AND… CAN THEY SAVE ME MONEY?

At property loan advisor we deal with a lot of enquiry when speaking and advising clients on what type of mortgage is suitable for them. The options appear to be endless and can be confusing. The key is to have a loan product that will help save you money, offer flexibility and help you achieve your goals.

THE OFFSET ACCOUNT

The simplest way to describe an offset account is a normal everyday transaction or savings account that is linked to your home loan. That means when the mortgage lender calculates the interest to your loan, they take the balance in your offset account off what you owe on your mortgage and apply interest on the reduced amount. So at the end of the month when interest is added, a lower amount of interest is added to the loan. These savings could be quite significant just for letting your accumulated funds and wages sit in your account.

The bank or lender may charge transaction fees, but most lenders will waive transaction charges on offset accounts altogether, they are more likely to charge a “package fee” for the loan, offset account and a credit card. Many clients like to have all of their salary paid directly into the offset account. This ensures that any income not spent is being used to reduce the balance of your loan. While receiving the interest savings you also have the flexibility to access your funds at any time.

The below example is based on one of our clients – they have $50,000 in their account and it offsets $50,000 on their loan account, having the effect of interest only being charged on $300,000 instead of $350,000. As you can see the savings are quite substantial and the clients have the ability to access the funds at any time they need to.

Albert Einstein said that compound interest is the eighth wonder of the world I am going to suggest that Mortgage Offset Accounts are the ninth wonder of the world! These accounts have so much flexibility and can save you lots of money!

THE LINE OF CREDIT

The simplest way to describe a line of credit is that it is like a giant credit card limit, secured by your home. This product has loads of flexibility, although … along with flexibility comes responsibility. Many of our property investor clients love the line of credit product as it is part of their overall strategy for growing a property portfolio.

For example, our client may own a home that is worth $500,000 and currently have a home loan of $300,000. Their goal is to buy an investment property. We can approach a lender to set up an additional $100,000 as a completely separate loan to the existing home loan of $300,000. The advantage of doing it this way is that you have loans set up with different purposes. The existing home loan can remain on a principal and interest loan and the second loan of $100,000 can be a line of credit loan and can be interest only. The line of credit can then be access for the deposit and cost for the purchase of an investment property. The other major advantage of having the loans split into this structure is that you keep your non deductable loans separate from your deductable loans. Check with your accountant if you are entitled to claim the interest on your line of credit.

Many people approach their existing lender with the goal of purchasing an investment property and they are offered an increase on their existing home loan and then they can access the cash through a redraw facility which I will discuss next. The problem with this loan structure is that your borrowings are not separate and when it comes time to tax time you may have destroyed a very nice tax deduction.

REDRAW FACILITIES

A home loan with a redraw facility allows you to borrow money you’ve already repaid and is usually offered with variable interest rate loans. It allows you to use any extra income or savings to reduce the balance of your loan, thereby reducing your interest repayments and “redraw” that extra money in the future should you need it.

Some lenders will limit you to as few as two redraws per year. Others will charge you up to $50 per withdrawal, and some even insist that you redraw a minimum of $2000. Check with your bank or mortgage broker for a redraw facility that provides you with maximum flexibility at minimum cost.

All three options will you to save money, getting the right advice on each facility will not only give you savings on your home loan but will allow you easy access to cash to help you with your goals.

Due diligence is everything when it comes to investing rental property. Check out the top 5 tips and strategies to help you grow your property portfolio.

1. Decide – Capital gains or rental return or both?

You need to consider whether you are chasing rental returns or capital gain. A rental return will help you pay off a property over time; Capital growth will allow you to use the equity to purchase future investment properties. You may decide to have a mix of both. It will come down to affordability. An experienced mortgage broker can assist with the ability to borrow.

2 Calculate the rental return

The very first step is to calculate the rental return on the property and ask yourself the question; does this meet my criteria for purchasing the property? Some people are looking to achieve a positive cash flow on the property others look for capital growth.  You can very easily do a “back of the envelop calculation” that requires finding out what the weekly rent potential is versus the value of the property.  If you want to achieve a 5% return you would look for a property where the rent is the same as the first three digits in the purchase price. For Example $400,000 house rents for $400 per week it is roughly a 5% return. In fact it is really 5.2% ($400X 52 ÷ $400,000) = 5.2%. Try it – it works! Given that interest rates are at an all-time low it becomes easier to seek a neutral or positive cash flow on the property.

3. What’s the property really worth?

It is really only worth what someone is prepared to pay for it. Statistical analysis will help; you can use RP Data or other vendors of data to offer comparisons. Things that can help your negotiations are how long the property is on the market for, where does the property “fit” with other properties similar to the one you are researching, has the vendor previously dropped the price. What is the condition of the property you are looking at? Bear in mind if you purchase a property that needs repairs this will impact your ability to borrow for that property. The bank may request to see that you have funds available to do repairs or decline the loan because it is not a good security risk for them.

4. What is happening in the local market?

1. Regardless of the statistical data when the valuer goes out to value the individual property, the fact is that the individual property is impacted by power lines, most people will view this as a health risk that they are not prepared to take. The majority of people may have trouble funding the property due to the adverse remarks that the valuer may add to the valuation report to the bank. Events such as murder or suicide that have occurred on the property will dramatically affect the sale and hence the value. Once a valuer makes comment on why the property is at a reduced sale price it will alert the banks to the risk and hence the ability to borrow, especially in mortgage insurance territory.
2. “I am looking to purchase a property in an area where all the other properties are listed at offers over $325,000. The property is 3bed, 1bath, 1car is perfectly fine condition the problem with the property is there are power lines running over rear of the property, which is the reason no one else is interested because it is well under what other properties have been selling for. A very similar property in the same street sold 2 months ago for $365,000.
3. You could take a market analyst approach and research everything online. However, in my experience the most definitive way is to visit the area yourself and burn some shoe leather whilst walking around talking to local real estate agents and neighbours of potential houses that you a looking to purchase. A perfect example of this was a young investor made enquiries about a property he was thinking purchasing.

5. Property management

It may be tempting to manage property yourself. If you are going to do this put a proper lease in place and collect the payments by direct debit. Even if the property it is rented to a family member.  There are two main reasons you should put the proper paperwork together; one is to establish “the rules of the game” making sure everyone is aware, all too often the relationship that starts off good can end in disaster. The other reason is that you will need to prove that you can service future borrowings. If the bank can not verify the income on a property rented to a family member then it is assumed that there is no income on that property. This makes life difficult if you want to refinance to get yourself a better deal or grow your property portfolio. Best option is to have a local property manager do all this for you. The good ones are worth their weight in gold!

Hi Felicity, I learnt a new word yesterday: macro-prudential. I understand the RBA is also talking about it in relation to investors. It looks like its going to be harder for investors to get loans. What is more scary I heard mortgage brokers saying the banks will soon increase interest rates for investors but keep owner occupiers loans low in a attempt to cool the property boom. Your thoughts? They have been advising investors to consider converting over to fixed interest rate loans.

Hi, great question – interesting term macro-prudential and what does it mean for investors? Macro-prudential controls are financial regulations aimed at minimising the risk to the financial system as a whole, while traditional micro-prudential regulation limits stress individual institutions.

They are measures that are not associated with the monetary policy (raising interest rates) which are designed to slow lending, particularly to property investors.

Some of these measures could include capping loan-to-value ratios or capping debt-to-income ratios or stress testing borrowers capacity to cope with rising interest rates.

At the end of the day, it is anyone’s guess as to what may happen. Growth in the market is not Australia wide and is mainly in cities such as Sydney and Melbourne. When I compare products in the market for investors small differences appear between owner-occupier and investor loans – for example, most lenders that offer Loans at 95% LVR will capitalise the mortgage insurance for owner occupiers but not for investors.

I think regardless of the financial landscape – the most important thing is to check in with your broker or banker when you are transacting a property deal and get the advice to match your circumstances and goals.

Fixed rates are historically very low now and great for locking in and knowing what your cash flow is, the downside is that if you sell the property in the fixed term you can be up for large break cost, so knowing what you want to do with the property determines what type of loan you would take up.

Most people think negotiating is about a win / lose situation. In other words, they are focused on their outcome not on what the other party wants. The reality is that you really can’t get what you want until that other person gets what they want. In order for that to happen the other person has to actually tell you exactly what they want or you have to ask lots of questions and be prepared to listen to understand what they want. The latter is usually the best way of extracting information to understand what the other person wants.

The first step when negotiating a property deal is to know exactly what you want and what you are prepared to pay. Knowing the type of house, you are looking for and what you plan to do with the property once it comes into your possession. This will require market research. The second step is to know what the other person wants, sometimes that can be a little tricky especially if the other person does not really know what they want.

The properties that often have the most potential are the ones that smell really bad. Many of my property investor friends would refer to this as the “smell of money” because it was very easy to fix a house that smells bad. A smelly house turns most people off, which makes selling difficult. This type of property usually requires the carpet to be ripped up and replaced or the floor boards sanded and polished rather than replacing the carpet. The polyurethane can be the best way to get rid of the “cat pee” smell entirely. Other simple quick fixes such as sugar soaping walls and tidying up the outside appearance add tremendous value. These houses once cleaned up present beautifully, they have increased rent potential and increased ability to sell for profit.

Properties don’t have to smell bad in order to get a good discount on the price. Often properties that are presented in an untidy fashion can be identified as properties that are likely to be highly negotiable. The number one reason people sell and don’t care how the property is presented, is because they are over the property. Situations like; the tenant living in the property has been nothing but a pain, they are so tired being a landlord and are over dealing with the tenant and just want the property sold. The other common reason is that the owners have separated, it has been a nasty separation and they are desperate to move on. Sometimes the reason is the owners have moved elsewhere and have started a new life, maintaining the upkeep on the old property is a low priority.

For many people selling a property for the best price is not the top priority, moving on, is their top priority. This goes back to the paradox of negotiation, in order to get what you want you have to make sure that the other people can get what they want. As a property investor you are always looking for a discount on a property and in many cases people will give you a discount because they need to get rid of the property. Knowing what you want and being highly organised with finance puts you in the box seat for a successful negotiation.