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property lending

Tighter lending restrictions on the way

Tighter lending restrictions will be introduced within two months, as announced recently by Federal Treasurer Josh Fyrdenberg. Australia’s financial regulators are expected to restrict the size of new loans, with expectations that borrowing capacity could soon be capped at below six times the borrower’s income.

The changes raise concerns after many borrowers have taken out loans larger than six times the size of their income as property purchasers attempt to keep up with sky-rocketing prices.

It has never been a better time for buyers and investors to take out a loan with interest rates at record lows, however, the focus is on whether borrowers will be able to service this debt once interest rates begin to rise and we move into ‘COVID normal’.

According to the Australian Purdential Regulation Authroity (APRA), high debt-to-income (DTI) ratios are those over six times the applications gross taxable income. Currently, 22% of all new lending applications in the June 2021 quarter were more than six DTI, which is a 50% increase from June 2020, where only 11% of total applications were greater than six DTI.

Statistics show that Australians on average are earning a yearly salary of $83,000 meaning if borrowers were limited to six times their income, they could only borrow just over $500,000.

When looking at the average price of residential properties in Australia, the Domain median national house price is $955,927. The new borrowing cap will mean the average Australian would be priced out of all major capital cities.

It’s expected these DTI limits will impact investors with existing property portfolios and first home buyers trying to maximise their borrowing capacity the most. Although we may see some leniency for first home buyers as the intention behind introducing these DTI limits is to curb speculative investment rather than hamper affordability for first home buyers.

APRA has tightened lending standards twice in the past and on both occasions the property market proceeded to fall 2-8% in the following 12 months, indicating a similar fall in growth may come in 2022.

As a result of the new lending restrictions, it is expected that the local and national housing price growth will slow from 20% in 2021 to 7% in 2022.

 

If you have any questions regarding the new lending restrictions, or would like assistance securing finance, please give us a call on 03 5434 7690 or email endeavor@endeavorbendigo.com.au

first home owner

Client stories in the 2020-21 financial year

Over the past 12 months we have worked side-by-side with many clients to support them in making life changing purchases. We get satisfaction out of securing finance to fund purchases that will never be forgotten.

Below is a review of just some of the people we have helped over the last year and a summary of how we assisted them in securing their new property.

Having the right mortgage advice from an honest adviser makes what can be a daunting process a walk in the park. If you would like assistance in securing finance to fund your next property purchase or refinance please give us a call on 03 5434 7690 or email endeavor@endeavorbendigo.com.au

 

Eloise

Eloise settled on her first home after we assisted her with securing finance and navigating through the range of First Home Buyer benefits available at the time. The First Home Buyer Stamp Duty exemption allowed Eloise to save $15,000 on stamp duty for the purchase of her established home.

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Jake and Laura

We assisted Jake and Laura at the end of 2020 to purchase some vacant land. The couple then begun their build which is now complete. Exciting times ahead! They were able to take advantage of both the regional First Home Owners Grant of $20,000 and the $25,000 New Home Builder Grant which were available at the time.

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Erin and Ryan

Erin and Ryan settled on the purchase of their first home in the middle of this year. This was particularly exciting as we were able to secure them the $20,000 regional First Home Owners grant, even though the house was already built. Pretty good perk for new eligible properties, particularly when you can move in straight away.

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Tom

When Tom’s parents decided to move interstate he couldn’t pass at the opportunity to purchase the house he grew up in! Often when a sale happens between family members, the State Revenue Office (SRO) will not allow for the first home buyer stamp duty waiver if the house is sold under market value.

We worked with Tom, his parents and the SRO to ensure the house was purchased at a price which would allow for Tom to still be eligible for the stamp duty waiver.

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Albert and Quynh

We assisted Albert and Quynh by working through their borrowing power and arranged finance prior to attending an auction in a hot market, allowing the newly engaged couple to bid with confidence. Being prepared before the auction proved useful given their complex self-employed income and existing investments.

The couple were successful in winning the auction, a good result for all involved!

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McKinley Builders

Working with McKinley Builders involved “owner builder” which many banks aren’t comfortable with even for self-employed licenced builders. This also involved bridging finance which allows clients to build and move in to their new house before selling their existing house.

Better than living in a rental while you build and needing to move twice!

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Tom

We guided Tom through the regional Victoria $20,000 First Home Owners Grant and also the $25,000 Home Builder grant to help him finance his new home. He was referred to us by his employer, McKinley Builders, who are in the story above.

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Dill and Georgia

We helped Dill and Georgia take advantage of both the regional Victoria $20,000 First Home Owners Grant and the $25,000 Home Builder Grant. The couple were referred to us by their accountant as Georgia had become newly self-employed.

We worked with her and formed a plan of attack and timing for her and Dill to get their build off the ground.

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Hayden and Tilley

We helped Hayden and Tilley take advantage of the regional Victoria $20,000 First Home Owners Grant as well as the $25,000 Home Builder Grant. The couple were referred to us by their friends Georgia and Dill, the clients in the story above. They recommended Hayden come and talk to us, and we also later found out that we had been recommended to Tilley by one of her colleagues who is also an exciting client! So they knew they were in good hands.

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Chasing yield in a low interest rate world

Low interest rates and unsettled sharemarkets make the chase for yield a challenging prospect. Yield is important, particularly for those approaching or already in the retirement phase as maintaining capital and enjoying a steady income stream are the two key factors to provide for comfort in the years ahead.

But how can you get a decent return when the cash rate is only 1.5% and the interest rate on many traditional fixed interest investments is not much better?

According to Canstar, fixed term deposits are offering an average of 2.69% for one year and 2.87% for five years.i While it is above the inflation rate of 1%, it’s still modest.ii

Of course, there are other conservative investments such as government bonds but even these offer only low returns. According to Bloomberg, 2-year government bonds have a yield of 1.59%, five-year 1.74% and 10-year 2.11%.iii

Corporate bonds

Corporate bonds generally offer better returns than government bonds, term deposits or cash because they carry a higher risk. With corporate bonds, you are lending money to a business in return for interest payments compared with shares where you become a part owner of the company. You can buy the bonds via a prospectus, but these days many are traded on the ASX.

You can currently get yields of around 2.75% for high quality, lower risk corporate bonds, however if you already have exposure to company shares on the market, then adding corporate bonds to your portfolio may reduce your level of diversification.

It is also worth considering investments such as hybrids, which have characteristics of bonds and shares, hence the name. You can currently get a yield of up to 6% in hybrid issues from household name companies including the major banks, ultilities, retailers and insurers.

As an alternative to selecting individual bond issues, a professionally-managed bond fund offers the opportunity to invest in a diversified portfolio of corporate and government bonds and cash.

Good returns from shares

Shares continue to be attractive for investors looking for regular income. The average dividend yield for listed companies is 4.2%; with capital growth, total returns are above 9%. In the latest reporting season some $24 billion was paid out in dividends from Australian listed shares.iv

One key advantage of shares is dividend imputation, where you may actually end up with a cash rebate on the tax that has already been paid by the company.

Stocks such as banks and telcos are often viewed as good sources of yield although concentrating your investments in one or two sectors reduces diversification and increases risk.

Similarly, focusing exclusively on yield may mean that your portfolio is not as diversified as it should be.

Property options

Residential investment property has featured as a major source of investment returns in recent years, but with house prices high and rents tightening the yield has been falling. Add to this the lumpiness of an investment in property – you can’t just sell the kitchen if you need quick cash – and property may carry increasing risk.

Commercial property may be a better option given that in the year to March the average annual return was 14%.v

As an alternative to direct property, listed Real Estate Investment Trusts (REITS) invest in a diversified property portfolio and can be bought and sold on the sharemarket. Since March they have performed quite strongly.v

The hunt for a decent yield in a low interest world is likely to be a feature of investment markets for some time. But your investments, and particularly those that constitute your retirement strategy, should be a long-term plan. Chopping and changing asset classes to try and get a good yield can prove costly.

Call us to discuss the best income-producing investments for your needs.

i www.canstar.com.au/term-deposits/the-current-term-deposit-environment/

ii www.tradingeconomics.com/australia/inflation-cpi

iii www.bloomberg.com/markets/rates-bonds/government-bonds/australia

iv www.commsec.com.au/content/dam/EN/ReportingSeason/August2016/ CommSec_Reporting_Season_August2016_Dividend-windfall-24billion-to-be-paid-out.pdf

v www.afr.com/real-estate/commercial/investment/commercial-property-the-top-investment- in-the-year-to-march-20160517-goxj63

Using tax for effective property investing

With Australian property remaining expensive and banks tightening their lending criteria, investors need to ensure their property investments are a financial success.

A key element is maximising the taxation benefits flowing from your investment. This includes correctly structuring the loan and ensuring your deduction claims don’t fall foul of the tax man.
Getting the structure right

As with any investment, having the correct ownership structure for a property asset is vital and can make a big difference to your tax benefits. For example, couples negatively gearing their investment property loan usually find it best to have a larger ownership percentage in the name of the higher income earner.

On the other hand, with a positively geared property, it may be better to have the lower income earner holding a larger ownership percentage. If the property is held jointly, all rental income and losses must be split in line with the ownership percentages and detailed records maintained to substantiate all claims for tax deductions.

Also consider whether either partner expects a career change that will affect their future income, as changing ownership structures down the track can be costly.
Managing the loan

Once the investment property loan is set up, there are more tax issues to consider. Property investors can only legally claim a tax deduction to the extent the borrowed funds are used for income producing purposes, regardless of the security offered to obtain the loan.

In cases where the loan monies are used for both private and income producing purposes (such as a property partly used for rental and partly as your home), you must split all expenses into deductible and non-deductible amounts.
Watch your deductions

Many property investors focus on tax deductions, but care is required as the rules are complex. For example, if you make extra repayments on your investment loan and then use the redraw facility to obtain money for private purposes, you cannot claim a deduction for the interest attributable to that money.

Normal tax deductions for a rental property include the cost of advertising for tenants, professional property management, interest, council rates, land tax and strata fees, building and landlord insurance, pest control and accounting fees. These costs, however, can only be claimed when the property is tenanted or available for rent.

Other points to watch include claiming a deduction for loan establishment fees. This must be spread over the term of the loan or a five-year period, whichever is shorter. If you claim travel expenses for inspections, the main purpose of the trip must be to visit the property; if there is a private portion all expenses must be split.
Depreciation or capital works?

Claims for depreciation, or the decline in value of assets with a limited effective life (such as freestanding furniture, washing machines and TVs), can be made each year, but deductions for any capital works must be spread over 40 years. Capital works include improvements or alterations such as removing an internal wall or replacing capital equipment such as old kitchen cupboards.

Investors need to be careful when claiming for the cost of repairs to their property. These are immediately deductible, but improvements such as replacing a damaged laminated kitchen bench top with a granite one must be claimed as capital works expenditure.
Check your CGT

CGT is another tricky tax area, but the key to minimising your bill is to ensure you identify all legitimate expenses that contribute to the cost base of the property used to calculate any capital gain.

The cost base includes the price paid for the property plus buying and selling costs like stamp duty, legal fees and the agent’s commission. Rental properties owned for more than 12 months attract a 50 per cent discount on any capital gain.

To ensure you are making the most of the tax rules relating to your investment property, call our office today on 03 5434 7690.

Property: Rent, buy or invest?

Buying a home has been heralded as the way to get ahead for generations of Australians. But with housing affordability a rising concern for would-be first home buyers and their parents, many younger Australians are beginning to weigh up whether it’s better to buy, rent or invest in residential property.

Despite record low interest rates, getting a foot on the property ladder has become increasingly difficult.

Against this backdrop, it’s hardly surprising that the proportion of first home buyers has fallen to less than 14% of all home buyers, the lowest level in more than a decade.ii

As the numbers of first home buyers fall, many younger Australians are focusing on buying an investment property instead. A recent survey by Mortgage Choice found 50.8% of investors who purchased a first investment property were 34 or younger, up from just 33.8% three years ago.iii

So which is best – buy, rent or invest?
Home sweet home

One of the best arguments for buying a home is that it forces you to save. Most of us find it difficult to save money today for long-term goals, but that is what paying the mortgage forces us to do. The pay-off is eventual ownership of an asset that enjoys favourable tax treatment when you sell or when seeking eligibility for the age pension and other means-tested benefits in retirement.

Unlike rents, which rise along with the cost of living, mortgage payments are fixed to the initial cost of the property and tend to fall relative to rents for similar properties over time.

Buying also provides the security of being your own landlord and the flexibility to renovate. After building up equity in your home you may choose to borrow against it to kick-start an investment portfolio.

On the downside, saving for a home deposit and transaction costs is a major hurdle for first timers. Ongoing costs for rates, maintenance and insurance can also be significant. While mortgage interest rates are currently at record lows, buyers also need to factor in the possibility of higher rates over the term of the loan.
When renting makes sense

Renting has the potential to free up money to invest in assets with a higher return than residential property. For this strategy to work, your rent must be less than you would otherwise spend on mortgage repayments. You also need the discipline to invest the savings if you want to get ahead.

Renting rather than buying can be a profitable strategy when other asset classes provide higher returns. Yet over the past 10 years residential property has been the best-performing asset class with an average annual return of 8% a year compared with 5.5% for Australian shares. iv

While this is no guarantee of future performance, it helps explain why many would-be first home buyers are taking a new approach to the old rent or buy equation.
The middle way

First time buyers often find they can’t afford to buy in an area where they want to live. So to get a foot on the property ladder they continue living in rental accommodation – or at home with Mum and Dad – and purchasing an investment property.

The advantage of this strategy is that your tenants help pay off the mortgage. And unlike a home you live in, costs such as mortgage interest, repairs, rates and insurance are tax deductible.

At the end of the day, the decision to buy, rent or invest will depend on your personal financial situation, the state of the housing and rental markets, the returns available on other investments and lifestyle. The important thing is to have a long-term housing strategy that won’t disadvantage you in later life.

If you or your children are weighing up whether to buy, rent or invest in property, give us a call on 03 5434 7690 to discuss the options in the context of your overall investment strategy.

 
ABS Housing Finance Australia, May 2016, 5609.0
ii Mortgage Choice, 2016 Investor Survey,17 June 2016
iii ASX Russell Investments 2016 Long-term Investing Report