Puzzle Finance Blog
The big banks in a mortgage war — should you fix your loan?
IT’S the one question I get asked more than any other as an economics commentator: should I fix my mortgage?
The question has become more pressing thanks to the eruption of a mortgage war between the big banks on their fixed-rate loans. Commonwealth Bank fired the first salvo last week, slashing its five year fixed rate to 4.99 per cent. Westpac and NAB quickly followed suit.
Make no mistake, that’s cheap. Variable mortgage rates have averaged around 7.5 per cent over the last two decades, so anything with a “4” in front is good news for borrowers.
It’s unusual, too, because usually borrowers pay a premium for being fixed — you pay a higher interest rate for the certainty of knowing what your repayments will be. But today, the fixed rates on offer are substantially below the bank’s advertised standard variable rates of around 5.9 per cent (of course, most borrowers can negotiate a discount to that headline rate).
On the face of it, banks are essentially taking a punt that interest rates won’t rise from their current record lows for half a decade. That would be unprecedented. More likely, rates will rise during that time.
So just what are those banks up to?
First, banks can afford to discount rates because their funding costs have fallen dramatically recently as international investors have begun betting on lower interest rates for longer (unlike during the GFC when borrowing rates shot sky high because of fears about the stability of the entire financial system).
And let’s not forget those multi-billion dollar profits our banks have been reaping in. Even if the banks end up wearing some losses on these fixed loans, they may deem it worth it to dip into some of those fat profits to steal new customers.
And finally, with the federal government considering the recommendations of the David Murray financial system inquiry, now seems like a strategically wise time for a sudden display of conspicuous competition.
So, should you get involved in their war by switching to one of these cheap fixed rate loans?
The first thing to consider is what fees and strings are attached to what you can do with your money.
Fixed rate loans usually include break costs if you want to exit the mortgage before the end of the fixed term period.
And there are often restrictions on making additional repayments, should you come into some money unexpectedly. Overtime, the ability to pay off your loan faster may mean lower interest costs than the cheaper fixed rate.
As a nation, less than one in five Aussies usually opt to fix their mortgage.
This is in stark contrast to many other countries, where long term fixed rate loans are the norm. Traditionally Aussie borrowers have valued the ability to pay off their loans faster. Indeed, one of the biggest economic trends since the GFC has been the rise in borrowers getting ahead on their repayments.
Our historic preference for variable rate loans has served us well, even if it does make us a bit obsessed about interest rate moments. More people on variable rate loans means the Reserve Bank has a tighter grip on the economic reins, being able to influence household budgets more directly.
And before you jump in bed with the big banks, there are alternatives to consider.
Many smaller lenders are currently offering variable rate mortgages below 5 per cent. Before you opt to fix, why not try haggling on a variable rate loan? Many borrowers will be able to get as much as 1 or 1.5 percentage points off the headline standard variable rate just by ringing up the bank and asking — or, more importantly, threatening to leave.
At the end of the day, the decision to go fixed or variable is a gamble on where you think interest rate are heading.
Fixing in will protect you against interest rate rises, but it could also deny you the benefit of any interest rate cuts.
So, to my second most commonly asked (but related) question: where are interest rates heading?
In reality, it’s not possible to know for sure.
Inflation figures released last week showed inflation is at the top of the Reserve Bank’s comfort band at 3 per cent. Markets, which had been toying with the idea of further interest rate cuts, now view the prospect of further interest rate cuts as unlikely. The next move will likely be up, rather than down.
Cue speculation of imminent interest rate hikes!
But there’s another, more likely, possibility: that interest rates are simply set to remain at their current lows for a long period of time.
These are, after all, unusual times we live in. The United States is still printing money to pump its economy and many central banks have their interest rates at near zero per cent.
When it comes to global interest rates “lower for longer” is the new mantra.
So either way you punt, fixed or variable, debt is cheap and likely to remain that way for some time.
Posted by Jessica Irvine - News Limited Network on 28th July, 2014 | Comments | Trackbacks | Permalink
Mix of fixed and variable rates the wisest course
The banks might look like they’re going soft by cutting the five-year fixed home rate below 5 per cent, but there’s more where that came from.
Even so, they'll do just about anything to avoid making an across-the-board cut in the variable rate that most borrowers pay.
Sure, they’ll discount it for new borrowers or existing ones who kick up a big enough fuss, but a far more expensive cut for everybody is something else again.
Mind you, the CBA’s 4.99 per cent isn’t quite what it seems. It comes with a $395 annual fee, but even so.
Frankly, if you’re paying more than 5 per cent, whether fixed or variable, then you’re being ripped off.
And there’s no mistaking the trend in interest rates that, as I’ve been saying for a while, has been down despite the exhortations of the banks’ own economists. Clearly the banks aren’t listening to them and neither is the market.
Come to that the Reserve Bank has little say either. The world is awash with cheap cash and there’s nothing it can do – were it inclined to which it isn’t – about the banks soaking it up.
Just the other day Westpac raised money offshore for less than it had to pay before the GFC.
The days the banks can complain about their funding costs are over, even if this is a bleak turn of events for savers. Watch term deposit rates as the banks quietly drop them further.
If you want to know where interest rates are going you have to follow the smart money that shows its hand in, of all places, government bonds.
That’s probably because there are fewer moving parts to get wrong – the interest rate and maturities are fixed and there’s no credit risk.
But they trade just like shares and the smart money has been ploughing in so the yield has dropped as their prices have soared – just as paying more for a share reduces the return from the dividend even though the amount is fixed.
Without fuss or fanfare there has been a rally in bonds for months.
It’s mostly foreigners buying, including smarties who can borrow at less than 1 per cent and invest it in Australia at over 3 per cent. But so what?
Money talks and I’d be wanting my super fund to moving cash out of the bank and into bonds which pay more, plus come with the juicy prospect of a capital gain.
So should you fix for five years?
Well don’t let me stop you but bear in mind the end game is to pay off the mortgage as fast as you can. Some fixed rate loans let you make additional payments and even have full offset accounts, but they aren’t offered by the banks. And they’re more expensive.
No, it’s safer to mix and fix. Leave some of your loan variable, especially when the rate happens to be lower to begin with and isn’t going anywhere in a hurry, while fixing the rest.
Posted by David Potts Sydney Morning Herald on 27th July, 2014 | Comments | Trackbacks | Permalink
Fixed interest rates too good to pass up, say experts
Home loan customers should take advantage of low fixed interest rates and lock in now, experts say.
The Commonwealth Bank, National Australia Bank and Westpac on Wednesday cut their longer-term interest rates to below 5 per cent.
CBA was the first to lower its five-year fixed mortgage rate to 4.99 per cent. NAB and Westpac followed suit.
“Competition in this market has finally bred benefits for consumers; 4.99 per cent on a five-year home loan is very sharp. It is an excellent deal,” said Alex Parsons, chief executive of interest rate research company RateCity.
“Will rates keep coming down? No. Non-banks have had below 5 per cent for a while. Now banks have joined in.”
Interest rate advisers all agree conditions are ideal for a switch to fixed rates.
“Our monthly Reserve Bank surveys say the interest rate is due to rise in the next year. It is likely that the interest rate will drop before rising again to normal levels, but at the moment this is a good rate,” Finder.com.au spokeswoman Michelle Hutchison said.
“Historically, cash rates have been around 5 per cent and interest rates another 2 per cent higher. So we are now near the bottom of the cycle.”
Rates may drop before they rise, but borrowers are better off locking in the rate now rather than speculating.
“Even with a possible rate reduction you still get comfort from hedging your bets against the possibility of rates eventually going up,” 1300 Home Loan managing director John Kolenda said.
AMP Capital’s chief economist Shane Oliver, agreed, saying economic indicators showed borrowers needed to take advantage of the low rates.
“Fixed rates are normally higher. Average inflation tells me the RBA will not stay at the current rate,” he said. Rate rise likely in nine months
Dr Oliver predicted a rate rise was likely to be about nine months away, around the June quarter next year.
“The banks are offering this deal because they can. Costs of borrowing have dropped and are consistent with Australian bond yields falling.”
A combination of economic factors including improvements in the global capital market with lower spreads have resulted in the cheaper cost of money.
“Last year some mortgage providers were already doing 5 per cent. So to avoid losing market share, the big banks have joined in,” Dr Oliver said.
He cautioned the low rate deals may not last because banks would have only a limited amount of money at low rates.
But Mr Kolenda said borrowers must be sure they are switching for the right reasons, such as certainty of repayment and peace of mind rather than as a speculative play on where rates are going to move.
“Many committed to fixed rates just before the global financial crisis and watched the rate drop to a low of 3 per cent,” he said.
Fixed rates are also not ideal for people on high salaries.
“If you lock it in now, and want to repay chunks of the loan, you may have break costs. Also, are you upgrading your loans, or having another child?” Canstar research manager Mitchell Watson said. He recommended splitting loans between variable and fixed rates to “get best of both worlds”.
Interest rate adviser Mozo is more conservative, saying consumers must watch the rates for the next few weeks.
“We may not be at the bottom yet,” director Kirsty Lamont said. “This is the start of what will be more pressure on fixed rates. Other lenders will match if not undercut the rates.”
Posted by Su-Lin Tan - Sydney Morning Herald on 25th July, 2014 | Comments | Trackbacks | Permalink
Australians would rather float than fix on mortgages, despite low rates
The country's biggest banks may have slashed their fixed mortgage rates, but historically home buyers prefer to try their luck when it comes to borrowing costs.
Unlike most other countries, we are a nation of risk takers who opt far more for the flexibility of floating loans rather than the certainty of a set interest rate.
The Commonwealth Bank, NAB and Westpac are engaged in a fixed mortgage war, yet on average only about 12 per cent of home loans have been fixed during the past 22 years.
While this new chance to lock in record low interest rates at less than 5 per cent may whet the appetite for fixed home loans, they have never dominated the Australian market in the same way as in the US and Europe.
The proportion of fixed rate mortgages reached its peak at 25.5 per cent during the global financial crisis, according to Australian Bureau of Statistics data, as home buyers feared rates would keep rising and squeeze household budgets. It stood at 14.9 per cent of home loans in May, having stayed close to that level for the previous four months.
Australians' preference for variable rate mortgages proved helpful during the GFC, as it gave the Reserve Bank of Australia a direct way of stimulating the economy when needed.
Variable loans fluctuate with the cash rate, which has been set at an unprecedented low of 2.5 per cent for almost a year. Fixed loans reflect the outlook for the cash rate and bet on it being increased.
Mortgage and Finance Association of Australia chief executive Phil Naylor said there is "something in the Australian psyche" that leans towards being carried by the market rather than fixing against it.
The possibility of making a saving if interest rates drop and of being able to pay the loan out early entices home buyers to variable rates, he said. Until recently, it was also variable rate loans that were flogged to homebuyers rather than fixed.
"It's always been the case. It's just been traditional in Australia that Australians have opted for variable rates. They prefer that flexibility rather than being caught in a fixed rate mortgage when rates go down," Mr Naylor said.
Another reason home buyers might prefer variable rates is because mortgage rates are mostly only fixed for up to five years in Australia, HSBC Australia and New Zealand chief economist Paul Bloxham said.
The longer term rates, of 10 to 15 years, tend to be higher and this makes it more attractive for home owners to stick to variable or only short fixed rate mortgages, he said. Unlike in Australia, in the US fixed rates have little or no break fees making them more flexible for consumers and increasing competition between lenders.
"In Australia you mostly have fixed mortgages of one, three or five years available. If you compare it to the US, for example, the bulk of mortgages that households there have are 30 years. The Australian market doesn't have that sort of product on offer," Mr Bloxham said.
But the latest move by the big banks, combined with the possibility of a interest rate rise in the future, could encourage more punters to place their chips on a fixed loan.
Michelle Hutchison, from online loan comparison service Finder, said she would not be surprised if home buyers started to pay fixed rates more attention.
"Borrowers know that an interest rate rise is on the horizon and fixed rates are still dropping and becoming competitive with variable rates," Ms Hutchison said.
"It could also be possible that these fixed rates may not last long, in a weeks time they might be up again. Fixed rates do move more than variable."
Rate City chief executive Alex Parsons said the move by the big banks to drop their fixed loans made it a "super exciting" time for Australians home buyers. "This change is significant and it spells out a new round of competition. It spells out that banks are prepared to fight for consumers and that's great," he said.
Posted by Melanie Kembrey - Sydney Morning Herald on 24th July, 2014 | Comments | Trackbacks | Permalink
Offset accounts can save you thousands
For those who have worked and scraped to save a mortgage deposit, there is a strong instinct to find the best value loan, and repay it in the most efficient way possible. If this is you, I suggest you take a look at a product called the offset account loan. When they’re used properly they can save you thousands of dollars and accelerate the paying-down of the mortgage.
An offset account is a transaction account directly linked to your mortgage account. The balance of funds held in the offset account serves to reduce the balance of your loan account for the purposes of calculating interest. These calculations are carried out on a daily basis, so each day you have a credit balance in your offset account, it is saving you interest. Here is an example. If your mortgage balance was $300,000, and you put a $5000 tax refund into the offset account, interest would only be charged on $295,000 for the period the offset account is maintained at a $5000 balance.
The longer you can keep the balance high in your offset account, the lower you keep the interest bill and, therefore, more of your money is paying-down principal rather than interest. This is how you speed up the repayment of the loan.
It can work this way: all income goes into the offset account and fixed costs (mortgage, power, phone, internet, gas, car finance) are direct-debited from the offset account automatically. For those without spending discipline, weekly spending money (including grocery budget) can be deposited into separate bank accounts, and an allocated amount goes into debt reduction or investments, including super. The trick is to never have an ATM or credit card attached to the offset account, especially if you are likely to take yourself on a spending spree. Have one for your weekly spending account, but not the offset.
An offset account is a do-it-yourself tool because you can set it up yourself, fine-tune it as you go and use it as both a budgeting and wealth-building system. It’s worth noting that loans with an offset account are often marginally more expensive than your typical basic loan. However, by adopting strategies for aggressively paying down home loan debt, you can potentially be better off in the long term.
If you have the discipline and the focus to make this work – and many Australians do – you’ll find you can better control your money and you can make your income work harder for you. You’re also potentially ahead tax-wise because the money you save on paying less interest is tax-free, whereas if you put the $5000 tax refund in a savings account you would potentially have to pay tax on the earnings.
Offset account mortgages are not a magic bullet and they don’t suit everyone. But for focused, disciplined people who want to be smart about their mortgage and finances, this is something worth investigating.
Posted by Mark Bouris - Sydney Morning Hearld on 24th July, 2014 | Comments | Trackbacks | Permalink
Turning a home into an investment
As life inevitably changes, a property may need to fulfil a variety of purposes. Evolving circumstances, like a new relationship, a baby or a job transfer can cause buyers to re-evaluate a purchase.
Therefore it may be ideal to buy a primary residence that can be rented out and converted into an investment.
An investment property that has a strong rental yield is always underpinned by the qualities that made it a desirable owner-occupied home in the first place, according to agents.
Agent and auctioneer Greg Hocking said renters wanted the same characteristic in a property that was sought by an owner-occupier.
"People buy a house for a personal reason, so is it suitable [as a rental] is the question," Mr Hocking said.
"Location is first and foremost, then, will it require significant ongoing maintenance? And generally speaking, the closer it is to the inner-city rim, the better capital growth."
Swimming pools and verdant gardens, as well as decorative exterior finishes, can marginally boost the rental value, but at the same time add enormously to the cost of upkeep, he said.
The combination of capital growth and solid rental return is the Holy Grail of acquiring a home that will later be a rental investment
Agents say a position near schools, shops, doctor surgeries and public transport, as well as a property that is easy to maintain, is a recipe for a good rental return.
But perhaps the most important factor - and the least known - is that two bedrooms, no more, no less, will attract the right sort of renter. It's the real estate baby bear equivalent in the Goldilocks story - two bedrooms are just right.
Kay & Burton senior executive portfolio manager Mikhala McCann said two bedrooms was the magic number that translated to keen interest from an ideal demographic.
Three bedrooms often attracted groups of young singles and one bedroom was limiting in its appeal, Ms McCann said.
However, two bedrooms will attract young professionals and couples who require room for a study or are planning to have a baby, and therefore tend to be long-term renters who look after the property.
Ms McCann said a neutral colour scheme would also be in demand with tenants who, unable to make alterations, were often unwilling to put up with flamboyantly toned feature walls or other flourishes that reflected an owner's personal taste.
"When you are a tenant, the legislation says you cannot change anything, so those little things that as an owner wouldn't worry you because you can eventually change, will impact tenants," she said. "They want something neutral that they can bring their own style to.
"If you do have a garden or a pool, the cost of upkeep should be built into the rent so it is protected and maintained."
Rae Tolley, manager of the property management department at Beller Real Estate, said owners should ideally refresh an investment house between tenants.
She said older properties were competing against the glut of glossy new apartments on the market.
"The average tenant stays for two years-plus, so things do wear out over that time," Ms Tolley said.
"There is an abundance of new properties, so you have to keep refreshing your property and adding to it, and you should have an improvement plan.
"Going back to that oversupply, properties that don't have a freshen up at the change of tenant are often vacant for longer, and a good property manager will come up with a plan of things that need to be done with the change of tenant so the owner can draw up a financial plan."
An easy-to-care-for property will tick the boxes of tenant appeal and ensure a hard-earned investment does not deteriorate.
"It is very hard for tenants to maintain it in the way you would because there is an element of disconnect, that aspect of separation," Ms Tolley said.
Bayside Frankston, at the gateway to the Mornington Peninsula, and inner-city Footscray and Seddon have been nominated by agents as smart-buy suburbs for residences-cum-investment properties.
Coburg and East and West Brunswick, as well as working-class Glenroy, also offer strong rental returns. Those suburbs have older, larger blocks - tenants love space - and don't experience long periods of vacancy.
Jesse Linardi, design director of dKO Architecture, said renters were chasing a lifestyle as much as buyers.
Mr Linardi designed and built a two-bedroom townhouse on South Street, Preston with the intention to live in it and then use it to kick off an investment portfolio.
He lived in the urban-style townhouse for about three years, and then moved on to his next residential project.
Mr Linardi, who rents a home in North Melbourne, has welcomed two sets of tenants in Preston over the past four years.
He said the contemporary features he valued as an owner and occupier, including open fireplaces, courtyards off the bedrooms and an abundance of natural light, have been as much in demand with his tenants.
"I always wanted to build my own house and I wanted to keep whatever I built for the future, so I always knew it would be rented out," he said. "I got to the point where financially I knew that if I moved out and rented it out it would be self-sufficient.
"In the area where the house is in Preston, there is not a lot offering that is architecturally designed. They want to enjoy the space, whereas a lot of older properties on the market don't offer those natural things like light and sun.
"Whether a home costs $300,000 or $3 million, people fundamentally want the same things."
Mr Lindardi is building a five-storey townhouse for himself in Collingwood, with the aim to rent it out and continue to grow his property portfolio.
* A top-notch investment property needs to have mod-cons, a good floor plan, generous living space, fresh paint and carpets and be easy to clean, said Rae Tolley. "It is important to have a dishwasher and air conditioner - a lot of properties that don't have features like split system air conditioning are lagging behind in the market," she said.
* Scarcity factor is key, according to Greg Hocking. Dime-a-dozen off-the-plan apartments are a danger zone. Mr Hocking said buyers could lose 10 to 15 per cent of their purchase price when the property was completed, but a period cottage or an art deco apartment would have the greatest capital appreciation.
* A garage or storage cage will add to the attraction, as transient renters need somewhere to stash their stuff, said Mikhala McCann.
Posted by Emily power- Domain (The Age) on 20th July, 2014 | Comments | Trackbacks | Permalink
Family ties a plus with property
For some people the rivalry never ceases, but a growing number of home hunters are now turning to their siblings to make the biggest purchase of their life.
With first home buyers having to save harder and longer than before, joining forces with a brother or sister is the only way to get a foothold on the property ladder. The median house price jumped 10 per cent to $600,000 over the year to May, while the median unit price rose 6 per cent to $422,000, Domain Group data shows.
Sisters Helen, 20, and Anna Shaw, 23, started funnelling their savings into property when they were teenagers.
But it certainly wasn’t easy. They started working in part-time jobs when they were in high school and continued throughout their law degrees at university.
The sisters built up a deposit together - with some help from their family - and bought a solid brick two-bedroom Victorian house in Cremorne.
“At about 15, we had an informal discussion and agreed that it was a waste of money to rent,” said Anna, who shares the house with a flatmate while her sister lives at home.
“We worked out that if we borrowed an amount of money between the two of us – if we just paid a little bit more than what people our age were paying for rent – that we could make the repayments at a rate that was enough to make it worthwhile.”
There could be challenges if personal circumstances changed, she admitted, but they wrote a contract that “covered every possible scenario”.
“If one of us wants to sell, the other one would have to buy them out. We couldn’t sell to a third party,” she said.
And just like these sisters, a growing number of first home buyers are looking at this option. A survey by Mortgage Choice in 2013 shows 3.8 per cent of first time buyers bought with a sibling, compared with 1.8 per cent five years ago.
The senior economist from Domain Group, Andrew Wilson, said there had also been a shift, over a long period, from one wage being able to support a mortgage to two significant full-time wages.
“There’s nothing that will stop the underlying demand and aspiration for home ownership, but it will require a longer wait in the queue or other means of saving faster to be able to get into the queue or to be able to borrow more to get the loan,” he added.
Rob He, 26, a sales agent at LJ Hooker Hampton Park, said he bought an off-the-plan two-bedroom apartment in Abbotsford as an investment with his sister Michelle, 24, because shouldering monthly mortgage repayments by himself would challenging.
“With the one income, it is a big commitment. Now I’ve got my sister in the picture, the risks and also the pressure is shared among the two of us,” he said. “What better person to enter into [the market] with than your own sister?”
Kelly McBean, 22, and her brother Mark, 20, share the same thoughts.
They recently paid the deposit for a 375-square-metre block of land just five minutes’ drive from their family house in Berwick, and plan to build a three-bedroom house when it settles next month.
“We decided to purchase together because neither of us would be able to do it ourselves,” she said.
“We both want to move out but neither of us want to rent, so this is a long-term investment and we can move out at the same time.”
Posted by Christina Zhou - Domain (The Age) on 11th July, 2014 | Comments | Trackbacks | Permalink
No need to be negative - it's high time to fix
Economists have changed their tune about interest rates and you won’t like it if you’re trying to save.
But here goes anyway. Having cried wolf all year about a rate rise being just around the corner, despite the Reserve Bank (in whose hands the decision rests) saying it wasn’t planning on doing anything, they’ve finally accepted it’s being fair dinkum. Or rather that it doesn’t know so neither do they.
Goodness knows which bit about “a period of stability” in rates meant an imminent rise but there you are. Those who’d been predicting a rate rise as early as this very quarter are now eyeing-off Christmas.
But most tip next year and some toward the end of it according to a survey by finder.com.au of economists including, tellingly, those at the big four banks.
Take it from me that if the Reserve Bank were to do anything before the year is out, it would be to cut rates and frankly that’s only a bit more plausible than a rise.
After all it’s not going to do anything that might push up the dollar, which a rate rise would do by attracting more of the hot money the world’s central banks are so helpfully printing, while commodity prices are on the skids.
Meanwhile, much to everybody’s surprise, government bond yields are falling, apparently due to buying by China’s central bank which would also explain the stronger dollar, so it’s even possible the banks might trim their fixed rate offerings.
Hmm, perhaps not. Don’t want to draw attention to the fact that their economists are predicting a rise in rates which in the real world are falling, do we?
Either way you don’t want to wait until rising rates seem a dead cert before you fix because by then all you’ll be doing is locking them in early. The banks will have already built the rise into their fixed rates making the whole exercise self-defeating. You don’t want the bank to have the last laugh, do you?
Speaking of which, think twice about fixing the whole mortgage. You want to retain some flexibility and, besides, I could be wrong.
But it’s savers I feel sorry for.
Falling yields on bonds, which are the risk-free benchmark for all other deposit and lending rates, not to mention the cheaper money the banks can get offshore, are squeezing whatever juice is left out of term deposits.
After tax and inflation a term deposit leaves you with three-fifths of five-eighths of nothing.
Unless businesses and first home buyers go on a borrowing binge, some way off judging by the lack of investment intentions and unaffordable home prices, the banks just don’t need to be nice to savers anymore.
That’s why term deposit rates have been edging down even though the Reserve Bank hasn’t been doing anything.
More to the point, there’s no reason to expect this to change anytime soon. My guess is that a 12 month if not longer maturity would be better than parking your money in an online account while waiting for term deposits to offer a decent rate. You’ll eventually get a higher rate if you sit there long enough but think how much it will have cost you in the meantime.
The only thing that would prod the Reserve into lifting rates would be inflation picking up.
Nobody expects that, but then as all those bogus rate predictions showed that doesn’t mean much.
Even then, inflation-indexed Commonwealth-guaranteed bonds, which conveniently trade on the ASX, would be arguably better than term deposits.
Unfortunately the interest rate is nothing to write home about but it increases over time with inflation. Even better, the face value of the bond is indexed as well.
Posted by David Potts - Money Manager (Fairfax Digital) on 2nd July, 2014 | Comments | Trackbacks | Permalink
Help with the nightmare of buying
Are lost weekends the worst part of house-hunting? Suffering endless open for inspections, an over-loaded in-box of listings and sales-driven real estate agents?
For some buyers, the experience is clouded with fears: of missing out for a lousy $1000; of paying more than it's worth or more than the vendor’s bottom price; of buying a property that might prove to be unsuitable and paying for the mistake forever.
For a novice, bidding at auction against tactical adversaries and aggressive auctioneers is a nightmare, as is dealing with the rules of submitting offers for private sales and expressions of interest.
It surprises many that buyers' agents (or buyers’ advocates) don't have a bigger presence in Australian real estate, handling all of the above and more to varying degrees, depending on the client’s brief, and being able to source properties off-market, often from selling agents whose vendors want privacy or a quick sale.
And it surprises buyers’ agents that people who wouldn’t consider cutting their own hair or laying their own carpet hand over the biggest sum of money of their lives, with no expertise and sometimes with the selling agent as their only advisor.
“Not only should a seller have good representation in the transaction, but also buyers,” said Janet Spencer, vice-chair of the buyers’ agents chapter of the Real Estate Institute of Victoria, and a founding member of the Real Estate Buyers’ Agents of Australia (REBAA).
Janet, who was a selling agent before becoming a buyers’ agent in 1995, said statistics were lacking and buyers’ agent sales were not specified in transactions, but it was an important growth industry, especially in a high-priced and rising market.
The fee, however, can be an obstacle. Adding between one and 2.5 per cent of the purchase price — that’s $25,000 on a million-dollar property — on top of stamp duty, legal fees and bank costs is a big consideration.
“People can be quite sceptical about it,” Janet said. “But mistakes are costly in real estate. There’s a 13 per cent transaction cost in buying a mistake, then selling it and rebuying, plus the stress and the time factors.
“I frequently see people emotionally engaged at auctions, caught in the competition, and bidding beyond their limit. That’s what an auction thrives on, people competing for the property.
“When I started, a two-bedroom flat was $35,000, now it’s around $500,000. If you’re borrowing 80 per cent of that you want to be buying well. That’s what [is] driving consumer interest to get a professional.”
The fees, negotiable by law in Victoria, are paid after purchase – a buyer’s advocate cannot deduct commission on the transaction. An upfront retainer can also be added.
Michael Ramsay, REBAA inaugural president and a buyers’ agent since 1998, said it created “an equal playing field”.
“The main thing is that we’re in their corner,” he said.
Michael has acted twice for Linda Cantan – a decade ago for a Richmond investment property, and last April for a house in Malvern. Both were bought before auction.
“I would look at places and they would go for way more than what was quoted initially,” said Linda, who works in project finance. “I started to question, am I looking at the right properties?
“Michael has a good relationship with the estate agents and gets provided with information I had no access to. He got the Malvern house $100,000 to $150,000 cheaper than what it would have sold for. People can debate about fees but I’ve made that back and more.”
Michael said securing the right property and assessing future prospects was as important as getting a price below the buyer’s expectations. He speaks to neighbours about extension plans, seeks out structural problems and analyses renovation potential as required.
“Buyers can be highly educated people and very savvy and have a high net worth but be very lost in the property market,” he said.
James Buyer Advocates principal agent Kristen Hatt said it was a growing industry, and especially strong in Boroondara and Stonnington.
“The art of buying and selling has changed significantly since pre-internet days,” Kristen said.
“Agents keep track of what you’ve looked at, your price points, what you might bid at, and in an auction they might pass it in rather than put it on the market when they know your budget. They are storing and accessing so much more information.”
There is no typical client, but they include time-poor professionals, often with a young family; investors and developers; high-profile clients; and people moving to Melbourne from interstate or overseas.
Janet Spencer said each job had to be tailored to meet a buyer’s needs, which could be constrained by time, budget or specific needs.
Levels of engagement varied from a full property search, negotiation and purchase, to a simple auction-bidding service.
She recommended engaging agents who were licensed estate agents or agent’s representatives, members of the REIV (which ensures they have at least $2 million professional indemnity insurance and on-going professional development) and members of the REBAA, which sets guidelines for professional conduct and has a minimum standard for accreditation.
“You’d be wise to do due diligence; don’t assume anything,” Janet said. “If someone is offering the service for free they’re not working for the buyer, they’re working for and being paid by the seller.”
Case Study: A family crisis
Margaret Steel had engaged a buyers’ advocate countless times over many years for her property-development company and for corporate investment, but a family crisis showed her the full benefit.
Her elderly mother was in temporary respite care as the family prepared to downsize her out of the big family home. “She hated it and we were desperate to get her out but we had very specific requirements because she was in a wheelchair,” Margaret said.
The four siblings charged Janet Spencer’s Buyer Solutions with finding a suitable unit with disabled-conversion possibilities, in a pocket from Balwyn to Templestowe.
“Mum put pressure on us and we put pressure on Janet,” Margaret said. “She found the place and signed up within 10 days of the brief. We managed to get it off-market, and it worked out cheaper making a quick decision, as it didn’t go to auction or a heavily contested private sale.
“It saved us at least three times her fee, getting in ahead of other prospective buyers, and I don’t think we would have even found this,“ she said.
Posted by Jacqui Hammerton - Domain (The Age) on 2nd July, 2014 | Comments | Trackbacks | Permalink
Categories: Auctions, Purchasing Property, Buyers Advocate
Borrowing tips for self-employed, contractors
With interest rates low and house prices taking off in Sydney and Melbourne, commentators have claimed that lending criteria has slackened and borrowers are taking home loans they can’t afford.
I don’t agree. Lending criteria is as solid as it has been since the global financial crisis and most borrowers are borrowing no more than 80 per cent of the property price. Mortgage defaults dropped throughout 2013 according to the Fitch rating agency, with just 1.25 per cent of mortgages more than 30 days in arrears.
Surprised by this talk of easy credit are the self-employed and contractors, many of whom find it as hard as ever to get a home loan. For these people, the claims about easy mortgages are simply fantasy.
The good news is that mortgage lenders do have loans for self-employed people, contractors and business owners, so long as you can substantiate your income.
Here are a few tips:
• Full doc: Self-employed people don’t always need a '‘low documentation'’ loan, with the higher interest rates those mortgages carry. ‘'Low doc’' simply means alternative forms of income confirmation (bank statements, financial statements, accountants’ declarations) as opposed to PAYG slips and tax returns. If you have tax returns you should be pursuing a full documentation loan at standard rates.
• Have income: Showing income to afford the loan is just the start; when you subtract monthly expenses you must have cash left over to service the loan. This is called serviceability.
• Work on serviceability: Build a history (at least six months) of low expenses and high income. Lenders and brokers are obliged to confirm both, so it is important to establish a solid track record.
• Reduce debt: Eliminate or reduce your consumer debt. Lenders count the limit on your credit cards as money owed, not the balance.
• Show savings: A savings history means you’re serious about the loan and you live within your means.
• Be concise: Provide the documents the lender or broker asks for. They may include BAS statements, tax returns, bank accounts and perhaps a declaration from your accountant.
• Do your taxes: Keep your taxes up to date so you can always show your most recent income history. And make sure the tax assessments are paid. Self-employed applicants usually have their tax portals checked for taxes outstanding.
• Understand your structure: Understand how your business structure affects your personal income and what happens to your borrowing power if your taxable income is too low.
• Have a strategy: Consider consulting with a mortgage broker or a loans manager to formulate a plan for buying your property. This allows you to build your serviceability based on expert advice.
• Build a good record: Once you have a mortgage it can be used to consolidate debt or refinance to a better loan. However, you must have a good record with that loan. Of interest to subsequent lenders will be a history of on-time payment and extra lump sum payments you made.
Finally, be open with brokers or lenders. They are required to verify what you say and perform checks on the documents provided. If you don’t tell the truth, you could end up with a loan that you can’t afford or nothing at all.
Posted by Mark Bouris - The Sunday Age on 1st July, 2014 | Comments | Trackbacks | Permalink
Hold or fold: the end-of-mortgage dilemma
Paying off a home loan is certainly cause for celebration – but is it worth holding on to the loan facility rather than discharging the mortgage? Sure, you finally hold the title deeds, but in doing so are you letting go of a source of “emergency funds” into which you may need to dip?
Mortgage broker Owun Taylor of Mortgage Choice says most homeowners who make a big effort to pay off their loan early are so thrilled that they discharge the mortgage without thinking ahead.
He cites two clients who closed their home loan facilities but now regret it thanks to changed circumstances.
One had split his mortgage into fixed and variable rate components. But on inheriting a large sum of money, he paid the variable part of the loan and closed it. Now he wants to renovate the family home and, rather than dipping into an existing loan, he has to set up a new one.
“He was so full of joy at seeing what he’d paid off, but he’s lost the ability to redraw [equity in the home],” says Taylor.
“[Discharging the loan] is a much older way of looking at this – now he’s got to go back to the lender, provide payslips for him and his wife, and put in a full application to go back and borrow the money he already had on hand.”
The time spent doing this has also lost him a window of opportunity. “He had a builder ready, but because it will take four weeks until he can get the cash, he’s lost the slot,” says Taylor. “He’s kicking himself.”
The other client – who also had a variable/fixed loan split – is looking to buy a larger family home and needs to come up with a $130,000 deposit in a few weekends when he bids at auction.
“He came into some money, and rather than just putting it into the variable loan [to be available for redraw], he asked the lender to credit it to the loan and reduce the loan size,” says Taylor.
The variable component of the loan was dramatically reduced, meaning he can’t redraw the $130,000 deposit if he is the successful bidder on a new $1.3 million home.
“He didn’t think about the bigger picture. He’s asset-rich but cash-poor, so now is having to refinance that property [to come up with a deposit],” says Taylor.
Stamp duty a consideration
Smartline Personal Mortgage Advisers’ Michael Daniels agrees there can be benefits in keeping a loan facility open after it has been paid down to zero.
“Ultimately, however, the benefits lie in the convenience and savings,” says Daniels, Smartline state manager for NSW and the ACT.
“For example, while redraw facilities often allow you to take money out of your loan account without having to go through the entire credit approval process again, some redraws have time limits, others have maximum single-draw limits and others cap the amount that can be redrawn without a credit assessment.”
He points out that the other flaw in paying down a loan and then needing to organise another one for a similar amount is mortgage stamp duty. “This duty is no longer levied on the purchase of residential dwellings, but it’s charged at about $4 per $1000 if you borrow against your dwelling for other purposes, such as buying shares or paying for a holiday.
“If you paid mortgage stamp duty in the past, it will be based on the original size of the loan. If you borrowed $400,000, for example, you will have a stamp duty limit within that amount.
“If your redraw stays within this limit, you don’t have to pay duty again – for any redraw purpose. But if you discharge your mortgage, you lose your stamp duty limit and could have to pay a fee if you re-borrow in the future.”
Financial adviser Justin Hooper, managing director of Sentinel Wealth, advises caution if you’re able to redraw on your mortgage. “If you are not disciplined, you could end up using the money when you shouldn’t. If that’s the case, do yourself a favour by getting rid of the facility to make it more difficult.”
If the only time you intend making a redraw is a genuine emergency – to cover medical bills or overseas flights in the event of difficulties with family overseas, for example – being able to access the equity in your home is a cheap source of funds. And it’s preferable to having to sell investments within a fixed time frame.
For older mortgage borrowers, though, it can be more difficult, even if their balance is close to zero, says AMP chief operating officer Rob Slocombe. Not only can they redraw less towards the end of their loan, often the only option is setting up a new loan.
Given their age, the lender will need updated information on their financials, as well as an “exit strategy” outlining how they will repay the loan (even if they never intend to use it).
Some lenders cite “conversion fees” of about $350 to switch from older loans to newer ones with slightly extended loan terms, and there may be redraw restrictions.
In essence, though, what many are looking for is access to a facility they may never use – in other words, a cheap source of “just in case” emergency money.
So for those close to the end of the term of their original mortgage, the only choice seems to be to discharge the loan (where costs include solicitors’ fees ranging from $300 to $400) and set up a line of credit secured on their property.
For older borrowers, say in their fifties, this might involve a 10-year term. But the costs of setting this up can be much the same as mortgage start-up costs – around $600. An expensive way to set up access to money you may never need.
Posted by Debra Cleveland -- Australian Financial Review on 21st June, 2014 | Comments | Trackbacks | Permalink
Six questions for your financial planner
Most investors need reliable financial advice. The problem is in finding it.
There are about 18,000 financial planners in Australia. The vast majority - perhaps up to 85 per cent - are associated with a major bank or AMP, which means they either work for these organisations or are remunerated by them in some way.
The vertical integration of the industry, where the manufacture of financial products seamlessly slips into the selling of them under the guise of advice, all but ensures you'll be sold well rather than advised sensibly. So the big banks and AMP aren't good places to fish for advice.
But just because a planner's office doesn't sport a Commonwealth Bank logo doesn't guarantee independence. Most major financial planning firms, including Count Financial and IPAC Securities, are either owned by or associated with the big banks. And the banks see them as distribution outlets rather than havens for independent advice. The adverse, systemic influence of rebates and commissions means they too are best avoided.
The Financial Planning Association, an industry body whose 7500 practising members are bound by a code of practice, understands the lack of trust and transparency in the market and has been urging the government to break the nexus between advice and sales.
However, Finance Minister Senator Mathias Cormann said on Friday the government would push ahead with its plans to roll back elements of new financial planning laws and water down consumer protections for those seeking financial advice.
So how to find solid advice?
What you should really look for are planners free from links to product manufacturers, and without commissions or payments of any form from them. You should also think carefully about advisers levying fees as a percentage of your asset base. A smaller professional body, The Independent Financial Advisers Association of Australia, promotes these criteria, but in a sign of how laughably compromised the industry has become it has a membership of just 12 planners.
So your best chance of getting good advice is to first ask a planner what company owns their advice licence and whether they or their employer receive any benefits from recommending their products. If they do, walk out.
When you find one not too conflicted, here are six questions to ask them. They aren't a guarantee of trust or competence but they will increase your chances of getting good advice.
1 Are you a certified financial planner? Becoming a qualified planner costs $1500 and takes just eight days. Becoming a certified financial planner - an internationally recognised qualification consisting of four modules, each run over three months - is more demanding. About 5,000 FPA members are CFP-qualified and you're almost certainly better off with one of them.
2 Have you ever recommended a managed agricultural scheme? Some of these schemes paid advisers fees of 10 per cent or more. If they succumbed to this temptation, no matter how reformed they claim to be, leave immediately.
3 Do you put your clients into your own firm's funds and products? If the answer is yes, ask what steps they have taken to source non-conflicted alternatives and minimise the conflicts of interest. If there's much spluttering and prevarication, there's your answer.
4 Can you show me your investment portfolio? Those proffering advice should eat their own cooking. So a quick glance at your adviser's portfolio, even if it's just a list of products with percentage allocations, will be informative. If they own vastly dissimilar investments ask them to explain the reasons. If they don't stack up, go.
5 Do you offer flat fee-for-service pricing? If the adviser answers no, their remuneration is very likely tied to product sales in some form or other, making the chances of genuinely independent advice unlikely. Money does an awfully good job of skewing incentives. If the adviser offers a percentage of an asset-based fee, expect service akin to having your own fund manager. If that's not the pitch, forget it.
6 Can you show me a sample statement of advice? The share market regulator ASIC's 2012 shadow shopping of retirement advice revealed that almost 40 per cent of plans reviewed were of poor quality and only 3 per cent solid. A statement of advice should cover budgeting, cash flow projections, a comparison of multiple strategies and a discussion about what you can realistically fund in retirement. If the document lacks clarity or is unnecessarily long, the adviser has missed the point of it and it's time to leave.
Once you find a good planner and they deliver your statement of advice, use the same process to acquire a second opinion.
The financial planning sector is structured to deliver product sales at the expense of good advice. Your retirement is too important to skimp on finding out whether you're being suckered
Posted by John Addis - Fairfax Digital on 19th June, 2014 | Comments | Trackbacks | Permalink
There's more than a million self-managed funds
A milestone was reached recently with the number of self-managed superannuation funds (SMSFs) reaching just over 1 million.
The appeal of DIY funds is much broader than to just the usual suspects thought to be most suited to running their own funds – small-business owners, self-employed professionals and highly paid employees. And tax office data shows that half the funds hold less than $518,000 in investments.
Now, many of these will have been started by couples who are relatively young and are building their retirement savings. About 40 per cent of new DIY funds are set up by people between 25 and 44.
But get this: Tax office data shows that five years ago, less than 20 per cent of those starting their own funds were aged 25 to 44. So the growth is occurring among younger and younger people. They want the control and are willing to take the responsibility for their retirement savings. They accept that the legal responsibility cannot be outsourced to anyone else who is advising them.
But surely there is more than this to explain the growth in DIY funds. SMSFs are not products in the sense of life insurance or managed funds. They are legal structures that hold assets with various rules about how the money is invested and how money is moved into and out of the funds.
However, there is an industry emerging around the administration of DIY funds. Advertising of DIY administration services is everywhere and awareness is increasing, including among those who are less suited for them.
Most people starting their own funds are more than capable of making their own decisions about their retirement savings. But the big growth in numbers also suggests that DIY funds are increasingly also set up by people for whom the benefits are marginal at best. They could be leaving a large superannuation fund with total costs of less than 1 per cent a year.
With DIY funds, there are the costs of investing, accounting and auditing that could be much higher than is paid on a large fund, especially if there is not that much money in the self-managed fund. Members of large funds are eligible for compensation if they suffer losses as a result of fraud or theft. For SMSF trustees, recourse is legal action.
However the chance of fraud is minimal for most trustees. That is because though DIY fund trustees have the freedom to invest widely, most stick to the investments they know best: shares in the biggest listed Australian companies and term deposits.
Most of the largest superannuation funds now offer term deposits and direct share-investing to their members. Brokerage rates on the buying and selling of shares through large funds are usually low.
And then there is life insurance. Most large funds offer their members life insurance with automatic acceptance and no need for a medical examination. There is evidence that trustees starting their own funds are leaving some money in their large funds to retain the cheap insurance cover.
Posted by John Collett - Money Manager (Fairfax Digital) on 19th June, 2014 | Comments | Trackbacks | Permalink
5 crack negotiation tactics when buying a property
Scoring $20 off the price of a toaster is usually achieved by asking ‘is this your best price’?
Simple. Sweet. Pluck required? Minimal.
But how do you crunch a deal when negotiating to buy a property worth hundreds of thousands of dollars?
What tactics do the experts use to secure the keenest prices?
1. Find a deal sweetener
When Sydney investor Brad Callaughan is serious about buying a property, he spends serious time discovering what it is the vendor really wants.
It may be a short settlement because of an imminent divorce.
Or perhaps they have a soft spot for buyers offering unconditional contracts?
“Find out what the other person wants because the key to negotiations is making them a ‘win win’ proposition,” says Callaughan, the director of Callaughan Partners, accountants, business advisors and financial planners.
2. Cash trumps all
It’s old school and it works. Make a cash offer when haggling a home price discount.
It doesn’t mean you need to carry wads in a backpack to every home auction and open house
Just get your finances sorted and arrange easy access to these funds before talking turkey.
It means you can pay that all-important contract deposit on the spot … a killer tactic when deal-making.
3. Butter up the selling agent
Callaughan also recommends giving the vendor’s agent an incentive.
“This doesn’t mean you become unethical and make the agent act unethically but when I buy a flipper property (one he intends turning over quickly), I offer the agent the resale if they are to help me in my negotiation.
“Suddenly they have the chance of making two commissions on the one property, which is a huge incentive.”
4. Go in hard and fast
In a red hot market, don’t risk losing out by making low-ball offers. It wastes time and gives rival buyers time to swoop.
If you have done your research and know the home’s market value, make your first offer your biggest, advises buyer’s advocate Catherine Bakos of Empower Wealth.
In a rising market, Bakos says she sometimes uses “knockout blows” to stun vendors and secure sales before the market and prices have had time to catch up.
5. Keep budget close to your chest
“The first person to name a price loses,” Callaughan says.
Always draw out the other party before you give any indications of your budget or valuation of the property.
The less the other party knows about the depth of your pockets, the better.
“In negotiations, if you are the first person to show your hand, you are most likely going to end up losing.”
Posted by Caroline James - Realestate.com on 13th June, 2014 | Comments | Trackbacks | Permalink
How to negotiate the best commission
SELLING your home can be expensive with legal fees, stamp duty and of course the agent’s commission.
It can all add up to tens of thousands of dollars.
While you can’t negotiate on government fees and charges the one thing you can save money on is the commission you pay your agent.
Almost every state in Australia has deregulated agents’ commissions.
HOW TO NEGOTIATE THE BEST COMMISSION
• Ask a couple of agents to submit what they charge for commission. This will help you work out whether you are being charged a reasonable rate.
• Create a little competition between agents, make sure they know you are asking others. You can use this to try and get the agent you really want to “price match’’.
• Don’t expect agents to be competitive with their fee if you want them to sell for above where the market is. If they have to work a lot harder to sell your property for the price you want expect to pay for it
• Don’t always take the cheapest commission — you often get what you pay for.
• Don’t forget advertising fees may not be included.
• Do your research, higher value properties can often negotiate a lower percentage commission.
• Get it in writing.
Buyers agent Josh Masters of Your Empire says ask upfront if they will reduce their fee.
“This can go both ways, you get what you pay for and it is your largest asset you will ever own, do you really want the cheapest agent?
“And if they reduce their fee straight away when you ask imagine what they will do when they are trying to sell your home and they have a buyer in front of them.’’
Another trick he has heard of is offering to allow agents to keep their signboards up for a few weeks after the sale.
It is good advertising for them and could reduce the commission enough to cover GST.
How do the states compare?
In Queensland there is a cap on the maximum allowable commission in place but new legislation will remove that by the end of the year.
According to Real Estate Institute of Queensland CEO Anton Kardash once that is abolished sellers and agents will be free to work out commissions between themselves.
He says there has always been the ability to negotiate lower commissions, but historically most agents offered services at the maximum cap permitted by legislation.
Until the new legislation comes into affect the current formula for the maximum commission payable is 5 per cent of the first $18,000 and 2.5 per cent on the balance of the sales price plus GST.
On the sale of a $500,000 that would equate to $13,255.
Mr Kardash says the changes make it a more competitive environment and agents will have to be prepared to justify what it is they’re offering for the price they’re charging.
Robert Williams of Australian Real Estate Consulting says they have analysed what the average commission are throughout Australia.
He says it is not so much about what agents charge but what it could cost you if you get the wrong one.
Their research shows that real estate fees in The ACT generally range from 2.5 per cent in the city and metropolitan areas to between 2.5 per cent and 4 per cent in the outer areas.
In New South Wales fees range from 2 per cent to 2.5 per cent in city areas and 2.5 per cent to 3.5 per cent in outer areas.
In the Northern Territory commissions range between 2.5 per cent to 4 per cent.
South Australia commissions generally range from 2 per cent to 2.75 per cent in the city and metropolitan areas, then 2.75 per cent to 3 per cent in outer areas.
Victoria commissions range from 1.6 per cent to 2.5 per cent in the city and metropolitan areas, then 2.5 per cent to 3 per cent in outer areas.
Western Australia commissions are generally from 3 per cent to 3.25 per cent.
In Tasmania commissions are deregulated but the Real Estate Institute of Tasmania retains its scale of commission as a guide.
Where the purchase price is from $100,001 upwards — $5523 plus 3.99 per cent of excess over $100,000 is the suggested commission.Real Estate Institute of New South Wales president Malcolm Gunning says often individual offices set what they think is an appropriate commission to charge.
“I think agents would love a prescribed fee,’’ he says.
He says agents tend to ask for a higher commission in an area where properties are not selling as easily because they know they will need to put a lot more time into selling the property.
Paul Bird of the Real Estate Institute of South Australia says some agents will negotiate to sell for a set fixed price rather than a percentage so at least you know how much you are paying no matter what the property sells for.
But he says normally they deal in percentages.
Mr Williams says also be prepare to pay a slightly higher percentage commission if your property is outside of town.
He says while agents don’t collude on what they charge for commissions most know what each other is doing which can make it difficult to get them to come down in price.
Posted by Prue Miller - News Limited on 13th June, 2014 | Comments | Trackbacks | Permalink
Unlock a tax break
Two-thirds of Australia’s 1.8 million landlords report a tax loss on their properties – those losses totalling more than $13 billion, according to Australian Taxation Office data. In the lead-up to the end of the financial year, it’s worth checking you are getting your full entitlements from your investment properties.
Any investors who expect to earn less next year should investigate what they can prepay before June 30. The biggest is likely to be 12 months’ interest on the mortgage.
And if you don’t have a depreciation schedule, organise one now and pay for it before June 30. Anyone who has a house built after July 18, 1985, needs one to maximise their deductions. They are also worthwhile for older houses that have been renovated, as explained later.
Organise repairs and, as long as these cost less than $1000 and you trust the tradesman, pay for them before June 30 to score a deduction this tax year even if they won’t be completed until later.
It’s important to distinguish between repairs and maintenance and improvements, because the latter do not generate immediate deductions, although they can be depreciated over time. The ATO provides a good guide to help you understand the differences (see www.ato.gov.au/Individuals/Ind/Rental-properties---claiming-repairs-and-maintenance-expenses).
Other expenses which can be claimed include paying a gardener to maintain the outdoor area and administration costs.
Even if prepayments are not on your agenda, the end of the tax year is a good time to take stock and make sure you are claiming everything you can.
If your investment property was built before 1985, you may not have bothered with a depreciation schedule, but it’s likely that a home 30-plus years old has undergone some improvements, which would be depreciable. And even if that is not the case, Tyron Hyde, director of quantity surveyor Washington Brown, points out your property’s purchase price includes land, building and plant and equipment (fixtures and fittings) and firms like his can help you break down those categories. “In about 99% of the cases we can find enough plant and equipment items to justify the expense of engaging our firm,” he says.
Landlords planning kitchen or bathroom renovations on properties built after 1985 should engage a quantity surveyor before they demolish, says Hyde, so the residual value can be assessed. For example, a rental property with a 20-year-old $10,000 kitchen attracts an immediate deduction of around $5000 when it’s demolished. If you have been missing out on building and depreciation claims, the good news is that you can obtain a schedule and claim up to the previous two years. For the average cost of around $660, which is itself tax deductible, it’s well worthwhile.
Some expenses need to be claimed over a longer period, including valuation fees, lender’s mortgage insurance and loan establishment fees, which can be claimed over a period of five years. The end of the financial year is also a good time to consider whether you should be claiming your landlord deductions on a regular basis rather than annually, especially if cash flow is tight. To do this you need to fill out a PAYG Witholding Variation Application, which you will find on the ATO site, and have less tax taken out of each pay packet.
Get expert endorsement
Before forming a long-term relationship with a financial institution, it is important to look at all the options.
Take time to shop around for a financial partner that meets your needs and give serious consideration to “member-owned” organisations, such as building societies, credit unions and mutual banks.
A valuable part of your research would include looking for expert endorsement on financial products. Experts within the financial services industry, such as Canstar and Money magazine, offer independent ratings and awards that give an indication of the best value products in the market.
Member-owned organisations rank highly in these comparisons, as they often have higher interest rates on investments, lower interest rates on loans and fewer fees and charges. A little time spent researching and shopping around could save you thousands.
Posted by Pam Walkley - Money Magazine on 5th June, 2014 | Comments | Trackbacks | Permalink
Nine tips that pay off at tax time
Don't delay in getting your accounts in order as we approach the end of the financial year.
The end of the financial year – it’s a time many businesses dread because it means additional time spent ensuring their accounts are up to date and in order.
From speaking with our customers, I know that for entrepreneurs and business owners, time is critical and you want to be spending as much of it as possible building the business or with your family. You have enough on your plate without the hassle of sorting through incomprehensible tax and financial matters.
Fortunately, with the advent of cloud-based accounting software designed specifically for small businesses and their trusted advisers – accountants and bookkeepers, year-end compliance can now be less taxing than ever before.
The end of the financial year signals a number of deduction opportunities as well as potential threats to cash flow so it’s time to be alert…but not alarmed.
Get in early and make an appointment with your accountant to discuss how to make the most of your tax position to help you get ahead. You and your accountant can estimate your likely tax position and come up with strategies that make sense for your business, and give you time to implement them.
Here, it’s important to note the Federal budget announcement on 13 May could affect small business, so be sure ask about its impact on future financial years.
Apart from seeking professional help, here are nine quick tips to help ease the 30 June burden.
(Please note that these tips apply to small businesses with less than $2 million annual turnover).
1. Be certain to get your super deductions. Even though superannuation doesn’t have to be paid until 28 July, paying employee and personal contributions by 30 June will allow time for processing delays and getting valuable deductions this year.
Note: According to The Australian Tax Office (ATO), superannuation is only deductible when paid. That means that it must be cleared through your bank account, received and recorded by the employee’s superannuation fund prior to that date. Be prepared; pay early.
2. Pay expenses in advance. If your cash flow allows it, consider paying recurring expenses in advance. Things like insurances, interest, rent, conference fees, subscriptions, travel costs can mean an immediate deduction. If you expect your tax pay will be higher this year than next year, you may benefit from deferring income to next year and accelerating deductions into this year. Using credit cards to pay for tax-deductible expenditures will earn you the deduction this year, even if you don't pay for it until next year.
Note: The expense may not be eligible if it covers more than 12 months.
3. Claim deductions now for future expenses. You may be entitled to claim an immediate deduction for expenses you are committed to, goods or services that have been received or work performed – even if won’t happen before 30 June. This includes salaries and wages, staff bonuses and directors’ fees.
4. Spend up! But only if you need to. If you need to replace low-cost equipment or purchase new tools, computers or other equipment soon, consider purchasing them before 30 June to get the full tax benefit now.
Note: You may only receive a $300 benefit for every $1,000 spent. Always check the ATO website for the latest updates.
5. Write off bad debts. To deduct bad debts, the ATO requires you to write it off while it still exists, prior to 30 June. Review your accounts receivable with your accountant or bookkeeper to determine whether a deduction qualifies before the deadline.
6. Check your assets and inventory. Consider writing down or writing off obsolete stock. Then think about revaluing the remaining stock using one of three methods: cost price, market selling value or replacement value. Choose the method that produces the lowest stock value; if the value of closing stock is less than the value of your opening stock, you may receive a deduction. When the reverse occurs, you may generate income.
7. Repay any borrowings. If you, a family member or an associate have borrowed money from your business, you should ensure that the company charges the appropriate interest and consider making the minimum required repayments before the end of the financial year.
Note: Failure to do so may result in the entire amount of the loan being treated as taxable income, causing you to be taxed personally at rates of up to 46.5 per cent.
8. Pay on time and don’t over-claim. Unpaid taxes and fraudulent claims are serious business. The Australian Tax Office is actively looking to recover $17.7 billion, with 60 per cent of that – some $10.6 billion – owed by small businesses. It’s critical to submit accurate returns and pay on time.
9. Use expertise not guesswork. Don’t forget that the ATO site is an extremely useful resource for small to medium businesses. You should always consult a qualified accountant before making any decisions that may have a bearing on tax obligations.
Brad Paterson, vice president and managing director of Intuit APAC
Posted by Brad Paterson - The Age on 4th June, 2014 | Comments | Trackbacks | Permalink
Investors urged to get the most from tax depreciation
With the end of the financial year just around the corner, savvy property investors need to maximise their deductions to squeeze every dollar out of their tax return.
But experts say people often claim less than what they are eligible for, while others miss out altogether.
“We find that many don’t do a depreciation schedule,” said Ken Raiss, director of Chan & Naylor Accountants. “For new clients who come and see us, at least 30 per cent don’t even do one ...and many haven’t got an appropriate one.”
And those who don’t claim a "scrapping schedule" (when they complete a renovation) was closer to 50 per cent, he said.
Bradley Beer, managing director of BMT Tax Depreciation, said capital works deductions and plant and equipment depreciation were two types of deductions that continue to be missed.
A total depreciation claim of $3168 on average by property investors – derived from recent ATO statistics relating to claims made for the 2011-12 income year – was well below the typical claim found by BMT Tax Depreciation, he said.
“Data collected from tens of thousands of depreciation schedules prepared by BMT Tax Depreciation suggests the average claim should be around $10,100 in the first full financial year and $7350 per year on average over the first 10 years of owning a property,” he said.
Beer said smaller assets such as exhaust fans, door closers and even garbage bins were frequently overlooked. “People will claim an oven, but they won’t claim the cook top and the range hood because they think it’s all a part of the same thing,” he said.
He says a quantity surveyor could also notice renovations completed by a previous owner which are otherwise often missed because investors have a tendency to claim items they have just spent money on.
“Even if the previous owners have installed those assets or completed that renovation, they can only claim that percentage of wear and tear for those few years they’ve owned it,” Mr Beer said. “The new owners start to claim it from when they became the owners.”
This means if the previous owners claimed depreciation on a carpet (with an effective life of 10 years) for the first three years, there may be seven years left to claim.
Raiss said investors can also claim assets in common areas such as lifts, signage and the front door.
Silvana Masalkovski, principal of LJ Hooker Point Cook, encourages investors to make capital improvements to enhance the long-term value of a property.
“For example, adding a bedroom is a guaranteed way to make a capital improvement,” she said. “The value of the house will increase and they will also get a higher rent.”
Investors may spend $700 or $800 to close a wall to create a bedroom, but it would add a minimum of $10,000 to the value of a property, she said.
She also advises investors to have their real estate agents pay for all the expenses such as water bills, rates and repair expenses so nothing will be left out in their annual statement.
Damian Paull, 53, who owns an investment property at Sanctuary Lakes, said good record-keeping was one of the most important lessons he learnt over the years. He also thought it was more tax effective to turn his four-bedroom home into an investment property.
“We’ve rented out what was the family residence and we’re currently renting ourselves,” he said. “[We can] make the debt that we’ve got in our mortgage more effective – work harder for us – and take advantage of the available tax deductions for investment properties.”
Posted by Christina Zhou - Domain (The Age) on 4th June, 2014 | Comments | Trackbacks | Permalink
Big mortgage, big discount: Major interest rate cuts on offer as competition for best borrowers heats up
Banks are granting deeper discounts to customers who take out big mortgages, with some lenders offering the biggest reductions in advertised rates since before the global financial crisis.
As lenders compete for a bigger slice of the $1.3 trillion home loan market, mortgage brokers say discounts have grown to as much as 1.4 percentage points off standard variable interest rates for the most sought-after borrowers.
The increase in discounting comes as regulators warn home buyers and banks to remain cautious when interest rates are at record lows and household indebtedness is rising. While standard variable mortgage rates have not moved since the Reserve Bank cut official rates to 2.5 per cent in August last year, some borrowers have been able to get a better deal by securing a discount from their lender.
The discounts are typically offered by banks as part of a package deal, and the biggest reductions are reserved for people who borrow the most money.
Mortgage Choice, the country's largest independently owned mortgage broker, says discounts have recently hit up to 1.4 percentage points for people borrowing large amounts, and the trend drove more borrowers towards variable-rate loans in May.
''We haven't seen discounting like this since well before the GFC,'' spokeswoman Jessica Darnbrough said.
''Lenders are hungry for business and with rates sitting at historical lows, they are all being forced to out-discount each other in a bid to grow their market share.''
With banks also cutting their fixed-rate home loans, Reserve Bank governor Glenn Stevens noted the trend on Tuesday, when the central bank left official rates on hold.
''Interest rates are very low and for some borrowers have edged lower over recent months,'' he said.
The trend comes as regulators seek to make sure home buyers and banks remain cautious in an environment of cheap debt.
The Australian Prudential Regulation Authority last week issuing new guidelines on responsible lending practices and said there was a risk banks become complacent when interest rates were low and house prices rising.
Reserve Bank official Luci Ellis also last month warned first home buyers not to overstretch themselves in the competition with investors to buy property.
Ms Darnbrough said that to obtain 1.4 percentage points off the standard variable rate a customer would have to borrow more than $1 million and have a deposit of more than 20 per cent of the property's value.
Customers borrowing $500,000 with a 20 per cent deposit would be eligible for discounts of up to 1.1 percentage points from the Commonwealth Bank-owned Bankwest, 1.15 percentage points from Suncorp, or slightly less from various other lenders, she said. The discounts are determined on a case by case basis.
Banks have raised mortgage discounts in part because their funding costs have fallen, but also because it is a way for them to sell a wider range of financial products.
John Kolenda, managing director of mortgage broker 1300HomeLoan, said he had seen discounts as large as 1.36 percentage points, and banks used discounts to recruit customers of other products such as deposits or credit cards.
''They are trying to acquire these customers, to then provide them with broader solutions,'' Mr Kolenda said.
Stockbroking analysts have highlighted the trend towards increased discounting as a potential squeeze on bank profit margins.
Reflecting the heightened competition for customers, latest results showed the big banks' average net interest margins narrowed by 5 basis points to 2.08 per cent.
While all of the major banks are targeting mortgage growth, official figures show National Australia Bank and ANZ Bank have been expanding at the quickest pace.
NAB's mortgage book grew at an annualised pace of 8 per cent in April, and ANZ's grew by 7.6 per cent, Macquarie analysis of Australian Prudential Regulation Authority show. Getting the best mortgage deal
Finding the right mortgage is more than just finding the lowest interest rate. However, even seemingly small differences interest rates can save tens of thousands of dollars in repayments.
•Shop around and consider the smaller lenders who often have the lowest rates. Do not just accept lenders' advertised rates as most lenders will offer discounts to borrowers with good credit histories. The larger the mortgage, the deeper the discount that can be expected.
•It is not just the interest rate. Charges and fees can add thousands to the cost of a loan. All lenders are required to provide the "comparison rate" alongside their advertised rates. The comparison rate is based on a loan of $150,000 and a term of 25 years. It is a good attempt to capture the fees and charges of the loan and express those costs through the interest rate.
•Mortgage brokers can be useful. Be aware they can have only a limited range of lenders. Some, while professing to recommend from a large panel of lenders, only recommend the mortgages from a couple. Lenders usually pay brokers commissions that are based on the size of the mortgage. Be wary of being advised by a mortgage broker to borrow more than is needed.
Posted by John Collett - The Age on 4th June, 2014 | Comments | Trackbacks | Permalink
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