He likes "red brick" units without lifts. Newer builds with their gyms and swimming pools have high strata fees, he says. And lifts break down constantly requiring expensive repairs. "For an investor the strata fees in these complexes can be a killer," he says. In his opinion, the investor is subsidising the lifestyle of the tenant in these complexes.

He says too many investors place too much importance on the tax breaks. "You do not buy an investment for the tax breaks, you buy it so that you can make money from day one," he says. Lee means "negative gearing", where, if the rent does not cover the interest and other expenses, the shortfall reduces the investor's income tax liability. Negative gearing reduces the landlord's losses. But the only way to make money on a loss-making investment is to eventually sell it for capital gains that more than make up for the accumulated losses. But relying so much on capital gains increases the riskiness of the investment, Lee says. He prefers units in the lower price range as they pay the highest yields and can be become cash-flow positive in a short time.

He says units can be found for between $250,000 and $300,000 in Sydney and Melbourne's outer suburbs that can be rented for up to $300 a week. On Lee's calculations, with a mortgage that is 90 per cent of the purchase price, repayments over 30 years and 5 per cent interest rate, the property could be almost cash-flow neutral from day one and, as the rent rises and size of the mortgage reduces, the investment would turn cash-flow positive. Units in the $650,000 price range, with the same assumptions, would have a lower yield and be cash-flow negative for the investor for longer, Lee says.

Posted by John Collett - The Age on 2nd April, 2014 | Comments | Trackbacks | Permalink

Weighing a bubble against a slump

It'll be a good six months before the Reserve Bank even thinks about lifting interest rates. And while cheap mortgages are propping up property prices, don't expect great wonders from here on.

In his recent testimony to parliament, governor Glenn Stevens admitted he didn't know how long ''the period of stability'' in interest rates would be, which was unusually, perhaps alarmingly, frank but could also be seen as a clever way of staying non-committal without seeming unco-operative. If he doesn't know, he can hardly be accused of a backflip when he does.

Fast forward to the latest minutes of the Reserve's board meeting which say the pause will be ''for some time''. (By the way, it meets again today but nothing will happen.)

Not that I want to put words in the governor's mouth, but somebody has to. 

Besides, he dropped a big hint: rates won't move until the Reserve's economic forecasts change. Since these are only a few months old, that seems unlikely before the May budget and probably a while after it.

It's true most economic statistics of late have suggested things are improving, but then that's just what the Reserve has been predicting. It's also why the dollar is on the way up again, a critical consideration.

A fly in the ointment is inflation, which, improbably, jumped in the December quarter - a one-off from the dollar's drop from parity but enough to get currency speculators excited at the prospect of a rate rise.

The dollar ''remained high by historical standards'', the Reserve's board said on its last public outing. It has since risen, doing its bit to rub out some of the inflation it created.

While the dollar is rising, the Reserve Bank won't be inclined to lift rates, which would only push it even higher.

Then there's the fact that the US Federal Reserve has more or less put a six-month timetable on unwinding or ''tapering'' the extra money it's printing - we'll see how global markets cope without their sugar hit.

So with such a benign interest rate outlook, can property prices continue their momentum?

They should grow in line with household after-tax incomes, or at least no faster to be sustainable. With Australia's national income settling into growth of about 6 per cent annually, that must set the upper limit to how far prices can rise each year.

Even that's pushing it, considering the record amount of household debt, the fact that the growth in wages if you hadn't already noticed is subdued and barely keeping up with inflation, and unemployment is creeping up.

Oh, and let's not overlook the fact that values are indisputably high to begin with.

On top of that, rental yields are falling. Potential landlords might be after capital gains - all right, as is everybody else - but if the running yield is low it suggests Sydney or Melbourne prices are becoming over-extended.

Certainly they wouldn't withstand a rate rise when it comes.

Also supply, which has been constrained in Sydney though not elsewhere, is about to increase judging by the surge in building approvals. That can't be good for values.

Fortunately, while the Reserve Bank might hate the idea of a property bubble developing, it would be just as alarmed if values slid just as the economy is going through a transformation from mining investment into, well, investment in something else.

The last thing it would want while that's going on would be a property slump curtailing consumer confidence.

Read David Potts in Weekend Money every Sunday.

Read more: http://www.theage.com.au/money/investing/weighing-a-bubble-against-a-slump-20140401-35ur5.html#ixzz2xfs2M2Q7

Posted by David Potts - The Age on 2nd April, 2014 | Comments | Trackbacks | Permalink

Seeking to get a foot in the door

Want to buy a house? For first home buyers battling to get into Australia's competitive property markets, 95 per cent home loans can offer a doorway in. But borrowers should do their homework before entering such arrangements.

Low and no-deposit home loans hit the peak of their popularity in August 2008, when 86 per cent of mortgage products offered a loan-to-value ratio (LVR) of 95 per cent or higher.

Add a global financial meltdown to the mix, and banks became more cautious - mortgage products with high LVRs dropped significantly. By August 2010, they were just 49 per cent of home loans.

But in recent years, as the property market has heated up, the low-deposit home loan has been making a comeback. Since August 2011, about 70 per cent of mortgages in RateCity's database have an LVR of 95 per cent or above. The financial comparison website monitors 2900 home loan products, covering all major brands. Of those, 109 have an LVR of 97 per cent or above. RAMS offers a 100 per cent home loan, but only with a guarantor. 

As Alex Parsons, chief executive of RateCity, observes: ''It's tough for first-home buyers because they are trying to save money, and the interest rates for savings are very, very low; property prices are going up and therefore these products with high LVRs are very, very attractive to first-home buyers.''

Ben Turner, 31, and his wife, Alex Kiel, 29, opted for a 95 per cent home loan, after unsuccessfully trying to break into the Sydney property market.

''We'd looked for a few years and we were always saving our money because we knew that we wanted to get into the market because it was such a good investment,'' Turner says. By the end of last year, they were facing a ''now or never situation''.

''We saw the places that we were once able to afford easily were now out of our reach. We missed out on a few properties at auctions … so we downsized what we actually wanted and went with an investment.''

Instead of buying a house in Sydney's Inner West, they settled on an Eastern Suburbs apartment, close to where they are renting. If you're thinking of following the couple's lead, here are four questions to weigh up.

Can you cope with interest rate rises?

Parsons urges borrowers to bear in mind that interest rates are at historic lows. ''Make sure that you can afford a few interest rate increases in the future without putting yourself into mortgage stress.''

The Australian Prudential Regulation Authority (APRA) issued a similar warning in September last year, after seeing an increase in low-deposit mortgages. It said: ''It is important for [authorised deposit-taking institutions] to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current low levels.''

It stopped short, however, of following New Zealand's example, where banks have to restrict new residential mortgage lending at LVRs of more than 80 per cent to no more than 10 per cent of the value of their new housing lending flows.

Do you look good on paper?

Lenders can be choosy. Jessica Darnbrough, head of corporate affairs at Mortgage Choice, says: ''[Lenders] have put in all these rules and regulations for themselves so that they avoid dealing with people [who] will perhaps default on their mortgage.''

People who have recently paid off large debts are less likely to get a low-deposit loan. More likely is the university graduate who has walked straight into a high-paying job.

How did you get your deposit?

When your deposit is small, its make-up is crucial. Darnbrough says lenders like to see genuine savings. ''Some lenders, like St George, will let you show rental payments as evidence of genuine savings, but generally a lender will like to see 5 per cent, or in the case of these low-deposit home loans, 2 or 3 per cent in genuine savings.'' You need to be able to show you've saved regularly, or held on to a gift or a bonus for at least three months, sometimes longer.

Can you afford the lender's mortgage insurance?

Taking out a low-deposit home loan has a knock-on effect: lender's mortgage insurance. It protects the lender if the borrower defaults. The premium - between 2.65 per cent and 3.3 per cent of the loan - can be paid as a lump sum or via your repayments. You may have to pay it twice (see breakout). If you don't qualify for a low-deposit home loan, or want to avoid mortgage insurance, what's your best alternative? Keep saving. Watch out for insurance trap

Beware - lender's mortgage insurance can strike twice.

If you refinance before you have 20 per cent equity in your property, you will cop another hit of lender's mortgage insurance (LMI).

Mortgage Choice's Jessica Darnbrough says most people refinance after three to five years, and LMI isn't transferable between one lender and another.

Even if you refinance to another product with your existing lender, you may have to pay the premium again. Risky lending

Home loans with LVRs of 95% and above (deposit of 5% or less)

March 2014 - 70% (% of RateCity's database)

February 2014 - 69%

January 2014 - 69%

August 2013 - 73%

August 2012 - 68%

August 2011 - 69%

August 2010 - 49%

August 2009 - 59%

August 2008 - 86%

Source: ratecity.com.au, data accurate as at March 27, 2014

Read more: http://www.theage.com.au/money/borrowing/seeking-to-get-a-foot-in-the-door-20140401-35uqu.html#ixzz2xh5P9wz7

Posted by Christine Long - The Age on 2nd April, 2014 | Comments | Trackbacks | Permalink

Head over heart the best tip

Buy a new place, and rent out the old one? Make sure it is a financially sound move.

Australians have always had a love affair with property. Now, with interest rates at record lows, many people are taking advantage by buying a new home or apartment to live in, but they are also wanting to keep their existing home as an investment property.

What I am hearing as a result are many of the same questions being asked, whether by clients or by friends over drinks on a Saturday night, about what they should be doing with that investment. There seems to be a lot of confusion about what you can claim, what you can borrow and how best to set up your investment to maximise any benefits you might receive.

So here are my standard responses:

■ If you want to keep your existing home as an investment property and buy another place to live in, simply increasing the loan on your existing home will not necessarily give you more of a tax deduction. That's because the tax office looks at the purpose of the borrowing and not the security you are borrowing against. However, if you want to buy carpets, blinds or carry out renovations before you rent out your existing home then increasing your current borrowings to do this may be tax deductible. Advertisement

■ If you have an existing mortgage against your home but you have made numerous redraws for things such as holidays, cars or boats, and you now want to use the loan as a deduction, be aware that not all of the loan may be tax deductible because the purpose of the borrowing was not to buy or improve the property.

The question that I pose in response to people buying a property to live in and wanting to keep their own home as an investment property is: why? Often the loan on the existing home (which will become the rental property) has been paid down considerably, so the property is usually positively geared. The loan on the new home is almost always considerably higher because rather than having a deposit saved, they are using the equity in their existing property to borrow more. None of which is tax deductible.

Which leads back to my question: why keep the original property? Unless you have good reasons to keep it, often it makes better economic sense to sell your existing home, pay down the debt on your new home and then buy an investment property that would now have a higher amount of debt. Yes, there are selling and buying costs to consider but often these are outweighed by the benefits to be gained by having the higher loan with the new investment property and not with the new home.

Often the real reason people want to keep their home and convert it to a rental property when they move is emotional rather than rational. They feel they should, or it was the first home they bought so they don't want to dispose of it. If you can afford to keep it and you acknowledge that you're doing it for an emotional and not a rational reason, then that's fine.

However, owning an investment should be an economic decision rather than an emotional one, so be aware of all the pros and cons above and then make a decision with your head, not your heart.

Of course, if you're still unsure, talk to a professional like your accountant for advice.

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

Read more: http://www.theage.com.au/money/investing/head-over-heart-the-best-tip-20140329-35q6h.html#ixzz2xZPbIdWz

Posted by Melissa Browne - The Age on 30th March, 2014 | Comments | Trackbacks | Permalink

Dumb debt can rack up interest costs

It's more about when, rather than where, the credit's due that should worry you.

From Wednesday, credit agencies will find out more about you if you have a credit card, mortgage or any other kind of loan.

And while paying the monthly minimum on your card will keep your credit score safe, it could cost you thousands in interest.

The worst offenders among the two million who don't pay off their credit card in full each month are those earning more than $70,000, according to the Australian Securities & Investments Commission (ASIC)'s web site moneysmart.gov.au. 

Although representing 22 per cent of adult Australians, they make up 42 per cent of those who carry over a card debt of $5000.

Managers and the tertiary qualified are also disproportionately represented among those not paying off big card debts each month.

ASIC dubs this ''dumb debt'' because it piles up automatically since the minimum repayment doesn't even cover the monthly interest. In fact, dumb debt takes 30 years to repay. That's longer than most mortgages.

Yet one in four credit card users carry over an average debt of $4600 each month.

Paying just twice the monthly minimum would save them 24 years of debt, and almost four times the total interest paid, says ratecity.com.au, a financial products comparison website.

Under the new reporting rules, credit agencies will track your repayment history for two years and any card or loan payment that's five days late earns a black mark. This becomes a default on amounts more than $150 that are 60 days overdue.

Curiously, the banks can report all your credit card limits to credit agencies but not how much you have already spent. Even more confusing is that they'll know if a credit card has been paid off.

Another anomaly is that mobile phone contracts and the like, where payment difficulties are most likely, aren't counted as credit. Telcos can access your credit rating but they can't affect it.

For credit cards your biggest problem may not be a potential black mark - and late fee - for missing a payment but a huge interest bill.

Apart from paying more off, one way to cut credit card interest is refinancing with a personal loan, from at 10.99 per cent compared with credit cards' average 16.9 per cent.

Or you could do a zero rate balance transfer to a new card but don't spend on it - you'll be up for the prohibitive cash advance rate then. Rate City says the cheapest is issued by Westpac with 14 months interest free, reverting to 13.49 per cent with an annual fee of $45.

And remember every time you apply for a credit card it appears on your credit rating. Asking for more credit isn't a good look.

But under the new rules, at least if you cancel a card that will now be recorded, too.

The broader credit reporting also gives you a chance to redeem yourself. But concerns have been raised that it will also enable lenders to charge more vulnerable borrowers higher interest rates.

The dominant rating agency is Veda. A free copy of your credit file is available once a year. Hard yards on his card

These days John Johnson always leaves home without his American Express card.

The feeling may be mutual, because once he started getting his $24,000 balance down Amex would cut his limit to the new outstanding amount.

It had taken him just a few months of only paying off the minimum for the debt to spin out of control.

His card debt mounted as John and his wife, Joanne, set up their own property interior styling business, Home Dressing, based in Sydney’s Ultimo.

They used the card for their working capital, but it was the automatic direct debits that crept up on him.

I'd been paying it off every month and was never at the limit. But for a couple of months we were a bit tight on cash so I just paid the minimum. The balance remained the same and I was adding purchases to it,’’ John says.

‘‘I didn’t notice the direct debits – it’s easy to lose track because there’s a lot going on when you’re starting a business.’’

When he hit the $24,000 limit two years ago, Amex told him he had become a creditrisk. ‘‘That’s when I got worried,’’ Johnson says. He slammed on the brakes by no longer using the card, helped by the business requiring less investment and generating more cash. He increased the repayments above the monthly minimum andused his tax refund.

‘‘As I paid it off Amex reduced my limit,’’ he says. Which would have been a favour – but for an increased interest rate of 21 per cent even as the Reserve Bank was cutting.

Today the limit is $14,000 and Johnson has $11,000 left on the card, which he’s going to transfer to a honeymoon zero rate card.

‘‘I’ll use the interest free period to pay it off quickly.’’

Posted by David Potts - Money Manager (Fairfax Digital) on 12th March, 2014 | Comments | Trackbacks | Permalink

It's a handy little top-up

Feeling the pinch? Getting a bit on the side could be exactly the boost your bank account needs.

If you are constantly struggling to stay ahead of the bills, cutting expenses is not the only way to make the budget balance. Sometimes what you really need is to give your income a lift.

Extra money from a second job, a part-time business or a few shifts here and there can all help bridge the gap between incoming and outgoing.

Examples are the ski instructor who spends part of his day hunting for graphic design jobs, the fireman who runs a retro furniture business on eBay (see breakout), and the photographer who generates affiliate income via several websites. 

For some, extra income means luxuries. For others, it is a matter of survival.

ME Bank's latest Financial Comfort report showed 40 per cent of the 1500 households surveyed were breaking even and spending all that they earned in a typical month. One-quarter of households reported they could not afford the essentials, or could only just afford the essentials (see table below).

Dominique Bergel-Grant, founder of the financial site Leapfrog Women & Money, says sometimes lifting your income just means making a different decision, even for a short time.

It might be in a family's best interests, for instance, for a non-working spouse to get a part-time job for six months or return to full-time work sooner.

''Perhaps that's a conversation that needs to be had not only for their career, but to put the family in a more comfortable position,'' she says.

Others get serious about increasing their income when they set their heart on buying a house, starting a family or travelling.

''I've seen some people who are definitely on lower incomes, but they work two, sometimes three jobs, seven days a week for 12 to 18 months just to save up to get their house deposit,'' Bergel-Grant says.

If there is a way to make some extra cash, Kylie Ofiu has probably given it a go: child-minding, hairdressing, freelance writing, selling on eBay, taking in a boarder. She has even written a book on the subject, 365 Ways to Make Money.

Ofiu's extra income-earning experiments took off when she and her then husband had two small children, and it was difficult making do on a single wage.

While she is willing to try most things once, she says some things are not worth the effort. ''Online surveys, mystery shopping, letterbox drops, selling things that you've made at markets, party plans, busking - now, people are too stingy,'' she says.

Her favourite financial boost has been her blog. Within a few months, her musings on becoming a millionaire by the age of 30 got advertising support and within 12 months won her a book deal. It has opened the way to international public-speaking engagements and a financial mentoring business.

She advises others to find extra earners that are enjoyable, synch with their skills and work with their lifestyle.

''One of my friends does cleaning during school hours and the money she makes she puts towards a holiday. They have nine kids, so it costs them quite a bit,'' she says.

Each year, her stepmother cooks up a storm and makes a tidy sum selling baked goodies at markets in the four weeks before Christmas.

Earning a bit on the side can be handy when additional costs crop up. By day, Meryl Whiteside works full time at a software company. By night, she makes extra money helping others save on their phone, internet and utility bills.

The reason? ''I have a very sporty child who plays baseball and there are lots of opportunities to travel overseas, so it's to supplement that,'' she says.

She paid $500 to become an independent contractor for ACN, a direct seller of telecommunications and other services, and it supplied a website. Whiteside covered her set-up costs quite quickly, so now any money she makes goes towards her savings goal.

''I might not make enough to pay for the whole overseas trip, but it might pay for his pants or the bat. You think of it as an added bonus. It's something that you don't have there to start with.''

For anyone who sees dollar signs in their hobby, it is important to stay on the right side of the Australian Tax Office (ATO).

That means being able to spot the difference between a hobby and a business.

According to ATO figures, about 465,000 individuals had salary and wages as well as business income in 2010-11.

Sometimes an extra-income earner starts as a hobby, then someone realises they can make some money by selling online or at markets, says Peter Bembrick, partner, taxation services at accounting firm HLB Mann Judd.

''You cross a line,'' he says, and that line affects whether you should be declaring your income on tax returns. If your GST turnover is more than $75,000, you must register for GST as well.

A 2010 court case deemed that a person who raised and sold more than 1200 turtles was in business.

''The turtles were sold after they were purchased from an interstate supplier and advertised on the internet. Payments were received in both cash and direct deposit to a bank account,'' according to the ATO.

For three years, gross sales of more than $100,000 were not reported on income tax returns. The turtle seller was convicted and fined.

On the upside, a business can claim tax deductions for allowable expenses and you might be able to offset losses against other income now or in the future.

However, Bembrick warns the ATO can be sceptical about a business recording large losses. ''It's not unreasonable to spend a lot of money upfront and maybe not make a profit initially, but you've got to be able to show that it is going to turn a profit.''

Having a business plan can show an intention to do more than dabble at the edges of a money-making venture, he says. It will also help to clarify whether the outlay in money and time is worth the income it is likely to produce.

Tax considerations can also arise if you take on a second job. Sometimes it seems that income from a second job is taxed to the hilt. Bembrick explains this is because someone earning money from a second job already has the benefit of the tax-free threshold on earnings from their first job. However, people are better off indicating that on their employment declaration form for the second job. The alternative can be a nasty bill at tax time. ''It's always a bit of a shock to the system if you lodge your tax return and find you've got a whole lot to pay.''

If your time is stretched to the maximum by work and family commitments, your best option might be to start investing, with a focus on earning income from managed fund distributions, dividends or rent.

''Becoming wealthy as an employee is actually quite difficult,'' says Bergel-Grant. ''Often it involves looking at what other things you can do. It might be having a second job, so you can put that money into an investment. That might be an investment property that over time pays for itself and then it will give you rent.'' For the love of it

Julian Simmons is a Sydney firefighter who runs a retro furniture business, Retro Funk and Junk, on eBay.

His work as a fireman - two nights and two days a week - is what pays his bills. Then he is free to spend his downtime making some extra money for socialising from his passion for mid-century modern furniture.

The 42-year-old says the business started quite organically about three years ago when he found his house was beginning to overflow with vintage furniture as he upgraded. ''It started to accumulate and I thought I'd better start selling off some of the excess pieces. There's only so much you can have around the house.''

Now, he admits that between his two money-makers, there isn't much time left for sleeping and even weekends away turn into an opportunity to check out some garage sales.

''It's pretty much become my life,'' he says, but he does not mind when he is doing what he loves.

Business or hobby? Spotting the difference

The ATO suggests asking these questions:
  • Did you set up your online sales with the intention of being a business?
  • Do you pay for your online-selling
  • Is your main intention to make a profit?
  • Do you make repeated or regular sales?
  • Do you sell your online items for more than cost price?
  • Do you manage your online selling as if it were a business?
  • Is what you are selling online similar or the same as what might be sold in a bricks-and-mortar business?
Income adequacy

13 per cent Can afford the essentials and extras, as well as save or make extra loan repayments

21 per cent Can afford the essentials and extras, such as travel for holidays

41 per cent Can afford the essentials and have money left over for eating out occasionally, entertaining at home and other items

21 per cent Can only afford the essentials

4 per cent Can only afford the essentials

Source: ME Bank Financial Comfort Report December 2013

Posted by Money Manager - Fairfax Digital on 12th March, 2014 | Comments | Trackbacks | Permalink

Home insurance traps lurk in small print

LET’S begin your home insurance story with a happy ending. Always read the fine print.

Most complaints involving home and contents insurance come down to the policy holder thinking they were insured for things that weren’t covered — sometimes the entire house in natural disasters — and the only way to avoid this is to read the small print.

LOWER POLICY COSTS: Join the Big Insurance Switch campaign

Hundreds of thousands of Australians don’t bother reading the terms and conditions of their home and contents policies, leaving themselves exposed to having insufficient insurance cover.

Financial services firm Canstar’s research analyst Lilith Bohler says it is vital consumers know what they are, and are not, covered for.

“Make sure that the amount you are insured for reflects the true value of your property because if you are underinsured you may find that any future payout is limited,’’ Ms Bohler says.

“Don’t forget to include the cost of any home improvements that you have made along the way such as the addition of a swimming pool or a garage.”

Reading the fine print can turn up a whole host of surprising conditions.

As an example, did you know that policies often do not cover events when a building is left unoccupied for more than 60 days?

And flood cover — you are rarely automatically covered for it.

Read the fine print — your home depends on it:

Home and contents insurance policies can be up to 40 or 50 pages long and hard to read. The things to look for are the “definitions” and the “exclusions” which spell out what is covered and what is not covered.

Does your insurance policy cover flood damage? Do you have full replacement or fixed price cover?

The distinction between a home damaged by flood waters and homes damaged by storm water could be the difference between a payout and getting nothing.

Many insurance policies do not provide cover for flood damage — loosely defined as water flowing from rivers, creeks, dams, lake or reservoirs — but do provide coverage for storm water damage.

Adequate insurance:

If you ever need to rebuild your house, here are “supplementary’ costs to include:

Alternative accommodation while your house is rebuilt.

Removal of debris from the site.

Architects or other professionals to draw up plans.

Services to make your property safe for workers.

Lodging plans with your local council.

Adequate contents insurance:

Keep receipts of household goods for proof of ownership. This includes furniture, clothes, appliances and jewellery.

When working out how much home and contents insurance you need, start by listing all your belongings and working out how much it would cost to replace them.

Taking photos and doing it room by room is sensible because you may be surprised by how much you have.

Combat premium hikes:

Ask for a loyalty discount.

It’s often cheaper to pay their premium annually rather than monthly

Choose a higher excess if you can afford it.

Discount for safety features.

Don’t just pay your renewal.

There are more than 120 licenced insurers operating nationwide so consumers are urged to hunt around for a good deal.


A new campaign, the Big Insurance Switch, launched this week aims to help you lower your living costs by tackling soaring home insurance premiums.

Research has found that home and contents insurance premiums have been growing at a much faster rate than wages, yet many people take little notice of their policies, what they pay and what is covered. If you’re serious about getting ahead financially, it’s time to cut out the complacency.

You can join the campaign for lower insurance costs here . One Big Switch will negotiate with insurance providers and aims to use readers’ combined weight of numbers to get a good deal.

It’s a free service and you are under no obligation to apply for any deal presented during the campaign.

News Corporation Australia will earn a commission for every person who successfully applies for an insurance policy generated by the campaign so will One Big Switch.

Posted by News Limited Network on 10th March, 2014 | Comments | Trackbacks | Permalink

Three keys to unlocking rates puzzle

RESERVE Bank governor Glenn Stevens said it last month; and just in case you didn’t hear or believe him, he said it again yesterday.

The RBA’s official interest rate is on hold for some and perhaps many months. The exact words he used — and they were exactly the same last month and this — were: “a period of stability in interest rates.”

That didn’t stop the economentariat from seeking deep clues in the RBA’s statement, to tell them — so they could tell you — what he REALLY meant.

They “found” essentially two — one in what he did say this month and didn’t last month; and one in what he didn’t say this month and did last month.

This month he said “the exchange rate remains high by historical standards”. Last month, he’d merely noted “the exchange rate has declined further”. So, hint, hint, he’s back to trying to “jawbone (down)” the Aussie.

In contrast, whereas last month he had said that the RBA “expects growth to remain below trend for a time yet”, that was missing from this month’s statement, replaced by a more upbeat “over time, growth is expected to strengthen”.

The problem is that the two “clues” pull in opposite directions.

The first would suggest that the RBA wanted a lower Aussie, as that’s needed to boost growth — and, stretching it out, that if we and it didn’t get it, further rate cuts might come back onto the agenda.

The second would suggest that the RBA now believed we might get growth closer to trend and get it quicker; therefore the next rate change was more likely to be an increase than a cut.

The holistic answer to all that deep speculation is two words: the Ukraine. A month ago, far less three months ago, who was predicting that the Ukraine could destabilise global financial markets and potentially force a reassessment of policy around the world.

I’m not suggesting that we are now necessarily teetering on the edge of another precipice. But rather to make the point, that the best laid plans of mice, men — and Reserve Bankers — are hostage to “events”. In particular, to those from out of left field.

Or as Zhou Enlai said: “it’s too early to tell.” He was talking about the significance of “recent” events in Paris — although whether in 1789 or just back in 1968, is a matter of interesting conjecture.

Whatever, I’m borrowing the quote on behalf of Stevens, in respect of which direction the next rate move, when it comes, will be. That is to say, I doubt that he has the faintest idea.

The changed words from February’s statement to March’s were about something far more modest; they were all about context, not about sending subtle hints about the “next rate change”.

February was about explaining and contextualising a shift in policy. The RBA was shifting from its previous stance of mild ease to one of neutrality.

In the context of that and slightly disturbing — or “challenging” — December quarter inflation figures, the RBA wanted to make it very clear it was ruling out not just further rate cuts, but any suggestion of rate rises.

Hence, the avoidance of any explicit reference to the Aussie being “too high”, which might have suggested a rate cut was still possible; but equally the specific reference to the forecast of below trend growth, to rule out any speculation of a hike.

This month, as the RBA was merely repeating its policy stance, it was more relaxed about noting relevant dynamics — both the high (but still relatively lower) dollar; and strengthening (but still not rocketing) growth.

But at core nothing has changed — either from the policy stance initiated a month ago or the forecasts of (gradually strengthening) growth and (marginally moderating highish) inflation that it was founded on.

In this context, the three sets of statistics — released yesterday, today and tomorrow (well, actually, next Thursday) are critical. Both in telling us what is happening, but also how they play into the RBA’s perceptions.

Yesterday the trade data showed that net exports on their own would add 0.6 per cent to GDP growth in the December quarter — with those GDP figures to surface today.

That would double the contribution of net exports to growth compared to the December quarter a year ago when we got an overall growth rate of 0.5 per cent; and could push annual growth over 2.5 per cent.

Two points. We will find out today — there are just too many variables to try to predict the number.

But more importantly, today’s GDP figure is about yesterday — the December quarter. The RBA bases its rates policy on where tomorrow’s growth is headed.

The big factor in that is the coming fall in resources construction. The RBA is actually being “optimistic” to believe that growth elsewhere in the economy will offset that enough to bring overall growth back closer to trend.

Next week we get the monthly jobs numbers. They are a critical part of the RBA’s two-tier balancing act. First in assessing where the economy might be headed; and then how they play into the RBA’s rate rhetoric.

It’s tried to walk a delicate line between predicting deteriorating jobs and the resources investment cliff (or slope), into a still-strengthening overall economy.

It is that line which essentially gets you to steady rates. At least, while it’s still “to early to tell”.

Posted by Terry McCann - Herald Sun on 5th March, 2014 | Comments | Trackbacks | Permalink

Pay off full balance on time to avoid backdated interest

Interest-free day calculations on credit cards are so complex and poorly disclosed it is no wonder they provide a rich stream of revenue for the banks. About $6 billion in interest payments runs into the coffers of the banks and other financial institutions each year from credit cards.

''I'm yet to see a clear and concise explanation from any of the banks, even though that was one of the stated aims of the 2012 credit card reforms,'' says Andrew Duncanson, of comparator site Mozo.

When the cardholder does not pay off a statement in full and on time, lenders charge interest on the whole balance, usually back to the date of the purchase, which could be nearly two months earlier, Duncanson says.

Also, if full payment is made only a day late, the interest is usually backdated to the purchase date, on the whole balance, he says. 

Retiree Ken Pheeney, 66, from Bundaberg, was not aware of how the interest-free period worked until he learned the hard way. He had a debt of $2000 on his card and paid off all of the debt but $50 by the due date.

''I got charged the interest on $2000 even though I was $50 short,'' he says. He was hit with an interest charge of more than $50. Ken rang the bank to complain and it was only then that he realised that interest was charged on the whole $2000 even though he owed only $50 on the card. After he complained, the bank waived the interest charge as he usually paid off the card debt in full by the due date. If only half of the $2000 is paid off by the due date, Mozo calculates the cardholder would pay up to $88 in interest under the worst-case scenario.

If the cardholder paid off the full balance of $2000, but one day late, Mozo calculates the cardholder would pay interest of up to $73. Some cards backdate interest only to the start of the current month, but most go all the way back to the purchase dates.

To make matters worse, with most cards, the cardholder also loses their interest-free period on subsequent purchases, Duncanson says.

In the example, interest on the $1000 is carried forward into the next statement period. Cash advances start accruing interest, which is usually higher than the purchase interest rate, when the cash is withdrawn or transferred online. Mozo says the average interest charged on purchases is 17.3 per cent and usually higher for cash advances. ''It's so complicated that most people won't ever get their head around the subtle differences,'' Duncanson says.

''The best advice is to always pay off your full balance, on time,'' he says. For those who pay off the balance in full by the due date and do not make cash advances, there will be no interest charges. Duncanson says if the cardholder is unable to pay off the balance in full by the due date they should shop around for a card with a low interest rate.

With the changes to credit reporting rules, missing a payment has greater implications than just interest charges. Under the new rules, more information is held on credit records, including credit card repayment history.

For example, a minimum credit card payment more than five days late will be recorded. A poor record could make it harder to get a loan.

''Another thing that trips up people is balance transfers with zero rates,'' Duncanson says. These offer a low or zero interest rate on the debt that is transferred from the old card. But the low or zero interest rate is usually applied on the transferred balance for a certain period, after which the purchase or cash advance interest rate is charged, Duncanson says. ''There will be no interest-free period on purchases until the balance is paid off in full,'' he says.

Posted by John Collett - The Age on 5th March, 2014 | Comments | Trackbacks | Permalink

Cut through the buzz of DIY super

BUYING residential property via a self-managed super fund has surged in popularity but warning signs are emerging that suggest investors need to be extra careful.

The recent collapse of Charterhill Group, which was a one-stop-shop for pumping property into self-managed super, has destroyed the life savings of many, and some advisers think more collapses will come.

Last year, the proportion of residential property held in SMSFs jumped from 5.6 per cent to 9.9 per cent.

That's a big jump, and it's likely that many of those using the property-in-SMSF strategy don't have a lot of assets left over to diversify their nest egg after paying for their property.

Real estate is Australians' most popular investment but putting all your eggs in any basket is dangerous, especially if the bulk of your wealth outside of super is also tied up in property, such as your own home. Sure, shares have been scary over the past seven years, and cash returns have been crappy as interest rates have tumbled, but pinning all your hopes on just one type of asset is a recipe for disaster.

Diversification of assets smooths out your risk and your returns. People can still get exposure to property in their super funds through a wide range of property investment funds and trusts, both in Australia and overseas.

SMSFs are certainly shining, becoming the biggest component of the nation's $1.8 trillion mountain of superannuation savings. Bout bright lights attract pests, and property spruikers fuelled by greed have been buzzing loudly of late.

Putting property in a SMSF can be a great strategy for some people. Business owners can effectively pay rent to their nest egg, and there are some huge tax savings at retirement, especially if you are a business owner and can transfer your business premises to your SMSF then effectively pay rent to your nest egg.

It can work for others too because of some huge tax savings when it comes to selling the property at retirement. However, the Labor government tried to toughen those tax rules for super last year, and we may see the Coalition take a similar tack in its Budget in May.

Aussies' affection for property is blossoming in the super environment, but make sure you understand all the risks before taking a lovers' leap.

Posted by Anthony Keane - Daily Telegraph on 4th March, 2014 | Comments | Trackbacks | Permalink

Busting finance's tall tales

I've noticed a number of myths and misconceptions that keep coming up about mortgages, so I thought I would address the 10 most common.

1. It's not worth refinancing a mortgage for an improvement of half a per cent. If you have a $350,000, 30-year loan with an interest rate of 5.24 per cent, and you refinanced to a rate of 4.74 per cent, you would save $107 a month and $38,480 over the life of the loan. Is that worth it to you?

2. I can't refinance a fixed-rate loan. Not true. You can refinance a fixed-rate loan but you'll be hit with a break cost, which is compensation for the loss the bank will incur when you leave.

Weigh up the break costs versus the potential savings and see what you come up with.

3. I need a 20 per cent deposit. Many lenders will give you a loan with as little as 5 per cent deposit, although with less than 20 per cent you will have to get lender's mortgage insurance, which some lenders will include in your loan.

4. I want to use a mortgage broker but what about the fees? Mortgage broking fees are paid by the lender, not by you. A mortgage broker finds you the best loan at the most competitive rate.

5. A competitive rate doesn't really matter because the Reserve Bank controls home loan rates. The RBA adjusts the cash rate from time to time but each lender can change their rates as they see fit.

6. Once I find a good rate, I'm sorted for the life of my loan. Lenders can move their variable rates at any time, so a loan that's competitive today might not be competitive in the future.

7. It doesn't matter if you pay your loan monthly or fortnightly. False. A 30-year, $350,000 loan on a 4.74 per cent interest rate, would mean monthly repayments of $1,823.66. If you paid half ($911.83) fortnightly, the loan term would be 25 years and six months, and you'd save over $53,000 in interest. Weekly payments are even better!

8. I'm too old to refinance my mortgage. Age discrimination is illegal. A bank looks at your repayment ability, so they're looking at your income and the loan term.

9. Self-employed people pay higher interest. If you're self-employed and can't produce your tax returns, you may be offered a low documentation loan that can have higher interest rates. If your financials and tax returns are in order, you qualify for the same rate as a PAYG employee.

10. Banks keep secret files on my credit history. Wrong. All lenders use a credit reporting system to check your history. Know what they know by finding out your history at mycreditfile.com.au.

What do you think? Talk to me on Twitter @markbouris

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

Read more: http://www.smh.com.au/money/busting-finances-tall-tales-20140301-33sni.html#ixzz2urQTpOy9

Posted by Mark Bouris - The Age on 2nd March, 2014 | Comments | Trackbacks | Permalink

Picking the right investment property a balancing act

Rental investors need to weigh up various factors

Pinpointing rental demand is important in residential property investment, and vacancy rates - the proportion of unlet dwellings - can be a useful measure.

But how much weight should a would-be investor put on this figure when they are deciding where to buy?

Australian Property Buyers director Karin Mackay says while investors should look for where ''there may be a shortage of rental properties'', the overriding factor is price growth. 

''Capital growth is key,'' Mackay says, noting that this means not just looking at what median prices ''did last year'' but how a suburb has performed over the past 10 or 20 years. 

Vacancy rates are typically higher in inner than outer suburbs.

Real Estate Institute of Victoria figures broadly show that Melbourne's outer suburbs (20 kilometres-plus from the CBD, excluding the Mornington Peninsula) had the lowest annual vacancy rate, of 2.1 per cent, in 2013.

By comparison, inner suburbs within four kilometres of the CBD had the highest vacancy rate, at 3.8 per cent, up from 3.4 per cent in 2012.

But Mackay says an inner-city investment should still perform better when it comes to capital growth. ''It will rise far quicker in value,'' she says.

A suburb-by-suburb analysis of vacancy rates by Australian Property Monitors showed middle and outer eastern suburbs - including Boronia, Ringwood East, Bayswater North, Montmorency, Heathmont and Bonbeach - had the lowest vacancy rates for houses last year.

For units, Cranbourne, Sydenham, Kilsyth, Thornbury and Cremorne ranked the best.

Dr Andrew Wilson, senior economist at Fairfax-owned APM, says several factor could influence such results, including increased activity from owner-occupiers, leading to a smaller pool of rental properties.

The strength of the market in middle suburbs, pushing more renters out further in search of more affordable rentals, may also be a factor, Wilson says.

He adds that the outer eastern suburbs also saw solid improvement in median house price growth last year and notes that ''not everybody wants to live in quaint inner suburban cottages or refurbished new properties … some people do want the middle ring-outer ring suburban lifestyle, and maybe that's part of it.''

Ian James, director of JPP Buyer Advocates, which also has a small property management department, says vacancy rates are playing an increasingly important role when investors are looking at buying units in the inner suburbs.

He says this is due to the large number of apartments now coming on the market within a few kilometres of the central business district. ''With the new amount of stuff coming on, it is damn hard to rent them out,'' James says.

Many units in inner city areas such as Richmond or South Yarra will still experience good capital growth in the long term, but renters may be harder to come by. And he says this is particularly relevant with the increasing number of people who are now relying on rental returns for their income.

''[Vacancy rates] play a higher part now I believe because people are actually thinking about different styles and types of property,'' James says. And vacancy rates in an area is just one factor to take into account when considering how easy it will be to rent out an investment property.

Barry Plant property franchise development manager Yvonne Martin says factors such as a property's distinctiveness, location and presentation all play a critical role in determining how attractive a property will be for renters.

Martin says the price range of the property is also an important consideration because properties at the top end of the market will have higher vacancy rates and there are more negotiations on rent than for properties at the lower end of the market.

''The more expensive the property, the more expensive the rental's going to be and the greater chance that it is sitting vacant for longer,'' Martin says.

Sprucing up a property makes financial sense

When Jason Wong and his wife Kim bought their two investment properties, vacancy rates were a consideration but not the deciding factor.

The couple currently own a three-bedroom unit in Burwood East, which they initially lived in, and a three-bedroom house in Boronia.

''At the end of the day, it's really about long-term investment for us,'' says Mr Wong, a development manager at Colonial First State Global Asset Management. ''If the property was vacant for some time, we wouldn't be too fussed about it but it is important in a longer term sense that we continue to get tenants.''

Mr Wong, who currently lives in Wantirna, says while the couple considered the demand for rental properties in the areas in which they bought, they also spent thousands of dollars sprucing up both places to make them as attractive as possible. This move proved to be particularly successfully with the Burwood East property.

''It was getting a bit tired internally and we were probably struggling a little bit to get tenants,'' he says.

''But as soon as we spruced it up, we had people actually upping bids to get in there.''

Posted by David Adams - The Age on 2nd March, 2014 | Comments | Trackbacks | Permalink

What the new comprehensive credit reporting system means for you

ON MARCH 12, a new comprehensive credit reporting system (CCR) will come into effect in Australia that will change the way lenders assess risks when taking new clients.

At present, a person’s credit file — the detailed collection of their financial history — is governed by the Privacy Act and only provides limited negative information, like defaults and bankruptcies to lenders.

However under the new system, known as CCR, a much wider range of information will be available, from details of credit cards and personal loans to monthly bill repayment history.

The information will also be able to be shared among credit providers, but not with telecommunications and utility companies at this stage.

Credit reporting agency Veda’s marketing manager Belinda Diprose said the changes are designed to provide a clearer picture of consumer behaviour.

“It’s really about making sure people aren’t overextending themselves and lenders have best possible picture when it comes to making a credit decisions,” she said.

“Previously they were able to share some information [like] credit applications you made as well as if you have an overdue debt, default, bankruptcy, court judgments.”

However the changes mean companies will be able to access additional information around the types of credit, limits and how often people pay their bills on time.

“If you miss a repayment by more than five days that will be marked on your file under the new system, However a default is not marked just because you missed a repayment,” Ms Diprose said.

Credit defaults are when a payment of $150 is more than 60 days overdue.

Ms Diprose said although the changes mean more information will be collected, they will allow people to establish a positive credit rating quickly and show they have recovered from negative events.

However people will need to remember to be vigilant with bill payments in order to keep their file clean — which could be a struggle considering 80 per cent of Australians don’t keep track of their credit history.

Ms Diprose said the changes will bring Australia more in line with the US and UK, where consumers actively use their credit score to seek out a good deal from providers.

“A good credit history makes you more attractive to credit providers … It’s a really important piece of that lending decision so you can get credit you want,” she said.

Veda’s top tips for managing your credit rating: 

• Set up direct debits to ensure bills are paid on time

 • Schedule loan repayments for payday

 • Keep track of credit commitments and only apply for credit when you really need it

 • Credit includes things like store finance so don’t neglect payments on your fridge or car

• Close any accounts you don’t need

• Get your bills via email and flag them to make sure they’re paid on time

• If you’re having trouble meeting payments, ask for an extension or negotiate new terms

• Get a copy of your credit report so you know where you stand

To get a copy of your credit score visit Veda.com.au

Posted by News Limited Network on 27th February, 2014 | Comments | Trackbacks | Permalink

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