Who Decides The Size Of Your Mortgage?

You or the Broker?

A Larger Mortgage Means More Broker Commission

Well the typical mortgage broker gets over 0.5% of the initial value of your mortgage and a trailing commission of around 0.15%.

With a typical 30 year mortgage having a life of around 6 years the total commission is going to be around 1.3-1.4%.

That’s $3,900 -$4,200 for a $300,000 mortgage, with an additional $1,300 – $1,400 for every additional $100,000.

Do you think that means there might be an incentive for the broker to ‘stretch’ you to a bigger mortgage?

Sounds great if it means you can get a bigger house, but a lot of people that have been sold that story are suffering mortgage stress!

But Doesn’t The Broker Gets You The Best Deal?

I’m not so sure, as the banks own most of the big name brokers, for instance:

  • Commonwealth Bank owns Aussie Home Loans
  • NAB owns First Choice

Do you think there might be some pressure to direct your custom to the Big Bank?

If you are getting offers from subsidiaries, of a big bank are they really that different?

Bank of Melbourne, Bank of SA, and St Georges Bank are all subsidiaries of Westpac.

An independent broker won’t have as much pressure to use a non big bank lender, but they may want to use a bank with a higher commission level.

After all consumer law only requires to the broker to identify a ‘Suitable Loan’ not the ‘Best Value’.

So What Can You Do?

  1. Before you go to a Broker think about how much you can safely repay,even if interest rates go up.
  2. Treat brokers as you might treat a typical purchase. . . . . ask a couple of different ones for a quote.

Tax, Timing and Red Tape

Guest post by Laura Costello

What You Need to Know About Buying Investment Properties in Australia

 

Buying an investment property is one of Australia’s popular long-term forms of investment.

However, many people become overwhelmed by the process, or are left scrambling to finance the purchase and on-going management of their investment property.

Where and what you buy will affect your return on investment, as will maintenance costs and taxes.

Here is what you need to know before buying an investment property, including some tips to help you identify a good investment property and popular financial strategies to help you receive the most from your returns.

Financing an investment property

House and land packages offer an affordable home loan solution, allowing you to bundle the financing loans for the house and land.

One of the main benefits from the package approach is that the construction loan allows you to ‘draw down’ on an agreed amount to pay during each stage of the building process.

This means that you only pay interest on the specific money you are using during each stage that the home is built.

It also means that you do not have to pay stamp duty, as it only applies to established homes.

Leveraging equity in your home, or equity from another property investment, can be another effective way to buy an investment property.

Most lenders and mortgage insurers have valuable data on different locations and property developments.

Accessing this information can assist you in choosing the right loan and investment property for your financial situation.

Property is a long-term investment

Investing in property is a popular and proven path to long-term wealth.

However, as it is a long-term investment, you should not and cannot rely on the property price and yield rising straight away.

The financial benefits of an investment property increase the longer you can afford to commit to the property.

Therefore, it is important to make sure that you can maintain your mortgage repayments over the long term.

It is also important to note that, unlike shares or other investments, you cannot sell part of an investment property if you need money.

As a long-term investment, it is crucial to also be aware of other taxes involved in property investing.

These taxes include Capital Gains Tax, Land Tax and Stamp Duty which may all change over time.

Where to buy

Buying in a familiar market will ensure less time required in researching the area.

Look for areas where high growth is expected and check recent sale prices in the area, so you get an idea of what you can expect to pay.

When considering where to purchase your investment property, it is also important to research the rental yield of similar properties in the area.

Your study and research about vacancy rates will indicate whether the property is in a desirable area that will make it easy to rent the property out, or sell it in the future.

Finally, when considering the area in which to purchase the property, it is also vital to find out about any proposed changes which may affect future property prices includngi factors such as zoning changes or major new developments.

What to buy

There is many things to consider before buying an investment property, choosing a property type is one of the earliest and most important decisions you will make.

  • There are numerous benefits and disadvantages for different property types.
    Units can be easier to maintain than houses, but you will have to pay costly body corporate fees. It is also important to consider the cost of maintaining the property.
  • Older houses can be cheaper to purchase, maintenance costs may result in spending more than you originally intended.

Similarly, while pools and extensive landscaping are attractive features, it is important to consider the maintenance costs involved.

It is advisable to engage a professional building inspector before you purchase an investment property which will allow you to find any potential problems and expenses associated with the purchase.

Features that will make your investment property appealing to as many people as possible, include proximity to nearby schools, shops and transport.

It is important to find a property that will attract all segments of the rental market; such as singles, couples and young families which will ensure that you keep your vacancy rates low.

Negtive gearing

Negative gearing has been a popular strategy for Australian investors for many years.

It occurs when the costs of taking out and maintaining an investment are greater than the income you receive from it. You can then use your investment loss to offset the other income you earn, allowing you to pay less tax.

This means that as a whole you will be required to pay less tax to the Australian Taxation Office (ATO).

The investment expenses that you can claim as a tax deduction are generally expenses associated with the management and the maintenance of the property.

The three main categories that you can claim deductions on are:

  • Revenue deductions (interest on money you borrowed)
  • Capital items (large items such as dishwashers) and;
  • Building allowances (depreciation over time for building works).

Seek advice from a tax accountant in order to determine which expenses you may be eligible to claim.
Investing in property is one of Australia’s favourite ways to invest.

As with other types of investments, it’s important to do your research and seek professional advice.

Speaking to an experienced financial advisor and attaining the services of a property manager, are vital to ensuring the success of your investment.

Bio: Laura Costello is in her final year of a Bachelor of Law/International Relations at Latrobe University. She is passionate about the law, the power of social media, and the ability to translate her knowledge of both common and complex topics to readers across a variety of mediums, in a way that is easy to understand.

Ghost Houses 2017

Walking around my local area I came across this abandoned partially built house. . . 

. . . and next door this abandoned 3 house development.

They are reminders that things can go wrong, and if you are over committed financially you can’t find a a way back.

Here are just some of the ways that you can run out of money during the build, and finish up owning a ghost.

  • Builder going Bust, Even if you have a guarantee it is still going to cost you extra to have another builder take over the job.
  • Additional Site Works costs.
  • You split from your partner.
  • You, or your partner, loses a job.
  • Your employer suffering a downturn restricting the amount of overtime you were expecting to earn.
  • Illness reducing wages for several months.
  • Rise in Interest Rates.

Make sure you aren’t over committed!

Are You Prepared For Interest Rate Rises


Interest Rates are Going Up!

Don’t know when but they haven’t gone up for 4 years so it isn’t going to last much longer!

How Much?

Well the real answer is no one knows, but some of the financial wizz kids are predicting something like 1.5% rise.

To me that means expect a 2% rise.

So What Will It Mean to You?

A 1% rise on a new mortgage will increase the weekly payments by around $20/week for every $100,000 borrowed.

That means for a 2% rise on a typical $400,000 mortgage you could be looking at $160/week.

Don’t forget this won’t be the only thing going up. Gas, Water, Electricity, Rates, all seem to be on the move upwards while not a lot seems to be happening on the wages front.

Here are a few thoughts about what you could do:

 

Already Along The House Journey

It could be worth looking to fix either part, or all of your mortgage. If you have separate mortgages for the house and the land it may be best to fix one while leaving the other variable to maintain some flexibility.

Start increasing your mortgage payments now so you get used to living on less, and you build up a cash buffer.

Think about contingency plans in case you get hit with something like a reduction ,or loss of income.

Starting To Look At A New House

You need to factor in the potential price rise into your budget, and your expectations.

Considering going for a smaller house rather than having a financial millstone around your neck for the next 5 or more years.

 

See Finance for similar posts

 

Will You Be A First Home Buyer In Perth?

Sponsored by First Home Owners Centre

The Department Of Finance has released good news if you are considering becoming a first home buyer, in Perth or anywhere in Western Australia.

Changes in 2013-2014

The adjustment announced last year, in the projected State Budget for 2013-2014, included an increase in the First Home Owner Grant from the previous amount of $7,000 to $10,000. This increase is for any first home buyer in Perth, or elsewhere in Western Australia – constructing or buying a new home.

In addition, it will offer a $3,000 allowance for any first home buyer obtaining an Established Home Commence Operation from September 25, 2013. Essentially, this means that any first home buyer that signs an agreement to build or purchase a new house from that date, or has already begun laying the foundation for the building of a new house, is entitled to the enlarged $10,000 endowment.

If you are a first home buyer signing a new agreement to purchase a previously constructed home from September 25, 2013, you may be qualified for an award of $3,000 towards that purchase.

Duty Liability

As a first home buyer qualified for the First Home Owner Grant, you need to be aware that a percentage rate of transfer duty will apply if the assessment of the property falls below a certain limit. When you apply, the details of this duty will be explained in the documentation.

Other Resources

As a potential first home buyer in Perth, you should look into what other resources might be available to you to assist with your home buying funding. In addition to the funding available from the Department of Finance, there is also grant funding available from the Department of Commerce. Founded under the Real Estate and Business Agents Act, The Home Buyers Assistance Account, offers a support grant of up to $2,000.

For more information on learning how you can become a first home buyer in Perth, visit FHOC.

 

New House Insurance

Your builder has given you a handover date . . .  so you need to organise property insurance to start on that day.

How Much House Insurance Will You Need ?

Well you have only just finished building so isn’t the price you have just paid the right amount?

I think you need to add 30%-50% to the build cost.

Why Do You Need Extra Property Insurance?

Well building on a new development is cheaper and an entirely different proposition to having a house replaced when it is surrounded by other houses.

Here are some of the reasons for extra costs:

  • Demolition and removal of material from the site;
  • Once fences are built around the site and perhaps trees planted on the nature strip builders may consider the site ‘Restricted‘;
  • Gardens, and paths, which may have been excluded from the initial construction cost will have to be replaced;
  • The original builder may not offer the standard house you had previously built meaning architects may need to be engaged. (Even though you had a project house built you may find yourself up for a cost structure of a custom house)
  • Building regulations may change.

All these extras make it important to make sure you don’t under insure.

The costs of possibly over insuring are small, compared with having to deal with the trauma of loosing your home. . . . Then having a bill of tens, or even hundreds of thousands of dollars, to replace the house.



Also see Danger of Under Insuring

 

New House Guarantees and Warranties

I’m always a bit suspicious of guarantees and warranties!

In my opinion most Guarantees are really just a piece of paper that explains how the Guarantor will fulfill their legal liabilities. (In some cases they explain a process which is less than fulfilling their liabilities)

Bearing in mind I’m not a lawyer this is how I see the situation with regard to new house ‘Guarantees’ and ‘Warranties’

Standard of Build

Under the ‘Standard Domestic Building Contracts’ the builder is required to build a house that is ‘suitable for purpose’.

That is it complies with the building codes and regulations and will not suffer structural damage or have any other major defect.

If you suffer a problem you can go back to the builder under the contract. In effect you have an Implied Guarantee.

If the defect was as a result of his construction or the materials they supplied, the builder is liable to remedy as long as the time since the contract was completed is ‘Reasonable’.

What is Reasonable?

Well it will depend on the State laws but in Victoria Section 134 of the Building Act 1993 places a limit of 10 years on the builders liability.

Previously builders were being chased for problems arising 20 or 30 years later, which was considered unreasonable. (If you want to see how unreasonable some homeowners can be see this link: Unreasonable Behaviour)

Builders Warranty Insurance

One source of confusion is that the Builder Warranty Insurance for new houses only lasts for the following periods post completion (or contract termination):

  • 6 years for structural defects
  • 2 years for non-structural defects.

This warranty insurance can only be claimed by the home owners, if the builders can’t meet their liabilities through death, disappearance, or been declared insolvent. . . . If the builder is still trading its up to the builder to provide the remedy Not the Insurer.

Taking a Mortgage Repayment Holiday

Taking a Mortgage Repayment Holiday

Have you hit trouble keeping up with your new home mortgage payments?

Even the most careful planners can face financial trouble when something unexpected occurs.

The good news is that you may be able to qualify for a repayment holiday. Here’s some advice about putting your mortgage on hold while you deal with a financial emergency.

What Is a Repayment Holiday?

A repayment holiday is a period during which you do not make mortgage payments.

The most common reason to request that payments be paused is the loss of a job. Some people ask a lender to pause their mortgage payments during maternity leave or an extended trip.

While mortgage payments may be put on hold during a repayment holiday, borrowers also have the option to pay a reduced amount during this period. . . . . This option is ideal when a person experiences a reduction in income without completely losing their source of income.

Applying For A Repayment Holiday

You’ll have to contact your mortgage lender to apply for a repayment holiday.

If you have been making extra payments to pay off your mortgage more quickly, it will be easier to take a repayment holiday, as you’ll essentially be cashing in on the extra payments that you’ve already made.

However, people who have not made extra payments on their mortgage will have to prove hardship in order to qualify for a repayment holiday.

Get expert advice for a repayment holiday feature for your home loan from mortgagechoice.com.au.

Costs Of Pausing Mortgage Payments

It is important for you to understand that you’ll be paying a price if you opt for a repayment holiday.

Interest continues to accumulate during this period. This interest will be added to the total amount that you owe on your mortgage, so you’ll end up paying interest on the interest in the end.

Taking even a short repayment holiday can increase your monthly payments over the life of the loan.

While the amount added to your monthly payment may be small, the total extra amount you’ll be paying adds up quickly.

For example:

Imagine that you take a repayment holiday for six months after paying your mortgage down for a year.

This short pause can add $50 or more to your monthly mortgage payment.

If you started with a 30-year mortgage, you could be adding over $17,000 to the total cost of your home.

The high cost of taking a repayment holiday makes it ideal for homeowners to opt for a reduction in repayments rather than a full pause of their payments.

You can minimise the financial hit associated with pausing your payments by paying as much as you can each month.

Taking a repayment holiday from your mortgage can help you get through a tough financial situation, but you should remember that there are costs associated with this option.

Contact your lender immediately if you are experiencing a financial hardship. Your lender can help you determine the best option for keeping your mortgage in good standing while you work through your situation.

This article was written courtesy of Mortgage Choice.

Lenders Mortgage Insurance

One financial cost that some people don’t factor into their calculations when buying a new home is Lenders Mortgage Insurance.

What is Mortgage Lenders Insurance?

This is a cost you will have to pay if you haven’t got a 20% deposit on the total value of the completed house and land.

In other words your Loan to Value Ratio (LVR) is more than 80%.

The banks regard high LVR’s as high risk, but instead of increasing the interest rate they require you to take out an insurance premium in their favour in case you default.

How Much?

Well the amount will depend on the amount you want to borrow and the amount of your deposit.

Lets say you have $25,000 but want to spend build a new house which will be worth $500,000.

You will end up paying around an extra $17,500.

Typically this is added to the amount you borrow.

If you want to calculate the amount there is a useful calculator at www.genworth.com.au

Should You Pay?

As you can see from the above example the LMI can be a considerable amount. Should you pay it? or save up a bigger deposit? . . . . well it really depends on a couple of things:

  • Your Current Accommodation If you are living with parents or in a house you own it can be worth saving more. If you are paying rent it may be worth taking on the LMI (assume you are paying $400/week the LMI in the above case is equivalent to 44 weeks rent)
  • Inflation In the above case the LMI is around 3.5% of the cost of the house and land. In a time of rapidly rising land and costs there can be an advantage in jumping in a bit earlier.

I’m not suggesting you jump in with the sort of small deposit some builders suggest. . . . but just think carefully

It might be worth paying LMI rather than waiting years to save 20%.

Hints

  1. It’s worth getting ‘Financially Fit‘ which means having a bigger deposit
  2. LMI is normally stepped in bands, so it it can make a worthwhile difference to be below a percentage band. (having a 10,1% deposit can be quite a  bit cheaper than a 9.9% deposit)
  3. Make sure you are happy with your lender  for the long term. LMI is not transferable! Changing lenders, if you still owe more than 80%, can be expensive

 

See Finance for Similar Posts

 

Investment Property or New Home

Guest post by Callum Scott of Scott Finance

Are you building for yourself? . . . or will it be a rental property?

Over the last part of the 20th century home ownership has been around 70% but has now slipped to 67.5%.

Why has this happened and will this trend continue?

Is it an affordability issue?

Mortgage Choice’s ‘Future First Home Buyer Survey’ found that nearly 32% of renters polled said that they would continue renting longer to save for a deposit.

A study by the Australian Housing and Urban Research Institute (AHURI) found that over the last 20 years the number of ‘Long Term Renters’ (more than 10 years) renters has increased from 27% to 33.4%.

ABS, Housing Occupancy and Costs 2011-12 shows that on average,  tenants spend 20% of their gross income on housing. After income tax and living expenses, this does not leave a lot to put towards a housing deposit.

Although house building prices seem to be competitive will land prices continue to rise?

Unless salaries keep up,  it all becomes tougher.

Perhaps with mortgage interest rates at a historic low and with lenders fiercely competitive in the deals they are currently offering. This may be the time to make a move to build a new investment property? . . . . . Just make sure you have done the calculations so you can deal with future rate rises!


For no cost advice about new house finance contact: Scott Finance