Property Investment Finance Insights
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Learn some key tips to help ensure you structure your property investment finance correctly.
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Property Investment Finance Insights
- 1. Master Class: Insights to financing your property portfolio With Paul Kalajzich from Anne Street Partners
- 2. We help investors build and manage their property portfolios
- 4. Real Estate Investar’s tools
- 5. Master class webinars • Designed to share knowledge. • Desire to provide extra value to our clients. • Great for both new and experienced investors. • Plenty of opportunity for Q&A. • We will run these regularly throughout the year, and sometimes involve our partners to provide additional insight.
- 6. Todays 9 topics 1. Why there is so much changing in the current investor lending market 2. Low interest rates; are fixed rates feasible? 3. Should refinancing be a consideration 4. What is borrowable equity and the main factors that determine borrowable equity
- 7. Todays 9 topics 5. Choosing a Bank or Lender 6. How much to borrow 7. SMSF lending - Limited recourse borrowing arrangements (LRBA). 8. Locations - Regional areas 9. Professional unbiased advice
- 8. Maximise audio quality • Please ensure your speakers are on, volume is up and not on mute. • You can test your audio in the control panel of the Go To Meeting software, under audio preferences. • If you can’t hear us yet, please ensure your speakers are on and turned up. • TURN OFF: Outlook, Skype, online back-ups and any music or video downloads. • Faster internet = better quality audio.
- 9. Audience poll Which property investment category are you in?
- 10. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 10 Material contained in this presentation is an overview only and it should not be considered as a comprehensive statement on any matter nor relied upon as such. This presentation contains general information only and does not take into account your personal objectives, financial situation or needs and you should consider whether the information is appropriate to you before acting on it. Both superannuation and tax laws are complex and subject to change. Before acting on any information you should consider seeking advice from a financial adviser and your accountant before making any financial decision in relation to any matters discussed in this presentation.
- 11. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 11 Introducing Paul Kalajzich Meet your presenter • Paul has over thirteen years of hands-on experience in the residential mortgage market, particularly within mortgage broking • Paul holds a Diploma of Financial Services (F/MB) • He is also an accredited member of the Mortgage and Finance Association of Australia (MFAA ) • Paul has held senior mortgage broking related positions with Aussie Home Loans, NAB, St George Bank and is currently based in Perth with Anne Street Partners
- 12. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 12 Anne Street Partners • Established 1997 • Privately owned – non bank aligned • Broad range of financial solutions • Nationwide footprint • Experienced mortgage finance professionals with over $1.3 billion on the current home loan book. One of Australia’s leading wealth management organisations
- 13. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 13 Why is there so much changing in the current investor lending market? * “Strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action” As a result banks have now cut discounts for housing investor borrowers, and informed brokers of further changes to its credit policies, serviceability, including maximum loan-to-valuation ratios (LVR) for investment products. * APRA Press release – 09 Dec 2014
- 14. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 14 Why is there so much changing in the current investor lending market?
- 15. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 15 Making sense of the changes Source: NABBroker August 2015
- 16. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 16 Audience poll Are you aware of the interest rates you are currently on?
- 17. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 17 Did you know? • Investor lending growth accelerated from 11.7% in 2013-14 to 18.6% in 2014-15 • Lenders had a combined $516.9 billion of interest-only mortgages at the end of 2014-15, which represented growth of 20.0%, compared to growth of 13.6% in the previous financial year Source “APRA figures support lending crackdown” http://www.mortgagebusiness.com.au/ 26 Aug 2015
- 18. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 18 Audience poll When did you last have a professional review all of your mortgages?
- 19. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 19 Low interest rates; are fixed rates feasible? • The affect of an interest rate change will be determined by whether the loan is entered into at a fixed or variable rate. • Here are the advantages of fixing your loan: – Makes budgeting easier – Rate rises don't matter • The disadvantages – Rate drops will annoy you – Can you make extra repayments? – Break fees
- 20. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 20 Low interest rates - are fixed rates feasible? • Break fee = Loan amount x Remaining fixed term x Change in cost of funds • Fully functioning fixed rates • How to decide
- 21. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 21 Low interest rates • Variable rates • Discounting • Comparison
- 22. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 22 Low interest rates • Rate is a non definable • Term vs property turnover –What is your investment strategy –Split variable / fixed
- 23. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 23 Audience poll Have you considered refinancing?
- 24. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 24 Low interest rates
- 25. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 25 Should refinancing be a consideration? • Structure – Loan type – Example
- 26. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 26 Should refinancing be a consideration? • Structure – Asset protection – Investor
- 27. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 27 Should refinancing be a consideration? • “Cross collateralised” security – Family home and new investment property used as security for both loans • Stand Alone • Stand Alone or Cross Collateralisation
- 28. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 28 Should refinancing be a consideration? • Structure – All Monies Mortgage – Offset – Repayment type • Flexibility • It’s not about rate… or is it?
- 29. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 29 Borrowable equity and the main factors that determine borrowable equity • Property valuation – Types of valuation utilised – Not an exact science • Revaluing all properties • Improving valuation potential
- 30. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 30 Borrowable equity and the main factors that determine borrowable equity • Revaluing all properties • Improving valuation potential
- 31. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 31 Choosing a Bank or Lender • Lender types • APRA impacts • Appetite and risk
- 32. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 32 Choosing a Bank or Lender • Exposure • Policies –character –capacity –capital –collateral –conditions • Access
- 33. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 33 Choosing a Bank or Lender • Advantages of being with one lender • Disadvantages of being with one lender
- 34. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 34 How much to borrow? • Income types • Rental treatment • Servicing calculation
- 35. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 35 How much to borrow? • Gearing • Buffers • Existing debt
- 36. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 36 Audience poll Have you ever considered using a SMSF as a strategy for property acquisition for retirement?
- 37. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 37 SMSF lending - Limited recourse borrowing arrangements (LRBA). • Superannuation Industry Supervision (SIS) Act amended in September 2007 (section 67A)
- 38. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 38 LRBA Structure
- 39. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 39 Benefits of SMSF strategy • Ability to invest in direct property • No financial impact on lifestyle • Increase exposure to growth assets • Control over investment choice • Potential tax benefits
- 40. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 40 Locations - Regional areas • Newly developing regions • Banks apply differing consideration outside of metropolitan areas • Mining areas
- 41. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 41 Professional unbiased advice • Legal • Financial adviser • Finance manager
- 42. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 42 Introducing Anne Street Partners Finance Managers
- 43. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 43 The Anne Street Partners Finance Team Karim El Baghdadi Senior Manager, Finance Melbourne David Lee Senior Manager, Finance Brisbane Mustafa Haddad Manager, Finance Sydney Paul Kalajzich Senior Manager, Finance Perth Cliff O’Connell Senior Manager, Finance Adelaide Greg Sawyer Senior Mobile Lending Specialist Sydney Wade Henry Senior Manager, Finance Perth Mark Collie Manager, Finance Melbourne Aida Liang Senior Manager, Finance Sydney
- 44. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 44 Exclusive refinance offer • $1,500 cash back from St George • $500 from Anne Street Partners • Includes a highly competitive rate* * Rates do depend on your circumstances and loan structure requirements
- 45. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 45 Get your 45 min complimentary lending phone consultation today Reserve your opportunity at: tinyurl.com/ASPFIN2 submit your details and one of our specialists will call you.
- 46. Anne Street Partners Home Loans Pty Ltd. ABN 11 135 905 681 Australian Credit Licence 391660 46 Finance Q&A Paul Kalajzich Senior Manager, Finance Reserve your opportunity at: tinyurl.com/ASPFIN2 Submit your details and one of our specialists will call you for a 45 minute no obligation consultation.
Notas do Editor
- Anne Street Partners is a leading, privately owned Australian wealth advisory firm. We exist to help our clients achieve their financial and lifestyle goals through the creation and protection of their wealth. The Anne Street Partners business was established in 1997 and since then we’ve gone on to provide advice and guidance to over 5,000 Australians from all walks of life - many of whom would have never previously considered using a financial adviser or developing a financial plan. As a privately owned organisation, Anne Street Partners operates a non-aligned structure; we are not owned by any bank or other institutional entity. This operating model is deliberately structured to help facilitate an unbiased and impartial approach to developing a tailored financial strategy for each individual’s circumstances. Using our in-house specialists and drawing from a wide panel of professionals, our speciality is our ability to leverage these synergies to create opportunities and efficiencies that in many circumstances are simply out of reach for some mainstream financial planning providers. We aim to develop a comprehensive, tailored financial approach that is specifically designed to each individual’s goals and objectives. Our approach considers each client’s circumstances on their own merits and we utilise our efficient, integrated service model to deliver a greater overall result. We believe all Australians deserve a brighter financial future. Therefore we strive to inspire each and every one of our clients and business partners to enthusiastically advocate the engagement of our services to their families, friends and professional connections.
- We are really excited to participate tonight and its great to see so many interested in the presentation. Well it’s certainly exciting times as we have seen in recent press when it comes to Borrowing for Investment property. SO WHAT’S HAPPENing? In short the Australian Prudential Regulation Authority (APRA) has introduced directives aimed at curbing investor borrowing. The reason behind APRA’s involvement is the significant growth of lending to property investors, particularly in Australia’s two largest capitals property markets – Melbourne and Sydney. Just to make things clear – APRA were not really concerned about property prices; they wanted to ensure the stability of our banking sector (after all that’s their job.) Background Briefly, the combined Government Regulators including ASIC, APRA and the Reserve Bank have expressed concerns about a potentially overheated property market, especially in Sydney and Melbourne. APRA is looking to take the heat out of the market by slowing the growth of mortgage investment lending. In its role as regulator of banks and other financial institutions, APRA has issued guidelines designed to do that, as well as ensuring the ongoing strength of Australian Banks and maintaining strong credit rating enabling self management should financial markets cause GFC like issues In December 2014, APRA recommended the banks restrict the annual growth in residential property investment loans to 10 per cent or less year-on-year. But this appeared to have little effect on investor home loan approvals, with investor loans creeping towards 50% of all lending, so in May APRA tightened the screws causing several major banks to significantly change their lending policies to investors. Just to explain they are not capping Investment lending at 10% but managing for 10% growth each year. As an example if we consider $100 of funds the year enables that to grow to $110 in simple terms. Then at the end of June, APRA released a temporary directive to five banks requiring them to increase the amount of capital they hold against their residential mortgage exposures.
- We can see by these slides from the RBA Prices have differed across the country with two standouts for Vic and NSW At the same time the volume of lending from Investors has grown considerably. Key changes APRA has asked banks to cap investment loan growth at 10% p.a. A number of lenders are already at, or even over, this limit, so they are under pressure to significantly reduce their investment lending. This has seen banks like AMP withdraw from the investor market altogether for the remainder of this reporting year. The four major banks and Macquarie Bank are also required to increase the capital they hold against mortgages, which tends to increase the cost of lending. This means that ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank will have to retain billions of dollars that would otherwise have gone out in home loans in addition to ensuring the current lending is also covered by capital. The ‘simple’ way to do this is increase repayments to attain the required monies as we are experiencing and as you will have witnessed if monitoring rates or even via mail for existing lending, Banks have already passed on some of these costs to customers via higher interest rates. The result is a more expensive mortgages and controlled mortgage volumes through policy tightening or changes. HOW HAVE THE BANKS RESPONDED? (Some applied across lenders differently) Put simply: they’ve made money harder to get and more expensive for property investors. Changes introduced by some of the banks include: Amended loan serviceability through calculations, including ‘stress test’ requirements. In other words – could you afford your loan repayments if interest rates rose to 7.5% (or more) and you would also have to pay principal plus interest each month. Clearly this would knock out some marginal investors. Restriction of negative gearing consideration from within the calculations. Restrictions to maximum loan-to-value ratio requirements – now down to 80% LVR for investors and 70% LVR for SMSF’s, and Removal of discretionary pricing on investor loans – in other words raising interest rates for investors. HOW May THIS AFFECT THE PROPERTY MARKETS? It’s likely that some of the heat will also come out of the capital city inner suburban established apartment markets as competition from investors dies down a little. The upside of this will be more stock to choose from and less competition and while prices in this market are unlikely to fall, capital growth will probably be lower over the next few years. Now this is a good thing. The rate of property price growth over the last few years, especially in Melbourne and Sydney was unsustainable. Slower growth means an increased likelihood of a gentle landing when the market slows down, rather than a crash. The changes are likely to have a smaller impact on apartment prices in Brisbane and Perth where currently the number of investors in the market was less. HOW WILL THIS AFFECT BEGINNING INVESTORS? Potentially the biggest growth of investors comes from this market as more stay at home get into property through investment as grants like First home owners are wound down. First time investors who usually get into the market with high loan to value ratios using mortgage insurance are likely to be hit the hardest. Many will have difficulty scraping up the 20% deposit required or proving they can “service” their loans. Those who would in the past would have bought at lower price points will struggle to afford “investment grade” properties in good locations. . HOW WILL EXISTING INVESTORS FARE? Existing investors will be hit with a slight increase in interest rates, unless they have fixed rate loans. However investors with strong incomes and good equity will still be able to obtain loans and be in a great position to add to their portfolios. After all the banks are really just money shops and need to lend to make a profit. But some existing investors with a multi-property portfolio who plan to release equity to purchase another property could be hit hard by the new serviceability requirements. Even though prevailing interest rates are generally around 4.5 – 5 per cent interest only, the banks are likely to assess their ability to service the loans on their entire portfolio at an interest rate in the order of 7.5 per cent with principal and interest repayments. THE BOTTOM LINE APRA will get what it wanted – a cooling down of the investor segment of the property market and clearly we’re in for some interesting times as the changes work their way through the system. Westpac reporting already at 10% cap If they don’t then we can expect even tighter restrictions to be enforced. This enforcement is likely to be placed on individual lending institutions if they do not comply therefore it is likely they will all follow with possible slightly conservative approaches and rapid implementation. The upside is two fold where our Banks are future proofing themselves for Market downturn and is that anything that prevents our property markets from a solid downturn is a good thing. And there’s no sugar coating it – if the Sydney and Melbourne property markets kept steaming along as they had over the last few years, we were setting ourselves up for a significant slump (not a crash – a slump!) so this has probably been averted. If you’re looking to buy a new home, there’s probably never be a better time and if you’re a long term property investor there will be some great opportunities in the market – but careful property selection will (as always) be critical.
- Refer to slide… Recap the Key changes APRA has asked banks to cap investment loan growth at 10% p.a. A number of lenders are already at, or even over, this limit, so they are under pressure to significantly reduce their investment lending. The four major banks and Macquarie Bank are also required to increase the capital they hold against mortgages, which tends to increase the cost of lending. Banks have already passed on some of these costs to customers via higher interest rates. What does this mean for you? If you have a home loan that includes principal repayments or you live in your home, you may not be affected. In fact some lenders may even decrease interest rates on that loan. If you have an investment, or an ‘interest only’ O/O home loan, you may find that your lender increases the interest rate on that loan. If you are looking at buying an investment property, you are likely to find the lending market more restricted than in the past. This doesn’t mean you won’t be able to find a loan that suits you, just that it may take a little more time.
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- RBA maintained 2% cash rate on the first Tuesday last month So as we mentioned those with existing fixed rates will be without the imminent effect of the rate increase to existing lending. There are of course advantages and disadvantages associated with both types of interest, fixed and variable If the economy is doing well, for instance, and consumer spending is up this increases the likelihood the Reserve Bank will increase rates therefore consumers entering into a mortgage at this time will be more likely to select this type of interest. By fixing when the economy is running smoothly and interest rates are cheap you will protect yourself from credit crises and volatility. Unfortunately, most Australians fix when rates are high because they fear that rates are going to go higher! Of course the opposite is true if economic growth is sluggish. During slow growth periods, the RBA will reduce rates to stimulate spending and consumers will therefore be more inclined to enter into a variable mortgage. Variable loan holders enjoy the benefits of rate reductions, as well as the strain of a rate increase and for a loan with a life of around 20 years or more this can be a difficult decision for borrowers. Did you know? It is worth noting with the current environment there is also the potential that the RBA will potentially drop its cash rate again sub the current 2% but we may find due to the imposed capital requirements set on lenders those rates discounts may not be passed on. Read Slide advantages Read Slide disadvantages You would not fix your rate if you are planning to: Sell your property, Make a large lump sum repayment, Refinance your home loan,
- Break fee - slide Traditionally, fixed rate loans lack the flexibility offered by other home loan products. However, with new products coming out in the market, some of our fixed rate loans now offer features such as: Extra payments without penalty Redraw facilities100% offset facilities Low or no monthly account keeping fees Interest only repayments It is important to remember that fixing your rate means commitment for a period beyond anybody’s prediction. To some extent it is a gamble but at the very least fixed rate loans provide insurance against interest rate rises that might put your home at risk. We recommend that you always keep your financial goals and priorities in mind when making a decision on your home loan and seek independent financial advice before fixing the rate on your home loan.
- Variable home loans on the other hand, provide you with more flexibility. Talk to slide If the Reserve Bank announces a rate cut, your loan payments are likely to be reduced – although not always to the same extent as the official rate cut, as we have seen over the past few years. You can also make extra repayments, which can help you pay off your loan more quickly. But if rates rise, so will your repayments – and generally by the full extent of the RBA’s increase. If rates rise dramatically, you may find yourself having trouble making repayments. These days we generally know through the media the Reserve Bank’s decision on whether to raise or lower its cash rate generally feeds into the mortgage rate they pay. Only the variable rates that are affected by this decision and the detail can also be found by the . Discounting Advertised rate is not always the best rate and our finance managers can assist here. Generally discounting has come off Investment lending although banks are very keen to build O/O lending to assist in building the ratio of investment to O/O Combination lending of Investment and O/O can attract consideration although we need to consider the risk of cross securitisation as a strategy and we will discuss this further tonight. Comparison Comparison rates It is difficult to compare home loans that have different interest rates and fees. This is why credit providers must give a comparison rate when they advertise a rate or a weekly payment for home loans. The comparison rate includes the interest rate or weekly repayment amount, plus most fees and charges. It is important to be aware of the scenario used in a comparison rate as they are generalised. For example, you may see a loan advertised as: Variable interest rate 4.95%, comparison rate 5.28% - based on loan of $150,000 over 25 years. While this comparison rate reflects the true cost of this example loan, it would be a completely different figure for a loan size of $500,000, or for a loan term of 30 years. This is why your Finance Broker will be able to review your scenario for an accurate consideration of rates and fees applicable.
- Rate… Slide … spaghetti On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest margin which most banks report quarterly, represents this spread, which is simply the difference between what it earns on loans versus what it pays out as interest on deposits. This of course differs for every Lender and therefore at different times the difference will vary so ABC may be cheaper than XYZ today and XYZ may be cheaper in six months This, of course, gets much more complicated given the dizzying array of credit products and interest rates used to determine the rate eventually charged for home loans. Term vs property turnover… slide Strategy of hold or turnover for renovators or those in increasing value markets as example Split vari / fixed if fixed is desirable but want to pay extra
- Discounting Advertised rate is not always the best rate and our finance managers can assist here. Generally discounting has come off Investment lending although banks are very keen to build O/O lending to assist in building the ratio of investment to O/O Combination lending of Investment and O/O can attract consideration although we need to consider the risk of cross securitisation as a strategy and we will discuss this further tonight. Special Real-estate Investar and Anne Street Partners offer St George and many others offer Additional $500 from REI & ASP
- Through a changing portfolio what we start with as a home and lending scenario may well be requiring different consideration as it grow. What is loan structuring? Creating the best possible scenario for your property portfolio and it s debt. There are three areas in which a loan and its underlying asset can be structured. The actual loan type chosen, the asset ownership structure and borrowing entity, and how equity in existing properties is utilised. The correct loan structuring advice can increase the tax effectiveness of your loans, help protect your assets, and can make restructuring your loans when your circumstances change easier Interest rate savings (Brabham) At ASP, we can suggest loan structures that we think will be the most effective for any given scenario. We will often work with our clients’ other trusted professionals to determine the best outcomes for our clients. Choosing the right loan type and features Should you go for a line of credit, an interest only loan, a loan with a 100% offset account, a plain old principle and interest loan or something else? The truth is for the most simple of borrowing situations it probably doesn't really matter that much. However once your affairs become more complex or you are planning to acquire multiple properties in the future it does start to matter. This is where some good advice upfront can potentially save you many thousands of dollars in the future. Many a time we see borrowers, other brokers and bank managers focussing their energies on the specifics of a loan itself such as small differences between lenders fees and interest rates. Instead they should be looking at the bigger picture first then the product second. As the example below shows choosing the right product can end up saving you considerably more than a potentially small difference in interest rate between two loans. That is not to say that we can't get you both the right product and the best rate, often we can, however it pays to keep focussed on ones strategy first not the best rate offered today. An Example of choosing the right product: Interest only loan with offset account An effective structure would be to use an interest-only loan with a mortgage offset account. The strategy would be to funnel any repayments above the minimum required on the interest-only loan into the offset account. This would do three things: Having funds accumulating in an offset account reducing interest due This may be compared to a standard principle and interest loan, and provided they paid at least the difference between the interest only and the principle and interest repayments into the offset account each month. In the future when the property becomes an investment, they would have a loan for the same amount as initially borrowed and on which the interest charged would be fully tax deductible. This is opposed to if they had made repayments off the principal of the loan reducing the amount. This would then mean the loan balance and therefore interest claimable would be less. Any funds accumulated in the offset account could at that point be used towards the next purchase. In summary, this structure works for the borrower as they have not be penalised by paying any more interest on their loan than they would have if taking a more traditional loan. And they have maximised their future tax deductibility for when their property becomes an investment. For any given scenario there is usually a correct loan product to choose. 2. Loan structuring for asset protection Standard all parties on the loan equally and severally liable Title in one name with a guarantor scenario The loan could then be set up in joint names if allowed by the chosen lender, or if not allowed the non-owner could act as a guarantor for their partner if needed. Owning via a trust A trust is an arrangement which allows a person or company to own assets on behalf of another person, family or group of people. These people are known as the beneficiaries of the trust. Assets are owned on behalf of “beneficiaries” and are controlled by a “trustee” who can be either a corporation or a natural person. The trustee is governed by a “trust deed” which sets out the rules that the trustee must follow. It also covers how profit is distributed to the beneficiaries. There are a few different types of trusts, but not all are accepted by lenders. We recommend you speak to your finance professional 3. Loan structuring for investors Most investors use the equity in one or more properties to allow them to purchase another. We believe that great care should be taken in how these loans are structured. The key here is to maintain portfolio flexibility to enable growth and change within the properties
- 2. Loan structuring for asset protection Standard all parties on the loan equally and severally liable Title in one name with a guarantor scenario The loan could then be set up in joint names if allowed by the chosen lender, or if not allowed the non-owner could act as a guarantor for their partner if needed. Owning via a trust A trust is an arrangement which allows a person or company to own assets on behalf of another person, family or group of people. These people are known as the beneficiaries of the trust. Assets are owned on behalf of “beneficiaries” and are controlled by a “trustee” who can be either a corporation or a natural person. The trustee is governed by a “trust deed” which sets out the rules that the trustee must follow. It also covers how profit is distributed to the beneficiaries. There are a few different types of trusts, but not all are accepted by lenders. We recommend you speak to your finance professional 3. Loan structuring for investors Most investors use the equity in one or more properties to allow them to purchase another. We believe that great care should be taken in how these loans are structured. The key here is to maintain portfolio flexibility to enable growth and change within the properties
- What is “cross collateralised” security? Cross collateralisation is the term used to describe when two or more properties are used to secure one or more loans by the same lender. When you have loans cross collateralised, the lender in question is securing the aggregate of all your borrowings with the aggregate of all your security. If an investor wanted to acquire a property using the cross collateralisation method, they could structure as per the following example. Stand Alone When the stand alone structure is the best option We always recommend that our clients do the stand alone method if possible. The reason for this is that untangling a series of crossed collateralised properties can be very difficult. It can also mean the borrower loses control of their affairs and can expose them to unnecessary risk. As an example, say an investor has 5 properties all tied together as security for various loans and decided to sell one of their properties. Lenders can require the following to happen. The other 4 remaining properties would have to be valued to see if the security for the remaining loans will be sufficient. If it wasn’t, the lender can demand all sale proceeds be used to reduce the overall debt. In extreme cases a lender may even not allow the sale to go through. Some lenders require a full reassessment of a borrower’s financial position to see if they can still afford the remaining loans. This can come at an inconvenient time for the borrower. If the remaining loans are not affordable according to the lender, they can as above demand the entire sale proceeds are used to reduce the overall debt level. In extreme cases, if the lender takes the entire sales proceeds and they are still satisfied that the remaining loans fit within their policy, it may trigger a default. In this case a lender could force a borrower to repay all their loans immediately. In practice this would mean having to liquidate their entire property holdings, including possibly the family home, or repay the debt in full by refinancing to another lender (which might not be possible). Most lenders will require new loan and mortgage documents to be issued. While this in itself is no big deal it can be a hassle! By keeping all properties as stand alone, the investor can sell any property at any time and pay out only the loan or loans secured by that particular property. There is no need to complete a reassessment of your “position” with the lender, and also no need to do valuations on the remaining properties. Importantly, the investor dictates what happens to the net sale proceeds. Stand Alone or Cross Collateralisation? When stand alone is not the best option Occasionally it is just not practical to have properties structured as “stand alone”. This would occur when an investor didn’t have sufficient equity in single properties to make the required deposit for the next purchase. They may have enough equity in two or more properties, but may not want multiple loans. In that case “crossing” may be the best option.
- What are “all monies” mortgages? “All monies” is the term that refers to the fact that many mortgages do not relate to a specific loan amount advanced, but to all monies owed by a borrower to the lender. Therefore, even if an investor chooses to use the stand alone method to structure their loans, if all their mortgages are with the same lender they are still exposed to the “all monies” clause if something goes wrong. In fact the lender in question can make a call on any or all of the borrower’s assets. The only way to protect against a lender making a call on a property (even if they don’t hold the mortgage) is if the property in question is mortgaged to another lender. This effectively locks them out. Offset loan An interest offset account is a transaction account that is linked to a home or investment loan. Most offset home loan accounts these days offset all of the funds in the offset account against the linked loan. As an example the loan balance of $300,000 is offset by the balance of the offset account which is $5000. So in this scenario when the daily interest is calculated by the lender on the home loan the interest will be calculated based on a net balance of $295,000. Another way to think about an offset home loan is to think of the offset account as a transaction account within your home or investment loan. Having funds in the offset account or paying those funds into your loan itself has the same effect on the interest you are charged. Having the funds in the offset account however allows you to use the funds like you would with a normal bank account.as we discussed earlier Flexibility Spreading your exposure If you have multiple properties and loans we recommend you have at least 2 main lenders. The reason for this is for risk mitigation purposes. It may be easier to have all your loans with one lender but if you ever get into financial trouble it will be in your favour to have two or more lenders. A good strategy would be to have one lender for your home loan and another for all your investment loans. Strategy to avoid outgoing lender delay It’s not just about rate: What are Australia's Investors top reasons for refinancing? Rate opportunity especially where loans have not been reviewed recently Restructure of lending through portfolio changes Restructure for greater effectiveness Additional security acquisition Security improvements There are also other scenarios you might find yourself in when deciding whether or not to refinance, including: Consumer debt consolidation Poor debt behaviour As we know, refinancing isn't as simple as finding a better interest rate. Refinancing comes down to the costs, so you should work out if these are outweighed by the potential benefits. Pertinent to consider what is the true cost of refinancing? Estimates about the cost of refinancing vary between $500 to over $3,000, so you should ask your current lender, as well as your potential lender what costs you'll be up for before considering refinancing. Note that the costs below are indications only and do not take into account your personal situation. Fees charged by your current lender Discharge fees up to $400. Exit fees (these now only apply to fixed rates and loans entered into before July 2011). Registration fees. Fees charged by your new lender Application fees up to $600. Valuation fees up to $300. Settlement fees up to $300. Legal fees up to $150. Lender's Mortgage Insurance, even if you've paid it for your current lender. Refi rebates are popular with lenders
- The bank’s assessment of a property’s value A bank valuation is not the same as the market value A bank valuation will nearly always be less than the market value. This is because they’re not the same thing. We use a bank valuation to work out how much we might get if we sold the property. We’ll only sell your home if you’re having serious trouble with the loan or you’re really behind with your mortgage repayments. This may sometimes be for a lower amount than you’d ask for. On the other hand, the market value of your property is how much you’d get if you sold the home yourself. When you’re selling, you can generally watch the market, wait until the time is right and get the price that you want a competitive price that matches similar properties in your area. Desktop valuation Desktop valuation is a term used to describe a limited (and sometimes fully automated) process of estimating the value of a property. Most notably, desktop valuations are a type of appraisal that does not involve a physical inspection. These types of real estate appraisals are typically used for residential properties, located in relatively stable neighbourhoods with a sufficient number of recent and comparable sales. It is assumed, among other things, that the home is in reasonably good condition. The loan LVR is less than 80% and the application services comfortably Drive-by appraisal A value estimate made without examining the interior of a property. Full valuation A value estimate made with examining the entire property. Key for investors is meeting Tenant availability and ease of contact for access. Note: Property appraisal and property valuation are not inter-changeable terms, and when dealing with property, it’s important to understand what each means, and when it is applicable. Most simply put, a valuation involves a formal process and may have a legal standing, whereas an appraisal is informal and not legally binding. Property Appraisals – Educated Guesswork A property appraisal is an estimate of price, usually given by a real estate agent. The agent uses their knowledge of the local area and recent sales in that area, to provide a guide as to the price that might be obtained for a particular property. There is an inherent bias in appraisals, as they are usually requested by potential vendors, and so higher values are likely to be suggested. Appraisals are an opinion, are generally free and have no legal standing. Property Valuations- Systematic process A formal property valuation differs from an appraisal in that it determines the actual value of a property from an independent and impartial point of view. It’s a complex process, and in most Australian states a formal valuation can only be provided by a qualified valuer who has undertaken the necessary education and training. This provides some security that all factors relevant to the particular property are adequately considered. A written report will be produced, and a fee charged. The bank’s credit criteria (such as the percentage of the property’s value they will lend you) The bank’s borrowing capacity (how much you can afford to borrow) Make sure your loans aren’t cross-securitised
- Revaluing all properties Realise that revaluing all properties at the same time might not be best. Different types of property and locations improve at differing rates and times As we are aware our markets fluctuate nationally and flexibility of a multi property portfolio is attain with planning and market monitoring. If we were value a Sydney property today we would expect sound growth in recent times where as a Perth security will be stable if not slightly decreased over recent time. Improving valuation potential I am not going to cover areas such as painting and decorating but simply suggest what a Valuer may find a positive consideration. Where practical make sure your property is clean and well-presented when the Valuer inspects it. Have that access be simple where practical through ease of tenant communication and access times. Where practical provide a list of unseen improvements such as water softeners, a/c types, IT fixed instillation or quality fittings. Realise that valuations can be unpredictable at times. Your ASP Finance manager can assist in providing estimation guides to assist in planning.
- Different lenders use different models for assessing how much a person can afford to borrow. Often it is possible to maximise your borrowing capacity by using certain lenders in a certain order. Be it Bank Major (ANZ, CBA, WBC & NAB) or Second tier (Suncorp, St George Bankwest or ING as examples, Building societies, Credit Unions we can also consider a mortgage manager, or non-bank lender. A Non Bank lender sources funds from those Australian finance wholesalers who do not have a retail presence. Non-bank lenders can often offer more competitive rates because they specialise in mortgages, they are not subsidising less profitable businesses and they do not have high overheads of bank branch networks. Easily accessible through our finance management team we can review the range APRA As previously mentioned all lenders will be impacted generally by Capital raising through APRA guidelines but what will become apparent are those generally not effect with higher levels of Investor exposure. Appetite vs risk Risk management is about understanding and managing the Bank's risk environment and taking measures, where necessary, to ensure those risks are contained to acceptable levels consistent with the Bank's risk appetite. The Bank has a very low appetite for credit risk. The Bank manages this risk carefully by applying a strict set of criteria. Whilst we are aware the Banks are taking controlled approaches they are in the money lending business, they key for investors is ensuring you are able to define the best opportunity for your portfolio and that is where a investor experienced Finance Broker is key to work through the myriad of polices and products.
- Exposure Exposure that can exclude an application from a lender may well be how much they have already ready lent in an area such as postcode or even within a prescribed development. In WA as an example the North West mining towns are generally an exclusion right across the board at high LVR even done to 60% due to the changes in the mining infrastructure and reduced housing demand. Additionally a lender my consider a multi dwelling construction of say 100 units where they will apply a level of exposure within the development of as an example 20”%, if your application takes it over the limit although a strong application it may be declined. Policies We are time restricted to be in-depth on policy is but are able to identify the key areas a lender does consider The five key elements a borrower should have to obtain credit also referred to as the 5 C’s Character When lenders evaluate character, they look at stability — for example, how long you’ve lived at your current address, how long you’ve been in your current job, and whether you have a good record of paying your bills on time and in full. If you want a loan for your business, the lender may consider your experience and track record in your business and industry to evaluate how trustworthy you are to repay. Capacity Capacity refers to considering your other debts and expenses when determining your ability to repay the loan. Creditors evaluate your debt-to-income ratio, that is, how much you owe compared to how much you earn. The lower your ratio, the more confident creditors will be in your capacity to repay the money you borrow Capital Capital refers to your net worth — the value of your assets minus your liabilities. In simple terms, how much you own (for example, car, real estate, cash, and investments) minus how much you owe. Collateral Collateral refers to any asset of a borrower (for example, a home) that a lender has a right to take ownership of and use to pay the debt if the borrower is unable to make the loan payments as agreed. Some lenders may require a guarantee in addition to collateral. A guarantee means that another person signs a document promising to repay the loan if you can’t. Conditions Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. If the borrower is a business, the lender may evaluate the financial health of the borrower’s industry, their local market, and competition. Some lenders develop their own loan decision “scorecards” using aspects of the 5 C’s and other factors. Example: borrower’s credit used vs. credit available. Access Direct to Lender – single product brands limited comparison Online – as direct with the added complexity of online quirks and limited assistance for specific scenario assistance Or the professional knowledge via an experienced Finance Broker to assist in unravelling the detail, opportunity identifying the best structure, and management through a sometimes complex transaction.
- Advantages of being with one lender: Upfront and ongoing fees are likely to be lower. Time taken to get an application for a new property will be less. Discounts are likely to be higher. Management and moving deposits and redraws between accounts is simpler and faster as everything is in the one spot. You are a “bigger” customer and therefore should have better on your deals, however that really comes down to your ability or your advisers ability to negotiate coupled with the size, attitude and mood of your lender. Disadvantages: You extend the power of your lender over you and your decisions. Adding or removing one property affects your whole portfolio. All monies policy implications The financial health of one property can affect your whole portfolio. One small change, like selling, can trigger multiple valuations and with that, multiple valuation fees. Changes to policy may effect all lending In considering changes of Lending it is better to prepare than to attempt a wholesale change when also wanting to perfom an aquistion transaction
- Income PAYG Self employed Probation Casual – Part time Contractors Professionals – Medical, Legal, Accountants, Mining Engineers & other high income Allowances & benefits Rental As a general rule, lenders will take 80% of your gross rental income along with other income, such as your salary, to calculate your borrowing power. The reason lenders use only 80% of your rent is that they assume that 20% of the rent you receive will be used to pay for managing agent’s fees, council rates, strata levies, repairs and to cover for any vacancies. Not all lenders assess your rent income in the same way. Some will only use 75% of the rent, and some will not apply tax to the rent while others will. We commonly help professional investors who have 10 to 50 investment properties and want to grow their portfolio. There are two ways that we can help professional investors to prove their income and continue expanding their portfolio: 80% of Rent Income Method: This is the standard method used by most banks to assess rent income. One of our lenders can accept 100% of your rental income if you’re not reliant on negative gearing (positively geared investors only). Tip: Family tenants Many investors decide to buy investment properties close to their own home and then to lease them out to their extended family. By keeping it in the family you can reduce your risk of having troublesome tenants and enjoy having your family close by. Unfortunately, many people who rent to their family have a hard time proving the rent income that they earn as there is no managing agent and often no formal tenancy agreement in place. Servicing Calculation
- Negative or positive gearing If you are thinking about borrowing to invest you need to understand if the investment will be negatively or positively geared. Negative gearing Negative gearing is when your income from an investment (such as dividends or rental income) is less than your interest and/or other expenses. If you negatively gear your investment is initially making a loss which you hope you will make up with a capital gain when you sell your investment. A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. Remember, you are only reducing your tax because the income from your investment isn't covering your expenses. You will still need to cover the negative cash flow from other sources. Positive gearing Positive gearing is where your income from an investment is higher than your interest and/or other expenses. This means you will have extra money in your budget but you will have to pay tax on the additional net income. In particular, many lenders differ on the way they assess gearing benefits and the assessment rates they use to calculate the impact of your current debt commitments. Investment properties often have higher ongoing costs than the actual rent income will cover. These costs include: Property management Repairs and maintenance Interest on your mortgage Council and water rates Strata fees In addition to this you may have such non-cash deductions as the depreciation of the building, an expense that is included in your tax return but is not actually a cost that you physically pay. The ongoing cost of holding the investment property may be deducted from your taxable income and confirmable by your tax professional. Buffers During the life of a loan, interest rates will rise and fall and when lenders assess a borrower’s loan application, they do so based on an inflated interest rate, as it gives both the lender and the borrower confidence that the loan repayments can be made without undue hardship. All lenders assess a loan application using their own mortgage assessment rate, which is a buffer they add into the interest rate. It can be anything from 1.0% to 2.5% above the variable rate and it allows them to assess your ability to repay the loan, should the Reserve Bank cash rate rise, causing a mortgage interest rate increase during the term of your loan. The mortgage assessment rate varies between each lender, which means that when you apply for a loan each lender will offer you a different loan amount. Added to this, lenders will use different mortgage assessment rates for each of their own loan products generally the assessment rates are in the vicinity of 7 -8%. Existing debt Assessed at rate paid yet buffers may be added in near future. Credit cards are usually taken at 3% of their limit and some lenders still consider not applying credit card consideration where it is proven the card is cleared monthly. This works very well where utilised with an offset strategy of paying through the card for usual living expenses applying maximum daily offsetting to the loan and clearing it monthly.
- COS considerations Use your SMSF to borrow to purchase residential investment property in Australia. Suitable for Australian residents with an established SMSF as well as those planning to establish a SMSF Loan amounts from $100,000 to $2,000,000, giving you the potential to acquire property worth more than your SMSF's available cash funds Use rental income to assist with repayments A limited recourse loan where the amount recoverable on default is limited to the secured property itself, and all other assets of your SMSF are protected Choice of repayment types - principal and interest, or interest only Flexible terms from 1 to 30 years (interest only - maximum 15 years) At the end of the interest only term, repayments automatically change to principal, interest and fees for the remainder of the contract term Rates variable, fixed and combination loans (fixed and variable) available. Section 67A contains an exception for certain limited recourse borrowing arrangements (LRBAs): Borrowing is for acquisition of single acquirable asset Acquirable asset is held on trust with trustee acquiring beneficial interest Trustee has a right to acquire legal ownership after one or more payments Upon default, lender’s rights are limited to rights relating to the acquirable asset (personal guarantees) A different focus to mainstream property investment Features may differ from standard investment lending where features like split loans may not be available.
- Your SMSF selects a investment property to purchase, then appoints a property trustee to purchase the property on its behalf. The SMSF applies for the SMSF Investment Property Loan. The property trustee pays the deposit and exchanges contracts. If your loan is approved, at settlement the property trustee mortgages the property to the Lender who advances the loan. Your SMSF trustee pays all legal costs and stamp duty. Your SMSF collects rent, pays the usual outgoings on the property and makes the loan repayments. It manages the property in the same way as any other real estate investment. Personal contributions are acceptable to most lenders. The property is held in trust for the SMSF by the property trustee and once the loan is repaid, the legal title may be transferred from the property trustee to the SMSF, or the property may be sold. The rules around borrowing through an SMSF are quite complex so you should speak to your financial planner and professional tax adviser before deciding whether to borrow in order to invest within your SMSF.
- Newly Developing Areas Potential sound opportunity to buy in early Valuation challenges Previous Sales data lacking New infrastructure not considered Does the area have a diversified economy? • Is the area near the coast? • Does the area have good infrastructure and transport? • Does the area have stable employment? • Does the area have a decent population size? • Does the area attract a wide demographic? • Is the property size less than 10 acres? • Have there been multiple recent sales in the area? • Is the property away from flood-prone and bushfire-affected areas? • Have you considered the policies of a range of lenders and mortgage insurers? • Will you be financially stable if you struggle to get a tenant for a number of months? • Will you be financially stable if major industries pull out of the area and the property takes a hit in value?
- ASP Services to be inserted
- Discounting Advertised rate is not always the best rate and our finance managers can assist here. Generally discounting has come off Investment lending although banks are very keen to build O/O lending to assist in building the ratio of investment to O/O Combination lending of Investment and O/O can attract consideration although we need to consider the risk of cross securitisation as a strategy and we will discuss this further tonight. Special Real-estate Investar and Anne Street Partners offer St George and many others offer Additional $500 from REI & ASP