Puzzle Finance Blog
Cold reality to hot property
Investors be warned, there is no guarantee the property pot of gold won't boil over.
Intending property investors hoping to make a quick killing in Sydney and Melbourne's hot real estate markets should be careful. While RP Data reports Sydney property prices rose 13 per cent during the past year and Melbourne prices rose 7 cent, there is no guarantee the price rises will continue at the same pace.
Those who plunge into overheated property markets in the hope of making quick capital gains could be setting themselves up for a loss, says Sydney real estate agent Peter O'Malley, author of the top-selling book Real Estate Uncovered.
Would-be landlords should do their homework, have a decent deposit and be prepared to invest for the long term as capital gains may be harder to come by, O'Malley says. Property investors who borrow too much are exposing themselves to big risk. "I have seen [property] price corrections in my time and this idea that they never go down is not correct," O'Malley says. "I can show you dreadful losses after people have bought in a bull market like this one," he says.
"Their circumstances change, such as divorce or financial hardship, and they become forced sellers," he says
"They may lose only 10 to 15 per cent of the purchase price but that is 100 per cent or more of their equity.''
They could end up with negative equity; where homeowners owe more to the lender than they have received in the sale proceeds from the property.
O'Malley's book breaks ranks with the real estate industry. He reveals the underside of real estate agents and property markets and lays out the traps that await consumers new to the world of property.
That has made him unpopular with some real estate agents.
The book helps those buying and selling family homes, but his major concern is would-be property investors lured to the market by the prospects of quick capital gains.
O'Malley entered the real estate industry in 1997 at the age of 19 and says he has always been surprised by how many novice property investors make the most basic mistakes. There are investors who look at the gross yield (the annual rental income divided by the purchase price and multiplied by 100) without properly accounting for the costs of the investment.
They are then hit by expenses from all sides - property management fees, maintenance costs, rates and insurance, he says. While the gross rental yield on the investment property may be a "commendable" 5 or so per cent, their net return, the return after costs, is often closer to 1.5 or 2.5 per cent, he says.
Louis Christopher, the managing director of specialist property researcher SQM Research, says the average gross yield for units in Melbourne is 4.3 per cent and 4.7 per cent in Sydney.
"I think gross yields will fall over the next 12 months, because we are expecting property prices to rise faster than rents," he says. He says a vacancy rate of between 2 and 3 per cent usually indicates a market that is in equilibrium between landlords and tenants.
Docklands and Southbank in Melbourne, which are dominated by units, have vacancy rates of about 7 per cent, one of the highest in either Sydney or Melbourne, Christopher says.
In September, the Reserve Bank of Australia said in its Financial Stability Review it is "important that those purchasing property maintain realistic expectations of future dwelling price growth".
The Reserve Bank said that long-run future growth in dwelling prices might be expected to be more in line with income growth. While mortgage rates are likely to stay low, economists are expecting household income growth to slow as the peak in the mining boom passes.
Posted by John Collett - Money Manager (Fairfax Digital) on 8th December, 2013 | Comments | Trackbacks | Permalink
Buying off the plan much more than it used to be
Buying property off the plan has never been as popular as it is now, with purchasers of all ages responding to much more sophisticated ways of marketing, selling and delivering the product.
The increase in off-the-plan sales has been driven by demand, says Nigel Edgar, NSW general manager of Australand's residential division.
“It's a secure way to buy a new apartment in what's a popular market segment with limited supply,” he says. “And our research has shown us that people prefer to buy from reputable developers.” The advantage of buying exactly what you want, rather than having to compromise on existing property is now properly understood, says Murray Wood, director of agents CBRE Residential in NSW.
“People are keen to get into a project early so they can choose the pick of apartments off the plan, rather than waiting until it's built and then just buying what's left."
"It allows the opportunity to secure a property without having to settle for between 18 months to potentially four years for some developments, such as the Greenland Centre in Bathurst Street, Sydney."
“They can study floor plans and floor plates and research everything and know they can have the best, like the biggest balcony or the sunniest garden, and what suits them best. It's about having a bit of control, and knowing the timing.”
When life throws up a curve ball, such a purchase can give more flexibility. If a buyer is suddenly transferred to another city, they can sell their interest to someone else, says Wood.
In addition, the construction period gives people more time to save up funds, says Andrew Hall, an associate director of CBRE Residential in Melbourne, with younger, first-home buyers always hoping they might receive a promotion and a wage rise in the interim – or more time to get the courage to ask parents for a loan.
“We've found younger people and investors comfortable about buying off the plan for a while, but the more mature demographic, who traditionally shied away from that form of purchasing, are now coming into the market,” says Hall.
“We have projects selling all over Melbourne to an older and more sophisticated buyer who's looking to downsize from a traditional home.
“Young people have always liked it, for the time it gives them to save up, and the grants they can get now, and investors like to claim depreciation and stamp duty exemptions. But now a much wider market is getting it too.”
Buying off the plan worked so well for Jarrod Farey the first time, that he repeated the process twice.
He now owns a townhouse in Preston where he lives, and a townhouse and a house from a house-and-land package in Tarneit, near Werribee.
“I did it the first time mainly because of the cost savings,” says Farey, 30, a project manager. “I saved on stamp duty which is a big one, and I wasn't in a position where I wanted to move into it straight away. So that gave me 12 months more to save.
“By the time it had finished, it had gone up in value, too. So that capital growth also made buying off the plan very attractive to me.”
Farey checked the developers closely and worked out what he could ask for and change about the plans to suit himself. He says he's been lucky each time in that the developments turned out extremely well.
“I gave one developer a hard time!” he says. “But you never really know. Sometimes you have developers who have done lots of projects before who go under. There are no guarantees.”
NSW Ambulance Service worker Jackie Levett had been searching for an investment apartment for two years when, on a whim, she looked at a new development around Homebush Bay. As she sat sipping coffee in the piazza that is the centrepiece of Wentworth Point, she decided she liked it so much, she would not only buy a unit off the plan but probably live there.
“It had a really nice feel as a new community,” says Levett, 35, who is renting in Drummoyne. “I thought I’d like something new rather than having to renovate something old – and the models and all the planning looked good.”
Levett paid $545,000 for a one-bedroom unit on the top floor of one of the four buildings in the 642-unit complex The Address, designed by architects Turner.
Her father, a project manager and civil engineer, checked everything at the site and quizzed developers Sekisui House to make sure it would be a sound investment.
“It will be finished by the end of next year and so I’m happy that, by putting down my deposit, I’m now in the property market with time to save,” says Levett.
Five reasons to buy off the plan
1. If you think that new car smell is heavenly, just wait until you breathe in the air of your new, never-before-lived-in home, and admire the gleam of the new appliances, the virgin walls and the pristine floorboards, carpets or tiles.
2. Provided you buy well, it can be cheaper than buying an existing property, as well as savings on stamp duty and grants for buying new. In Melbourne, a payment of up to $10,000 is available for eligible first home buyers as long as the price of the property or construction of the home does not exceed $750,000. There is also a 40 per cent reduction on stamp duty for new homes worth $600,000 or less. In Sydney, first home buyers are eligible for a $15,000 grant if buying a newly built place for less than $650,000. They are also exempt from stamp duty if the value of the new home is less than $550,000 (or land valued less than $350,000), or a concession on stamp study if the value is between $550,000 and $650,000.
3. The design of new apartments and townhouses has improved hugely since the days of cramped, dark interiors with wasted corridor space, little storage and no balconies.
4. If the market is rising, the value of your apartment might have soared by the time it is finished and you have to pay for it – after saving for the two years of construction – and move in.
5. You get the latest in technology and finishes which may keep strata levies down, or great resort-style facilities which may mean you never have to leave home for entertainment again!
Five things to look out for
1. Check the developer. Look at what buildings they've developed before. Make sure there have been no problems, and do the same due diligence with the builder, architect and financier.
2. Look at the local plans and phone the council to make sure any open space is not zoned for another development.
3. Make sure the estimated levies are realistic to pay for the services and facilities promised. You don't want the levies to go up when it is discovered the bills are higher than predicted.
4. Avoid one-stop-shop situations where the developer, strata manager and building manager are basically the same company. When conflicts arise, you need someone on your side.
5. Read the proposed bylaws to ensure they suit your lifestyle. There is no comeback, for example, if the real estate agent told you it was pet friendly but the bylaws ban animals.
Posted by Sue Wellings - Domain (The Age) on 26th November, 2013 | Comments | Trackbacks | Permalink
Be cautious, first-timers urged
With a threat of mortgage interest rate rises in the near future, home buyers are asked to tread carefully.
After dipping over the first half of this year, financial stress levels are on the rise.
With the next movement in interest rates likely to be up, first-home buyers are being warned to be careful not to let their finances become over-stretched.
The Consumer Financial Stress Index, produced by credit-ratings agency Dun & Bradstreet, recorded 15.7 in October after hitting a low of 11.5 in August.
The main reason for the increase in the index, which measures consumers' demand and capacity for credit, is the sharp rise in house prices in Sydney and Melbourne. Other factors in New South Wales and Victoria include limited wages growth and soft labour markets.
Both property markets are being driven by investors and up-graders with first-timers locked out because of the rising prices. Median dwelling prices (which includes units) in Sydney have reached a record high and Melbourne is near its all-time peak. During the past year, the median dwelling price in Sydney is 11.5 per cent higher and almost 7 per cent higher in Melbourne, according to RP Data.
"With the Reserve Bank widely tipped to begin raising its interest rates in the new year, buyers who are planning to enter the market now need to have an eye on future affordability," says Steve Brown, a director of Dun & Bradstreet. He is expecting the Consumer Financial Stress Index to move higher after Christmas when personal finances often come under pressure.
People tend to spend-up on their credit cards over the festive season with the credit card debt falling due in January and February.
The concern is that people have become used to very low interest rates. Brown says mortgage repayment difficulties could rise when interest rates eventually move upwards and the size of the repayments increases.
"Mortgage stress is generally considered to occur when repayments are at 30 per cent of pre-tax income, so it's not difficult to see the impact a few interest rate rises could have," Brown says.
He says that mortgage holders need to have certainty of income, given the creeping unemployment rate in Australia, which is forecast to breach the 6 per cent mark next year. According to research conducted earlier this year by Dun & Bradstreet, 17 per cent of consumers surveyed had no savings, while 32 per cent would only be able to live off their savings for one month if they lost their job.
"People need to make sure they not only earn enough money to meet their regular obligations, but that they can survive financially in the event of a job loss or other interruption to their earnings," Brown says.
The cost of getting behind with loan repayments is about to become potentially much higher. Under changes to credit reporting rules, more information will be held on credit reports. These are the reports that lenders use to help assess credit applications.
At the moment, only payments of more than 60 days late are recorded and they are recorded as "defaults". When the new regime starts in March, a payment of more than five days late may be recorded as "not made".
While the new regime does not start until March, payment history going back to December 2012 can be included in the reports. Payment history for telecommunications and utilities are not recorded and that will not change.
"If home owners are unable to make their mortgage payments then they risk impacting their credit standing for the two years that this type of information will remain on their files," Brown says.
Posted by John Collett - Money Manager - Fairfax Digital on 17th November, 2013 | Comments | Trackbacks | Permalink
Wealth creation starts with buying the first home, say planners
With home ownership among younger people in decline, where does that leave their prospects for wealth creation?
The answer is not good for those struggling to gain a foothold in the property market.
There is ''no question'' that home ownership has added enormously to the personal wealth of most Australians, says John Hewison, a financial planner and founder of Hewison Private Wealth. And those permanently locked out of the market will be forgoing the wealth creation advantages that their home-owning parents enjoy, financial experts warn.
Part of the advantage of home ownership flows from the substantial tax breaks.
Successive governments have supported home ownership through favourable tax and social security treatment of the family home. The family home is exempt from capital gains tax when the owners sell and upgrade. And later in life, the family home is exempt from the assets test which, together with the income test, determines the amount of age pension that is paid.
A recent report by the Grattan Institute found home owners receive about $36 billion a year in government expenditure and property investors almost $7 billion.
By contrast, private renters receive very little support through the tax and welfare system, even though they make up nearly one in four households.
Of course, home ownership is not all about money. There is the security of owning your home, especially in retirement. For those in retirement who do not own a home there is a lot of stress over where they will live, says Laura Menschik, a financial planner with WLM Financial Services.
Renting in Australia is more uncertain than in some other countries because the lease terms are typically only six or 12 months. The short tenure of rental contracts adds to the concerns of renters about landlords giving notice or increasing the rent.
Paying off a mortgage is forced savings, says Andrew Heaven, an AMP financial planner with WealthPartners Financial Solutions. That can be particularly helpful to those who have difficulty saving.
''Over time, once the mortgage is substantially reduced, it becomes less of an expense than rent, which rises faster than inflation,'' says Mr Heaven.
The family home then becomes the ''engine room'' for further investing. Equity in the home can be used as security to borrow to invest in shares, property or managed funds. And the borrowing is at mortgage interest rates, which are going to be much lower than other loans such as personal loans.
Owners can make improvements to their properties and add value. Home owners who make further investments have the opportunity for another bite at the cherry, courtesy of the tax breaks on investments. Under ''negative gearing'', if income from the investments, such as rent or dividends, does not cover the interest costs and other expenses of making the investment, the shortfall reduces the investor's income on which income tax is paid.
With a mortgage, the pain is early on. Those with mortgages under control are likely to have the spare cash to be able to start or increase salary sacrifice contributions to superannuation, which, like property, is tax advantaged.
Mr Hewison says the advantages of home ownership in wealth creation underline the importance of getting onto the property ladder. But first timers may have to lower expectations if they are to get a start.
Mr Heaven agrees. ''Our parents were not looking to buy [their first home] within five or 10 kilometres of the city centre,'' he says. ''A bit of expectation modification would probably not go astray.''
But while the advantages of home ownership are clear, it should not come at the cost of mortgage stress. Mr Heaven's rule of thumb is that mortgage repayments should not be more than 35 per cent of the borrower's gross income.
In addition, buyers should be able to put down a deposit of at least 20 per cent of the price to avoid paying lenders' mortgage insurance.
The premium for the insurance runs to thousands of dollars. While it is paid by the borrower it covers the lender if the lender has to sell the house and there is a shortfall. It is a one-off premium that lenders add onto the loan.
Mr Heaven prefers first timers to have the full the 20 per cent deposit to show a good savings discipline and that they will be able to manage the mortgage repayments. It also gives borrowers enough equity in the property for some ''breathing space'' if property prices fall.
Planners say that for those for whom home ownership will likely continue to be out of reach, the best way to close the gap on home owners is to make salary sacrifice contributions to superannuation. Younger people have a cap or limit on how much they can salary sacrifice in a financial year of $25,000. The cap includes the 9.25 per cent compulsory superannuation.
By salary sacrificing, for the vast majority of salary earners, the income tax that would be paid on each dollar sacrificed is replaced by the 15 per cent super contributions tax. And once inside super, the money receives further concessional tax treatment.
Arranging for a set amount of pay to be sacrificed into super is easy to do and great way to save, says Ms Menschik. Also, superannuation savings can be used by renters to pay for a life tenancy in a retirement village or complex.
Read more: http://www.theage.com.au/business/property/wealth-creation-starts-with-buying-the-first-home-say-planners-20131115-2xmf4.html#ixzz2kl1MXYp2
Posted by John Collett - The Age on 16th November, 2013 | Comments | Trackbacks | Permalink
Could you manage it all by yourself?
You've got your head around negative gearing, bitten the bullet and bought a rental property, which, with any luck, will shoot up in value before you're ready to sell.
Should you maximise your return by managing it yourself or do you stand to save more than you spend by paying a property manager to wrangle the tenants for you?
The latter, says Fat Pizza actor and entertainment promoter Alex Haddad, 41, who has learnt the hard way that property management can mean a whole lot of hassles.
Haddad put his Ryde investment house in the hands of an agent three years ago, after being burnt by tenants who had been introduced to him by friends.
A landlord since 2007, he had sourced previous tenants from Gumtree and, despite confining background checks to a quick call to confirm that they were in work - ''I'm a good judge of character'' - managed them himself without issue. Pocketing more of the $350 weekly rent and a mistrust of agents, as a result of helping his parents through some bad experiences with their portfolio, motivated him to take the DIY route, Haddad says.
On the strength of the personal connection, he allowed the offending tenants to move in without a bond, but soon afterwards learnt they were unemployed and had no intention of paying regular rent. Subsequent attempts to have their Centrelink payments garnished were unsuccessful and moving them on took eight months and a tribunal appearance.
When they eventually left, owing six months' rent, they trashed the house and most of the furniture.
Haddad believes having an agent manage the property would have headed the situation off sooner, or prevented it from arising.
''Because it was a friend of a friend, I didn't want to do any harm to them.
''An agent would have been on to them straight away.''
A large percentage of Australia's landlords appear to share his views. About 2.5 million rental property schedules were lodged with the Australian Taxation Office in the 2010-11 financial year and 1.7 million of them included claims for property agents' fees.
Charges are tax deductible and vary widely between states and agencies. Management fees of 7 to 9 per cent, plus GST, are common, although some agents charge as little as 5 per cent or as much as 15 per cent.
Letting fees range from one to three weeks' rent.
Agent or no agent?
Whether or not to employ an agent is the sort of ''bread and butter'' query DFK Richard Hill accounting partner David Sharp encounters at least once a fortnight.
''It really comes down to time: how much you value your time and expertise.
''Anybody can do it - it's not rocket science - but my bet is most people don't do it particularly well.''
Many DIYers begin optimistically, but having to find emergency plumbers at 1am to deal with bathroom floods or have holidays interrupted by complaints that the pool filter is on the fritz can wear thin, Sharp says.
''It's all fine if you get a really good tenant and nothing really goes wrong … The reality is things can go wrong at any time.''
Besides not having a hotline to a pool of trusty tradies, many private landlords do themselves down financially from the outset, says George Kafantaris, whose Brisbane agency, Property Portfolios, manages 500 houses. ''A lot of landlords don't know what the true market rent actually is.''
Undercharge by $20 or $30 a week and bang go the savings you made by not paying a professional. Private landlords can also be chary about upping their rent in line with the market, particularly if they're on friendly terms with sitting tenants, Kafantaris says.
Lack of access to major internet sites where most properties are advertised can also put private landlords at a disadvantage when sourcing new tenants and can lead to longer vacancy periods.
It all takes time. Even during uneventful periods, Kafantaris suggests allowing five to 10 hours a month, or more if you want to keep up with changing legislation.
That's too hard, says Melbourne funeral celebrant Robyn O'Connell, 58. She and husband David Nugent own two rental properties in the outer suburb of Berwick and have had an agent on the job for the past four years.
The agent takes a 5.5 per cent cut of the $325 and $350 weekly rents and is worth every cent, O'Connell says. Her agent's vetting process has resulted in minimal tenant turnover and no dramas with those she has picked.
''She's really good at choosing tenants. I feel that's a gift,'' O'Connell says. ''If there is something wrong and you do have to go to court, they know what they're doing. Out of all the things you spend money on, it's one thing I don't begrudge.''
Have you had trouble with tenants? How did you resolve it?
Posted by Sylvia Pennington - Money Manager (Fairfax) on 13th November, 2013 | Comments | Trackbacks | Permalink
Minimising your mortgage
I had a lot of mail from last week's top twenty tips on getting a mortgage. A lot of readers wanted to know how to save money when you already have a home loan. Here are some tips:
1. Have a plan: you should plan to own your home as fast as possible, and therefore pay as little interest as possible.
2. Pay attention to the rate: consider a $350,000 loan over 30 years. If you had a 5.3 per cent mortgage and refinanced at 4.94 per cent - maintaining the same repayments - your loan term would drop from 30 years to around 27 years and five months, saving around $60,000 in interest.
3. Be prepared to refinance: to save on a mortgage, you must be prepared to go to a lender with a lower interest rate than your current one. Your mortgage may be a good deal when you sign up but five years later it could be expensive by industry comparison.
4. Understand the loan term: shorter loan terms usually mean you pay less interest and pay the debt faster. Let's say you have a $350,000 mortgage at 4.94 per cent, and you opt for a 25-year loan rather than a 30-year: you'd pay 19 per cent less in interest, saving you $61,626. Shifting to a 20-year term will save you $120,199.20.
5. Repayment frequency is key: the higher the frequency of payment, the slower the interest accrues and the faster you pay off the mortgage. If you pay half the monthly repayment amount fortnightly, rather than monthly, or a quarter of the monthly payment weekly, you end up saving the equivalent of an extra month's payment each year. Consider an average mortgage of around $350,000 and a 30-year term at 4.94 per cent. You'd save around four years and eight months off your loan term and more than $56,000 in interest, by paying the monthly repayment weekly or fortnightly.
6. Put windfalls into your home loan: Tax refunds, Medicare rebates and work bonuses should go into the home loan, reducing interest and speeding repayment.
7. Have the right loan: ensure your mortgage allows you to put in lump sum amounts. Many fixed rate loans don't allow this. If you're offered an offset mortgage that lets you put your income directly into the loan, make sure this suits you. It requires discipline.
8. Do it early: increasing your repayments and putting in lump sums is most effective when you do it early in the term of the loan.
9. Know your fees: the headline repayment figure in your mortgage agreement is not the only number you should look at. Lenders charge different fees, so be cognisant of any incidentals that may not be captured in the comparison rate.
10. Beware of interest only: don't select an interest-only loan if you want to repay it quickly. Always opt for principal plus interest. When borrowers ''set and forget'' their mortgage, they usually pay too much interest and have the debt longer than they should.
Get focused and save yourself a lot of money.
What do you think? Talk to me on Twitter@markbouris
Mark Bouris is chairman of financial services group Yellow Brick Road.
Read more: http://www.theage.com.au/money/minimising-your-mortgage-20131109-2x8gs.html#ixzz2kUuqtjED
Posted by Mark Bouris - The Age on 10th November, 2013 | Comments | Trackbacks | Permalink
Stability helps secure a loan
First-time mortgage borrowers are tired of being told that these are the cheapest interest rates they will ever see. More important is how to ensure they can secure a loan. Here are my top tips:
1. Have a clear goal. Use online calculators to see what you need to save and how much the repayments will be.
2. Have a budget and a plan. You need to have a deposit and to reduce your weekly outgoings. You need to do this for at least six months.
3. Save a deposit. The bigger the better.
4. Show consistent savings. Lenders want to see evidence of good financial management, rather than windfalls. Use a separate savings account to make regular deposits and few withdrawals.
5. Have a stable and consistent income. Lenders are generally less comfortable lending to someone who has had numerous jobs or long gaps between employment.
6. Don't switch careers. If you do change jobs, stay in the same field and show increased income. Apply for your mortgage before changing employers or starting a business.
7. Understand your budget. Lenders will want to know your gross income, and your financial and living expenses to gauge your disposable income.
8. Limit risk. Know that most lenders credit-score you to get an idea of how much risk you pose. So you must minimise credit inquiries, job changes and changes of address. Next year Australia will get a credit reporting system where creditors disclose late payments, not just defaults.
9. Stay put. Have a stable rental history and minimise moving houses or apartments.
10. Lower your limits on credit cards. Every $1 of credit-card limit stops you from borrowing up to $5 of home loan. Reduce credit cards to one, and reduce that card's limit to what you use. Pay off and cancel the credit card if you can.
11. Card care. Stop applying for credit or store cards, for it suggests you live outside your means.
12. Nothing's free. Don't take ''interest-free period'' finance offered by stores.
13. Ensure your bank accounts are in order. No late payments, over-limits or overdraws. Lenders usually check or require account statements for the past three to six months when assessing your application.
14. Know your credit report. Most lenders credit-score you on the Veda system, which shows your current and past credit activity. You can buy your Veda credit file at mycreditfile.com.au.
15. Check your tax. If you're self-employed, get your taxes done before applying and make sure there's no tax owing on your ATO account.
16. Reduce overheads. Fancy car leases, big smartphone plans and cable TV charges can reduce your net income and affect your serviceability.
17. Go home. Move in with your parents if you can, but only if you're going to save.
18. Talk to a broker. If you're worried about your credit score and serviceability, a broker can get you prepared pre-application.
19. Once is enough. Don't apply for too many mortgages. This affects your credit scoring.
20. Be truthful. Don't lie to lenders, especially about other loans or credit cards.
The basics always apply to mortgages.
You need a deposit that is big enough to have 20 per cent equity and cover stamp duty and conveyancing, and you need to show that you can service the loan.
This is a 25-year debt you are taking on, so take your time and get your preparation right.
Read more: http://www.theage.com.au/money/stability-helps-secure-a-loan-20131102-2wtfh.html#ixzz2jcL8eOEN
Posted by Mark Bouris - The Age on 3rd November, 2013 | Comments | Trackbacks | Permalink
Property or shares: where should you invest ?
When it comes to investing their hard-earned cash, Australians have always been partial to bricks and mortar and consistently rising property prices have guaranteed a solid investment return. As an alternative investment strategy, the Australian share market has also delivered results for investors, with shares reaching a five-year high last month.
When it comes down to the crunch, however, where should you invest your money? Property or shares?
How do the two compare?
In a 2013 analysis by the Australian Securities Exchange (ASX) and Russell Investments, titled Long-term Investing Report, shares came out on top – outperforming residential investment property over both a 10-year and 20-year time period.
The analysis found that after accounting for taxation and costs, Australian shares returned 8.9 percent capital growth in the 10 years to December 2012, while residential investment property returned 6.5 percent. Over a 20-year time period, the gap between shares and property was almost non-existent, with shares returning 9.8 percent growth and property returning 9.5 percent.
“In the long term, both asset classes – property and shares – perform similarly,” said Steve Crawford, owner of Experience Wealth Advice and Victorian director of the Association of Financial Advisers.
Which option is right for you?
The first step to choosing the best investment option for you is to identify your goal, according to Crawford, and ask yourself questions such as: are you motivated by a financial or lifestyle goal? Do you want an asset that increases in value or provides an income, or does both? What is your timeframe?
“If you want to grow your income in a shorter timeframe, property takes longer to provide a return,” Crawford said. “If your goal is to slowly build an asset that provides you with extra income you don’t have to work for, shares win the battle every time.
“If you are putting your money into shares, you should go into it with the view that you’re not going to touch it for five to 10 years to mitigate any volatility in the share market,” he added.
If you don’t have a sizeable sum for a deposit on a property, the share market may be more accessible than the property market. You can start building a share portfolio with a relatively small sum – as little as $5000 or $10,000 can get you well on your way and deliver regular income in the form of dividends.
Buying property can also entail hefty stamp duty, which adds to the cost of entering the property market. Stamp duty rates vary in each state, but as an example a $600,000 property in NSW may incur $22,490 in stamp duty and in Northern Territory, the stamp duty the same value property would be $29,700.
The advantage of property over shares is that you can use the equity you build in property to borrow against it, according to Crawford.
“Stamp duty can be prohibitive but the trade-off is you can borrow against property in the future. I’ve had clients who bought an investment property first, then used that equity to buy their forever home,” he said.
In conclusion, Crawford said there is “no investment silver bullet”. Where you choose to invest your money comes down to your goals and circumstances. And a lot of research and shopping around.
Posted by ratecity.com.au on 1st November, 2013 | Comments | Trackbacks | Permalink
Savviest home loan shoppers winning discounts of 1% or more
SAVVY home-loan shoppers are negotiating more than one percentage point off major lenders' variable interest rates, saving tens of thousands of dollars in repayments.
The battle for borrowers has escalated since the start of the Spring property season, brokers, bank sources and market observers said, with the biggest savings won by assertive customers seeking to borrow at least half a million dollars who boasted a 20 per cent deposit and were willing to "bundle" other financial services such as insurance.
"The level of discounting has increased," Mellick Wealth Management mortgage broker Fawzi Jreige said.
"You can now go to lenders and get 100 basis points off a loan size of $500,000."
A homeowner who secured such a deal would reduce repayments by $3540 a year and $88,500 over 25 years.
Mortgage Choice head of corporate affairs Jessica Darnbrough said it was possible to get even more than 1 per cent off from lenders including the Big Four.
"Lenders are being aggressive," Ms Darnbrough said. "They are competing for market share."
One broker, who spoke on the condition of anonymity, said major banks were prepared to knock off as much as 1.15 per cent.
However, the biggest discounts they talk about publicly are 0.8 to 0.9 per cent.
To go beyond this it is necessary to push hard, something that most people are reluctant to do.
"Australians are still more likely to negotiate over the price of a toaster than a home loan," said Kirsty Lamont, director at financial products comparison service Mozo, citing recent research it had conducted.
"It's a great time to haggle your home loan," Ms Lamont added. "You can get an extra level of discounting right now."
Smaller lenders are willing to cut even deeper.
The unnamed broker said he was currently obtaining discounts from non-majors of more than 1.2 per cent. This reduced rates to as low as 4.75 per cent.
Since late September, Citibank has been prepared to cut as much as 1.4 per cent from its relatively high standard variable rate (SVR) of 6.19 per cent, provided more than $500,000 is borrowed and that the prospective mortgagee has a 20 per cent deposit.
HSBC has this week begun offering 1.05 per cent off its 5.95 per cent SVR. Again, the minimum loan size is $500,000.
Citibank and HSBC have less than 1.5 per cent of the $1.2 trillion market between them.
The biggest advertised discount by a significant lender appears to be 1 per cent off with St George, which is owned by the nation's second-biggest bank, Westpac.
TIPS FOR GETTING THE BIGGEST POSSIBLE DISCOUNT ON YOUR HOME LOAN
Make sure you know the best offers on the market before you begin negotiating
Talk to multiple lenders then play them off against each other
Be willing to bring all your financial services needs to the home lender
You'll need to have a good credit history. Check first with the likes of Veda Deposit. Lenders will want to see a history of savings leading to a deposit equal to 20 per cent of the purchase price
The bigger the loan, the bigger the discount
Push hard to get an extra few basis points. If that's not your style then a broker may be a good option
Posted by John Rolfe - News Limited Network on 1st November, 2013 | Comments | Trackbacks | Permalink
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