Puzzle Finance Blog
Selling in season: When’s the best time to sell?
Though springtime is the traditional selling season for real estate, some properties are better suited to sale during the other seasons. It depends on the property, the current market and your presentation and marketing.
It’s no wonder people traditionally sell their homes in spring: everything’s in bloom, brighter and looks great. But talk to real estate agents and drill down on sales results, and you’ll find that the best season to sell your particular property isn’t necessarily spring.
The right season depends on a huge variety of factors, including the property itself, its surroundings and area you live in. For example, are you in a tourist spot? A beach suburb? Or are there events on at certain times of the year that turn your normally quiet street or suburb into a car park?
There can also be a huge advantage in marketing your home during traditionally quiet periods – winter, for example, or from mid-January into February, when other sellers are still on holidays. With fewer properties to choose from, more of the buyers will get to see your place.
Regardless of the time of year you decide to sell, there are some absolute must-dos:
After you’ve tackled the any-time-of-year jobs, you can focus on seasonality and how it may influence how you present and market your home.
- Thoroughly clean your property from top to bottom – inside and out
- Trim overgrown gardens; remove weeds and dead growth and refresh garden beds with mulch
- Address any off-putting maintenance issues, such as peeling paint, worn or marked carpets, cracked tiles, dirty grout and loose or rusted gutters (if you’re selling a knockdown or “renovator’s delight”, this step often isn’t necessary)
- Banish any pet smells
- Furnish the home in an attractive but not overly cluttered or personal way, to give potential buyers a perspective on room sizes and to present the home in its best light
- Pay for professional photographs and good marketing
Ensure the property is well aired, especially if you’re just moving out of cooler weather and the home has been closed up a lot. Remove any mould spots from ceilings, walls and window frames that might have crept up in winter (diluted clove oil or an 80 per cent white-vinegar solution both kill mould). Because people favour the outdoors in spring, it’s a good time to focus on getting those outside areas up to scratch. Fertilise the lawns and gardens to freshen them up from winter. If your pavers are dirty, pressure-wash them, and recoat tired, weathered decks. Finally, add some bright touches to suit the season, such as cushions and towels.
Some properties, such as holiday houses by the coast or river and elevated properties that get cool breezes, particularly lend themselves to being sold in summer. Likewise, homes that are generally quite dark and cold in winter. If a property has a lot of unshaded, west-facing windows and gets particularly hot in the afternoon, it may be worth holding inspections only in the mornings, or you may want to consider selling in a different season. If you do need to cool down a property, try to do so a few hours before any inspections so that potential buyers will feel very comfortable as they look through. And this season, when looking at accents such as cushions and throws, opt for cooler blues and greens.
Autumn can often be a busy time in real estate, as families have had time to recover from the summer holidays and get into a new school year before thinking about moving house. As the weather can vary, again remember to keep the home comfortable during inspections. In autumn, that could mean turning on the air-con one day and the heater the next! For accents, think a few cosy touches that suit the cooler temperatures, such as textured cushions and warmer colours.
Homes that get great winter light can really stand out during the cooler months. Those west-facing windows that were a problem in summer can make for a real bonus from June through August. Draw back the curtains and blinds on all windows and let as much light and warmth in as possible.
In the cooler parts of Australia, the focus should be on feeling warm and comfy. So light the fire or switch on the heat, turn on all the lamps and add some warm reds and oranges to your soft furnishings.
Also, be sure to consult your agent about the best time of day to show your home. For example, if you have lots of north-facing windows and receive plenty of winter sunshine, you’ll probably want to show it during the day.
Armed with these presentation tips and tricks, you’ll have a better shot at selling your home – no matter what the season.
Posted by Carolyn Boyd - Domain on 17th September, 2014 | Comments | Trackbacks | Permalink
What makes a great suburb ?
Think with the heart of a homeowner and the head of a property investor when it comes to choosing which suburb to buy in.
Buying your first home or investment property is a major financial commitment and the location you choose will significantly affect your real estate’s value. There are rational drivers that impact the value of an area, but don’t dismiss the emotional experience of actually living there.
According to Shannan Whitney, director of BresicWhitney, a leading Sydney-based boutique real estate agency, home buyers are motivated by a very different set of criteria to property investors when deciding where to buy property.
“Most people making a decision about where they are going to live are driven by what they can afford, not necessarily by what they want,” says Whitney. “I guess the second thing is what they personally desire. That’s a very different channel to an investor.
“There are two key things that investors have to consider. One is capital growth and the other is [rental] yield.”
Reviewing a potential suburb through the different eyes of a home buyer and an investor can offer telling insights, regardless of which you are. Home buyers: what suburb should I live in?
The process of finding the right area for your new home is dominated by your personal and financial circumstances.
“Two things are affordability and suitability, and under the umbrella of suitability comes personal enjoyment, convenience, all the things that people desire in the environment where they want to live,” says Whitney.
Evaluating the local sale prices in an area offers a clear guide to affordability. When it comes to suitability it is worth considering:
Life stage, relationship status and personal interests will all dictate which attributes shape your decision.
- Proximity to your work and social network
- Access to services including medical centres, hospitals, transport, day care, community centres, schools, universities and shopping centres
- Proximity to parks, beaches, town centres, cultural destinations, places of worship, dining and bar precincts and nightlife.
“Having close access to great bars and restaurants is interesting for some but not others … I think that’s one of the industry levers. People say you’ve got to buy close to transport, you’ve got to buy close to infrastructure, you’ve got to buy close to food and entertainment – all those sorts of things,” says Whitney. “It is certainly relevant for some profiles but for others it is not. I don’t think it necessarily determines the prospective value or the future value of a particular area.”
As an investor, looking at a suburb from a homeowner’s point of view will help you understand the demographic of the area and gain insight into the potential rental market. Property investors: what suburb should I invest in?
Investing in property is all about gaining a return on your investment, so you need to estimate potential capital growth (the increase in value of the property) and rental income of a location. Domain provides detailed market reports on specific areas, which delve into median prices, rental rates and population demographics.
The other important consideration is the term of your investment. Are you looking to sell the property after an initial upgrade? Or are you in it for the long haul with plans to lease the investment property out?
“Rental demand is a big one, and the second thing that dominates is what is going to go up the most [in value],” says Whitney. “In that regard, I guess, those more structural components come into play.
“That is, who is the demographic living there? Why are they there? What’s the depth in the rental market in a particular area? And of course, what are the prospects for the area into the future: development prospects or any significant political decisions that have been made, or might be made, that could alter the fabric of what the suburb is now and what it might become?”
A broad checklist includes:
Home buyers will also benefit from an investor’s impartial outlook when evaluating a suburb. Considering future changes to an area will help avoid unexpected lifestyle upheavals and achieving capital growth will improve a homeowner’s personal equity.
- Rental vacancy rates, average rental prices and median sale prices
- Potential rezoning and infrastructure changes
- Potential property developments and resulting impact on housing supply
- Availability of property management
- Basic population demographics including employment rates and age.
Finding a healthy balance between the emotional and financial considerations will help you determine the best location.
Posted by Jacqui Thompson - Domain on 17th September, 2014 | Comments | Trackbacks | Permalink
Consumers fear getting fingers burnt, again
When interest rates are slashed to record lows, it's meant to encourage people to take a few more risks with their finances.
But the latest figures on what consumers are doing with their savings must have made frustrating reading for Reserve Bank governor Glenn Stevens.
On the one hand, there are many of us who are stubbornly keeping our money in the bank because we're still cautious.
But at the same time, there's a big group who are intent on doing the exact thing that Stevens would prefer we'd cool off on: putting money into property.
The latest consumer sentiment report from Westpac and the Melbourne Institute published last week, included a question on where is the "wisest" place to put savings.
Despite puny interest rates that mean the returns on a deposit account are going backwards after inflation, some 34.3 per cent of people nominated the bank as the "wisest" place to put savings, the highest in almost two years.
On face value, that suggests households remain deeply cautious. But it's not that simple. The other place where Australians are increasingly keen to put their savings is property, favoured by 25.7 per cent of respondents.
Shares, in contrast, are still only the preferred choice for 8.5 per cent of people.
CommSec reports that with 60 per cent of consumers either preferring banks or property, it's the most polarised result for savings intentions in 20 years.
Why is this a problem? Well for one, the high priority given to savings accounts suggests many remain deeply cautious about the economy.
With unemployment still high at 6.1 per cent, slow wage growth and job insecurity, it seems many people are still reluctant to spend more, which is likely to keep growth sedate.
At the same time, however, it also shows the surging interest in the property market. Despite double-digit house price growth, and despite Stevens' warnings that prices can fall as well as rise, one in four consumers still view property as a winner.
This is significant because it highlights the bind facing Stevens.
The economy remains weak, as a record-breaking mining boom goes into reverse, and other businesses struggle to fill the gap. But to solve that problem with even lower interest rates would be a risky move indeed.
As the governor spelled out earlier this month, pumping any more cheap credit is not the answer to Australia's economic weakness. It would only risk further inflating "already elevated" house prices - something he last month said would be an "unwise" thing to do.
Lower interest rates have undoubtedly helped the economy - but they are not going to solve its problems and could also create new risks, if the housing market continues its bumper run.
Posted by Clancy Yeates - The Age on 17th September, 2014 | Comments | Trackbacks | Permalink
How to find a good financial adviser
Trust in financial planning must be at, or near, an all-time low.
The string of failures in the financial planning sector that has cost investors, mostly retirees, billions of dollars over the past decade has not just been at the fringes. Revelations about dodgy advice at the Commonwealth Bank in the past have likely further dented trust in personal advice generally.
Planning is still evolving into a fully-fledged profession and consumers have to do their own checks. While the majority of planners would never dream of doing the wrong thing by their clients, there are those working in business models where advice is used to disguise product sales.
The financial advice industry can be divided broadly into two types - planners who work for independently-owned planning firms and those - the vast majority - who are aligned with one of the big financial institutions. Independently-owned advisers operate their own licence and can independently decide on what products and strategies they will use.
Aligned advisers, such as those either employed directly by the big banks or working for an advice firm that is owned by a big bank, usually recommend their employer's products.
However, advice from a non-aligned planner is no guarantee of good advice. It was, for example, mostly non-aligned advisers who, in return for big commissions, recommended investing in property developer Westpoint, which collapsed in 2006.
Non-aligned advice firm Storm Financial, collapsed in early 2009. Storm advisers recommended only one "strategy" to clients.
They were advised to borrow, often with their homes as security for the loan, and invest in the sharemarket. The strategy unravelled when the sharemarket crashed as a result of the GFC.
Many had to sell their homes to repay their lenders and were left to rely on the age pension. Even accountants have not been immune from the disasters. It was mostly accountants who recommended the tax-effective agribusiness schemes such as Great Southern and Timbercorp that collapsed in 2009.
Mark Rantall, the chief executive of the Financial Planning Association, (FPA) points to a number of recent changes that will help lift the professionalism of planning.
The big banks and AMP have said they will lift minimum educational standards of their planners. Also, from the start of next year, there will be an online register of financial advisers.
It will likely include the planner's work history going back five years, qualifications, ownership of the planning firm and any bannings or other sanctions against the planner made by the Australian Securities and Investments Commission.
The register will, for the first time, allow the regulator to know the details of everyone licensed to give personal advice.
Rantall says there is more work to do with FPA members, regulators, government and industry bodies to "ensure we live up to the expectations of our profession and its clients".
Rantall says there are other things to ask an adviser besides qualifications, membership of professional associations, who owns the licence and how the planner charges for advice.
Consumers should ask the planner if he or she can refer you to those who have used their services. He says consumers will also find a lot of valuable information in the planning firm's financial services guide.
Rantall says there are some tell-tale signs of whether an adviser is likely to be acting in your best interests or not. "If they try to sell a product from the minute you walk in the door and if it sounds too good to be true, it usually is," he says.
"There is no short-cut to wealth creation," Rantall says. "If anyone is offering a short-cut; that means taking higher risk," he says. "The smart way to wealth generation is a long-term strategy and saving as much as you can, and managing down debt to an acceptable level," he says.
It is also about building the super nest egg and not incurring high interest rates on debt, such as credit cards, Rantall says. Sometimes the best advice does not involve a product recommendation at all, he says.
Where investments are recommended they should be "solid". If money is borrowed to make an investment the gearing levels should be conservative, he says.
Claire Mackay, a certified financial planner (CFP) and a chartered accountant at Quantum Financial, says there are a number of filters or screens that consumers can use to help choose a suitable planner.
The first is membership of the FPA as members must adhere to a code of conduct, ethical standards and undertake continuous education. New practitioner members of the FPA must have a relevant university degree.
About 5600 FPA members also hold the CFP qualification, which the association promotes as the "gold standard" of financial planning. Mackay says there is no filter that gives an absolute guarantee.
There are those who have the bare minimum and those who have gone "above and beyond", she says. Some have specialisations such as expertise on self-managed superannuation funds, for example.
Consumers should be aware that advisers work for firms with different business models. Some people like the comfort of a big brand, such as a big bank. "They are there to sell their services," she says.
There are free tools available for those with straightforward financial circumstances, MacKay says. This includes the Australian Securities and Investments Commission's MoneySmart website at moneysmart.gov.au, where there is a budget planner and a mortgage calculator as well as other calculators, including for superannuation and retirement.
Simple superannuation advice is also available over the phone from your super fund, she says.
How to pay for it
Many people pay for advice through an "asset-based fee", which is a fee charged as a percentage of the money under advice that is ongoing rather than paid upfront.
That can be a problem, because it may mean the planner has an incentive to make product recommendations and less likely to recommend paying-down the mortgage or buying an investment property.
That is because they can only capture an asset-based fee by pushing products. Many non-aligned advisers, including Claire Mackay, ask clients to pay a fee each year for advice. She says some people baulk at paying upfront. However, it is value the client is getting for the money that counts, she says.
Conducting a beauty parade of potential advisers is probably not that practical for most people. To make the search easier, Beddoes Institute, a consultancy, has launched its Most Trusted Advisers Register. It is designed to serve as a referral source for consumers.
Adam Tucker, the director of the Beddoes Institute, says thousands of clients of more than 150 advisers have been questioned. Of these 150, more than 30 have so far made it onto the network.
Tucker says these are the planners that are providing exceptional client service and performance. "Most trusted advisers also rated higher on their qualifications, experience and technical skills than other advisers," Tucker says.
Planners pay nothing to be listed on the network. It is not funded by any financial advice or financial services firm. Nor it is funded by any association. More planners will be added to the network over time. The website is at mosttrustedadvisers.com and there is also a free mobile phone app at the Apple store.
Jon Boughton, 68, a retired clinical psychologist and management consultant, was prompted to seek financial advice in 1989. He had been relocated by his employer from Sydney, his home town, to Melbourne, where he has lived ever since.
After relocating to Melbourne, Jon's wife Sandra, who is also clinical psychologist, heard financial planner Michelle Tate-Lovery of Unified Financial Services speak at Sandra's workplace.
"We contacted Michelle because my wife was very impressed with the comments she had made," Jon says. "At that stage, I was doing a lot of international work and was away from home quite a bit," he says.
"I was more inclined to spend my time with my family, rather than rooting around in documents trying to find out what the latest tax situation was or what the super situation was," he says. On meeting Michelle for the first time, he said he felt a connection straight away.
"It is not only a connection with the nature of the service offered," he says. "If you are going to share personal financial information with somebody you need to feel comfortable and confident with the person," Jon says.
Without advice they would have bumbled along, Jon says. "But there is no doubt we are significantly better off from having advice," he says. Michelle Tate-Lovery gets paid a fee-for-service. "There has always been openness and transparency about the manner in which fees are charged," he says.
Posted by John Collett - The Age on 17th September, 2014 | Comments | Trackbacks | Permalink
Ten ways to read the economy
Your own economy isn't hard to work out when you focus on your occupation, your income and your expenses. But when you want to make financial decisions and investments outside your normal expertise, then you'll want to work out the broader economy and what it means for your decisions. Here are my top 10 ways to read the economy.
A good resource for learning about the economy is the RBA web site, which aggregates national and global data. Use this to gain insight into factors that could effect your investments: low interest rates mean rising property prices; a growing economy usually means solid gains in the top stocks etc.
- Gross domestic product: GDP is a litmus test for how strong the economy is over all. It is household consumption, plus business investment, plus government expenditure, plus the difference when you minus imports from exports. GDP growth really matters: it's currently 3.5 per cent, above the global trend. Higher growth is expected.
- Household consumption: Household spending equals confidence, and it accounts for more than 70 per cent of GDP. It's currently rising. Final consumption expenditure (mostly household spending) rose 0.3 in the June quarter.
- Business investment: While mining investment is slowing this year, non-mining business investment is starting to rise, albeit from a subdued base (business credit growth is moving upwards too). If investment continues to grow, expect employment and GDP to grow with it.
- Government investment: Currently subdued in line with below-trend economic growth.
- Exports/imports: We had trade surpluses at the start of 2014, but we have deficits again as exports slow. Trade is determined by the growth of the Asian zone: it takes 75 per cent of our exports.
- Unemployment: Currently at 6.4 per cent, which is now higher than the US. It's been rising since June 2011, so unemployment was going up during the resources boom. Rising business investment should create employment.
- Inflation: While the economy is tepid, inflation – the general rise in prices of goods and services – is currently at 3 per cent, or the top of the historic 2-3 per cent range.
- The dollar: It has lost ground to the USD since 2013, which is not a bad thing for achieving balanced growth in our GDP. It's probably still over-valued against the USD.
- Interest rates: The single most important factor in the price of housing. We currently have historically low interest rates, contributing to a stimulatory effect. Many economists say we can expect these low rates into 2015. Mortgage quality is good too: more than 30 per cent of Australian mortgage borrowers are at least 24 months ahead of their repayment schedules.
- The RBA: Makes a decision on official interest rates each month, to ensure that inflation is within the 2-3 per cent band. The low cash rate of 2.5 per cent is likely to be sustained into next year because the RBA thinks it will help economic growth.
As always, do your homework, be patient and find an adviser if you're confused.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road.
Read more: http://www.theage.com.au/money/investing/ten-ways-to-read-the-economy-20140911-10f91e.html#ixzz3DLzLU3bM
Posted by Mark Bouris - The Age on 15th September, 2014 | Comments | Trackbacks | Permalink
Offset or redraw, which one leaves homeowners better off ?
MORTGAGE offset versus mortgage redraw – many homeowners are unsure which option is better.
Any way that home loan customers can reduce the principal on their home loan will help bring down interest costs and put a bigger dent into their mortgage, but experts say the two types of facilities serve different purposes.
Analysis by financial comparison website RateCity found 69 per cent of all home loans have a redraw facility, while 40 per cent have an offset account. Some have both.
Offset accounts are used as daily transaction accounts and the balance is taken off the total loan amount, which reduces the daily interest charges.
Redraw facilities hold extra repayments made on a loan and help create a buffer. However, they are not as easy to access because there is no card linked with this facility.
National Australia Bank’s general manager of consumer, Melissa Reynolds, says both types of home loan facilities can be a great way for savvy customers to reduce interest costs.
“An offset gives you day-to-day access to your funds. For example your pay and the daily balance in your offset is then offset against your home loan,’’ she says.
“The reason a redraw account becomes more popular is because customers like to think they are building up the equity in their home loan and keeping it separate.
“Because you have to access your redraw amount and then move it into your transaction account or other account and access that money through an ATM, then you are less likely to eat into that equity and into those funds.”
NAB figures show of all its home loans, 14 per cent have an offset facility and about 35 per cent have a redraw facility.
RateCity’s analysis found about one in five offset accounts are not 100 per cent offset and instead are only partially offset.
On the flip side, some redraw facilities have fees applied to make withdrawals, so consumers can get stung if they pull out funds.
RateCity spokesman Peter Arnold says offset accounts can be a good way to cut down interest costs but they can be tempting to dip into, given the ease at which they can be accessed.
“An offset account is a good way to minimise your interest and offset every possible cent towards your home loan for as long as you need it,’’ he says.
“For people with good discipline it’s a good way to do it, but it’s important you don’t dig in too much and defeat the purpose of having it. Whereas a redraw is what you’ll have as a safety net.”
ME Bank’s manager of products, Luke Easton, says for owner occupiers having an offset account or a redraw facility is critical.
“They would be better off using these types of accounts to save, instead of taking out a savings account where you get paid interest and pay tax on it,’’ he says.
Posted by News Limited Network on 14th September, 2014 | Comments | Trackbacks | Permalink
Top ten things that devalue your home
FROM crazy colours to dirty dishes, some things have home hunter running a mile, while other turn-offs are less obvious such as narrow corridors and dimly lit streets.
Mirror-image semi-detached homes, same suburb apartments or a row of terraces can all seem the same but have different prices. In many cases it is because owners and potential buyers know the hidden things that can devalue a property.
Here are 10 things that can cause a property to lose value.
The location is the single most important factor that can reduce the value of a property — and not just because it’s in a tough suburb or miles from anywhere. Location can also be about where one apartment is compared with another in a block of units or what side of the street a house is on, says WPB Property Group chief executive and valuer Greville Pabst.
“Generally, apartments positioned on higher or top levels tend to experience greater capital growth because they are not only more attractive to investors and owners but also to tenants,’’ he says.
It sounds like one of those planning terms that no one really understands, but amenity is a big value adder and detractor. This is all about services and things people want near their home such as shops, schools, businesses, recreation and community facilities. It’s also about what people don’t want near their home such as a fast food outlet, a party pub or car wash. You want to be close to the good things and away from the bad.
“Properties within five or 10 minutes walking distance to the local village and transport generally have a higher capital growth than properties further away,’’ Pabst says.
Being within a desirable school zone can add tens of thousands of dollars to a home, while being on the wrong side of the street and outside the zone will reduce the value.
Instead of adding value, bad and cheap renovations can actually destroy the value of a home. Buyers and valuers will be forced to discount the price in order to demolish, remove and then replace poorly designed or constructed additions and renovations.
“Only renovate to your target market,’’ Pabst says. “Research the local market, know the general age group and the needs of those households.”
4 FLOOR PLAN
A versatile floor plan is going to be in more demand than many larger properties with little flexibility or poorly planned rooms. The way a house flows, open plan areas and ability to use rooms for different uses is one of the most important things buyers and investors look for.
“A bad floor plan is a major draw back,’’ Metropole Property managing director Michael Yardney says.
“It’s not the size of your property that matters but the efficiency of the floor plan.”
Narrow corridors, clusters of rooms, walking through rooms to get to others will discount the value. Floor plans are also one of the crucial factors when a property is listed for sale and can often be the make or break decision to inspect a home.
Being too close or too far from transport options can impact the value. The extra foot traffic and transport noise from being too close to a train station, for example, will lower the value of a property. Too far away and it reduces the number of potential buyers or tenants, our experts say.
Main roads, however, are usually the biggest price plunger, says independent buyers advocate Catherine Cashmore. “Traffic isn’t the only problem. The front windows will also need to be shielded from people walking past, for noise and privacy, there will be an increase in rubbish that’s dropped on the street, blowing in to the front,’’she says.
“Worse still, getting out of the driveway or waiting to turn on to a busy road is very frustration and potentially dangerous.”
Noise is increasingly a modern day scourge. It can be a very real problem for occupants of a property, which means it is automatically an issue for all future buyers and, of course, valuers. Noisy neighbours, loud neighbourhoods, public transport, industry or restaurant issues and road noise will be a stumbling block when it comes to putting a price on your property, Cashmore says.
“This can be diminished by soundproofing the windows, however, that’s not much help in summer months.” Good quality construction is important to reducing internal noise.
7 HIGH DENSITY
High rise and high density living is not for everyone, Cashmore says.
“It’s important to focus on housing that appeals to home buyers, not just investors. Buying a small apartment in a high-rise block carries a risk,’’ she says.
“Supply is increasing for these types of dwellings and, therefore, it’s reasonable to suggest demand will wax and wain depending on the number of investors in the market.” Ideally you need to purchase a property that appeals to all buyers, she says.
8 NATURAL LIGHT
Be aware of neighbouring buildings and the impact they will have on light and blocking sunlight, Resi Group spokeswoman Lisa Montgomery says. “Nobody sets out to buy a dark and lightless place, if there’s one thing plenty of natural light does, it’s make property feel bigger,’’ she says.
The right aspect is also important, north facing is often the most desirable for natural light and sunlight, Montgomery says.
Well-lit streets, easy and safe access to public transport or parking and, of course, the calibre of the neighbourhood are going to impact on the security value of a property. Security and privacy are important issues that should not be underestimated, Montgomery says.
Sure it’s superficial but crazy colours, “personality decor”, poor street appeal, even clutter and messy furniture placement can make a huge difference when it comes to people putting a price on a property.
“It’s important to keep your colours neutral and perhaps decorate with colours,’’ Montgomery says.
Unusual or unique is also not such a great idea, says Cashmore, as it can “stick out like a sore thumb”. “Exotic features are just not appealing to the vast majority of people,’’ she says.
Posted by News Limited Network on 14th September, 2014 | Comments | Trackbacks | Permalink
Don't fall for the mortgage traps
As mortgage rates fall lenders are loading repayments with extra charges.
The banks are pushing loan packages with discounts on the interest rate, home insurance premiums and credit card fees, but they come with an annual fee between $395 and $750.
For example, banks will waive the annual and second cardholder fee on credit cards but not the penalty interest rate.
Nor are the extra inducements cheaper than shopping around for the best deal.
Credit card issuers such as Citibank are also charging a handling fee of 3 per cent on balance transfers to their introductory zero rate credit cards.
ANZ has the cheapest package for a variable home loan of 4.98 per cent but is undercut by 206 mortgages on finder.com.au including a no annual fee and 4.54 per cent home loan from loans.com.au.
Bigger imposts are reserved for first home buyers and investors with a deposit under 20 per cent of the property's value paying lender's mortgage insurance.
Even re-financing to a cheaper loan incurs a slug of about $500, despite the abolition of exit fees. This includes an administrative fee from the lender you're leaving and a state levy.
Discounts within the bank package deals may not be cheaper than you could find separately, according to Smartline adviser Karen Forbes.
"You might get a cheaper home insurance quote yourself. Or the bank branch might not tell you there's also a no fee loan available," she warns.
Independent research group Canstar agrees.
"You can probably do better by shopping around for the individual components. The big saver is the discount on the loan rate. Other bells and whistles are nice, but an 0.8 per cent discount is the big ticket item," says research manager Mitchell Watson.
He estimates the threshold where a package deal beats a more basic loan is a mortgage of about $200,000.
"There's also the convenience of only having to deal with one institution," he says.
Another trap is lender's insurance, which can cost thousands and has nothing to do with protection against illness or losing a job.
In fact it protects the lender from you, if you default and your repossessed home sells for less than what you owe.
Lender's insurance is a one-off premium that can cost thousands of dollars and is either front-loaded on to the home loan – exacerbating the insufficient valuation ratio which caused the problem in the first place – or is capitalised and so accrues interest.
Some lenders will also add up to 0.5 per cent to the mortgage rate.
Borrowers with a loan exceeding 80 per cent of a property's value who re-finance for a lower rate, can also be caught out by the fact that lender's insurance can't be transferred; you need to take out a new policy and so pay another premium.
Premiums can vary enormously between banks and other lenders, and can quickly wipe out any gains from a seemingly cheaper loan.
"An extra $4000 in lender's mortgage insurance premiums requires an exceptionally good rate to balance out the cost," Forbes says.
Lenders use different scales of loan amounts to set the premiums.
"Some lenders' scales go up in one or two percentage increments. One of the major banks adds a loading for self-employed people, and most lenders have a loading for investment properties.
"This information isn't published on lenders' websites, so you don't know the premium until you're well and truly advanced in the home loan application process," she warns.
Parents or grandparents giving or lending "a few thousand" to first home buyers can save $10,000 in mortgage insurance, says Tony Harris, director of themoneystore.com.au.
Most lenders offer insurance for borrowers as well but few take it up, even though it is protection against a disability preventing work or involuntary unemployment.
ANZ's website shows borrower's insurance on a $200,000 home loan with monthly repayments of $1300 costs $37.31 a month.
Only one-quarter of borrowers recently surveyed by mortgage insurer QBE had mortgage repayment protection insurance.
This dropped to just one in five "for those who have struggled with repayments in the past 12 months," says Jenny Boddington, chief executive of QBE LMI. Securing a better deal
What you're told by a bank's mobile lender may not be its best offer, as Danielle and Glenn Waterson discovered.
That's despite their hands being tied because they had to pay $6000 in lender's mortgage insurance, which they'd be up for all over again if they switched lenders.
They were on a NAB package rate but when it came to buying their second property, and keeping the first as an investment, the bank's mobile lender offered 4.82 per cent but with no new fees for the second loan.
Luckily for the couple they were frustrated by his follow-up, or rather lack if it. So they contacted mortgage broker Chris Howitt of Mortgage Choice, who had been recommended by a friend of Danielles.
In fact they've never met him – "we're both at work so it all had to be by email and phone but for me that's perfect," says Glenn – which didn't stop Howitt squeezing a better offer from the bank.
"We tried CBA but the rate wasn't as good and we would have had to pay $6000 mortgage insurance again. NAB was our only option but Chris said he was confident he could get a better rate. It was all so simple and effortless," Glenn says.
They finished up with 4.77 per cent, no extra lender's insurance and even a $375 cash refund thrown in.
Read more: http://www.theage.com.au/money/borrowing/dont-fall-for-the-mortgage-traps-20140911-10dsyv.html#ixzz3DG4Fqtho
Posted by David Potts - The Age on 14th September, 2014 | Comments | Trackbacks | Permalink
Mortgage customers should demand discounts on their home loan
A NEGOTIATING expert, working undercover, has proven how tens of thousands of dollars can be saved on a mortgage simply by demanding a better deal.
Picking up the phone and haggling to get the best deal possible has resulted in numerous offers including the wavering of fees, huge interest rate reductions and cashback offers.
Property guru and negotiation expert Steve Jovcevski posed as a mystery shopper including a first homebuyer, refinanced and investor and contacted the big four banks to ask for a competitive mortgage deal.
In nearly all scenarios he scored himself a further discount beyond advertised home loans deals.
CONSUMER LAW BREACH: Clawback fees charged by mortgage brokers
FIXED MORTGAGE RATES: Forecast to start rising in November
The research compiled by comparison website Mozo showed Jovcevski grabbed a huge 1.16 per cent off a standard variable rate loan for a $500,000 mortgage to 4.7 per cent and had a package fee waived.
This could save the customer more than $6,000 in the first 12 months.
Jovcevski also nabbed a 1.21 per cent discount off a variable rate on a $1 million loan bringing it down to 4.67 per cent and had the package fee waived.
This would save a customer more than $12,000 in the first year.
Mozo spokeswoman Kirsty Lamont said there are plenty of bargains to be had if home loan customers push for a better deal.
“We found lenders are offering deep rate discounts and other incentives to those prepared to haggle on their home loan,’’ she said.
“When pushed the banks are prepared to offer far better discounts than their standard published package loan discounts.
“But you need to do some hard bargaining to get access to the biggest discounts because they are very much under the table and they are not publicised.”
Lamont said they usually won’t offer their best deal in the first instance because they want to “boost their profit margins” and she said the onus was on borrowers to “push hard.”
Jovcevski said the critical formula of combining “research with haggling” can deliver excellent results for frugal borrowers.
“Often the lender will say they can only give you the best rate if you’ve put in an application,’’ he said.
“You have to be upfront, you don’t need to do an application to get the best deal.
“Give them a rate that they can match or do better on because as soon as the lender’s pricing department see an actual rate the more likely they are to move.”
He said sometimes it will take several calls to the same lender to score the best deal.
1300homeloan manager director John Kolenda said the lengths financial institutions will go to in order to give a customer a competitive deal with vary.
“Some won’t budge on rates but they may waive the application fee, so you have to make a number of calls to various lenders because they are all aggressively competing,’’ he said.
“If your loan to value ratio is lower then you get better a rate, but if you borrow more money you get a better rate.’’
Posted by News Limited Network on 13th September, 2014 | Comments | Trackbacks | Permalink
Daily habits can help us hit financial targets
I work with a colleague, Lauren, who gets up at 5.30am every morning and either runs or goes to the gym. I admire her dedication and each week I tell myself that I should start exercising in the morning before the distraction of work sidetracks me and stops me doing something at the end of the day. Of course I'm not a morning person and the morning exercise never happens. And unfortunately, I don't get any fitter by thinking I should do it.
The difference between Lauren and I is she has created a daily habit which means that every day she is ensuring she exercises. I'm sure she doesn't enjoy getting up as early as she does and would rather sleep in some mornings but she has a long term goal of completing a half-marathon within a particular time. So she simply does it.
Often we set lofty goals and things we want to achieve but before long the daily grind sets in and it becomes too hard and we quickly lose focus. Athletes don't get to the Olympics by hoping or by waking up in the morning and deciding it's too hard and hitting the snooze button. Instead they set up a series of daily habits and rituals that cover everything from when they get up, what they repeat to themselves before a race, what time and how often they train, what they eat and perhaps even the underwear they wear. It's all designed to create a series of habits to help ensure success and the achievement of their long-term goals.
It's the same for us mere mortals. It's often too hard if all we're doing is focussing on the long-term goal which may seem so far away, particularly when the bright shiny thing we want is in front of us today. However, by setting up a series of rituals and habits we are more able to set ourselves up for success when it comes to achieving our goals.
So if we're talking money and achieving our financial goals, what habits or rituals can we employ that might help us achieve our long term goals?
- Have a daily mantra. This might seem silly, but we often carry around money messages in our head that are self-defeating. They might be, "I'm terrible with money", "I can't save" or "I'll never be able to buy a home until I meet my future partner". Just as a successful athlete or even a successful business person might repeat a daily mantra about how they want to achieve success, why not create a daily mantra about how you want to view money. I'm not talking the Secret here but rather positive money messages that will infect the way you think. Stick them up on your mirror so you see them every day and start replacing unhelpful thoughts with affirming ones.
- Set up daily rituals. These are the small things you do every day that will help set you up for success. You might be buying your lunch each day from the shopping centre food court and going for a window shop which often leads to purchasing something after you eat. Instead, one of your daily rituals could involve getting up 15 minutes earlier so you can make your lunch each day that you take to a nearby park where you go for a walk after you've eaten. It's all about swapping one habit that is not so good for you for another one that will set you up for success.
- Keep track. There's nothing so motivating as a series of small wins on the way to a big win. So keep track of what you're spending and saving so you can see the effect of your daily rituals. There are many free apps you can use to track your expenses including some free ones provided by the government on the Money Smart website which work on your phone and are incredibly easy to use.
- Be accountable. There's a reason why professional athletes have coaches. Sure they might be able to do it by themselves but it's much easier when there's someone there pushing them along, celebrating with them and keeping them accountable to what they say they are going to do. It's the same with the rest of us. It might be a paid adviser, a good friend or your partner – the most important thing is to be accountable to someone regularly to help keep you on track.
There's nothing like having to turn up once a week or once a month and having to eyeball someone and admit that you didn't do what you say you were going to do to keep you on track Often we see the athletes on the podium but we don't see them at training again the next day.
At the recent Commonwealth Games a reporter asked Sally Pearson if she was going to take time off to celebrate now that she had won Commonwealth Gold. She laughed and said she'd eat some Tim Tams and have a day off but then it was back to training and racing a few days later. That's because Sally understands the importance of daily habits. It's the unsexy side of success - lots of small and often tedious steps. But once these steps or daily habits are set up, they will help carry you towards successfully achieving your goals.
Melissa Browne is an accountant, adviser, author and shoe addict.
Posted by Melissa Browne - Money Manager (Fairfax) on 11th September, 2014 | Comments | Trackbacks | Permalink
Property investing not a good fit for all
I cannot tell you how many times I have read that you double your money in Australian property investment every 10 years. It is the core assumption in all property marketing, it seems.
Of course, to make any money out of that implied 7 per cent return a year your rent has to cover your financing costs. The good news there is that with a tax break from negative gearing, it just might. But the financing costs are not the whole equation.
That 7 per cent return also has to cover that expertly hidden finder's fee - you know, the one that's rolled into the price of your overpriced off-the-plan apartment without you realising. It also has to cover the real estate agent's commissions, legal fees, stamp duty, the depreciation of any white goods and the cost of keeping everything just dandy.
It also has to cover any renovations, managing agent fees, rates, the time you spend mending the toilet, fixing the lights, replacing the roof tiles, unblocking the plumbing, replacing the boiler, let alone finding the property, selling the property, fighting tenants in court, dealing with body corporates and anything else that crops up, like stress and sleepless nights. And all this is before inflation, and inflation is not 3 per cent as the government claims.
Anyone who has ever paid a utility bill, bought food, filled the car or paid a private school fee knows that we all have our own personal inflation rates and it has nothing to do with a government calculation designed to dumb down the real inflation rate. For decades even the government inflation rate has averaged over 4 per cent anyway, leaving you a 3 per cent real return on property, and that's before you are taxed. Still think property is a "gimme"?
You can see why an equity investor finds the whole property thing a bit of a conundrum. When you buy BHP shares you don't have to fix the loo, send them $45,000 to renovate or worry about that finder's fee, the real estate commission, stamp duty and legals. You can buy it online for a competitive commission and after that you don't have to find a tenant, worry about interest rates going up or do anything at all in fact, but decide when to sell it (easier said than done). Plus you can sell it in bits.
Try selling your house one bedroom at a time to pay the school fees, or buy a car or go on a holiday. Plus you can do it in an instant, online, in the bath, on a whim, from your mobile phone from a bar, and unlike the property market you can liquidate multimillion dollar portfolios in minutes. Try doing that after you've bought "12 properties in 12months", as some of that marketing would have you believe is normal.
In shares you can also get exposure to large gains and extraordinary gains. When did a unit in Bendigo last go up 20 per cent in a year or thousands of per cent in a lifetime? In the past year, 38 per cent of the ASX 100 was up over 20 per cent and plenty of stocks have been up thousands of per cent.
So why is property so popular? The basic advantage of property over shares is that it is a more reliable, less volatile asset. Because of that the culture is different. The culture says you can safely borrow a lot of money to invest in it and in so doing make money out of other people's, out of the bank's, money as well as your own.
The crux of property returns is not that you earn a paltry 7 per cent but, if the rent covers all the borrowing costs, you get the whole 7 per cent return as a return not on the value of the property but on the value of your deposit. In other words, on an 80 per cent lending ratio, if you buy a property for $100,000 and make $7000 a year, you are actually making $7000 on your $20,000 deposit, which is not a 7 per cent return but a 35 per cent return. That's why you invest in property instead of shares, because of the gearing. It's powerful stuff.
Of course, you could do the same in shares. You could easily borrow 60 to 70 per cent on the big stocks, but you'd be mad to do so because whereas property is "safe and steady", shares are volatile and risky. At least that's the perception.
Ultimately they are different asset classes with the emphasis on different. It is not one or the other, it is both, or whichever one you're best at. If you're good at equities, which are hard, stick to equities.If you know the property market, stick to property.
I have both. You probably do, too, and there's nothing wrong with either.
Posted by Marcus Padley - The Age on 10th September, 2014 | Comments | Trackbacks | Permalink
The hidden costs of buying a home
Got preapproved finance? Check. Enough income to cover the bills? Check. But do you really know how much it costs to secure that new home?
Some expenses, while commonly overlooked, are essential to consider when you’re stepping into the property market for the first time.
Building, pest and land inspections can be essential, depending on the type of property you want to buy and your reason for buying it. Although there is a fee, you could inevitably save thousands in potential repair costs.
You can try to cut these costs by simply asking the vendor for any reports they may have. They are not always attached to the contract provided by the agent, so sometimes it’s best to just ask.
Legal fees and disbursements
As a rule of thumb, conveyancers often charge a flat service fee, while solicitors generally charge by the hour. So if your property purchase is relatively straightforward (that is, there are no property rights in conflict or unwanted covenants burdening the property), then you could probably save money by simply going with a conveyancer. But as always, shop around to get the best value.
Council rates and strata fees
Although a house or apartment might appear “cheap”, its upkeep may end up costing you in the long run. Ask the vendor for a copy of the council rates notice or strata report to understand your expected outlay every quarter. And when it comes to strata, check that the sinking fund isn’t running dry – you don’t want to be called upon at the next owner’s corporation meeting to pay more in strata fees than you expected.
Although in some states concessions and grants are currently available for eligible first home buyers of new homes, be mindful that stamp duty can be quite a hefty chunk of your purchasing budget. Luckily, there are online calculators to help you determine how much stamp duty you will be liable to pay.
Home, contents, landlords … They are all worth considering before buying a property. To protect your investment, you want to take out insurance sooner rather than later, making sure your property is covered from the day you exchange contracts.
If you’re buying a fixer-upper, be sure to factor in the cost of carrying out renovations. Then double it. Renovations – even the best-planned ones – can spiral a budget out of control pretty quickly!
Mortgage establishment fees, interest and penalties
Consider up-front mortgage-setup fees and talk with your financial provider about securing the best deal. Are they able to waive the establishment fee for a long-term or new customer? It doesn’t hurt to ask and shop around.
A savvy budgeting plan addresses all of these potentially hidden costs so that your first-time purchase goes smoothly.
Posted by Belinda Gadd - Domain on 9th September, 2014 | Comments | Trackbacks | Permalink
Do you know your credit history ?
A story in the newspapers this week told of a company that offered a free credit score and had its website crash from all the traffic.
I'm heartened by the story because it suggests there are many people out there who are interested in how the financial services industry scores their credit worthiness, they know it affects their ability to borrow in in the future, and – I assume – they want to do something about it.
A credit score tracks your application for and repayment of debt. Obvious debt includes a mortgage, car finance and credit card, but phone companies and other utilities also run credit accounts.
A credit reporting agency receives information from finance companies, banks and utilities, and adds it to your credit file. Those things worth reporting include arrears on a bill (usually more than 60 days late), missed loan repayments, new applications for credit and defaults. Most of this information remains on file for around five years.
Credit reports collect change of address, change of job, court writs and insolvency action. And they capture information such as you becoming a guarantor on someone else's loan.
While an agency collects your credit history and gives you a score, it's the lender you are dealing with who makes the final credit-scoring, in deciding what kind of risk you represent.
New home buyers, especially, can become nervous when they approach a mortgage lender – they can't remember their credit histories and what might be in a credit file to hinder their chances.
There are a few steps people can take:
Credit reports are a fact of life if you want to borrow money – they can be really helpful, so learn how they work and start planning. Good luck.
- Clean up Start by getting your repayments organised for credit cards, bills and loans. You can't change history but you can influence your financial future.
- Job and house Take the easy points on a credit score and don't change your address or job for a year before applying for a mortgage.
- Applications Try not to apply for unnecessary credit. Typically people that chase zero balance transfer rates and change their credit cards multiple times each year can get scored down, so be careful.
- Get a report You can go to the web site of a reporting agency such as Veda to access your credit report. Once you know your score – and the reasons for it – you can start planning. Note that obtaining your credit report does not impact your credit score.
- Broker Some mortgage brokers provide a free credit report because it will help determine which lenders will consider your loan application. If you're working with a mortgage broker, be sure to ask about this service.
- Build the positive Changes introduced this year mean you get to build a score on positive credit behaviour. This means that every on time repayment is a small positive mark on your credit file. It's worth thinking about how to take advantage of this.
Read more: http://www.theage.com.au/money/borrowing/do-you-know-your-credit-history-20140904-10c7rd.html#ixzz3Ckm2eO6j
Posted by Mark Bouris - The Sunday Age on 7th September, 2014 | Comments | Trackbacks | Permalink
5 ways to pick a growing suburb
Behind every great investment property there is a great neighbourhood just waiting to be discovered.
Finding the right suburb to invest your money in may seem like an arduous task, and perhaps sometimes you take a gamble, but we’ve gathered a few proven tips and ideas to make your decision a whole lot easier. Look at sales data
Many online organisations offer property sales reports, either free or for purchase. These property reports can show suburb price growth using monthly, yearly and 10-year comparisons. Take the time to obtain and analyse this data – it will help you identify market peaks and troughs, as well as dormant suburbs that are on the verge of a property price boom.
Other online tools and sources from which you can collect sales data include PriceFinder, local newspapers, known property experts or your local real estate agent. The Australian Bureau of Statistics also provides analytical articles; a QuickStats tool that gives you access to summaries on an area’s people, families and dwellings and lets you compare it with state and national data; community profiles; and more. Go for second best
Often, the most popular suburbs have already experienced a price peak and boom, and it could be another seven to 10 years before they achieve a similar cycle. If you invest in these suburbs, you could be paying top dollar for a slow return compared with a less popular suburb.
So, when looking for a suburb to invest in, go for the next best option – one that’s similarly priced. Chances are, you’ll be buying into a suburb that has yet to boom and will provide you with the fruits of that return. Supply and demand
If you’re looking to invest in a house or unit, consider the market impact of surrounding developments, such as new housing estates and high-rise constructions. Generally, the more properties available for sale in a suburb, the more diluted the return on your investment. Think outside the box
Try not to mentally restrict yourself to the suburb you’ve grown up in or by the type of asset you want. Many investment opportunities exist within the property market, including off-the-plan, rural and commercial property. Be open to the possibilities. Jump in your car, hail a bus or catch a train to a section of your city or area you’ve never explored and get to know it a little better. Keep an eye out for planned infrastructure
Properties located near train stations, schools, shopping centres and other amenities bode well for investment growth. This is a result of their increased rentability and lifestyle appeal for renters and buyers.
When spotting a good investment suburb, look for any planned infrastructure, which may positively impact the future sales price of the property. You can get this information from local council websites and government transport organisations.
Follow these helpful tips and you’ll be well on your way to finding the right investment.
Posted by Belinda Gadd - Domain (The Age) on 3rd September, 2014 | Comments | Trackbacks | Permalink
Boost your borrowing capacity
It’s a sure bet that any applicant who gets turned down for a mortgage loan on the basis of insufficient borrowing capacity will want to know what their maximum borrowing capacity is and how they can increase it.
You can embrace various strategies to increase your maximum capacity to buy a home or investment property. These strategies generally involve minimising outgoings while increasing your net income. Do away with debt and eradicate expenses
A key strategy is to reduce and, when possible, eliminate personal debt, including credit and store card debt, personal loans and hire purchases. This will result in your paying less interest, which in turn increases borrowing capacity. It also demonstrates to a lender your ability to control your finances and therefore meet your loan repayments.
If you can’t immediately pay off all your card debt, you need to try to reduce the maximum limits and consolidate the debt onto one card. Cards can attract annual interest rates of up to 30 per cent. The upshot of this is that even a manageable card debt can significantly reduce borrowing capacity in the eyes of a lender.
Reducing or eliminating any unnecessary expenses is another way to minimise outgoings. Any savings on groceries, alcohol, fuel and utility bills, clothing and entertainment can collectively go a long way towards growing your borrowing limit. Increase income
Increasing your net income at the same time as you minimise outgoings will also help. It doesn’t have to be by means of a promotion or pay increase at work, although this would be ideal. Other ways could be to take on a second job, take in a paying flatmate or rent out a spare room in your house.
Having more income would also make it easier to save for a larger deposit, which will boost your borrowing limit by giving you more equity to offer when applying for a loan. A larger deposit will also impress a lender with your ability to save and potentially to meet loan repayments. Tackle taxation
Reducing taxation is another strategy to increase net income and boost the borrowing limit. If you are not already doing so, you should employ an accountant to reduce tax paid on your personal and investment income.
If you’re serious about upping your buying potential, making a few key financial changes can get you closer to your home-buying goal.
Posted by Liam Egan - Domain (The Age) on 3rd September, 2014 | Comments | Trackbacks | Permalink
Adding value with home renos
Certain renovations please most of the people most of the time, and they practically guarantee a return on investment. So what do the experts recommend?
When you’re renovating your home, of course you want to improve your standard of living, whether it’s fixing what’s broken or outdated, making something more comfortable or attractive, or adding on space. But it’s also important to consider the renovations that will optimise the value of your property. Here are our tips for what to save on and when to splurge. Kitchens and bathrooms
Save: If you have only enough money to redo one area, make it the kitchen. “The best thing you can give someone is a working kitchen,” says interior designer Nikoll Nobay. It can also be cheaper than redoing a bathroom. “A bathroom often takes longer, whereas you can do a kitchen in one or two days.”
Interior architect Kate Bell agrees, saying that spending money on the kitchen makes the most sense. “The kitchen and living area are the most visible and most used areas of the house.”
The most economical way of making over a kitchen is by installing new cabinetry and benchtops. “Provided that your appliances are still in good shape, this can transform a tired, dated kitchen into a refreshed contemporary space that adds instant market value to your home,” says Nobay.
Splurge: Stick to travertine, limestone and caesarstone. And according to real estate agent Jason Pantzer of Phillips Pantzer Donnelley, neutral colours appeal more to the masses. “Darker colours and stones or marbles with veins are very personal choices,” he says. “So, from a resale standpoint, it’s better to be conservative. After all, the more demand for a home, the greater the return.”
Next, think about the bathroom. Pantzer points out that floor-to-ceiling tiles and underfloor heating are standard hits. Perhaps even more important is adding a second bathroom. According to the Turf Industry’s recent survey of real estate agents, buyers perceive a second bathroom as one of the top prerequisites when purchasing a house. Walls and floors
Save: Without question, paint your walls. A coat of white paint can make all the difference. If you have carpet in the living areas, rip it up and either polish the floorboards or, for an effective and inexpensive alternative, paint them.
Splurge: Pantzer says quality oak floorboards provide a timeless, classic look. Backyard
Save: Maintain your garden. Weeding, watering and mowing all cost next to nothing and can add real value. The Turf Industry’s survey found that a lawn adds 18 per cent value to your house.
Splurge: Add decking. Bell says a deck and lawn combination ticks all the boxes. “People like grass, and people like hard surfaces.”
As for a pool, Pantzer says, “It can be a trap, as not everyone wants one.” Going up
Save: Putting an extra bedroom and ensuite into a roof’s attic is a great way to add interior space without losing precious garden area.
Splurge: If you’re adding a second storey in a family area, Pantzer suggests putting all the bedrooms upstairs. “Generally, parents don’t want their children on another level.”
Whether you’re investing $5,000 or $500,000 of your hard-earned cash in home renos, do so wisely with a close look at what’s important for your home-improvement goals.
Posted by Emily Lawfrence Gazal - Domain (The Age) on 3rd September, 2014 | Comments | Trackbacks | Permalink
Five easy tips to save yourself hundreds of thousands of dollars
YOUR superannuation statement is due in the mail imminently but if you’re like most people, chances are you barely give it a second thought.
That decision could cost you hundreds of thousands of dollars on retirement.
Here are five tips to put you on the right track:
Fees have the potential to significantly erode your nest egg. If you’re 30, on $72,800 a year and pay two per cent a year in fees, you’ll be about $400,000 worse off at retirement versus someone who pays one per cent in fees.
That’s the equivalent of a boat — or 20 first-class trips around the world. Superannuation funds in Australia generally charge too much in fees — $19 billion in 2014, to be precise. If you’re in a fund that charges more than 1.5 per cent there’s good evidence to show that your net returns (returns minus fees) are likely to be lower than someone who pays one per cent or less in fees.
Some super statements are ambiguous and you may need to visit the fund’s website to find out what fees you are actually paying. Don’t forget to include “adviser fees” in your fee calculation. If you’re young and the only advice you have received is to invest in a ‘growth’ fund because you’re far from retirement you’re probably paying an adviser for very little value-add.
2) INVESTMENT MIX
For anyone young with more than 30 years until retirement, your investment mix should be focused on assets that have averaged higher long-term returns (typically shares and property, which are riskier than cash and bonds but provide higher long-term returns). So if you have a long-term horizon you can ride out short-term movements to harvest these higher returns.
As a rule of thumb, someone with a long investment horizon can have at least 70 to 80 per cent of their portfolio in high-growth assets like shares and direct property with the balance invested in lower risk assets like infrastructure, fixed interest, private equity and cash. Super funds with this type of investment mix are typically called ‘growth’, ‘high growth’ or ‘aggressive growth’ funds.
As you approach retirement the amount of your portfolio exposed to growth assets like shares and property is likely to decrease in line with your increased reliance on stability and income. Medium-risk funds are often called ‘diversified’ or ‘balanced’, and low-risk funds you may see being called ‘stable’ or ‘conservative’ or ‘capital guaranteed’.
ASIC’s super calculator can help you find the right investment mix. Some super funds also offer calculators but be aware they may not be completely honest about fees and are often designed to funnel you into their super funds.
Many super funds offer insurance cover for their members: death cover, total and permanent disability cover (TPD) and income protection cover (IP). You may choose to increase, decrease, or cancel your default insurance cover. To pay for insurance, premiums are deducted from your super account balance as opposed to you getting a bill.
Purchasing insurance through your super can be cheaper than buying it outside of super. Cover is usually limited and if you move from one fund to another your cover may end without notice. Also, if you have more than one super fund you may be paying for insurance twice unnecessarily.
4) TRACK RECORD
Many super funds have been bragging about their 12 to 15 per cent returns over the past year. Don’t get too excited about that because the market returned the same amount and most of these returns just came from the asset classes they invested in rather than skill.
It is very hard for super fund managers to beat the market return over the long term. Make sure you are looking at after-fee returns over five to 10 years when weighing up your super fund’s track record. In February, APRA released the returns for every super fund in Australia over the last 10 years.
Only two of the top 50 performing funds were retail (for-profit) super funds, which typically charge higher fees than corporate or industry funds.
Check the contributions from your employer are correct. From July 2014, the Superannuation Guarantee rate increased to 9.5 per cent (from 9.25 per cent). Next, using the ASIC calculator you can determine whether you will be able to retire on your desired level or income, or whether you need to supplement your super with additional contributions where you can.
Other options exist to boost your super including salary sacrifice and concessional or non-concessional contributions. But you may prefer to invest excess cash away from your super fund so you are not locking your savings up until retirement. Investing in a property or a low-fee investment portfolio are options.
Posted by News Limited Network on 1st September, 2014 | Comments | Trackbacks | Permalink
How good is your credit history? Credit website ranks consumers financial history and ability to get loans
AUSTRALIANS can determine their creditworthiness instantly and their likelihood of getting a loan through a new website.
The site — launched today by GetCreditScore.com.au — ranks consumers credit history from zero to 1200, giving them a realistic snapshot of their financial status before they approach a lender.
Eighty per cent of Australians have never checked their credit history and many would have no idea of what is on their file until now, experts say.
Independent consumer advocate Christopher Zinn said a lot of “confusion and ignorance” remained around credit scores and credit reports.
“People don’t really know that they have a credit score or how they can access it and what it means, it can affect their availability to credit and the cost of credit,’’ he said.
“If you have the confidence of a good credit score it can put you in a good position to ask for something that is better than is what’s put on the table by the lender.”
Consumers need their basic information including name, address, date of birth, email address and driver’s licence number or passport number to access their score.
Mr Zinn said the nation’s average credit score is 749 and it can be affected by late payments, whether an overdue bill was eventually paid, the amount owed in a missed payment and whether there were consecutive missed payments.
If a consumer has a good or excellent score — between 622 and 1200 — Veda spokeswoman Belinda Diprose said the consumer “can feel confident when approaching a credit provider for credit.”
“It puts the power back in consumers’ hands,’’ she said.
“It is up to each individual lender on how they assess people when they apply for a loan, they all have their own individual policies.”
Consumers can access their full credit reports for free from the nation’s credit reporting agencies including Veda and Dun and Bradstreet.
Posted by News Limited Network on 1st September, 2014 | Comments | Trackbacks | Permalink
Money experts warn customers over fixed rate home loans
A GROWING number of lenders are offering fixed home loan rates in the rock-bottom 3 per cent range but experts are warning customers they could get caught out by these enticing deals.
Expensive application fees, ongoing fee costs and hefty revert rates once the loan term expires — some as high as 5.79 per cent — are among the ways customers could get stung by taking short fixed rate loans.
Heritage Bank last week dropped its one-year fixed year loan rate to 3.99 per cent but financial service firm Canstar’s research manager Mitchell Watson said borrowers should think twice before being “induced” by these offers.
“Twelve months is a very short time when it comes to the life of the loan so those going into one-year fixed deals should look closely at the revert rate,’’ he said.
“It’s a big task to refinance again after 12 months and chase better deals.
“Over 10 years you may be worse off by choosing one of these loans.”
The revert rate on some of these deals once the 12-month period expires jumps almost 2 per cent.
Canstar data found if a customer took out a $350,000 loan on the average basic variable home loan rate of 5.17 per cent, over a 10-year period, the loan would cost $230,655.
But if a customer took out a one-year fixed rate of 3.99 per cent, they could end up paying up to $241,000 over a 10-year period once the fixed rate expired and jumped to the revert rate.
Mr Watson urged customers not to chase the “headline rate” and look at the revert rate and comparison rate on the loan.
Lenders recently started a war on five-year fixed rates to below 5 per cent signalling the tough competition to lure new customers.
Mortgage and Finance Association of Australia’s chief executive officer Phil Naylor said customers should work out whether “the savings on these loans are worth it.”
“You need to look at the whole cost of the loan and not just the interest rate,’’ he said.
Australian Finance Group’s chief executive officer Mark Hewitt said fixed loans spanning several years were the most popular for customers who opt to lock in their loans.
“A one-year fixed rate is similar to an introductory loan rate,’’ he said.
“Two to three-year fixed loans are the most popular and three-year fixed loans are the real battleground at the moment.”
The Reserve Bank of Australia’s board meet on Tuesday and it is expected they will keep the cash rate on hold at 2.5 per cent where it has remained since August last year.
Posted by News Limited Network on 31st August, 2014 | Comments | Trackbacks | Permalink
Plan ahead when buying first home
When interest rates are low, house prices usually rise and first home buyers can feel shut out of the market. But all is not lost – first home buyers should stick to a few simple tips:
- Deposit: Lenders want to see you have at least 5 per cent of the purchase price as genuine savings (generally you'll need 10 per cent overall). You can top up with money from your parents or grandparents, but you have to show at least six months of your own savings. Start saving, now …
- Savings: Set a goal for your deposit amount and save in a high-interest savings account that's separated from household expenses. Set a weekly deposit goal, use direct crediting and if you're a couple have one person's income going directly into savings.
- Reduce debt: Eliminate or reduce the limits on your credit cards and store cards. Lenders look at the limit on your cards, not your balance.
- Grants: The First Home Owners Grant can help with your purchase. But it must be for a new home construction; you can't use it to buy the land and lenders will not treat the FHOG as part of genuine savings. Do your homework because the grant differs slightly between states.
- Income: Lenders like to see stability and want to see evidence that you will repay the mortgage. So you should demonstrate at least six months (but preferably one year) of PAYG employment, or two years of financials and tax returns if you're self-employed.
- Shop around: You can find variable rate mortgages in the range of 4.6 per cent to 6 per cent. The 1.4 per cent difference, on a 350,000 loan over 30 years, is worth over $300 per month.
- Marketing: Watch for "discount" mortgages and special low offers. The low rates last for a year or two and then revert to a much higher rate. Always look at the "comparison rate".
- Fixed: Many first-home buyers like to balance their budget for a few years, and a fixed loan creates certainty. However, once in a fixed loan, your flexibility is restricted and you may encounter break costs if you want to sell or refinance.
- Vary it: Variable rates fluctuate with the market but they are flexible, allowing you to repay higher amounts and deposit lump sums from bonuses and tax refunds, speeding your repayment. You can refinance a variable rate loan without penalty.
- Offset: When you put all your income into a mortgage offset account, the balance pays down the mortgage by the amount you have in there each day. It stops interest capitalising against you as fast as monthly repayments. Offset accounts suit good budgeters.
- Price: Don't be disheartened if you can't buy what you want – buy the next-best and build a strategy for your next property.
- Advice: Mortgage brokers are excellent for insights, strategies and getting you a good result. They're worth talking to.
Always remember: When borrowing money and buying property, the same basic rules apply to everyone. So do your homework, be prepared, take some advice and go for it.
Read more: http://www.smh.com.au/money/borrowing/plan-ahead-when-buying-first-home-20140827-1090m0.html#ixzz3C1Em5hcW
Posted by Mark Bouris - The Age on 31st August, 2014 | Comments | Trackbacks | Permalink
Don't get burnt by the property market
How seriously should property investors take recent warnings that Australian property prices are 20 per cent to 30 per cent higher than they should be and that there is an impending apartment glut in 2017? Whatever the fundamental basis for these and similar warnings, existing and new property investors need to be aware of the potential downside.
The basic issue is to understand the risks involved with investments already owned or being purchased. While less popular for purchases of listed assets including shares and property trusts as well as managed funds, large levels of borrowing are widely used to help acquire direct property holdings.
This high level of gearing helps to drive up property prices in good times such as the present and down when markets turn down, for example due to increased levels of vacancies and/or falling rents. Currently, strong foreign buying interest, low interest rates and a shortage of available stock is forcing and encouraging new investors to bid up prices.
While it may be some time off, a similar downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations. Compared with share market falls which can be brutal and swift, downward property price movements are generally protracted as sellers holding out for higher prices ultimately are forced to lower their expectations.
A special feature of the apartment market can, however, result in distressed forced sales. This is when a large number of off-the-plan sales negotiated before or during construction fall through. A recent example of this occurring is the setback in the Canberra apartment market due to over-supply and reduced public sector employment opportunities.
In this situation, a significant percentage of off-the-plan buyers were either unable or unwilling to complete their purchases. The resulting forced sales depressed asset valuations and made it more difficult for heavily geared purchasers to obtain credit to meet their commitments.
The key message for individual investors is to be aware of these and other risks before entering into off-the-plan contracts. While one benefit of off-the-plan purchases is what can often be a lengthy time lag before money is required to complete the purchase, this can be a negative if personal circumstances change or property valuations fall before the settlement date..
The chances of both of these changes increase with the amount of time before completion. The risks are also greater in situations such as the present time when contracts are entered into in a buoyant market. So even if the warnings of problems ahead don't prove accurate, they are a timely reminder to avoid becoming over-committed to a future large heavily geared property purchase.
Read more: http://www.watoday.com.au/money/borrowing/dont-get-burnt-by-the-property-market-20140828-109ful.html#ixzz3C1Fjoga2
Posted by Daryl Dixon - The Age on 30th August, 2014 | Comments | Trackbacks | Permalink
Not much value in rewards credit cards
A study by researcher Mozo shows for most people, credit card loyalty schemes are hardy ever worthwhile.
Marketers' prey on the fact that we all like to think that we are getting something for nothing. However, among the 119 rewards cards covered, a third of them are hardly worth having, delivering less than $20 in rewards value each year, says Mozo director Kirsty Lamont.
Mozo ranked the reward credit cards assuming that $17,000 a year was spent on the card, which is the typical spend.
And one in four rewards credit cards lose you money each year because the rewards, which can include flight, gift cards and cashbacks, were worth less than the annual fees. "What's more, some rewards cards have such high annual fees that you need to spend more than $40,000 a year on the card just to break even," Lamont says.
However, the researcher has identified 34 cards from among the 119 that return more than $100 in rewards, after accounting for fees, each year.
The best card for the typical user delivering an annual net value of almost $300 and no annual fee is the American Express Velocity Escape Card. For big spenders, those spending $60,000 a year, the best card is the NAB Velocity Rewards Premium Card with a net annual rewards value of $1415.
With annual fees as high as $749 and the most generous points schemes reserved for the cards with the highest annual fees, consumers need to choose a rewards card carefully to ensure they get bang for their buck, Lamont says. Rewards cards are a massive industry and many people become obsessed with earning points.
"These points can be wildly overvalued and quickly eaten away by sky-high fees unless you are spending big on your card," Lamont says. There are other potential traps with rewards card. If the card holder does not pay off the debt, in full, within the interest-free period, the interest rates charged on the outstanding amount is usually much higher than non-rewards cards.
Kirsty Lamont says that the average interest rate on rewards cards is almost 20 per cent compared to an average rate on non-rewards cards of about 14.5 per cent. And the average annual fee is about four times higher at about $160 compared to just over $40 for non-rewards cards.
Those who are not disciplined in their use of credit cards should not be using rewards cards, Lamont says. "If you are paying interest on your card it makes no sense at all to have a rewards card because the cost of the interest will far outweigh any rewards you earn," she says.
Posted by John Collett - Money Manager (Fairfax) on 27th August, 2014 | Comments | Trackbacks | Permalink
Concerns growing towards buying real estate in a self-managed superannuation funds
IT seems that everyone wants to worry about the growing practice of buying real estate in a self-managed superannuation fund. From the government to financial planners to the Reserve Bank, the warnings have been getting louder in saying that this is an area that can severely damage your life savings.
Some of the concern is justified, and is necessary to combat the rise of property spruikers who use slick sales tactics to coerce people to borrow heavily in super to buy overpriced real estate.
But property investment in superannuation should not be avoided just because of warnings about some dodgy players in the self-managed superannuation advice industry.
The tax breaks offered by our super system are huge for property investors, particularly the tax-free nature of super after aged 60.
If someone aged in their 40s or 50s buys a $500,000 property inside their super fund and it doubles in value before they retire at 60 or later and sell it, they pay no capital gains tax on the sale.
GIVE YOUR MORTGAGE A HEALTH CHECK
If the same property is held outside super, $250,000 of the gain gets added to their taxable income – which would result in a tax bill of tens of thousands of dollars.
The same tax breaks are available for other investments such as shares and managed funds, but they can be sold in smaller parcels than property so the tax burden can be spread more evenly.
However, groovy tax benefits should never be the main reason for an investment. The numbers should stack up without the tax benefits, and if you would not buy an off-the-plan apartment in Queensland from a property spruiker outside of super, you certainly should not be considering it inside a super fund.
There are other risks, including:
· - Putting all your eggs in one basket: If you already own a home and an investment property, is it really a good idea to invest your super nest egg in the same class of asset? Shares have historically been just as good a long-term investment as property – just don't mention the GFC, where they more than halved in value and are still not back to their 2007 highs.
· - Government tinkering is frustrating. The tax benefits of super were set to be severely watered down last year, but it didn't go ahead. However, you can bet your nest egg that there will be more changes in the future.
· - Super is supposed to pay a retirement income, and if an investment property is unable to provide that to a retiree because tenants stop paying rent, their fund can be in breach of the rules and suffer big penalties.
If you can manage the risks, avoid marketing schemes and don't borrow too much, property investment in super should not be ignored completely just because the voices against it have grown louder.
Posted by Anthony Keane - News Limited Network on 26th August, 2014 | Comments | Trackbacks | Permalink
How almost 300,000 SMSFs avoid paying income tax
Only a fraction of Australia's half-a-million self-managed superannuation funds pay any income tax, experts say, because of generous super concessions and franking credits that are undermining the federal budget.
Tax Office statistics show almost 300,000 self-managed superannuation funds eliminated or reduced their tax bills through exemptions on super and $2.5 billion in franking credits in 2011-12. These are the most recent records available, although experts say the surge in dividend payments since then has further reduced the small amounts of tax paid by these funds, which are often the primary income of wealthy retirees.
At the time, 424,360 funds generated gross taxable income of $32.9 billion. About $15 billion of that was entirely exempt from income tax because the funds were in the pension phase, which doesn't incur income tax.
Self-managed funds contribute little to the tax system – because about half of the funds' assets are already in the pension phase, Tria Investment Partners principal Andrew Baker said. Also, most self-managed funds receive franked dividends, which cuts the tax bill of many other funds to zero.
"It's a problem isn't it?" Mr Baker said. "It's unlikely SMSFs are ever going to pay a substantial amount of tax as a segment."
The loss of revenue will rise because of an ageing population shifting assets into pension phase and the greater payment of dividends, he said.
Pressure is growing to focus on superannuation tax breaks in the Coalition's planned review of the taxation system. The government is desperate to find ways to reduce the budget deficit.
There have been frequent calls for the government to stop the concessions. The head of the Financial System Inquiry, David Murray, recently suggested Australia's dividend imputation system, which SMSFs are also capitalising on, needed to be looked at.
The roughly 1 million Australians with investments in self-managed super funds argue that having spent their careers paying income tax and following the rules they shouldn't be penalised for saving for retirement.
"Super funds, including SMSFs, are taxpayers, and franking credits should be available to all taxpayers," SMSF Professionals' Association of Australia's technical and professional standards director Graeme Colley said.
Experts say it would be better to tax the earnings of superannuation funds in pension phase at 15 per cent, rather than try to get rid of franking credits, which could see share prices plummet.
A fundamental change
Australia and New Zealand are now the only two developed countries that have full imputation of dividends.
Mr Baker said scrapping Australia's dividend imputation system, would involve "a fundamental change to the taxation system" that would be hard to implement. He said a better way to address the problem was a 15 per cent earnings tax for those in the pension stage. Another option was to copy the United States' minimum taxation rate, "that in short says everybody pays an amount of tax".
Ending franking credits could trigger a political backlash from investors and "would be reintroducing double taxation, so there are enormous problems with it", Mr Baker said.
"The UK did a similar thing 15 years ago, denying pension funds franking credits, and they got away with it . . . despite the protest." He said a tax rate on the pension phase would also stop gearing by SMSFs.
Tax Office data shows SMSFs have an interest expense bill of about $375 million a year, but Mr Baker said that's just the tip of the iceberg.
The data comes from SMSF tax returns, but it is common for SMSFs to achieve gearing outcomes by investing in private property trusts. He estimated the overall interest expense for the sector would be about $500 million annually.
Grattan Institute chief executive John Daley said any change to dividend imputation would have to be part of a package that also reduced the company tax rate and personal tax rates.
He said the difficulty with scrapping imputation was that it would "create incentives for companies to hoard capital rather than returning it to shareholders, which may reduce the efficiency of investment decisions".
Instead, the government should wind back superannuation tax breaks for the old and wealthy. "The easiest way to do this would be to tax the income and capital earnings of super funds in pension phase at 15 per cent," Mr Daley said. "These funds would then pay tax on earnings at the same rate as the super funds of those aged under 60."
He said there was no reason to grandfather this change.
"Anyone who is in pension phase can withdraw the entirety of their super fund tomorrow, and if they think they can find an investment on which they will pay less than 15 per cent tax, good luck to them," Mr Daley said.
"I'm guessing that there will be very few withdrawals."
'It ain't going to happen'
At the end of 2012, the average SMSF had $920,000 (typically funds are made up of more than one person: couples).
According to a 2012 ASX study, about 52 per cent of SMSFs directly hold Australian shares. Tax Office data shows of the $550 billion invested in SMSFs, $180 billion is directly invested in Australian-listed shares, which is already higher than the average of APRA-regulated funds.
Leading economist Saul Eslake said he was "undecided" about whether dividend imputation should be scrapped, although he had previously mentioned it is a costly tax break that the wealthy use to lower their marginal tax rates.
He said that like negative gearing, there are now so many who benefit from franking credits – SMSFs, investors and members of larger public or industry super funds – that "no matter what the intellectual merits of getting rid of it, it ain't going to happen for political reasons".
"Almost certainly, the benefits of franking credits are capitalised into the share prices of companies that have high franked dividend yields, so it seems almost inevitable that abolishing dividend imputation would cause share prices to fall, unless there were an equivalent reduction in the company tax rate," Mr Eslake said.
David Murray said in his review of the financial sector the imputation system – first introduced in 1987 and estimated to cost about $20 billion a year – had created a bias where individuals and super funds preferred shares and this had hindered the growth of the domestic corporate bond market.
PwC's submission to the Murray inquiry said "careful consideration should be given to whether there would be benefits to be obtained from modifications to the imputation system".
Read more: http://www.smh.com.au/business/the-economy/how-almost-300000-smsfs-avoid-paying-income-tax-20140826-108dpu.html#ixzz3BUcBtjWW
Posted by Nassim Khadem - The Age on 26th August, 2014 | Comments | Trackbacks | Permalink
Can you afford it? Can you afford to ignore it?
Our home prices are among the world’s highest and still haven’t peaked.
But if you’re thinking of buying there’s no need to rush, because from here on the rises are expected to be more sedate as the surge in building approvals kicks in and real incomes falter.
At the same time, rents for units are more than keeping up with inflation in Sydney and Melbourne though at best are flat in the other capitals.
Independent property commentators are tipping values will rise an average 6 or 7 per cent in the next year, compared with about 10 per cent last year.
‘‘Normally property prices keep going up until interest rates start to rise. There’s more upside ahead with very low rates, in fact fixed rates have been coming down but the gains will slow down a bit,’’ Shane Oliver, head of investment strategy and chief economist at AMP Capital says.
So when might rates rise?
Not for ages. Economists don’t expect the Reserve Bank to lift rates before its US counterpart, the Federal Reserve, which is planning to but hasn’t set a date as such, apart from making it clear that it won’t be until well into next year. In any case the smart money is even gambling that the Reserve has another cut in it.
Despite (or by pushing up prices perhaps because of) record low rates, affordability is a real issue.
Then there’s Sydney, described as ‘‘one out of the box’’ in the past year by Andrew Wilson, senior economist at Australian Property Monitors. ‘That has been due to low interest rates and investor activity, which is half the market,’’ he says, predicting 2 per cent price rises in each of this and the next quarter for Sydney.
‘‘Pent up demand has been released through lower interest rates, especially for investors in Sydney. Once it works its way through the system it wanes in impact,’’ Wilson says.
The other places to be in the next year are Adelaide and Brisbane, mainly because they have some catching up to do after last year’s under-performance. ‘‘Melbourne is likely to record half the growth it did last year – so that will be about 4 to 5 per cent,’’ Wilson says.
‘‘Perth is looking flat this year,’’ he says, and it wasn’t a reference to the city's topography.
Just as record low mortgage rates have boosted demand, an unusually long home building slump has limited supply. No wonder prices have been shooting up.
Although there’s a boom in housing construction under way it still has a lot of, um, ground to make up.
‘‘It’s the strongest in more than a decade but isn’t enough to make up for the under-building in the previous 10 years,’’ Oliver says.
In fact the adult population is still growing faster than new homes are being built, especially in Sydney, Melbourne and Brisbane.
St George Bank estimates the housing shortage is running at 101,300 dwellings a year.
Even so, there’s no getting around the problem of affordability.
Caught in the middle between low rates and high prices, both records, are household incomes. Wages fell in real terms over the past year and rising unemployment isn’t about to turn that around for a while.
Over time property prices rise on average by the growth in household disposable incomes.
These rose strongly after the global financial crisis as Australia’s export revenues soared thanks to China’s massive spending program, which concentrated on resource-hungry infrastructure. This filtered down to the neighbourhood as jobs, cheaper manufactures and wage increases.
Those days are over, though property prices have been the last to adjust to the new reality.
That’s why once interest rates start increasing, it seems around 5 per cent annual average rises will be the best that can be expected. That suggests real growth of only 2 per cent a year.
The return for investors will be higher when you add a gross rental yield of about 4 per cent on average. This probably won’t change much because even though prices are expected to rise, which would reduce the yield, rents will also be going up.
But remember costs such as maintenance, council rates and strata levies typically knock 1.5 per cent off this.
Also more than half of recent building approvals have been for units, suggesting a looming localised glut, since new apartment blocks tend to be built near each other. Buying off-the-plan also means you’re paying a developer premium.
Anyway there’s no chance of a property bubble while affordability is so constrained – potential first home buyers are staying away in droves – and bank lending is subdued.
The latest QBE annual survey of intending buyers in the next five years found a distinct cooling in sentiment.
Taken in late June, it showed 36 per cent thought the next 12 months would ‘‘be the best time to buy’’ compared with 42 per cent at the same time last year, mainly the result of the budget.
But come to that nor is a correction likely. The market is underpinned by interest rates that will remain low into the foreseeable future, because economic growth is relatively subdued and the housing shortage will take years to overcome.
Case study: Property performers
- Get your finances in order before you see the bank.
- Save for a deposit with the same lender for the best deal, or see a mortgage broker.
- Don’t be fooled by a cheap interest rate. Check the comparison rate that will take into account fees.
- Choose a mortgage with an offset account and use it.
- Fix some of your mortgage as protection but not all of it.
- Have your loan approved before you buy.
Paying rent can be dead money but sometimes so can earning it.
Yet doing both may be the easiest way of building a property portfolio.
Former pre-school teacher turned flight attendant, Melinda Lee, and store manager partner, Kabe Franklin, are looking for their fifth property, while renting themselves.
Nor do they do negative gearing - all four properties pay for themselves.
To refinance one of their properties they even broke a fixed-rate, two year loan with eight months left to run that dropped the rate from 6.33 per cent to 4.69 per cent for three years. Although this cost $1500, it only took five months to make up from the savings in interest.
Lee, 29, bought her first property – a two bedroom unit in North Parramatta – at 22 putting to good use the fact her father Kevin Lee is a buyer’s agent and doubles up as a mortgage broker. Its value has since doubled.
Originally it was an interest only loan but she subsequently switched to a normal one, which has become a winning strategy.
‘‘I lived there for a year because of the first home owner grant. After I moved out and when the rent was high enough to cover the whole mortgage repayment, I switched to a principal and interest loan. That way the tenants pay it off.’’ She and Franklin have been renting ever since, though they tried living in one of their properties but found they didn’t like the area.
‘‘It’s rented by uni students. They pay $530 a week and we pay $545 a week for which we get tax benefits and get to live in a nicer area,’’ Lee says.
The couple use the equity in one property as collateral for the next.
Their cardinal rule is that the rent must at least cover the monthly principal and interest on the mortgage.
‘‘It must cover the whole repayment. A lot of investors buy to just cover the interest payment and rely on capital growth but I don’t think values will double again like they did for my first unit, because wages won’t be going up as much,’’ Lee says.
They prefer two bedroom units though number four was a house in Albury.
‘‘There’s a bigger range of potential tenants with two bedroom units. We wouldn’t live in a one bedroom flat – there’s no space or storage. It wouldn’t suit a single mum with a kid for instance,’’ Melinda says.
They always fix. ‘‘The tenants are paying off the loan and it’s a long-term investment, so the rate doesn’t matter. It’s just good to lock in,’’ she says. Financing your dream
Lining up a home loan starts well before you set foot in a bank, let alone look for a property. ‘‘It takes the average couple 4.1 years to save a 20 per cent deposit for their first home, if they save 20 per cent of their joint income,’’ Kevin Lee, director of Smart Property Adviser says.
‘‘The best way to develop a savings plan is to allocate two weeks to keeping a detailed record of what and how you spend,’’ he says.
That 20 per cent wasn’t plucked out of the air either. Lenders want to see an 80 per cent loan-to-valuation ratio. And yes, the first home buyer grant counts as saving.
While you can get a loan with a slightly lower deposit, you’ll pay for the privilege.
That comes in the form of mortgage insurance, widely misunderstood as protection for you. It’s anything but.
In fact mortgage insurance protects the lender against you. Since you have to buy it upfront it’s usually spread over your loan, which lifts the cost again because you’re paying interest on it. So you end up with higher repayments.
The premium escalates exponentially for every dollar you’re above the 80 per cent.
‘‘Budget for costs such as stamp duty (about 2.5 per cent to 3 per cent of the purchase price) as well. If your parents can give or lend you a few thousand that can save $10,000 in mortgage insurance,’’ Tony Harris, director of themoneystore.com.au says.
And don’t forget properties have to be maintained. Even units come with ready made expenses such as strata levies and sinking funds.
Loyalty is the new black for banks.
‘‘You look more favourable to a bank if you have an account or a credit card with it. Pick one and build up a history with it,’’ Harris says.
And get your house in order so to speak, before you see a lender.
‘‘A loan will be knocked back on one overdue payment on a credit card in the past three months. And don’t swap jobs half way through the application,‘‘ he says.
Then there’s the question of which loan will suit you best. Mortgages come in all shapes and colours.
That’s easy: pick the one that you can pay off fastest. Oddly enough it may not be the one with the lowest rate.
‘‘Non-bank lenders can look cheap on the surface but there are establishment, valuation and solicitor fees. Banks charge an annual $395 package fee only,’’ Harris says.
As well, a basic no-frills loan will be very restrictive when it comes to paying it off sooner. A more expensive one with an offset account may have you debt free sooner.
Offset accounts are up there with the magic of compounding. In fact, there’s a connection. Extra repayments go in a special account earning the same rate as the mortgage costs. One cancels out the other, so the mortgage falls and you’re not taxed on the interest you earn.
The beauty is you can re-draw the money if you need it again.
This is also why you shouldn’t fix the whole loan; most fixed rate loans don’t have offset accounts or allow extra repayments.
Even so, when starting out there’s a case for an interest only loan just to get you on your feet.
‘‘The repayments are lower and you can swap to a principal and interest one any time. It gets you started but don’t stay on it,’’ Harris says.
Read more: http://www.theage.com.au/money/investing/can-you-afford-it-can-you-afford-to-ignore-it-20140815-1032kc.html#ixzz3As9NCyVc
Posted by David Potts - The Age on 20th August, 2014 | Comments | Trackbacks | Permalink
Bold approach solves the rent or buy conundrum
The great Australian dream is to own your own home. There are countless books and articles written about how to achieve it and even a movie about saving it. It’s the largest purchase many of us will make in our lifetime and owning it is a rite of passage: proof you have finallygrown up and are putting down roots.
However a growing number of people are questioning whether we should bother. With the price of homes rising and median home prices in some suburbs well out of reach of many potential homebuyers it is certainly a dream worth reconsidering. The problem with the alternative however is you’re simply paying down someone else’s mortgage and not accumulating any assets of your own. That is unless you consider a third option which is renting where you live and buying property as an investment only.
It’s an interesting alternative and one worth considering if you are able to remove the emotion around owning your own home. So what are the pros and cons of renting where you live and purchasing properties to invest instead?
The obvious down side of this strategy includes not owning your own home which is something many people are emotionally connected to. However if you can put that aside, there are a few more cons to this strategy:
- Instability: Being a perpetual tenant means you are at the whim of your landlord who may decide to sell the property, renovate it or move into it themselves. This might be a deal breaker if stability is important to you, especially if you have a family and don’t want to move around.
- Any Improvements are lost. Many people like to put their own stamp on a place however if you’re renting any material changes invariably needs landlord improvement and often can’t be taken with you when you go. So money spent on a home you’re renting is often a wasteful exercise.
- Capital Gains Tax Unlike owning your own home which is a capital gains tax exempt asset, when you sell an investment property you will almost always have to pay capital gains tax.
Of course with any downside there is usually an upside. With this strategy the pros include:
For many of us, owning our home is a decision we make as much with our head as with our heart. It is truly a mindset shift to consider renting instead and choosing to purchase properties that will only ever be for investment. However if you can remove the emotion, it’s an interesting strategy and certainly one worth considering.
- Rental deductions If you run a business or aren’t provided somewhere to work by your employer you may be able to claim a percentage of the rent you paid during the year. If you claimed a percentage of your ownership expenses and you owned your own home there would be capital gains consequences however with a rental, there’s no such problem.
- Costs are deductible Many of the costs associated with owning and renting out an investment property are deductible including interest. This means the cost of owning the property is reduced by the tax deduction you receive. With most people purchasing their own home today having a fairly high mortgage this means the true cost of ownership is often hundreds of thousands of dollars more than the purchase price which is often not factored in when they’re working out the profit they’ve made.
- Asset is income producing: Your investment property is income producing which in many circumstances means there is not a significant shortfall each week. This may mean instead of only being able to afford one asset, which is often your home, you can afford multiple investments as they are not reliant on you to pay the bills. This may mean you can leverage growth and diversify your risk in different suburbs or with different types of properties
- You are not tied down to one asset. This may seem like a strange one but there appears to be a growing trend especially amongst younger people not to be tied down for years to one location. They want to experience multiple locations or be able to move if their job requires it. Renting your home and having investment properties means you’re still building wealth but you’re not restricted to the one location.
- You don’t have to pay maintenance costs and if you do they may be a tax deduction. As any home owner will tell you, the purchase price is only the start of putting money into your pocket. There are the costs to maintain your property as well as the costs to upgrade as things wear out. If this is your home there is no tax deduction but if it is your investment property you may be able to claim these costs either in full or over a number of years. Of course, with the home you’re renting you generally don’t need to put your hand in your pocket at all for any maintenance or repairs.
- You need to sell your home to realise your gain. Most people can probably tell you, quite proudly, how much their home has gone up in value and how much equity or profit they have made. The thing is, the only way they can realise that profit is to sell their home which, let’s face it, most people would be fairly reluctant to do.
Posted by Melissa Browne - Money Manager (Fairfax Digital) on 20th August, 2014 | Comments | Trackbacks | Permalink
Tags: Purchase or Rent
Time to cut back debt, not lock in more
Predicting interest rate movements is a bit of a national pastime and while this can be an obsession for some, they are well worth thinking about.
Most economists believe rates are unlikely to go much lower. While some are predicting small rises starting from the fourth quarter of this year, others believe it will take until the first quarter of 2016 for the Reserve Bank to raise rates from the current 2.5 per cent a year level.
The policy of keeping interest rates low encourages greater borrowing and spending. However, it's often beneficial to do the opposite of what the herd does.
With rates that have been low for such a long time it’s easy to become desensitised to and complacent about debt.
During the past decade there has been a move away from principal and interest lending (which requires some repayment of principal with each monthly payment) to a predominance of "interest-only" loans.
The flexibility of these loans are attractive yet there’s often a risk that principal repayments are indefinitely deferred, with borrowers forgetting that making the monthly interest payment is getting them no closer to being debt-free.
Knowing that rates can’t stay low forever, one strategy is to lock in a fixed rate for a longer term, with some institutions now offering five-year fixed rates at less than 5 per cent a year. However, paying off debt is an even better approach.
While it may seem counterintuitive, it offers many benefits including inbuilt protection for when rates start to go up. Making additional principal repayments gives you greater ability to absorb the increasing cost of interest, as you can keep your repayments the same and have a lower proportion allocated to the principal (which will naturally absorb the higher interest costs).
This strategy will also give you a greater sense of control over your finances when interest rates inevitably begin to rise. Furthermore, cheap credit often fuels asset price expansion, and this is one of the reasons it’s currently difficult to find compelling value in either the equity or property markets.
Rather than borrowing more to buy over-valued assets, a better way to create equity in your current investments is to reduce debt. If your debt is mainly consumer debt (personal loans or credit cards) then avoiding the high cost of these types of lending products is a good idea at any time, however now is a better time than ever.
By reducing consumer debt you’ll be in a strong position to use your cash flow to buy well-priced assets as opportunities present.
Rates will not stay low forever, so take advantage now, reduce your debt and don’t acquire more.
Posted by Catherine Robson - Money Manager (Fairfax) on 20th August, 2014 | Comments | Trackbacks | Permalink
Developments for the early bird
Securing property in the initial phase of development can be a wise investment, provided you have purchased at the lower end of the market and locked this away at today’s price. In some cases, settlement can take as long as two years, allowing the owner time to save money and reduce the amount for a mortgage. Depending on the state or territory where you have purchased, there are added government incentives on brand new properties such as stamp duty concessions. While these benefits are enticing, there are a few hiccups that come from buying off the plan.
Winner Partnership's accountant and principal Susan Wahhab has secured numerous off-the-plan purchases for her clients. She says a common hiccup occurs if the owner's circumstances change over the lengthy settlement period and they cannot secure finance.
‘‘We recently had a situation where a client purchased a property off the plan some 18 months prior to settlement. Unfortunately, two months away from settlement, he lost his job,’’ said Wahhab. ‘‘We quickly had to come up with a plan. Thankfully, the property he purchased was in a popular development and we were able to find a buyer for his property. But, luck was on his side, just as we were about to get the property transfer under way, the owner found a job, and he was able to secure a mortgage for the purchase.’’
Wahhab offers these tips for off-the-plan purchases:
1. Find out if the bank will approve the loan earlier rather than later.
Get pre-approval from the bank. Even though pre-approval lasts for six months and the property might take 12 to 18 months to finish, it is worth going through the hassle of applying for a bank pre-approval to make sure finance won’t be an issue.
2. Do your numbers if you are buying an investment property.
Before you commit to paying the 10 per cent deposit, you will need to work out the numbers for cash flow, tax benefit and exactly how much the property will cost you after tax every week. Buying an investment property is a long term strategy. Without knowing the cost after tax and knowing whether you will be able to afford it, you will not be able to hold the investment over time to enjoy the long term capital gains.
3. Get a good lawyer who will read the contract from beginning to end.
Most property contracts are standard, but it is important to check for things such as the settlement period from date of plan registration. A standard contract has two weeks for final settlement. Ask for at least three weeks to cover any delays. Check the clause for changes that the developer can make to the plans or size of the apartment. Most states allow either a plus or minus 5 per cent variation for changes.
4. Ask for more.
The developer is keen to get the pre-sales done as soon as possible so they can get the bank approval to start building. Some marketing agents offer incentives to finalise sales. Make sure you get the developer to pay for the depreciation schedule and blinds, and if it is an investment property, ask for a rental guarantee for at least 3 months. It is worth asking.
5. Deal with the right people
Make sure you deal with professional advisers who can negotiate with the developer, the agent, and the bank on your behalf. A well known property adviser has a database of clients to market to if the need arises and you cannot go through with the settlement.
Sydney conveyancer, Cindy Warbuton says one the biggest challenges facing some of her clients, other than changes in financial and personal circumstances, is separating the differences between the agent’s marketing spiel and the contract terms. Also anything important to purchasers such as amenities and views must be included in the contract.
‘‘It can be hard to visualise what you are purchasing even with plans and models. This can lead to disappointment in the final product as can waiting months after settlement to have minor defects fixed,’’ Warburton said.
‘‘Purchasers should be clear on the longest date possible for completion - the ‘sunset date’ - as delays in expected completions are common. Another important issue is to check to see if you are entitled to any interest earned on your initial 10 per cent deposit as this interest is sometimes shared between the buyer and seller.’’
Read more: http://www.theage.com.au/money/borrowing/developments-for-the-early-bird-20140814-10413b.html#ixzz3B58mUmHa
Posted by Emily Chantiri - The Age on 20th August, 2014 | Comments | Trackbacks | Permalink
How to bargain for a better mortgage
DEAL Or No Deal, Wheel of Fortune, The Price Is Right, and Sale Of The Century – Aussies have had a long love affair with TV game shows. It’s almost as long as our love affair with real estate.
Well, come on down, homebuyers and property investors! It’s time to play Wheel and Deal for the Price of the Century!
The price of your mortgage, that is.
While the Reserve Bank keeps the official interest rate low and steady, perhaps for many more months, lenders have been busy slashing fixed-rate mortgages and being more generous with variable rate loans than they have in years.
Surveys say three-year fixed-rate home loans have dropped by up to 0.8 of a percentage point in recent weeks and many now sit below 5 per cent.
If you don’t want to lock it in, there are also some great variable rate deals available. However, these you will have to ask for.
Variable rates haven’t officially moved for 12 months, but the discounts offered by lenders through package deals and other negotiations have jumped from 0.7 per cent a few years ago to around 1 per cent in many cases today.
If you haven’t reviewed your mortgage for a couple of years, you should be worried about missing out on savings, says Smartline Personal Mortgage Advisors executive director Joe Sirianni.
“The cost of funds has reduced significantly for the banks in recent times and they are enjoying healthy margins, which gives them room to move when it comes to the rates they offer,” he says.
“Competition is at an all-time high and most lenders are more than prepared to sharpen their pencil.”
Sharp pencils mean sharp deals for borrowers, but your bank is not going to willingly cut another 0.2 or 0.3 per cent off your mortgage rate just out of the goodness of its heart. Negotiating an extra 0.3 per cent discount will save you about $50 a month and cut a typical $300,000 mortgage’s overall interest cost by more than $15,000.
The keys to bargaining for a better mortgage rate are:
Know what other rates and offers are available and how your existing loan stacks up. There are plenty of comparison sites and mortgage brokers willing to help you with research.
If you can show your lender that you can get a cheaper rate elsewhere they are more likely to listen.
Be prepared to walk if they don’t come to the party, but have another lender lined up.
When it comes to getting the best price on your mortgage, don’t be the weakest link.
Posted by News Limited Network on 19th August, 2014 | Comments | Trackbacks | Permalink
Simple saving solutions
We’re well into a new financial year and having got your taxes out of the way it’s time to think about making your money work harder for you.
Saving sounds good in theory, but where do you start and how do you boost your cash? Here are some simple tips:
- Set a goal. Know what you want to do with your money, how much you’ll need and what you need to do to get there. Goals don’t only give you a target to aim for, they also produce a reward. It may be a holiday you’re saving for or a house deposit or the down-payment on a new car. Whatever your savings goal, name it and give it a monetary value.
- Reduce or eliminate your credit card and store card balances. These facilities charge as high as 20 per cent a year – much higher than you can earn for your savings. To have your cash working for you, direct your windfalls such as tax refunds and work bonuses to eliminating your credit card debt.
- Compare short and long term deposit rates to find the best rate for your savings. Also, make sure you compare savings account products with term deposits, and don’t forget to compare fees and charges.
- Use savings calculators to see how much more your savings can earn with slightly higher interest rates and/or bigger deposits. Have a look at a calculator like the one on Canstar.com.au: it allows you to calculate different scenarios for reaching your goals, by changing the interest rate and the term deposit or savings account.
- Look further afield than your transaction bank. Many Australians save in an account at their current bank, but the higher yields are often at second-tier banks and other institutions.
- Negotiate directly with institutions and find the highest interest rates for your money, not just the advertised rates. Decide what rate you should be earning and ask for it.
- Identify alternatives to savings accounts and term deposits: alternatives that offer higher yields but with similar risk profiles. For instance, managed funds, cash management accounts, and ‘active’ cash accounts can give you as much as 1 per cent a year interest more than the online savings accounts.
- Establish a set-and-forget approach to meeting your goals. You should look at an automated direct debit to create forced savings, and think about strategies such as diverting the extra income you get from a pay rise into savings. Have a predetermined plan to put windfalls into savings.
- Talk to a professional. If you’re confused about interest rates, terms or strategy, seek advice from a professional, such as a financial planner or accountant.
There are so many resources that allow you to be fully informed and reach your goals, but you have to use them and you have to be prepared to act. Saving is always a good discipline – no one ever regretted having a nest egg. So do your homework, set your goals and get your money working as hard as you do!
Read more: http://www.theage.com.au/money/saving/simple-saving-solutions-20140814-103vie.html#ixzz3Ak76ElWx
Posted by Mark Bouris - The Age on 17th August, 2014 | Comments | Trackbacks | Permalink
Loan the best way to lend offspring a hand
The constant news of how unaffordable the Australian housing market has become is a major cause of concern for first home buyers and parents.
There are a number of ways that parents can help their children buy their first home. However, if the wrong method is used capital gains tax can be payable or the financial help can be wasted.
One resource that in most cases cannot be used is superannuation. This is because super must be used to provide retirement benefits and cannot be accessed unless a condition of release has been met, such as reaching 65 or retiring from full-time employment. Also a super fund cannot lend money to, or purchase a house for, members or their children. Parents wanting to help children buy their first home, but who want to retain control, can buy a property in their name or that of a trust. The problem is at some point the property must be transferred into the son or daughter’s name. In this situation the child lives in the home and either becomes the owner upon the death of the parents or when title of the property is transferred to them.
Using this method can protect the parent’s investment in the event of a divorce, but when the house is transferred capital gains can be payable. Once ownership of a property transfers, either upon death or transfer, a capital gains tax event occurs. This results in the parents or their estate paying tax on the increase in its value.
Another method of providing financial assistance is for the parents to give money to assist with the purchase of the home. This could be an amount for the deposit, or it could be enough to fund the full purchase price of the property.
Using a gift can result in a transfer of wealth out of the family in the event of divorce. When parents make gifts to children the resulting asset, whether it is cash or property, becomes an asset counted by the Family Court in the event of a relationship breakdown. Parents can then see more than 50 per cent of the gift ending up in someone else’s hands.
The best way for most parents to help children, and not face the risk of their financial assistance going to their son or daughter’s ex-partner, is to treat the amount provided as a loan. For this to be effective it is vitally important that the loan be properly drawn up.
Neil Collins, a family law specialist with Westminster Lawyers, said, ‘‘Preferably the loan would be in writing with the document signed by all parties and setting out the terms of the loan, such as the interest payable and the mode of repayment. The loan may be repayable in full or in part on demand. Binding Financial Agreements, drawn pursuant to the Family Law Act, are also an excellent way to remove doubt as to the existence of the advance and how it is to be treated in the event of a separation’’.
As a part of drawing up a loan agreement the parent should also consider having some form of charge over the property. This could be done as a mortgage, if it will not affect the chances of getting a loan, or as a caveat.
No matter what choice of financial assistance will be used it is vitally important for parents to get professional advice before the funds are advanced.
Posted by Max Newnham - Money Manager (Fairfax Digital) on 14th August, 2014 | Comments | Trackbacks | Permalink
When to set up an SMSF
A self-managed superannuation fund (SMSF) offers control and flexibility not found in any other type of super arrangement. But how do you know when you are ready for an SMSF?
A key deciding factor will be how interested you are in super and investing. Savers who want to focus on building retirement wealth and take control of their super also need to accept the additional responsibility this brings. Taking control of your super can sound like a great idea and many SMSF trustees/members revel in it, but it can also be an administrative burden and introduce risks. There are two broad types of SMSFs: those where the trustees make all the investment decisions and manage the fund’s investment portfolio and those where a financial adviser is engaged to provide investment advice and manage the fund’s portfolio.
The advantage of the trustees making all the investment decisions is that they have full control over the portfolio. But with this comes considerable responsibility and the risk of poor investments being selected.
The advantage of using a financial adviser is that the investment portfolio is professionally managed, making it less likely that rash decisions will be made when markets fall. An adviser can also provide strategic advice on related aspects such as contributions planning and pension payments.
Regardless of whether you manage your own money or have an adviser help you, all SMSFs need annual accounts prepared and an annual audit completed.
The size of your super balance also needs to be taken into account. The amount in super required to justify establishing an SMSF depends on the anticipated cost of running the fund.
As a guide, we believe about $200,000 is required to set up an SMSF for which the trustees make all the investment decisions. This is based on an estimated minimum annual accounts/ audit cost of $2200, which represents 1.1 per cent of the fund value. A balance of about $400,000 is required where a financial adviser is managing the investment portfolio. The financial adviser’s fee is likely to be about 1 per cent p.a., giving a combined compliance/advice fee of about 1.55 per cent p.a.
There are also special circumstances that necessitate a fund member needing the flexibility of an SMSF, such as the purchase of office premises to rent to a related business. No other super fund type can accommodate this.
It’s also worth noting that insurance options are more flexible and can be more cost effective for an SMSF than those available through other super arrangements.
Age is not a major factor in the decision process. Commencing an SMSF may be equally appropriate for a 25-year-old executive as a 65-year-old retiree.
Posted by Michael Hutton - Money Manager (Fairfax) on 12th August, 2014 | Comments | Trackbacks | Permalink
The big banks in a mortgage war — should you fix your loan?
IT’S the one question I get asked more than any other as an economics commentator: should I fix my mortgage?
The question has become more pressing thanks to the eruption of a mortgage war between the big banks on their fixed-rate loans. Commonwealth Bank fired the first salvo last week, slashing its five year fixed rate to 4.99 per cent. Westpac and NAB quickly followed suit.
Make no mistake, that’s cheap. Variable mortgage rates have averaged around 7.5 per cent over the last two decades, so anything with a “4” in front is good news for borrowers.
It’s unusual, too, because usually borrowers pay a premium for being fixed — you pay a higher interest rate for the certainty of knowing what your repayments will be. But today, the fixed rates on offer are substantially below the bank’s advertised standard variable rates of around 5.9 per cent (of course, most borrowers can negotiate a discount to that headline rate).
On the face of it, banks are essentially taking a punt that interest rates won’t rise from their current record lows for half a decade. That would be unprecedented. More likely, rates will rise during that time.
So just what are those banks up to?
First, banks can afford to discount rates because their funding costs have fallen dramatically recently as international investors have begun betting on lower interest rates for longer (unlike during the GFC when borrowing rates shot sky high because of fears about the stability of the entire financial system).
And let’s not forget those multi-billion dollar profits our banks have been reaping in. Even if the banks end up wearing some losses on these fixed loans, they may deem it worth it to dip into some of those fat profits to steal new customers.
And finally, with the federal government considering the recommendations of the David Murray financial system inquiry, now seems like a strategically wise time for a sudden display of conspicuous competition.
So, should you get involved in their war by switching to one of these cheap fixed rate loans?
The first thing to consider is what fees and strings are attached to what you can do with your money.
Fixed rate loans usually include break costs if you want to exit the mortgage before the end of the fixed term period.
And there are often restrictions on making additional repayments, should you come into some money unexpectedly. Overtime, the ability to pay off your loan faster may mean lower interest costs than the cheaper fixed rate.
As a nation, less than one in five Aussies usually opt to fix their mortgage.
This is in stark contrast to many other countries, where long term fixed rate loans are the norm. Traditionally Aussie borrowers have valued the ability to pay off their loans faster. Indeed, one of the biggest economic trends since the GFC has been the rise in borrowers getting ahead on their repayments.
Our historic preference for variable rate loans has served us well, even if it does make us a bit obsessed about interest rate moments. More people on variable rate loans means the Reserve Bank has a tighter grip on the economic reins, being able to influence household budgets more directly.
And before you jump in bed with the big banks, there are alternatives to consider.
Many smaller lenders are currently offering variable rate mortgages below 5 per cent. Before you opt to fix, why not try haggling on a variable rate loan? Many borrowers will be able to get as much as 1 or 1.5 percentage points off the headline standard variable rate just by ringing up the bank and asking — or, more importantly, threatening to leave.
At the end of the day, the decision to go fixed or variable is a gamble on where you think interest rate are heading.
Fixing in will protect you against interest rate rises, but it could also deny you the benefit of any interest rate cuts.
So, to my second most commonly asked (but related) question: where are interest rates heading?
In reality, it’s not possible to know for sure.
Inflation figures released last week showed inflation is at the top of the Reserve Bank’s comfort band at 3 per cent. Markets, which had been toying with the idea of further interest rate cuts, now view the prospect of further interest rate cuts as unlikely. The next move will likely be up, rather than down.
Cue speculation of imminent interest rate hikes!
But there’s another, more likely, possibility: that interest rates are simply set to remain at their current lows for a long period of time.
These are, after all, unusual times we live in. The United States is still printing money to pump its economy and many central banks have their interest rates at near zero per cent.
When it comes to global interest rates “lower for longer” is the new mantra.
So either way you punt, fixed or variable, debt is cheap and likely to remain that way for some time.
Posted by Jessica Irvine - News Limited Network on 28th July, 2014 | Comments | Trackbacks | Permalink
Mix of fixed and variable rates the wisest course
The banks might look like they’re going soft by cutting the five-year fixed home rate below 5 per cent, but there’s more where that came from.
Even so, they'll do just about anything to avoid making an across-the-board cut in the variable rate that most borrowers pay.
Sure, they’ll discount it for new borrowers or existing ones who kick up a big enough fuss, but a far more expensive cut for everybody is something else again.
Mind you, the CBA’s 4.99 per cent isn’t quite what it seems. It comes with a $395 annual fee, but even so.
Frankly, if you’re paying more than 5 per cent, whether fixed or variable, then you’re being ripped off.
And there’s no mistaking the trend in interest rates that, as I’ve been saying for a while, has been down despite the exhortations of the banks’ own economists. Clearly the banks aren’t listening to them and neither is the market.
Come to that the Reserve Bank has little say either. The world is awash with cheap cash and there’s nothing it can do – were it inclined to which it isn’t – about the banks soaking it up.
Just the other day Westpac raised money offshore for less than it had to pay before the GFC.
The days the banks can complain about their funding costs are over, even if this is a bleak turn of events for savers. Watch term deposit rates as the banks quietly drop them further.
If you want to know where interest rates are going you have to follow the smart money that shows its hand in, of all places, government bonds.
That’s probably because there are fewer moving parts to get wrong – the interest rate and maturities are fixed and there’s no credit risk.
But they trade just like shares and the smart money has been ploughing in so the yield has dropped as their prices have soared – just as paying more for a share reduces the return from the dividend even though the amount is fixed.
Without fuss or fanfare there has been a rally in bonds for months.
It’s mostly foreigners buying, including smarties who can borrow at less than 1 per cent and invest it in Australia at over 3 per cent. But so what?
Money talks and I’d be wanting my super fund to moving cash out of the bank and into bonds which pay more, plus come with the juicy prospect of a capital gain.
So should you fix for five years?
Well don’t let me stop you but bear in mind the end game is to pay off the mortgage as fast as you can. Some fixed rate loans let you make additional payments and even have full offset accounts, but they aren’t offered by the banks. And they’re more expensive.
No, it’s safer to mix and fix. Leave some of your loan variable, especially when the rate happens to be lower to begin with and isn’t going anywhere in a hurry, while fixing the rest.
Posted by David Potts Sydney Morning Herald on 27th July, 2014 | Comments | Trackbacks | Permalink
Fixed interest rates too good to pass up, say experts
Home loan customers should take advantage of low fixed interest rates and lock in now, experts say.
The Commonwealth Bank, National Australia Bank and Westpac on Wednesday cut their longer-term interest rates to below 5 per cent.
CBA was the first to lower its five-year fixed mortgage rate to 4.99 per cent. NAB and Westpac followed suit.
“Competition in this market has finally bred benefits for consumers; 4.99 per cent on a five-year home loan is very sharp. It is an excellent deal,” said Alex Parsons, chief executive of interest rate research company RateCity.
“Will rates keep coming down? No. Non-banks have had below 5 per cent for a while. Now banks have joined in.”
Interest rate advisers all agree conditions are ideal for a switch to fixed rates.
“Our monthly Reserve Bank surveys say the interest rate is due to rise in the next year. It is likely that the interest rate will drop before rising again to normal levels, but at the moment this is a good rate,” Finder.com.au spokeswoman Michelle Hutchison said.
“Historically, cash rates have been around 5 per cent and interest rates another 2 per cent higher. So we are now near the bottom of the cycle.”
Rates may drop before they rise, but borrowers are better off locking in the rate now rather than speculating.
“Even with a possible rate reduction you still get comfort from hedging your bets against the possibility of rates eventually going up,” 1300 Home Loan managing director John Kolenda said.
AMP Capital’s chief economist Shane Oliver, agreed, saying economic indicators showed borrowers needed to take advantage of the low rates.
“Fixed rates are normally higher. Average inflation tells me the RBA will not stay at the current rate,” he said. Rate rise likely in nine months
Dr Oliver predicted a rate rise was likely to be about nine months away, around the June quarter next year.
“The banks are offering this deal because they can. Costs of borrowing have dropped and are consistent with Australian bond yields falling.”
A combination of economic factors including improvements in the global capital market with lower spreads have resulted in the cheaper cost of money.
“Last year some mortgage providers were already doing 5 per cent. So to avoid losing market share, the big banks have joined in,” Dr Oliver said.
He cautioned the low rate deals may not last because banks would have only a limited amount of money at low rates.
But Mr Kolenda said borrowers must be sure they are switching for the right reasons, such as certainty of repayment and peace of mind rather than as a speculative play on where rates are going to move.
“Many committed to fixed rates just before the global financial crisis and watched the rate drop to a low of 3 per cent,” he said.
Fixed rates are also not ideal for people on high salaries.
“If you lock it in now, and want to repay chunks of the loan, you may have break costs. Also, are you upgrading your loans, or having another child?” Canstar research manager Mitchell Watson said. He recommended splitting loans between variable and fixed rates to “get best of both worlds”.
Interest rate adviser Mozo is more conservative, saying consumers must watch the rates for the next few weeks.
“We may not be at the bottom yet,” director Kirsty Lamont said. “This is the start of what will be more pressure on fixed rates. Other lenders will match if not undercut the rates.”
Posted by Su-Lin Tan - Sydney Morning Herald on 25th July, 2014 | Comments | Trackbacks | Permalink
Australians would rather float than fix on mortgages, despite low rates
The country's biggest banks may have slashed their fixed mortgage rates, but historically home buyers prefer to try their luck when it comes to borrowing costs.
Unlike most other countries, we are a nation of risk takers who opt far more for the flexibility of floating loans rather than the certainty of a set interest rate.
The Commonwealth Bank, NAB and Westpac are engaged in a fixed mortgage war, yet on average only about 12 per cent of home loans have been fixed during the past 22 years.
While this new chance to lock in record low interest rates at less than 5 per cent may whet the appetite for fixed home loans, they have never dominated the Australian market in the same way as in the US and Europe.
The proportion of fixed rate mortgages reached its peak at 25.5 per cent during the global financial crisis, according to Australian Bureau of Statistics data, as home buyers feared rates would keep rising and squeeze household budgets. It stood at 14.9 per cent of home loans in May, having stayed close to that level for the previous four months.
Australians' preference for variable rate mortgages proved helpful during the GFC, as it gave the Reserve Bank of Australia a direct way of stimulating the economy when needed.
Variable loans fluctuate with the cash rate, which has been set at an unprecedented low of 2.5 per cent for almost a year. Fixed loans reflect the outlook for the cash rate and bet on it being increased.
Mortgage and Finance Association of Australia chief executive Phil Naylor said there is "something in the Australian psyche" that leans towards being carried by the market rather than fixing against it.
The possibility of making a saving if interest rates drop and of being able to pay the loan out early entices home buyers to variable rates, he said. Until recently, it was also variable rate loans that were flogged to homebuyers rather than fixed.
"It's always been the case. It's just been traditional in Australia that Australians have opted for variable rates. They prefer that flexibility rather than being caught in a fixed rate mortgage when rates go down," Mr Naylor said.
Another reason home buyers might prefer variable rates is because mortgage rates are mostly only fixed for up to five years in Australia, HSBC Australia and New Zealand chief economist Paul Bloxham said.
The longer term rates, of 10 to 15 years, tend to be higher and this makes it more attractive for home owners to stick to variable or only short fixed rate mortgages, he said. Unlike in Australia, in the US fixed rates have little or no break fees making them more flexible for consumers and increasing competition between lenders.
"In Australia you mostly have fixed mortgages of one, three or five years available. If you compare it to the US, for example, the bulk of mortgages that households there have are 30 years. The Australian market doesn't have that sort of product on offer," Mr Bloxham said.
But the latest move by the big banks, combined with the possibility of a interest rate rise in the future, could encourage more punters to place their chips on a fixed loan.
Michelle Hutchison, from online loan comparison service Finder, said she would not be surprised if home buyers started to pay fixed rates more attention.
"Borrowers know that an interest rate rise is on the horizon and fixed rates are still dropping and becoming competitive with variable rates," Ms Hutchison said.
"It could also be possible that these fixed rates may not last long, in a weeks time they might be up again. Fixed rates do move more than variable."
Rate City chief executive Alex Parsons said the move by the big banks to drop their fixed loans made it a "super exciting" time for Australians home buyers. "This change is significant and it spells out a new round of competition. It spells out that banks are prepared to fight for consumers and that's great," he said.
Posted by Melanie Kembrey - Sydney Morning Herald on 24th July, 2014 | Comments | Trackbacks | Permalink
Offset accounts can save you thousands
For those who have worked and scraped to save a mortgage deposit, there is a strong instinct to find the best value loan, and repay it in the most efficient way possible. If this is you, I suggest you take a look at a product called the offset account loan. When they’re used properly they can save you thousands of dollars and accelerate the paying-down of the mortgage.
An offset account is a transaction account directly linked to your mortgage account. The balance of funds held in the offset account serves to reduce the balance of your loan account for the purposes of calculating interest. These calculations are carried out on a daily basis, so each day you have a credit balance in your offset account, it is saving you interest. Here is an example. If your mortgage balance was $300,000, and you put a $5000 tax refund into the offset account, interest would only be charged on $295,000 for the period the offset account is maintained at a $5000 balance.
The longer you can keep the balance high in your offset account, the lower you keep the interest bill and, therefore, more of your money is paying-down principal rather than interest. This is how you speed up the repayment of the loan.
It can work this way: all income goes into the offset account and fixed costs (mortgage, power, phone, internet, gas, car finance) are direct-debited from the offset account automatically. For those without spending discipline, weekly spending money (including grocery budget) can be deposited into separate bank accounts, and an allocated amount goes into debt reduction or investments, including super. The trick is to never have an ATM or credit card attached to the offset account, especially if you are likely to take yourself on a spending spree. Have one for your weekly spending account, but not the offset.
An offset account is a do-it-yourself tool because you can set it up yourself, fine-tune it as you go and use it as both a budgeting and wealth-building system. It’s worth noting that loans with an offset account are often marginally more expensive than your typical basic loan. However, by adopting strategies for aggressively paying down home loan debt, you can potentially be better off in the long term.
If you have the discipline and the focus to make this work – and many Australians do – you’ll find you can better control your money and you can make your income work harder for you. You’re also potentially ahead tax-wise because the money you save on paying less interest is tax-free, whereas if you put the $5000 tax refund in a savings account you would potentially have to pay tax on the earnings.
Offset account mortgages are not a magic bullet and they don’t suit everyone. But for focused, disciplined people who want to be smart about their mortgage and finances, this is something worth investigating.
Posted by Mark Bouris - Sydney Morning Hearld on 24th July, 2014 | Comments | Trackbacks | Permalink
Turning a home into an investment
As life inevitably changes, a property may need to fulfil a variety of purposes. Evolving circumstances, like a new relationship, a baby or a job transfer can cause buyers to re-evaluate a purchase.
Therefore it may be ideal to buy a primary residence that can be rented out and converted into an investment.
An investment property that has a strong rental yield is always underpinned by the qualities that made it a desirable owner-occupied home in the first place, according to agents.
Agent and auctioneer Greg Hocking said renters wanted the same characteristic in a property that was sought by an owner-occupier.
"People buy a house for a personal reason, so is it suitable [as a rental] is the question," Mr Hocking said.
"Location is first and foremost, then, will it require significant ongoing maintenance? And generally speaking, the closer it is to the inner-city rim, the better capital growth."
Swimming pools and verdant gardens, as well as decorative exterior finishes, can marginally boost the rental value, but at the same time add enormously to the cost of upkeep, he said.
The combination of capital growth and solid rental return is the Holy Grail of acquiring a home that will later be a rental investment
Agents say a position near schools, shops, doctor surgeries and public transport, as well as a property that is easy to maintain, is a recipe for a good rental return.
But perhaps the most important factor - and the least known - is that two bedrooms, no more, no less, will attract the right sort of renter. It's the real estate baby bear equivalent in the Goldilocks story - two bedrooms are just right.
Kay & Burton senior executive portfolio manager Mikhala McCann said two bedrooms was the magic number that translated to keen interest from an ideal demographic.
Three bedrooms often attracted groups of young singles and one bedroom was limiting in its appeal, Ms McCann said.
However, two bedrooms will attract young professionals and couples who require room for a study or are planning to have a baby, and therefore tend to be long-term renters who look after the property.
Ms McCann said a neutral colour scheme would also be in demand with tenants who, unable to make alterations, were often unwilling to put up with flamboyantly toned feature walls or other flourishes that reflected an owner's personal taste.
"When you are a tenant, the legislation says you cannot change anything, so those little things that as an owner wouldn't worry you because you can eventually change, will impact tenants," she said. "They want something neutral that they can bring their own style to.
"If you do have a garden or a pool, the cost of upkeep should be built into the rent so it is protected and maintained."
Rae Tolley, manager of the property management department at Beller Real Estate, said owners should ideally refresh an investment house between tenants.
She said older properties were competing against the glut of glossy new apartments on the market.
"The average tenant stays for two years-plus, so things do wear out over that time," Ms Tolley said.
"There is an abundance of new properties, so you have to keep refreshing your property and adding to it, and you should have an improvement plan.
"Going back to that oversupply, properties that don't have a freshen up at the change of tenant are often vacant for longer, and a good property manager will come up with a plan of things that need to be done with the change of tenant so the owner can draw up a financial plan."
An easy-to-care-for property will tick the boxes of tenant appeal and ensure a hard-earned investment does not deteriorate.
"It is very hard for tenants to maintain it in the way you would because there is an element of disconnect, that aspect of separation," Ms Tolley said.
Bayside Frankston, at the gateway to the Mornington Peninsula, and inner-city Footscray and Seddon have been nominated by agents as smart-buy suburbs for residences-cum-investment properties.
Coburg and East and West Brunswick, as well as working-class Glenroy, also offer strong rental returns. Those suburbs have older, larger blocks - tenants love space - and don't experience long periods of vacancy.
Jesse Linardi, design director of dKO Architecture, said renters were chasing a lifestyle as much as buyers.
Mr Linardi designed and built a two-bedroom townhouse on South Street, Preston with the intention to live in it and then use it to kick off an investment portfolio.
He lived in the urban-style townhouse for about three years, and then moved on to his next residential project.
Mr Linardi, who rents a home in North Melbourne, has welcomed two sets of tenants in Preston over the past four years.
He said the contemporary features he valued as an owner and occupier, including open fireplaces, courtyards off the bedrooms and an abundance of natural light, have been as much in demand with his tenants.
"I always wanted to build my own house and I wanted to keep whatever I built for the future, so I always knew it would be rented out," he said. "I got to the point where financially I knew that if I moved out and rented it out it would be self-sufficient.
"In the area where the house is in Preston, there is not a lot offering that is architecturally designed. They want to enjoy the space, whereas a lot of older properties on the market don't offer those natural things like light and sun.
"Whether a home costs $300,000 or $3 million, people fundamentally want the same things."
Mr Lindardi is building a five-storey townhouse for himself in Collingwood, with the aim to rent it out and continue to grow his property portfolio.
* A top-notch investment property needs to have mod-cons, a good floor plan, generous living space, fresh paint and carpets and be easy to clean, said Rae Tolley. "It is important to have a dishwasher and air conditioner - a lot of properties that don't have features like split system air conditioning are lagging behind in the market," she said.
* Scarcity factor is key, according to Greg Hocking. Dime-a-dozen off-the-plan apartments are a danger zone. Mr Hocking said buyers could lose 10 to 15 per cent of their purchase price when the property was completed, but a period cottage or an art deco apartment would have the greatest capital appreciation.
* A garage or storage cage will add to the attraction, as transient renters need somewhere to stash their stuff, said Mikhala McCann.
Posted by Emily power- Domain (The Age) on 20th July, 2014 | Comments | Trackbacks | Permalink