Frequently Asked Questions

Have a question? Below is a list of answers to the questions most commonly asked by our clients and past visitors to our site.

Simply click on a question below to see the answer.

If you have a question that is not answered below, please email your question to us and we will get back to you within 24 hours.

Home loans

What to do if I’m struggling with loan repayments?

Here are a few things you might consider doing if you find yourself struggling with loan repayments.

Contact your Bank if you’re struggling with loan repayments

With consumer protection legislation in place since July 1 2011, all lenders have a hardship clause in their mortgage contracts, which in essence, encourages empathy from the lender to help you get through this short term issue. Give your Bank a call and be honest and upfront with them and you’d be surprised the leniency they will show. There are options for you, one being your Bank may agree to defer your minimum contracted repayments for a few months. Anyway, please contact your Bank.

Reset your mortgage term

You can ask your Bank to reset your current loan balance over 30 years again, thereby reducing your minimum repayments. It may, in some instances cut your monthly repayments by up to $500.

Switch to interest only repayments

Request a short interest-only term (say 12 months). You can still pay principle and additional repayments at any time but at least the required minimum repayment will be much less than what it is now.

Reduce expenditure

This comes back to budgeting and having a good understanding of where you can cut down on any unnecessary expenses and enlighten you as to where your money is going. Download our comprehensive budget planner to start getting yourself on the right track.

Consolidate debts

Increase your mortgage to pay off all other personal loans and credit card debt can seriously reduce your overall monthly repayment commitments.

Increase income

Consider taking on a second job to earn some additional income, or working more overtime, or ask your boss for a salary review. You may even come up with a way to earn additional income from home.

Seek help if you’re still struggling with loan repayments

The last resort would be to seek professional advice from a specialist financial counselor which you can find one by simply doing a google search.

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How do I calculate stamp duty and other costs?

Easy – Go to our stamp duty calculator as this will calculate stamp duty and other Government costs for a property purchased in any State of Australia, whether you’re a first home buyer, second time buyer or an investor.

Stamp duty is a State Government tax on the transfer of property and is assessed on the sale price. The amount of stamp duty varies from State to State. Your Conveyancer / legal representative will advise you of the amount payable and if you are entitled to an exemption, or you can check your State’s website in the below table for more information.

Calculate stamp duty

State / Territory Website
ACT www.revenue.act.gov.au
NSW www.osrnsw.gov.au
NT www.revenue.nt.gov.au
SA www.revenuesa.sa.gov.au
TAS www.treasury.tas.gov.au
VIC www.sro.vic.gov.au
WA www.dtf.wa.gov.au
QLD www.osr.qld.gov.au

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What do I need to supply for a loan application?

Documents required for any loan application, really depends on each individual’s circumstances, but at least this will give you a guide of where to start.

100 POINTS OF IDENTIFICATION

  • 70 points of I.D (No more than one of these can be used): Birth Certificate, Citizenship Certificate, Australian Passport (can be used even if expired for < 2 years) or a Foreign Passport
  • 40 points of I.D: Drivers Licence (front and back), Student I.D, Proof of Age Card, Pension Card, Concession Card or a  Health Care Card
  • 35 points of I.D: Rates Notice (Can be used only if it’s not in arrears)
  • 25 points of I.D: Electricity/Gas/Water/Phone Bill, Medicare Card, or a Marriage Certificate

If any of the identification you supply has a different surname/maiden name on it than what will be stated on your loan application form then provide a copy of your marriage certificate also

INCOME

  • Your 2 most recent & consecutive pay slips (the recent one to be less than 4 weeks old, and as a minimum it must show your employer’s name on it, their ABN and your own name)
  • If you have a salary packaging arrangement, please provide evidence of the arrangement
  • If you have a company car that is fully maintained by your employer, provide a signed letter from your employer on their letterhead detailing the company car arrangement
  • Your most recent “PAYG Payment Summary”
  • All the pages of your latest “Tax Notice of Assessment” issued by the Australian Taxation Office
  • If you receive a Centrelink allowance, then a copy of all the pages of your most recent Centrelink statement
  • Proof of rental income: Copy of current lease agreement, OR last 3 months of rental income statements, OR a letter from the real estate office which is less than 6 weeks old confirming the amount of rental income
  • (If applicable) Child support agency letter

If you are self-employed:

  • All the pages of your last two years tax returns and financial statements (for Partnerships, Companies & Trusts)
  • All the pages of your last two years personal tax returns
  • All the pages of your most recent “Tax Notice of Assessment

SAVINGS / PROOF OF FUNDS TO COMPLETE SETTLEMENT

  • (Where your ‘deposit’ is held), all the pages of your last 3 months official savings account statement plus an internet printout of transactions on that account commencing from the end date on your last statement up to today’s date (make sure your name and account number is printed on any online statement and it shows the running balance next to each entry)
  • Stat dec from the giftor stating their relationship to you, the amount of funds they want to gift you, that it is non-repayable, and it is for the purchase of a property

LIABILITIES

  • If we are refinancing your home loan debt then provide all the pages of your last 6 months official home loan statement plus an internet printout of the transactions on that account commencing from the end date on your last statement up to today’s date (make sure your name and account number is printed on any online statement and it shows the running balance next to each entry)
  • If you want to consolidate any of your credit card debt then provide all the pages of your last three months credit card statements for each credit card
  • If you want to consolidate any of your personal loan debt then provide all the pages of your last six months official personal loan statement plus an internet printout of the transactions on that account commencing from the end date on your last statement up to today’s date (make sure your name and account number is printed on any online statement and it shows the running balance next to each entry)
  • Confirm your current HECS/HELP outstanding balance
  • Proof of rent expense: Recent one month transaction statement showing a clear narrative of your rent expense, OR letter from the real estate agent, OR current lease agreement

ASSETS

  • Your Annual rates notice on all properties that you own
  • Find out what your approximate superannuation balance is and with which Provider it is with

PURCHASES

  • A full copy of your fully signed contract of sale
  • A receipt copy of any deposit you’ve already paid

FOR REFINANCING

  • Sign your current lender’s “Discharge Authority Form” (We’ll complete the rest of the form for you)

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What is Lenders Mortgage Insurance?

No one likes paying extra costs, and a home is one of the cases where many people are already stretching themselves to the limit on the property sale price alone. Lenders Mortgage Insurance (LMI) is a one-off insurance payment which protects your lender against your default. LMI is commonly paid when the Loan to Value Ratio (LVR) is 80% or more. This occurs when more than 80% of the value of the property is borrowed from the lender by a buyer.

There are only two ways to avoid paying Lenders Mortgage Insurance:

  1. Save 20% or more as a deposit; or
  2. Have someone go guarantor for your loan.

Let’s break that down into some detail and see if you can save yourself from paying LMI.

How a 20% or more deposit saves you from Lenders Mortgage Insurance

Saving 20% of a property price is a tough task for the average first home buyer. To buy a property at $400,000, requires a deposit of $80,000 even before stamp duty, conveyancer fees and other expenses are tacked on. For a first home buyer, these sums can be unrealistically high. LMI functions as a much necessary lower rung on the property ladder for those who don’t want to go down the guarantor path.

How Guarantor loans work and can save you paying Lenders Mortgage Insurance

A guarantor loan is when a buyer has a loan guaranteed by someone else, usually a family member. This allows a borrower the option to borrow more than the value of a property to cover expenses, stamp duty and, even in some cases, costs for renovations or consolidate current debts. The guarantor is not liable for the full amount of the loan, only an agreed amount. Collateral for this guarantee is usually a guarantor’s property. We have ten lenders that offer guarantor loans.

The ins and outs of Lenders Mortgage Insurance

On a property worth $500,000 with a deposit of $30,000, a first home buyer can expect to pay around $12,500 for LMI, according to Genworth’s LMI estimator. Most lenders will allow this to be capitalised on the loan. This means that the borrower doesn’t pay the sum upfront, but it is added to the original loan amount.

LMI is calculated based on property value, location and loan amount. Typically LMI is paid on properties where 80% or more of the property value is borrowed. However, LMI may be applied to properties well below the Loan To Value (LVR) ratio of 80% if the bank deems it to be a higher risk, which to the borrower can often seem a little needless and arbitrary, such as a warehouse conversion or low doc loans.

LMI only covers the risk of the lender. If the borrower defaults, they are still liable. Refinancing with an LVR above 80% can attract LMI again, although in some cases a partial LMI refund may be paid out by the lender you are switching from. Mortgage Protection Insurance is insurance which can be taken by a borrower to insure themselves against mortgage default.

There are two major LMI providers in Australia which support the majority of the LMI-backed loans in Australia; Genworth and QBE.

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How is interest calculated?

How is interest calculated is simply on your outstanding balance on a daily basis and charged to your home loan account once a month. For this reason, and because of the number of days between interest charges varies, the amount of interest charged each month may also vary.

To calculate interest only repayments, your loan balance is multiplied by the interest rate, then divided by 365 days in a year, then multiplied by the number of days in the current month.

Go to our loan repayment calculator to make this job easy for you. This calculator will also calculate your weekly, fortnightly, and monthly principle & interest repayments.

Where can I find out my interest rate?

You can find out your current interest rate on the first page of your home loan statement or on your internet banking screen.

Why does interest exist?

The person or company lending money is giving up other uses for that money until the loan is repaid. The interest is supposed to make up for the fact that the person or company could have spent that money in ways that brought in extra value.

Learn the difference between simple interest and compound interest.

You’ve just calculated simple interest, in which you only pay interest on the principal you borrowed. Many credit cards and other loans, however, utilise compound interest, where the interest you owe gathers interest of its own. Compound interest can result in much higher interest over time than simple interest. Use our borrowing capacity calculator to help you calculate principle and interest repayments.

Here’s a side-by-side comparison of interest only vs principle and interest:

  • You take a loan out for $100 at 30% simple interest. You’ll owe $30 interest after the first time period, $60 after the second, $90 after the third, and $120 after the fourth.
  • You take out a second loan of $100 at 30% compound interest. You’ll owe $30 interest after the first time period, then $69, then $119.70, then $285.61.
  • Multiple other factors can come into play when calculating more complex forms of interest, including credit risk and inflation.

Talk to us

Contact us on 03 9700 7033 8:30am to 8:30pm Monday to Friday to arrange a free Home Loan Health check.

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How do I reduce loan quicker?

Everyone deserves to learn as many suggestions on how to reduce loan quicker, let’s face it, who wants to have an owner occupied debt in retirement?

Here’s some of the main tips we want to share with you now on learning to reduce loan quicker:

Reduce loan quicker

  • Pay more frequently than monthly – with fortnightly repayments you will actually be making one additional repayment a year. However, for this to be effective it is important that you ask your lender to halve your monthly repayments rather than recalculating them
  • Make extra repayments above the minimum – even $80 a month on a $200,000 loan at 7.32% will save you 3 years and 3 months off your loan term
  • Extra money like inheritance, a good tax return, a bonus from work should be credited into your home loan. If you have a redraw facility you still have access to this extra repayment when needed
  • Make your first repayment at settlement
  • Consider a 100% savings offset account
  • Salary crediting: you can use a credit card with a good interest free period to pay for your regular living expenses and at the end of the month have the card ‘swiped’ (or paid off) against the home loan
  • If interest rates fall ask your lender to leave your repayments as is
  • Do a regular stock take on your home loan. A loan may start off as good but have its competitiveness eroded by increased fees or rates, or by the introduction of better priced products on the market
  • Interest repayments on an owner occupied home loan are non tax-deductible, which means it makes good sense to give priority to paying off your home loan quickly instead of directing funds towards paying off investment loans or having them sit in low interest-bearing deposit accounts (where any interest received will also be taxed).

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Can i get a loan if I have a default?

Blue Key Finance has been in business since 2004, and we remember once you had a mark on your credit file there was nothing you could do about it other than to put your plans on hold for five or more years.

Now, we have a few specialist lenders on our panel who can offer home loans to you even if you have a default or two. They begin with slightly higher interest rates yet with a good repayment record you can move on to a standard home loan with a lower interest rate 18 months later.

These lenders offer loans to those with paid and even an unpaid default and even to discharged bankrupts, but before you apply be sure to consider why you ended up with bad credit, if there are possible credit repair options and how to keep a clean credit history. We would love to recommend you a trusted and reputable credit repair agency by visiting www.princeville.com.au . They will charge a small fee, only if they can guarantee the likelihood of removing your bad credit. This can take up to six 6 weeks which will ultimately put you in a better position for a better home loan. On the flip side, read on to see our top tips for getting approved for a home loan with bad credit.

9 tips to apply for a home loan with a default and get approved

When applying for a home loan with a default, there are a number of things you should consider doing before applying for any home loan.

1. Get a copy of your credit file

Before you even apply for a home loan, you’ll want to ensure that you’re familiar with your credit history. All of your prospective home loan lenders will have a close look at your history before granting you a home loan, so you want to be able to discuss the negative marks on your credit file with confidence. You can get one free copy of your credit file each year. This gives you the advantage of exposing negative listings which you can fight against using a credit repair service.

2. Take steps to settle any outstanding debts

New lenders will want to know what you’ve done to address your past credit mishaps, so ensure that any defaults are paid and you do the right thing by your previous creditors.

3. See if a credit repair service can help you

Some default listings, if placed on your file without proper adherence to the relevant laws, can be removed from your file. A credit repair specialist can help you in this regard. Removing negative listings from your credit file can see you apply for a regular home loan, avoiding the higher fees and interest rates of a bad credit home loan.

4. Apply for a loan with a specialist lender who looks beyond the numbers

Certain lenders in Australia specialise in bad credit home loans. These lenders, such as La Trobe Financial, Bluestone, Pepper and Liberty Financial, look at your credit file and take into account that a default or two can result out of a lifestyle change, such as divorce or illness, and will take into account your income and other factors to still grant you a loan, even if you’re a discharged bankrupt or have negative listings on your file.

5. Don’t apply for too many loans in one space of time

Your credit file includes all previous enquiries for credit, which includes past loan applications. Be careful with who you apply for a home loan with if you already have bad credit, as too many enquiries in the same space of time can present another red flag to prospective lenders, as it could indicate money management problems.

6. Tell your Finance Broker about your bad credit listings honestly

Tell us about each of your bad credit issues before we help you apply. If need be, you might have to organise a face-to-face meeting with us to give you the right opportunity to explain your credit history. This will give your lender more information to go on when deciding whether to approve or deny you a loan.

7. Think about Lender’s Mortgage Insurance (LMI) before you apply

In Australia there are only two major LMI providers, Genworth and QBE. They have their own lending criteria which they use to evaluate your loan, which can in some cases be stricter than that of your lender, leading to your application being rejected. Some lenders don’t use these insurers, meaning there’s no third party risk of being rejected for a home loan because of LMI. In most cases, these lenders, such as Liberty Financial and Pepper, will have their own LMI alternative.

8. If you can avoid applying with a spouse with bad credit do so

If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. This will obviously reduce your borrowing power, so consider this before applying this tip.

9. Eliminate your other debts to make your file look better

When your chosen lender looks at your application, they’ll take into account all of your current credit accounts, including credit cards and personal loans. If you can pay these off and close them before applying it’ll be one less factor that will work against you when your lender decides whether to approve or reject you. This is because your lender will look at your total capacity to pay off a loan, and if you have a number of credit cards – even if they’re not currently being used or maxed out – your lender could see this as a red flag.

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Are there self-employed loans without a tax return?

Self employed loans or better known as Low Documentation (Low Doc; which means low proof of income required) Home Loans are designed for self-employed customers and small business owners who may not have access to the financial statements and tax returns usually required when applying for a home loan. These products now attract interest rates equal to those who actually verify their income.

Our Finance Brokers will help you choose a home loan with a Low Doc option suitable for you. Today, the Low Doc option is available on a wide range of home loan products. We specialise in low doc loans but even for self employed clients with bad credit we cans till help – call us now.

What you’ll need for self employed loans with a Low Doc option

If you’re looking for one of our many self employed loans involving a Low Doc option, there are some conditions that apply. What follows is a general list:

  • You need to have been self-employed in the same industry for at least one year and supply details such as your ABN and/or Certificate of Incorporation. If your ABN is registered for less than a year, don’t worry, we can still help.
  • You may need to provide your Business Activity Statements (BAS) for the past 6 consecutive months, verified by the Australian Tax Office (ATO).
  • You need to confirm that your income has been registered for GST for a minimum of 12 months. Once again, if you do not satisfy this requirement, don’t worry, we can still help.
  • You may be asked to provide six months’ worth of statements for your primary business or personal transaction account.
  • The maximum amount you can borrow on a Low Doc Home Loan is 80% of the property value.
  • If you are borrowing more than 60% of the property value, you will incur the once off Lenders’ Mortgage Insurance premium.

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How can I improve my chances of obtaining finance?

If you haven’t refinanced recently, you may find that you have to jump through a few extra hoops when obtaining finance. Likewise, if you’re trying to get a home loan for the first time, it’s useful to know what can improve your chances of getting that all important loan.

So we’ve compiled a list of ways you can turn yourself into a more appealing borrower…

1. Refinance before changing jobs

When obtaining finance, the length of time you have been with your current employer can help determine if you’re eligible. As a general rule of thumb, when lenders mortgage insurance is involved then at least six months with the same employer is sufficient, but this will vary depending upon an individual lender’s conditions.

A good idea, then, is to stall any thoughts of that job move until after obtaining finance has been sorted. Incidentally, if you’re thinking of going self-employed in the near future, consider a mortgage that won’t need changing in the near term, as it will be difficult to refinance during the first couple of years you are in business.

2. Repay other debts before obtaining finance

It’s best to get into the habit of repaying credit cards, store cards, and overdrafts anyway – it’ll save you money – but having less of this kind of debt will also increase your chances of obtaining finance.

Lenders take into account the amount of outstanding debt you have, and the monthly payments you make, when assessing whether you can afford a new home loan. Worryingly, some lenders may even assess affordability using the potential amount of debt you could have, assuming that you have maximum balances on all your cards and overdrafts, instead of the balances you do have.

If you don’t use a certain credit card or overdraft, why not close it? Also, try to put all expensive debts onto the cheapest card you have (applying for a new 0% balance transfer credit card will impact your credit score – so leave doing this until the new mortgage has completed) and close the rest instead of repaying several and having lots of opportunities to spend.

3. Check your credit report

It’s important to check your credit report before applying for a mortgage as there may be items that have been repaid but appear outstanding, or even fraudulent applications made in your name. Getting this all dealt with prior to applying for a mortgage, before any money is lost, is a simple thing you can do to improve your chances of obtaining finance.

4. If you already have a mortgage, overpay

If you’ve got some money collecting little more than dust in a savings account, consider making extra repayments on your current mortgage instead.

If you have a particularly high loan-to-value (LVR) – the amount of mortgage in relation to the value of your property the higher the mortgage rate is likely to be, and it could also make refinancing more difficult. So, by paying extra you’re reducing the amount of mortgage you have and lowering the level of risk that a lender has to take on, and both of these could work in your favour when a lender is assessing the application.

As an added bonus, by paying extra and reducing the LVR you’ll be able to repay the mortgage quicker and will have access to cheaper deals, thereby helping you repay your mortgage more efficiently and cost-effectively.

5. Buying for the first time? Can your parents help?

The explosion of property prices has had a severe impact on how big mortgages are in relation to wages, and securing that big mortgage could be even harder.

But while you may be able to afford the monthly repayments, another side-effect of high property prices is that it’s really tough saving a deposit, even just 5 or 10%. So enlisting the help of financially-supportive parents can really make the difference, and there are several ways they can help:

  • They could help by giving or lending you part of the deposit. Borrowing money from family can sometimes cause trouble though, so be sure to agree repayments that all parties are happy with. Borrowing from family will usually work out cheaper than borrowing elsewhere, and of course, it doesn’t appear on your credit report.
  • They could act as a guarantor on your mortgage. This means that they guarantee that the mortgage payments will be made, so they become fully liable as well (although in some instances this liability may be limited to a certain percentage of the mortgage amount). Guarantors normally have to be able to cover their own bills and your mortgage payment.
  • A number of providers offer schemes for families to help get first-time buyers on the property ladder – do your research or ask us what the options are.
  • Your parents could borrow to help fund your deposit. The least preferable option, but an option nonetheless, they could take out an unsecured loan. However, this should be thought through very carefully as your parents will be out of pocket, and you may not be able to pay them back in the near term, or at all. You could set up an arrangement whereby you pay this loan as well, but remember that you’ll have your mortgage and bills to cover, so you need to consider if this is really affordable for all parties.

With any sort of arrangement where somebody takes a financial interest in your mortgage, we would strongly recommend seeking financial and legal advice.

6. Keep your house in order

When going through the application process, your property’s value will be assessed. If you need to borrow at a high LTV this will almost definitely mean a valuer physically coming round to inspect the property.

It’s the same as if you were trying to sell your house – it needs to look its best to command the highest price. So make sure the outside of your property is well maintained and that the interior is also. For the purposes of a basic mortgage valuation, they are looking at saleability of the property. The higher the value of the property, the more likely you are to secure a lower mortgage rate.

7. When obtaining finance enlist the services of an experienced Finance Broker

As opposed to going directly to a lender, making use of a good Finance Broker can improve your chances of getting a mortgage.

At Blue Key Finance we will search the market and will have knowledge of lending conditions particular to each lender, which, as well as your personal financial situation, they will take account of before making any recommendations to you.

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What affects my borrowing capacity?

There are seven factors that affect your borrowing capacity:

  1. Your income and minimum monthly contracted repayments
  2. Your lifestyle/living expenses
  3. Your credit history
  4. Your property deposit
  5. The type, term and interest rate of your home loan
  6. Your assets
  7. The value of your property

Income & commitments:

Before a lender will give you a home loan, they will want to assess how much you can afford in mortgage repayments.

To determine exactly how much you can afford in mortgage repayments, they will look at your income as well as any outstanding debts and other commitments you have. As such, if you are buying a property with another person your repayment capacity may be greater, which would mean greater borrowing power.

In addition to looking at your income, you lender will also review your current commitments, which includes all of your outstanding debt, credit and store card limits, personal loans, car finance and any other ongoing financial commitments you may have.

It may sound extreme but lenders will look at the credit limit on your card or cards as a liability you may have in the future, even if you don’t owe a solitary cent currently.

For instance, if you have a card with an $8000 limit and another with a $4000 limit, a lender will write down $12,000 as a debt against your name. Reducing your credit card limit by $10,000 may increase your calculated monthly disposable income by $300, which has the effect of having a net pay rise of $3600 per year.

Lifestyle/living expenses:

When working out your borrowing capacity, a lender will also look at your living expenses – things like what you spend on groceries, utility bills, school fees, child care fees etc all have to be taken into account.

Once a lender has identified how much you can borrow, it is a good idea to work out what your living expenses are and make sure you can meet your mortgage repayments while still retaining a good standard of living

Credit history:

Your credit history will play a big role in determining what your borrowing capacity is. If you can prove you are a reliable customer who meets their financial obligations on time, you may be able to borrow a higher amount. Of course, if you have missed a few bills or credit card payments in the past, this may work against you when you are trying to obtain finance.

Before seeing a lender, it is a good idea to get a copy of your credit history and see if there are any red flags or problems you can address before you start looking for finance.

Property deposit:

The more money you have in savings and can thus contribute to your property deposit, the easier it will be to obtain finance and increase your borrowing capacity. Lenders like to see that you are able to save money over a period of time – otherwise referred to as “genuine savings”, usually in the form of 5% of the proposed purchase price held in your savings account for at least 3 months,

Home loan type, term and interest rate:

The amount you can borrow may also depend on the interest rate and the term of your home loan. The lower the interest rate, the lower your repayments will be. A longer-term home loan will mean lower repayments, but a shorter-term loan may save you interest. You need to think carefully about what is most important to you.

Assets:

Your lender will want to know what you have in the way of assets before they determine how much you can borrow. Having assets like a vehicle, an investment property or shares can significantly influence a lender’s decision, especially those who credit score.

Value of the property:

Finally, once you have found the property you would like to purchase, how much a lender will lend to you will depend on what the property is worth, most borrowers don’t know this.

The lender will find out how much a property is worth by conducting a valuation of the property. That valuation will then determine exactly how much they can and will lend to you.

Effective strategies to boost your borrowing capacity

Keep financial records up to date

One of the most common reasons borrowers find themselves well short of their anticipated borrowing levels is that they don’t have up to date financial information to prove their income levels to the lender.

Simply completing your tax returns on time can help us secure the loan you’re after. It’s also important to show your overall income to your lender, not just your last two payslips.

In many cases, the last two payslips required by a lender may not give a clear picture of your true income. In the situation where you may have a low base salary but high bonus payments, providing your last two payslips could be a disadvantage. Most lenders will be able to provide an alternative way to assess your income which can be based on the group certificate from your employer or even notice of assessment from the Australian Tax Office.

Concentrating on the bigger picture of annual income rather than the most recent payslips will help.

Select the right loan product

Even within one financial institution there can be a big difference in borrowing capacity levels based on the product you select. Product features such as interest only repayments, fixed rates, variable rate discounts and lines of credit can all impact how much the lender will offer.

Be aware that income type is treated differently by nearly every lender

Lenders can be very selective when it comes to the type of income they include in their repayment capacity calculations. Some income types may be excluded altogether by one lender and fully included by another.

Almost every lender treats income derived from dividends, second jobs, child maintenance payments, company profits, bonuses, commissions, government benefits, annuities and rents differently. Navigating your way around this maze is very difficult and every dollar that a lender accepts improves your borrowing capacity.

Shop around

It may sound obvious but paying a low interest rate will save you hundreds of dollars on annual loan repayment commitments and thus increase your initial affordability.

A decrease of one per cent on your home loan rate may free up your cash flow by $260 a month on a $400,000 loan. This has the same effect of getting a net pay rise of $3,120 per year.

Allow us to shop around for you.

Split your liabilities with your partner

If you’re planning to buy a property under your name only, you can split your expenses on paper with your partner.

For example, two children as dependants may not be counted as your dependants if you can prove that your partner does and will continue to provide for them financially.

Use your properties as cross collateral

Using your property as cross collateral, or cross security, means you provide an existing property as a security to buy another property.

It’s increasingly requested by lenders because it minimises their risk of lending money against one single property. In other words, it’s a form of diversification for a lender. But be warned, there are pros and cons with this strategy.

The good thing is it may increase your serviceability to the extent you may borrow at a higher loan-to-value ratio. This may also save you money on lenders mortgage insurance when you borrow above the lender’s threshold.

The bad thing is, in the event of you being unable to meet the loan repayments, the lender may repossess the securities, which could put your properties at risk.

Another disadvantage with this option is that it can restrict your ability to refinance with another lender, so make sure you understand all the implications.

Extend the term of your loan

The longer the loan, the less the monthly repayments.

Thirty year loans for property are considered normal. You may want consider refinancing your current mortgage to a better product and interest rate and at the same time set it up for a 30 year term.

Save, save, save

Build up as much deposit or equity as possible. If you’re using a deposit to secure your loan, be sure to have saved consecutively over at least three to six months, depending on the lender.

Mind you, there is a large range with borrowing capacity between lenders. Go to our borrowing capacity calculator to get a rough idea on how much you can borrow.

Get an accurate borrowing capacity by contacting us.

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Investing

Why would I take out an interest only loan?

What is an interest only loan?

An interest only loan is more or less what it says on the can: it’s a home loan where only the interest is paid, rather than both the interest and the principle.

An interest only loan can be useful for investors who can claim the interest as a tax deduction, or buyers who only plan on holding onto the property for a few years before selling it. An interest only loan may not be a good idea for standard home-buyers simply looking to pay less on their weekly repayments, because the smaller the amount of loan principal that is paid off, the more overall interest you may end up paying on your loan over the 30 year loan term.

Use our loan repayment calculator to help you calculate interest only repayments on different loan amounts with different interest rate scenarios.

Some people might view an interest only loan  as an attractive choice when considering finance options for a home – particularly if their budget is tight or if there are other more exciting things they want to do with their spare cash. If you are considering an interest only loan though, it’s vitally important to weigh up some pros and cons of that type of loan.

Potential benefits of an interest only loan

Lower monthly repayments

Because you are paying only the interest component on your home loan, your monthly repayment will be comparatively lower. As an example and based on a home loan interest rate of 5%, the monthly repayment on a $300,000 mortgage over 25 years would be approximately $1,754 per month. If you were making interest only payments, the monthly cost would be approximately $1,250 per month.

Can help maximise tax deductions

An interest only loan generally presents potential benefits to investors. It allows the investor to pay only interest for an agreed period of up to five years, instead of ‘principle and interest’. This maximises the investor’s tax deductions whilst also freeing up cash flow for other investing opportunities. After all, paying off the principal means that interest would be charged on a smaller amount. This in turn reduces the dollar amount of the tax deduction.

An investor may take out an interest only loan  on a property, and count on appreciation of the property to pay the principle at the end of the term.

Can free up cash to allocate to other more important goals

In the investor example above, paying interest only (with the interest being tax deductible) would free up extra cash to put towards, for example a loan that isn’t tax deductible. Or free up cash to put towards business running expenses, or the cost of studying. There are plenty of other goals that can improve our wealth over the long term to which extra cash could be apportioned.

Potential disadvantages of an interest only loan

Still needs to be paid off at some point!

Unless it’s an investment property, or a property that you are only intending to hold for a few short years, chances are that you will need to pay off the principal of the loan at some point. Most interest only loans are only available for up to five years, with the loan reverting to a P&I (principal and interest) at a set future time. Unless there is a specific (and good) reason for you to be choosing an interest only loan, you could be just delaying – at your cost – the inevitable.

Interest rates are currently low

Home loan interest rates are currently low, certainly when compared with historical rates. While there is no guarantee that they won’t go even lower, it certainly does make now a good time to pay off some of the home loan principal. That way, if rates rise in the future, you will be paying those higher rates on a reduced loan size.

Could tempt you to spend more money than you can really afford

Paying interest only frees up your cash flow – but if you end up using that extra cash to pay for day to day “stuff” rather than for additional investments or to pay down other debt it could well be wasted money. This could lead you to rely on this extra cash flow for your living expenses.

Overall, if you’re considering an interest only loan, definitely think long and hard about the potential pros and cons and get some professional advice. At the end of the day you want to be certain, whatever your choice, that you’re doing the right thing for your finances.

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How do I unlock equity in order to invest?

Investment property home loans differ from your traditional owner occupied home loans in two main ways;

  1. The interest that is paid on them is tax deductible
  2. Investors are not usually focused on paying off the investment loan, whereas home owners are.

With those two factors in mind the perfect structure for investment property home loans has one more variable and that is if there is any existing personal debt on the family home and then determining the appropriate amount to unlock equity.

With this scenario, I am making the assumption that there is a home loan but that there is equity available in the home.

Important to unlock equity

OK, so let’s set some parameters for my example;

The Smith’s own a home in Endeavour Hills, a suburb of Melbourne. The property is valued at $700,000. The Smith’s current outstanding home loan balance is $200,000. The original loan was for $500,000 and they are fortunate that their loan allows them to redraw funds at no cost and they also have the ability to “split” the loan.

For the purpose of this exercise we are going to assume the Smith’s have substantial incomes and will have no problems borrowing up to an additional one million dollars. Furthermore, we are assuming that the Smith’s have an excellent credit history.

The Smith’s have been researching units in the Endeavour Hills area and have found a new 3 bedroom unit for sale with a tenant already occupying the unit on a 12 month lease.

The negotiated price for the unit is $500,000 and the rental payments are $500 per week (5.2% gross rental yield). The purchasing costs will be $30,000 which includes things like stamp duty, legal fees, bank costs etc. The total cost to buy this unit will therefore be $530,000.

Here is the scenario we would put to the Smith’s existing bank. This arrangement or structure will give the Smith’s the following benefits;

  • Flexibility to make further investments when they are ready to.
  • Maximum tax benefits.
  • Assisting in the ongoing reduction of their home loan.

Firstly, we will ask the bank to create a “split” in their existing home loan. What this means is that because the original loan was for $500,000, and currently has a balance owing of $200,000, the Smith’s have an available redraw of $300,000.

We will ask the bank to create a split for $130,000. This figure will cover the costs to buy as mentioned above, as well as the 20% deposit that the bank requires to avoid lender’s mortgage insurance.

So now the Smith’s will have a home loan with total available funds of $300,000 that has been split two ways.

  • The original home loan is now “split number 1” of $370,000 and remains as a loan for their home, i.e. Personal use and not tax deductible. This loan will continue to be paid on a principle and interest basis.
  • The new “split number 2” of $130,000 is specifically for investment purposes and as such the interest charged will be tax deductible. This loan will be paid as interest only.

The Smith’s will receive two sets of statements which makes it easy for both them and their accountant to calculate the tax deductible interest components.

Secondly, we will apply to their existing bank, or if they are not competitive, another bank, for a new stand alone investment loan for $400,000.

I use this type of structure for my clients as I believe it offers the best overall package at a minimal set up cost. I am always trying to keep your existing relationship in place with your current bank as this means less costs for you.

There are however two exceptions;

  1. You don’t want to stay. That’s fine with me; after all it is your home loan and not mine.
  2. Your existing banking arrangements are non-competitive. There are costs involved in refinancing, and sometimes those costs can be so high that even staying with a non-competitive bank (for the time being) will still be the best option. I can only advise on that depending on your personal circumstances.

Here is what we achieved for the Smith’s and their investment property home loans structure;

  1. They have used $130,000 of the equity that they have in their home to leverage into their first investment property. This then allows a standalone $400,000 interest only investment loan secured against the investment property, thereby, helping to avoid the high cost of lender’s mortgage insurance. A great move towards their financial future.
  2. They still have available equity in their home to use as leverage for future investments.
  3. They have maximised the tax deductibility of the funds that they have borrowed.

As you’ve seen from the above example, borrowers can obtain an investment loan for 100%, plus costs in many instances, when prepared to use the equity in their own home as either:

  • Supporting or collateral security, or
  • To raise additional funds to put towards the investment property purchase.

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What to be aware of when buying off the plan?

At Blue Key Finance we have seen a spike in interest in buying off the plan investment properties since 2010, which is what has inspired this FAQ.

Buying a property ‘off the plan’ simply means purchasing a property before it is completed and registered with the Land Titles Office.

When buying off the plan the purchaser typically pays a deposit—usually 10% of the purchase price, and once the property is completed is when you pay the balance.

Buying property off the plan has many potential advantages—including reduced stamp duty, access to properties that could be sold out by completion, customisation options, a chance of a capital gain prior to completion, and greater tax benefits for investors with two depreciation allowances and loan costs that can be claimed to help maximise your annual tax refund and therefore minimize your tax burden.

The following are 12 tips you need to be aware of when buying “off the plan”.

When buying off the plan make sure the developer has a good reputation

Research the background of the developer and its track record. Have there been court actions against the developer? Does it have a history of delivering what has been promised and settling disputes quickly and neatly?

Ensure there is an office where you can meet people face to face. Visit the property site and check the location. You should also carefully inspect the display home, models and plans as well as the fixtures and fittings.

Capitalise on stamp duty concessions on offer

In Victoria, you can find off the plan properties where stamp duty is simply calculated on the value of the land at the time you sign a contract of sale, rather then basing it on total ‘land + construct’ price.

Go to our stamp duty calculator to help you calculate the amount of stamp duty payable on a state-by-state basis depending on whether you are an owner occupier, investor or first home buyer.

Take rental guarantees with a grain of salt

Be careful buying into a development that is offering a rental guarantee because it is always factored into the sales price, and once the guarantee expires, the unit’s yield will revert back to market forces.

If an investment has a gross return of 6% and the developer guarantees $300 a week rent that would put the purchase price at $260,000. But if the market rent is in fact $250 a week, the property is really worth $218,000. This would have you paying 19.2% over the market value. The developer only has to pay $5,200 in total over two years to guarantee the $300 a week rent and the company would pocket $42,000—$5,200 = $36,800 net on the sale price.

When buying off the plan you need to take into consideration rising and falling valuations

Do not always assume that property prices are going to rise in the short term. You could pay more for a property at settlement than you could hope to sell it for in the current market.

Some developments may see Banks restrict their loan sizes to 80% loan to value ratio (LVR). So, when a valuation is done two weeks out from settlement and comes back lower than the price on your contract of sale you will have to come up with this shortfall difference!

For example, if you signed a contract of sale to buy off the plan for $400,000 due to settle in 6 months time, and you’ve arranged a preapproval for an 80% lend, i.e. $320,000—all well and good. BUT, when you go to arrange formal approval two weeks from completion and the bank’s valuer determines its value to be $370,000, then the bank will only lend you 80% of $370,000 or $296,000. This $24,000 shortfall, you would hope you have already set up an ’equity release limit’ secured against your home that has enough funds available in it to accommodate for such a shortfall.

Do your due diligence

First, it is absolutely essential to understand the buying process, precisely what funds are required and when you will need them. This will allow you to make an accurate cash flow analysis.

Have your finance lined up when you put down your deposit. Don’t be caught out close to settlement by not having your finance ready. Remember, something as simple as changing jobs and entering into a probation period can affect your capacity to get finance.

Don’t underestimate the risks of buying off the plan

One of the biggest risks is that a developer or builder will go under before completion or that a project will fail to get off the ground, but this should result in no financial loss for the buyer. When you pay your 10% deposit to secure your property it is held in trust either by the selling agent or vendor’s solicitor, buyers will get their money back.

Another big issue is often the final product. You should look at the schedule of finishes for all parts of the property, including floor coverings, colour schemes and kitchen appliances.

Become familiar with what is on the contract that will allow the ‘sunset’ completion date to be moved.

A new consumer law aimed at improving transparency and disclosure for off the plan property came into force early 2012. The front page of all sales contracts must state three things: that the amount of a deposit is negotiable but cannot exceed 10% of the purchase price; a substantial period of time may pass between signing the contract of sale and when the buyer becomes the registered owner of the property; and the value of the property may change between the time the contract is signed and when the buyer takes ownership. These detailed and clear warnings on the contract highlight the risks that are taken when buying off the plan.

Consider buying off the plan using your self managed super fund (SMSF)

Property investors can use limited recourse borrowing (LRBA) to fund off the plan investments using their SMSF.

Under this strategy, your SMSF receives a concessionally taxed rent, pays off the loan while you are still working, and transfers the property to you upon retirement.

After your retirement, you can either:

  • Take the property as a non-cash, lump sum benefit (although capital gains tax is payable on any capital profit, the tax rate is an effective 10% – if the property was owned by the fund for at least 12 months); or
  • Buy the property from the fund for its market price. No CGT is payable if the property is backing the payment of a superannuation pension, but you are personally liable for stamp duty.

Remember that the contract of sale needs to be worded correctly so that when the asset is transferred from the bare trust to the SMSF, the SMSF beneficiaries don’t risk having to pay double stamp duty. The bare trust is the arm’s length holding trust that holds the property until the mortgage has been paid off.

Buying early can have its advantages

Before a property is constructed developers look for possible pre-sales to give to the bank so it will provide funding for construction.

Many developers are willing to give good deals upfront to secure sales. Discounts can start from about 5% to about 10% on the completion price.

When buying off the plan as an investor, ensure you don’t miss out on tax benefits

The tax benefits are greater when property is newer because more tax depreciation items are available.

Be sure to have a schedule of inclusions such as fixtures and fittings on the sale contract, and commission a depreciation schedule from a reputable quantity surveyor.

The ATO requires that a period of 12 months elapses before you’re eligible for the 50% capital gains tax discount. This period begins when the contract of sale has been signed, so provided your settlement period is 12 months or longer you could in theory sell your recently purchased property the day after settlement and still qualify for the generous tax concession.

Consider using a deposit bond rather than tying up your cash

Buying off the plan will require investors to pay a deposit, usually 10% of the purchase price. While developers prefer cash, some will allow buyers to use a deposit bond or bank guarantee instead of requiring a cash deposit.

A deposit bond is a guarantee that says the insurance provider will pay the 10% deposit to the vendor in any of the circumstances where the deposit would ordinarily be forfeited by the vendor.

The Deposit bond provider will then seek to recover the money from the borrower. There is no exchange of money with the deposit bond in place until settlement. At settlement the buyer pays the purchase price in full, and the deposit bond lapses.

The main benefit of using a deposit bond is that savings remain intact, as the cost of the deposit bond is far less than the deposit itself.

We can arrange deposit bonds for our clients through Deposit Power. They provide short term deposit bonds for settlements of up to 6 months and long term deposit bonds for settlements from 6 months and up to 4 years, tailored for those buying off the plan.

Keep in mind negative gearing benefits

Look to take advantage of negative gearing allowances to reduce your annual tax bill.

Although investors can claim the negative loss on their tax returns at the end of the year, an investor must carry the cost of that loss throughout the year.

While most of the negative gearing benefits will come post-settlement when then apartment is rented out and the mortgage is being paid off, investors can also claim the interest or costs associated with funding their 10% deposit from the date they sign the contract. Interest paid on deposit funds is tax deductible, as are the costs associated with a deposit bond, if you choose to use one, from the date of exchange.

Borrowing expenses are amortized over five years.

Be aware that you cannot easily get out of a contract of sale

Generally, if you don’t proceed with the contract you will lose your deposit and may be pursued by the developer for the balance of payment or for any shortfall should the property be resold at a lower price.

Changes in personal circumstances such as divorce, unemployment, illness or death of a partner are not grounds for legally cancelling an off the plan contract.

You can generally only cancel a contract if the terms and conditions have not been met by the developer or builder.

These may include conditions set out in a “sunset clause”, which usually pertains to a period of time in which the project must be completed and settlement should occur. You may also be able to cancel a contract if the builder has not registered the plans for the development by a set date in the contract.

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How do I reduce capital gains tax with a property?

When you dispose of an investment property you might have to pay capital gains tax on any profit. What can you do to legally minimise your tax?

Claim all your costs

The capital gain is worked out by taking the sales proceeds and deducting the cost base. The cost base is not just the cost of acquiring the property but also includes many incidental costs (such as stamp duty, legal fees, real estate agent costs), costs of ownership (e.g. interest on borrowings, repairs), improvement costs and title costs. Make sure you claim these. The higher your cost base, the lower your capital gain.

Sell when you’re at a low taxable income

If you’re considering selling your investment property in the near future and it will incur a capital gain, consider selling it when you know you will have a low taxable income that year. This is because, capital gains tax is not a separate tax but simply added to your taxable income when you lodge your tax return and if your taxable income starts low then you will obviously incur less tax on your capital gain.

Claim the discount

If you held the property for more than 12 months, the capital gain can be discounted by 50% for individuals and trusts or by 33.33% for certain superannuation funds. There’s no discount for companies.

Held the property since 1985? It could be exempt from capital gains tax

If the property was acquired before September 20, 1985 (when capital gains tax was introduced), there would generally be no capital gains tax.

Lived in the property?

If the property was your private residence at some point during your ownership, the gain covering that period might be excluded.

A number of small business concessions are available where capital gains on business assets are incurred. So long as the conditions are met, you can apply for as many concessions as you’re entitled to until the gain is reduced to nil – check whether you’re eligible.

Capital gains tax is a complex subject—so please consult your Accountant or ask for a referral to one of our professional Accountant’s.

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Refinancing

What should I consider BEFORE refinancing?

Before refinancing we strongly urge you to give careful consideration to:

1. Refinancing costs and charges

Current lender charges
Discharge mortgage admin fee approximately $300
Government charges
Discharge mortgage registration fee (Vic) $114
New mortgage registration fee (Vic) $114
New lender charges
Application fee $0 – $600
Lenders mortgage insurance $0 if loan to value ratio is below 80%
Brokers charges
Brokerage or mandate fee Our service is FREE

2. Introductory or honeymoon rates

Consider the true ongoing interest rate once the initial interest rate period has expired and compare whether the quoted ongoing interest rate is in fact an improvement on your current arrangements.

We always like to compare the true cost/benefit analysis over a period of 3, 5, and 10 years for you.

3. Monthly or annual fees and charges

The “comparison rate” is a regulatory standard which lenders are required to disclose and helps to give you a picture of the actual rate including fees. It includes the fees associated with the mortgage, such as application fee, ongoing fees and discharge costs.

We believe the “comparison rate” is only a good indication if you plan to hold to your next home loan for 30 years. Bear in mind though, that the average loan term is about three years before a client refinances again, and this is because of various reasons. So, as mentioned above, please allow us to compare the true cost/benefit over a period that is relevant to you.

4. Our FREE over the phone comparison

At Blue Key Finance we appreciate that formulating a true comparison can, at times, be a confusing exercise. Your lending requirements may have changed since your loan was established and we are dedicated to ensuring you receive the most appropriate financial solution for your individual lending needs.

A refinance away from your current lender to your new chosen lender can take up to five weeks.

At Blue Key Finance we don’t just facilitate the lending, we also listen – call us now.

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How are break costs calculated?

Break costs may be high. We’ll now explain the process of fixing interest rates, what break costs are and when they are payable.

The process of fixing interest rates

When a Bank lends you money at a fixed rate for a set term, the risk associated with movements in interest rates is accepted by the Bank. The Bank then manages the risk based on the understanding that all the required repayments due over the whole of the fixed rate period will be made in full and on time. The Bank obtains funding on this basis through transactions as wholesale interest rates. If you make  prepayment (i.e., you repay ahead of the due date or you pay an extra or higher amount) or change to another interest rate pr product or another repayment type, that will change the Bank’s funding position. If wholesale market interest rates have dropped, this causes a loss to the Bank. The estimated amount of this loss is passed on to you as a break cost (subject to the prepayment threshold described below).

When are break costs payable?

Break costs ARE payable on your fixed interest rate loan when wholesale interest rates have fallen during the fixed rate period on your loan AND:

  • You prepay all of the total amount owing on your loan before the end of the fixed rate period; or
  • You make prepayments in excess of the prepayment threshold (most banks allow you to prepay an extra $10,000 in each 12 month period without incurring any break costs); or
  • If the total amount owing on your loan becomes repayable immediately during a fixed rate period because you are in default; or
  • You change to another interest rate option (fixed or variable); or
  • You change the repayment type (principle and interest, interest only, interest in advance)

Why are break costs necessary?

When you break your fixed rate period, the Bank has to break its wholesale interest rate arrangements and, if wholesale market interest rates have dropped, this causes a loss to the Bank.

How are break costs calculated?

The Bank calculates break costs using the break costs method which will be set out in your “General Terms and Conditions” of your loan agreement.

The break costs method estimates the Bank’s loss but does not necessarily reflect any actual transaction that the Bank may enter into (either before or at the time of the break).

Break costs are calculated on wholesale market interest rates. Those rates may not be the same as the fixed interest rate for your loan or other fixed interest rates that apply to the Bank’s other products. They may be lower or higher.

Warning:

Break costs can be high and the formula is complex. We suggest you ask your Bank for an estimate of the break costs and seek independent financial advice before you prepay any amount above your prepayment threshold on your loan during a fixed rate period.

Examples

The following two examples are a guide to the impact of break costs on a home loan:

EXAMPLE 1

Original loan amount $250,000
Original loan term 25 years
Initial fixed interest rate period 3 years
Fixed interest rate in your contract 8% p.a.
Repayment method Interest only

Wholesale market interest rates fell by 5%

 BREAK COSTS

Month Broken Break Cost Amount Prepaid
12 $23,528 $250,000
18 $17,837 $250,000
24 $11,962 $250,000

EXAMPLE 2

Original loan amount $400,000
Original loan term 25 years
Initial fixed interest rate period 3 years
Fixed interest rate in your contract 7% p.a.
Repayment method Principle and interest

Monthly repayments of $2,500 & wholesale market interest rates fell by 2%.

BREAK COSTS

Month broken Break Cost Amount Prepaid
12 $14,653 $400,000
18 $11,175 $400,000
24 $7,540 $400,000

We make the following assumptions in the break cost calculation examples:

  • The loan is repaid in full at 12, 18 and 24 months;
  • Wholesale market interest rates fell for home loans by 5% p.a. (Example 1) and 2% p.a. (Example 2) between the date the fixed rate period started and the date of the break;
  • There were no previous partial prepayments on the loan;
  • Only the required monthly repayments were made – there were no arrears or additional repayments on the loan;
  • The loan is repaid immediately after the repayment due on the date of full prepayment (that is, after the 12th, 18th or 24th repayment is made);
  • Fees and charges that may be added to the loan balance are not taken into account;
  • There is an equal number of days in each month (that is 365/12 days in each month)

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Why consider refinancing?

Refinancing can save you money on your repayments by lowering your interest rate

The interest rate on your mortgage is tied directly to how much you pay on your mortgage each month – lower rates usually mean lower repayments. When refinancing, you may be able to get a lower rate because of changes in the market conditions, your personal situation has improved over time, or because your credit score has improved. A lower interest rate also may allow you to build equity in your home quickly.

You can often get a better interest rate by switching lenders.

For example, compare the monthly repayments (for principle and interest) on a 30 year loan term of $400,000 at 4.20% and 5.20%.

Monthly repayment at 4.20% $1,956
Monthly repayment at 5.20% $2,196
the difference each month is $240
But over a year’s time, the difference adds up to $2,400
Over 10 years, you will have saved $24,000

Refinancing can adjust the length of your mortgage

Increase the term of your mortgage: You may want a mortgage with a longer term to reduce the amount you pay each month. However, this will also increase the length of time you will make mortgage repayments and the total amount that you end up paying towards interest.

Decrease the term of your mortgage: Shorter term mortgages – for example, a 15 year mortgage instead of a 30 year mortgages will allow to pay off your loan sooner, further reducing your total interest costs. The trade-off is that your monthly repayments usually are higher because you are paying more off the principle each month.

For example, compare the total interest costs for a loan of $200,000 at 6.00% for 30 years with a loan at 5.50% for 15 years.

Monthly payment Total interest
30 year loan at 6.00% $1,199 $231,640
15 year loan at 5.50% $1,634 $94,120

Tip: Refinancing is not the only way to decrease the term of your mortgage. By paying a little extra on principle each month, you will pay off the loan sooner and reduce the term of your loan. For example, adding $50 each month to your principle repayment on the 30 year loan above reduces the term by 3 years and saves you more than $27,000 in interest costs.

Changing from a variable rate mortgage to a fix rate mortgage

If you have a variable rate mortgage, your monthly repayments will changes as the interest rate changes. With this kind of mortgage, your repayments could increase or decrease.

You may find yourself uncomfortable with the prospect that your mortgage repayments could go up. In this case, you may want to consider switching to a fixed rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly repayment. You also might prefer a fixed rate mortgage if you think interest rates will be increasing in the future.

Refinancing to get cash out from the equity built up in your home

Home equity is the dollar-value between the balance you owe on your mortgage and the value of your property. When you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment (this is called a ‘cash out’ refinancing). In order to refinance to access your equity, you will need to have your home valued to determine its current value.

Property investment is currently one of the most popular ways of building wealth for your future. Whilst saving the deposit to purchase a second property may be difficult for many, rapid rises in property values in recent years have provided an opportunity to refinance in order to access some of the equity in your home to use a a deposit instead.

Accessing your equity will increase the amount you owe on your original property and increase your mortgage repayments. However, if you use the equity to make a property investment, you will have the opportunity to capitalise on home loan value increases on two properties over time and this has the potential to help you increase your wealth in the long run.

Other uses for a lump sum in cash are literally endless – you could use your equity to buy your family a boat, a caravan, the overseas holiday you’ve always wanted, to renovate or extend your home, to consolidate debts, or even use it to invest in a business or shares.

Remember though, for every $10,000 of equity you access, will generally mean an extra $55 in principle and interest repayments on your mortgage each month.

Refinancing to consolidate debts

It may be worth considering accessing some of the equity in your home to pay off your more expensive debts. This could dramatically reduce the amount of interest you have to pay on your overall debts each month, offering you some financial relief and helping you to enjoy a more comfortable lifestyle.

It’s a far better idea to be in a position to save money each month rather than waste it on expensive credit card and personal loan interest repayments. By refinancing to consolidate your debts, you could possibly find yourself in a position to save money to make other investments or even pay off your home loan sooner.

Refinancing to renovate or extend your home

Renovating or extending your current home to meet the needs of your growing family or changing lifestyle is often a better option than purchasing an entirely new home. By renovating or extending, you will be able to create the home that exactly meets your needs and if you’re careful about the improvements you make, perhaps even increase its value at the same time, which in effect offsets the cost.

In conclusion

If you have plans or goals for your future then remember, your home loan can be used as a financial tool to help you reach them. We’re here to help you make the most out of your home loan, so please don’t hesitate to give us a call for a chat about what you want to achieve and how refinancing your home loan could help to get you where you want to be. We’re always happy to spend the time with you to help you make the right decisions to reach your financial goals, so please call us today

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First Home Buyers

How do I calculate stamp duty and other costs?

Easy – Go to our stamp duty calculator as this will calculate stamp duty and other Government costs for a property purchased in any State of Australia, whether you’re a first home buyer, second time buyer or an investor.

Stamp duty is a State Government tax on the transfer of property and is assessed on the sale price. The amount of stamp duty varies from State to State. Your Conveyancer / legal representative will advise you of the amount payable and if you are entitled to an exemption, or you can check your State’s website in the below table for more information.

Calculate stamp duty

State / Territory Website
ACT www.revenue.act.gov.au
NSW www.osrnsw.gov.au
NT www.revenue.nt.gov.au
SA www.revenuesa.sa.gov.au
TAS www.treasury.tas.gov.au
VIC www.sro.vic.gov.au
WA www.dtf.wa.gov.au
QLD www.osr.qld.gov.au

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What is a deposit guarantee?

In Australia, when a person enters into a contract to purchase residential property it is common practice for the purchaser to lodge a cash deposit of up to 10% of the purchase price with the vendor’s solicitor as security for the purchaser’s obligations. The deposit gives the vendor (the seller) a fund against which they can claim if you fail to complete the transaction. A deposit guarantee or also known as a “Deposit Bond” is a substitute for the cash deposit between signing contracts and settlement.

A deposit guarantee is a convenient way of securing a residential property purchase when funds are tied up. The guarantee that we organise is issued by “Lombard Insurance Company Limited” to the vendor for all or part of the deposit required. A deposit bond can be issued for all or part of the 10% deposit amount required. You can only apply for a deposit bond through us once you have a conditional approval “subject to just a valuation”. This means once your chosen lender verifies your recently signed contract of sale and then notifies us they’ve ordered a valuation on your new purchase, is when we will get you to complete and sign a two page application form for a deposit bond.

So, if you fail to complete the purchase of the property, the vendor or the holder of the deposit bond has the right to present the deposit bond to the insurer and claim the full amount of the deposit bond. The insurer will then seek reimbursement from you for any monies paid by it plus any other costs and expenses (because you have signed their ‘counter indemnity agreement’). In essence, a deposit bond enables you to defer your 10% deposit until settlement. The deposit bond is not a policy of insurance. It is a form of surety or guarantee.

Before you agree to purchase a property (or bid at an auction) you should check with the vendor that they accept deposit bonds instead of a cash deposit. You should also ensure that the vendor’s solicitor inserts the relevant clauses into the “contract for sale” to enable the deposit bond to replace the cash deposit.

Reasons why a deposit bond would be popular

  • Buyers that have no ready access to cash: Buying and selling at the same time, first home buyers short on the required 10% deposit, retirees downsizing are usually asset rich but cash poor.
  • More convenient to use a deposit bond: Property investors prefer to have their own cash working harder elsewhere, and for those that want to buy an off the plan purchase do not want to lose access to their cash.

Scenario

If you were buying a $450,000 property and the vendor insists on an upfront 10% deposit of $45,000, and you agree to provide only $15,000 once you receive your unconditional approval, then you can simply apply for a deposit bond for the difference – in this case, a $30,000 deposit bond.

Generally, you would apply for a deposit guarantee:

  • If you prefer to keep your savings earning interest right up until the day of settlement
  • If you have sold your current home but funds are not yet available for the deposit on your next property
  • If you are a first home buyer and don’t have the full 10% cash deposit required
  • If you do not want to pay the penalty for breaking a fixed investment or selling shares
  • If you are an investor and effectively borrowing 100% of the purchase price
  • If you may want to attend more than one auction before you decide which home to purchase
  • If you want a cheaper and quicker solution to arranging a deposit, than securing short term finance

It’s quick and easy:         You return a completed and signed double sided application form to us and the deposit bond will be issued within 48 hours to your Solicitor/Conveyancer, us and the vendor’s real estate agent.

It’s flexible:                       Deposit bonds can be used for private sales and auction purchases. Check with the vendor of the auctioned property if they will accept a deposit bond instead of cash or a cheque before you commence bidding, and in the case of a private sale, check with the vendor before you make an official written offer.

It’s cost effective:           It only costs a one off flat fee of 1.3% of the deposit bond amount that you’re applying for. In the example above, a deposit bond of $30,000 would therefore only cost you $390.

For even more information feel free to visit www.depositpower.com.au or simply call us to clarify what has just been explained.

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What is a guarantor loan?

A guarantor loan is most commonly used by first home buyers to enable them to enter the property market by utilising their parents as a guarantor (for security purposes only) which will also enable them to avoid the high lender’s mortgage insurance (LMI) premium which can range from $5,000 to $20,000 depending on the purchase price and loan size.

Some parents today are thinking about how they can help their children break into the property market, without having to dip into their own savings or liquidating their own assets. The ability to borrow up to 100% (and sometimes up to 110%) is the big attraction of guarantor loans. Guarantor loans are now the only product that allows a borrower with no deposit or little deposit to buy a home and as a result, their popularity has increased. This popularity increase is also as a result of the major banks reducing their maximum LVR’s to 95% and in some case to just 90% and tightening their credit criteria.

Benefits of a guarantor loan

  • Purchase the property you want rather than having to settle for a cheaper alternative
  • Still be entitled to normal interest rates and the normal suite of home loan products
  • Avoid Lender’s Mortgage Insurance (LMI) because your parents will put up a limited guarantee amount enough to bring your ‘loan to value ratio’ (LVR) down to 80%
  • Your parents won’t need to hand over cash to you, nor will they need to make repayments on their limited guarantee amount while they’re acting as guarantor
  • Any time after settlement, your parents can discharge their responsibility as a guarantor, however, if in your own right your LVR is above 80% then  you will have to pay the required mortgage insurance premium at the date of discharge
  • The earliest your parents can discharge their responsibility is when you can achieve a 95% LVR in your own right (i.e. your loan balance divided by the valuation of your property).

Example of a guarantor providing security support only:

Mr A is seeking to borrow $392,000 to purchase a property valued at $400,000 (as he only has enough deposit to be able to cover the stamp duty and other expenses associated with buying a property and $8,000 of initial equity). The LVR for this example is 98%, which is outside of acceptable security limits for any bank. In order to help Mr A obtain his loan, Mr A’s parents have agreed to allow the Bank to take a mortgage over their property in order to provide a limited guarantee. The amount for loan 1 will be the ‘purchase price * 80%’ and the amount for loan 2 will be the ‘remaining loan sought amount’ which will also be the limited guarantee amount.

So, loan 1 will be $320,000 and loan 2 will be for $72,000; i.e. the limited guarantee amount. NB: a limited guarantee only reduces the LVR so as to avoid LMI, and does not reduce the loan amount requested from Mr A. Mr A’s repayments will still be based on a $392,000 home loan amount.

What we would like to know upfront is which bank your parents mortgage is with, how much is left owing, roughly the value of their property and how much they earn per year. That way, we we can then determine your best lender and product options going forward.

Things you need to know upfront about a guarantor loan

  • With guarantees, if down the track you default on your home loan, the Bank can then demand repayments be made from your parents until you get back up on your feet again.
  • If your parents own their home outright, then the Bank will want to take possession of their title and will only return it once your parents discharges their responsibility as guarantor.
  • Your parents may only have to act as guarantor for less than a few years. As the value of your home increases and you pay down your loan, your parents should be able to withdraw their support. This frees up your parents to consider other options for the use of their property’s equity – such as for their own investment plans. Your parents can remove the guarantee once you owe less than 95% of the property value & if you meet the LMI and bank lending criteria at the time. However, it is better to remove the guarantee when the loan has been paid down to 80% of the property value, as this will avoid the need for you to pay LMI.
  • Offering a guarantee may limit your parents future borrowing potential.
  • As long as your parents combined limited guarantee amount and their existing mortgage amount is less than 80% on their own property’s value then a guarantor option is still a viable option.
  • Most lenders require guarantors to seek legal advice prior to settlement of the loan. We recommend your parents to sit down with a lawyer before you buy your home, only because if they decide to be guarantor initially and then decide not to proceed after formal approval, then you may be left unable to complete the purchase.
  • All lenders allow immediate family to be a guarantor, apart from your parents this can include an aunt, uncle, grandparents, and a defacto partner.

An alternative to guarantor loans is for your parents to give you a gift as a deposit. In most cases a gift of 10% of the purchase price is enough to allow you to qualify for a loan on your own. This option is suitable for parents who are in a strong financial position or who are not comfortable providing a guarantee secured by a property that they own. Bear in mind though, the gifted funds have to be in your own account for at least 3 months prior to buying your home.

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What is Lenders Mortgage Insurance?

No one likes paying extra costs, and a home is one of the cases where many people are already stretching themselves to the limit on the property sale price alone. Lenders Mortgage Insurance (LMI) is a one-off insurance payment which protects your lender against your default. LMI is commonly paid when the Loan to Value Ratio (LVR) is 80% or more. This occurs when more than 80% of the value of the property is borrowed from the lender by a buyer.

There are only two ways to avoid paying Lenders Mortgage Insurance:

  1. Save 20% or more as a deposit; or
  2. Have someone go guarantor for your loan.

Let’s break that down into some detail and see if you can save yourself from paying LMI.

How a 20% or more deposit saves you from Lenders Mortgage Insurance

Saving 20% of a property price is a tough task for the average first home buyer. To buy a property at $400,000, requires a deposit of $80,000 even before stamp duty, conveyancer fees and other expenses are tacked on. For a first home buyer, these sums can be unrealistically high. LMI functions as a much necessary lower rung on the property ladder for those who don’t want to go down the guarantor path.

How Guarantor loans work and can save you paying Lenders Mortgage Insurance

A guarantor loan is when a buyer has a loan guaranteed by someone else, usually a family member. This allows a borrower the option to borrow more than the value of a property to cover expenses, stamp duty and, even in some cases, costs for renovations or consolidate current debts. The guarantor is not liable for the full amount of the loan, only an agreed amount. Collateral for this guarantee is usually a guarantor’s property. We have ten lenders that offer guarantor loans.

The ins and outs of Lenders Mortgage Insurance

On a property worth $500,000 with a deposit of $30,000, a first home buyer can expect to pay around $12,500 for LMI, according to Genworth’s LMI estimator. Most lenders will allow this to be capitalised on the loan. This means that the borrower doesn’t pay the sum upfront, but it is added to the original loan amount.

LMI is calculated based on property value, location and loan amount. Typically LMI is paid on properties where 80% or more of the property value is borrowed. However, LMI may be applied to properties well below the Loan To Value (LVR) ratio of 80% if the bank deems it to be a higher risk, which to the borrower can often seem a little needless and arbitrary, such as a warehouse conversion or low doc loans.

LMI only covers the risk of the lender. If the borrower defaults, they are still liable. Refinancing with an LVR above 80% can attract LMI again, although in some cases a partial LMI refund may be paid out by the lender you are switching from. Mortgage Protection Insurance is insurance which can be taken by a borrower to insure themselves against mortgage default.

There are two major LMI providers in Australia which support the majority of the LMI-backed loans in Australia; Genworth and QBE.

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What do I get as a Victorian first home buyer?

First home buyer incentives change and also vary from state to state. Please contact us for updated information as part of your research and purchasing preparation.

Log on to http://www.firsthome.gov.au to ascertain your eligibility. Read on for accurate information for your entitlements as a Victorian first home buyer.

To be eligible for the Victorian ‘first home owner grant’ (FHOG):

  • Eligibility is determined at the date of settlement or completion of construction.
  • All applicants and their spouse/partner(s) must be considered when answering eligibility questions.

Eligibility checklist for a first home buyer

If you answer YES to ALL of the below questions, you will most likely be entitled to receive the FHOG:

  1. Is this the first time each applicant and/or their spouse/partner will receive a grant under the First Home Owner Grant Act 2000 in any State or Territory of Australia?
  2. Is each applicant and their spouse/partner a person who has never owned a residential property, either jointly, separately or with some other person before 1 July 2000 in any State or Territory of Australia? NOTE: Applicants are not eligible for a grant if they or their spouse/partner have held a relevant interest in residential property prior to 1 July 2000, even if they have never occupied the property.
  3. Is each applicant and their spouse/partner a person who has never occupied a residential property for a continuous period of at least six months in which they acquired a relevant interest on or after 1 July 2000 in any State or Territory of Australia?
  4. Is each applicant a natural person (e.g. not a company or trust) and at least 18 years of age?
  5. Is at least one applicant a permanent resident or Australian Citizen?
  6. Will at least one applicant be occupying the home as their principle place of residence for a continuous period of at least 12 months commencing within 12 months of completion of the eligible transaction?
  7. Has each applicant on or after 1 July 2013:
  • Entered into a contract for the purchase of a home in Victoria OR
  • Entered into a contract to have a home built in Victoria

The glossary of terms mentioned above are at the bottom of this FAQ.

Constructing new homes – $10,000 – $20,000

In Victoria, if you enter into a contract to build a new home, or buy a home that has never been lived in before under $750,000, you will be entitled to the $10,000 FHOG. The grant rises to $20,000 for new homes in regional Victoria.

Eligibility requirements

  • Use the property as your principle place of residence within 12 months of becoming entitled to possession of the property (which usually occurs at settlement or completion of the build), and
  • Reside in the property for a continuous period of at least 12 months

$0 stamp duty or reduced stamp duty for Victorian properties under $750,000

If you sign a contract in Victoria to buy/build a new property for < $600,000 then you will pay $0 in stamp duty. Otherwise, If you sign a contract in Victoria to buy/build a new property between $600,001 to $750,000 then stamp duty is significantly reduced and increases on a sliding scale.

Visit our stamp duty calculator to calculate your expected stamp duty cost.

First home buyers options for entering the property market

  1. Get enough gifted funds from your parents to bring the loan amount down to your maximum borrowing capacity or to the lender’s maximum ‘loan to value ratio’.
  2. Buy with a friend (some lenders offer the ‘property share’ option)
  3. Utilise a guarantor for security support to avoid lenders mortgage insurance.
  4. Husband/wife or defacto to become a co borrower to maximise borrowing capacity.
  5. Apply for a personal loan for the deposit required to get into the property market.

Glossary of terms

Applicant: The person applying for a grant who, on completion of the purchase of a home or construction of a new home, will own or hold a relevant interest in the land on which the home is built.

Completion of the eligible transaction: When the applicant is entitled to possession of the property under the contract, or the building is ready for occupation as a place of residence and the applicant is registered on the Certificate of Title.

Consideration: Purchase price or cost of construction of the home.

Eligible transaction: Contract for the purchase of a new home, contract to build a home or construct a home as an owner builder on or after 1 July 2013.

New home: A home that has not previously been lived in or sold as a place of residence including house and land packages and off the plan.

Relevant interest: A person with a relevant interest may be described as someone who will have a legal entitlement to occupy the home being bought or constructed. usually this will be the person registered as proprietor on the title. This commonly is an estate in fee simple. Each person acquiring a relevant interest must be an applicant on the application form.

Spouse/partner: A person is a spouse of another if they are legally married to each other. A person is a partner of another if they are in a domestic relationship regardless of gender.

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What are the purchasing costs?

It’s important to know all the purchasing costs involved upfront, to avoid any unwanted surprises along the way.

Purchasing costs

Deposit

Generally, it’s a good idea to save around 10 – 25% of the property value as a deposit. The greater the deposit, the less you will have to borrow (and the lower your repayments will be), but it all depends how soon you want to be in your new place.

Most lenders will lend to 90% of the property value but we have several lenders that will still go to 95% of the property value and allow you to capitalise the mortgage insurance premium, effectively lending you up to 97% of the property value.

Lenders Mortgage Insurance (LMI)

If you are borrowing over 80% of your new home’s value, generally you will be required to take out lenders mortgage insurance (LMI). This protects the bank if you can no longer pay the mortgage and default the loan. LMI is charged as a once-only premium and is added to your loan so that you don’t have to save for the fee upfront.

If you don’t want to pay LMI, some lenders will allow your parents to act as a guarantor to put up a limited guarantee. Talk to one of our Finance Brokers to find out more about this service offering.

Loan Application Fee

There is a standard upfront establishment fee of about $350 – $700. This covers the preparation of loan application documentation, legal fees for standard mortgage preparation and one standard valuation.

Purchasing costs: Legal / Conveyancing

You will need to engage the help of a Solicitor or Conveyancer to purchase your property for you. There fees can range from $850 – $1,500. If you like, we can recommend you to one of our preferred Solicitors or Conveyancers.

Insurance

We recommend you take out home building and contents insurance which covers the cost of damage in the case of fire, burglary and certain other events. We recommend you do this at unconditional approval stage.

Remember, if your deposit is less than 20% of the property value, you will also need Lenders Mortgage Insurance as outlined above.

Purchasing costs: Inspection Fees

It’s really important to make sure you know what you’re buying. That’s why we recommend two forms of inspection that should be carried about before settlement:

  1. Building Inspection – checks for structural problems.
  2. Pest Inspection – ensures the house is free of pests and termites.

If you’re in need of this service ask us who our preferred building & pest inspector is and we’d be more than happy to refer you their service.

Utility Connections

Remember that you will need to arrange the connection or transfer of utilities such as water, gas and electricity. There can sometimes be connection or transfer fees so make sure you know what they are up front.

Council Rates

Contact your local council to confirm any fees that may apply in your area.

Stamp Duty

Stamp duty fees can vary in each state so you’ll need to be aware of the cost that this will add to your property. For most property purchases, the state government will charge you Transfer Stamp Duty payable at settlement of the loan (when the property changes ownership).

In some cases, First Home Buyers may be eligible to have the stamp duty waived or discounted. Go to our stamp duty calculator to find out your total government costs depending on what state you buy your property in.

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SMSFs

Who is the borrower for a SMSF loan?

The borrower for a SMSF loan is the SMSF trustee, which can either compromise individual trustees or a corporate trustee.

SMSF loan where your SMSF has individual trustees

SMSF Name The Johns Family Super Fund
Individual Trustees Jay Johns & Jackie Johns
Members of the SMSF Jay Johns & Jackie Johns
Borrower Jay Johns & Jackie Johns as trustee for The Johns Family Super Fund

SMSF loan where your SMSF has a corporate trustee

SMSF Name Smith Family Super Fund
Corporate Trustee Nero Pty Ltd
Directors of the Corporate Trustee Sam Smith & Sandy Smith
Members of the Smith Family Super Fund Sam Smith & Sandy Smith
Borrower Nero Pty Ltd as trustee for Smith Family Super Fund

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Who is the SMSF purchaser on a contract of sale?

This seemingly simple question is probably the most important when considering becoming a SMSF purchaser to purchase an investment property. Unfortunately this is the area that property investors seem to get wrong.

The name on the contract for the purchase of a property when a SMSF loan is used needs to be the Trustee of the Bare Trust. The Trustee should be a company, for example:

Smith Custodian Pty Ltd [A.C.N. 123 456 789]

A Corporate Trustee structure for your BARE Trust has the following advantages:

  • The majority of banks and lenders who have SMSF loan products require a company as Trustee of your Bare Trust
  • Property registered in the name of the company will be legally separate from those held in the personal names of the members of the SMSF
  • A separate Trustee company adds another layer of legal protection
  • The same company can be used as Trustee of multiple BARE Trusts

The following names should NOT be put on the contract of sale when your SMSF purchases property utilising borrowed funds:

  • The name of the SMSF
  • The names of the Trustee(s) of the SMSF
  • The names of the members of the SMSF
  • Any of the above with “and/or nominee” * (this option is o.k if you buy the property in Victoria)

* If you sign a contract of sale for a property purchase with the intention of it being held by your SMSF using borrowings, and you don’t have the correct name on the contract, you will need to go back to the vendor and arrange for an entirely NEW CONTRACT to be completed with the correct name.  This of course is not ideal, and you may lose any leverage you have gained in the negotiation of the price and terms of the original contract.

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What are the ATO’s concerns with SMSFs?

Sole purpose test For example, Trustees who are regular golfers and invest fund moneys in a golf club membership with playing rights attached would raise questions. Secondly, where Trustees are paying for children’s tertiary education through the SMSF
Running a business If a SMSF is running a business, it is not being administered for the sole purpose of providing retirement benefits to members and beneficiaries.
Arm’s length dealings Any dealings between a SMSF and its members or related parties must be conducted at arm’s length, i.e. they must be at prevailing commercial or market rates.
LRBAs LRBAs are fine, but the existing investment restrictions continue to apply; e.g. in-house assets and the prohibition on acquiring certain assets from a related party.
Borrowing guarantees and contribution limits In the event that a guarantee supporting a LRBA for a SMSF is enforced against a member, a payment by the guarantor could potentially be treated as a “contribution” and generate an excess contributions tax liability where the member’s relevant contributions cap is exceeded.
Investment strategy Some SMSFs did not have an investment strategy, or if they did, they were not investing in accordance with it.
Record keeping Some SMSFs kept no records of meetings at which decisions (such as revising the investment strategy) may have occurred. A small number operated without holding any meetings at all. The ATO expects minutes to be kept outlining the Trustee’s investment decisions, how they made those decisions, transaction records, statements of a SMSFs financial position, who the Trustees of a SMSF are, their consent to act as Trustees and copies of tax returns.
Failure to keep assets separate The ATO has found non-compliance where the SMSF failed to maintain its assets separately from those of a business in which one or more of the Trustees were involved. In some cases, assets were not in the name of the SMSF but in the name of one of the Trustees, exposing the asset to loss if the Trustee were declared bankrupt or their business went into receivership.
Business real property Although the law allows Trustees to invest 100% of the SMSFs assets in “business real property”, Trustees should give proper consideration in their investment strategy as to whether having all of a SMSFs assets in one basket represents a prudent investment strategy.
Holiday homes Holiday homes leased to related parties and their value was in breach of the in-house asset rules. The ATO considers that exceedingly generous terms sometimes attaching to these leasing arrangements also suggested the arm’s length rules were being ignored.
Bank accounts Some SMSF bank accounts were overdrawn and in a few cases the fund did not even have an account.
Loans The ATO is concerned about loans that are unsecured, not decreasing in size, lack regular repayments or have poor documentation. Secondly, the SMSFs assets may not be used as collateral for a loan as a charge cannot be placed over the assets of a SMSF.
Artwork and collectables Members cannot enjoy a benefit from the investment in art before preservation age. Therefore, it cannot be displayed in the Trustee’s home or office except under very strict conditions. Artwork or collectables can be leased to a member or other related party as long as the in-house asset rule is not breached and they are leased at commercial rates, satisfying the arm’s length rule.
Non-lodgement There are a small number of SMSFs that have a poor lodgement compliance record. Member contribution statements contained in the SMSF annual return are also critical to the ATO’s administration of excess contributions tax assessments.
Market value reporting Trustees are required to value SMSF assets at “market value” for reporting purposes.
Residency Trustees who will be temporarily overseas for more than two years need to ensure, prior to going overseas, that their SMSF does not become a non-resident fund.

NB: Penalties are paid by the SMSF Trustees and not the SMSF.

If you’re a Corporate Trustee of your SMSF, the Directors are jointly and severally liable to pay the penalty. This means the ATO may collect the entire penalty from any one of the Directors of the Corporate Trustee or from all Directors in various amounts, until the penalty is paid in full.

Now, this differs from individual Trustees, where each Trustee is required to pay the full amount of the penalty.

In all instances, you cannot use the assets of your SMSF to pay the penalty, and you cannot reimburse yourself from your SMSF, you will have to pay the penalty amount yourselves directly.

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What are the SMSF benefits when investing?

Comparison point SMSF Individual
Tax on rent Taxed at 15% while members are working.

Taxed at 0% once members are retired and drawing a pension

Taxed at marginal tax rate (up to 49%) regardless of whether members are working or have retired
Capital gains tax Taxed at 15% if asset owned for less than 12 months. Taxed at 10% if asset owned for more than 12 months.

No capital gains tax payable if members are retired and drawing a pension

Taxed at marginal tax rate (up to 49%) regardless of whether members are working or retired.
Access to rent as a form of income Can only be withdrawn from the SMSF as a pension over age 55 Can be accessed at any time
Use of the investment property Cannot be used for personal use by the members of the SMSF or any person related to the members of the SMSF. Can be accessed for personal use at any time.
Deposit required Minimum ‘20% + costs’ required Minimum ‘5% + costs’ required
Cash flow Loan repayments are made from a combination of rent, personal contributions, and your employer contributions Loan repayments are made from rent and your surplus income.
Tax effective loan repayments By making a concessional contribution to your SMSF and using that cash to repay the loan, you will have more money available after tax to make repayments. Thus, your loan will be paid off sooner. All repayments on the loan are made with after-tax dollars.

Your personal tax rate may be as high as 49%. After tax that leaves 51 cents to make any additional loan repayments.

SMSF benefits when investing in property vs. personal ownership

Often borrowing arrangements are started in the name of an individual who is subject to a high marginal tax rate. The decision is usually driven by the immediate tax benefits when the investment property is producing net losses each year. This may make perfect sense whilst the investment property remains negatively geared. However, if the investment property later produces net income, rather than net losses, and ultimately large amounts of capital gains upon disposal, a high marginal tax rate can be a burden on the overall profitability of the investment property.

The generally lower effective tax rates applicable in superannuation are attractive when an investment property is positively geared. So an intention to reduce debt quickly via principle and interest repayments and extra repayments via surplus funds held in your SMSF may be something to consider if cash flow is of no concern for your SMSF.

As you can see in the table below, superannuation attracts just 15% tax on earnings, and an account-based pension (AP) has a zero tax rate, making super a very attractive structure through which to invest

Tax rates on the different investment structures

You Up to 49%*
Company 30%
Trust Marginal tax rate of beneficiaries
Super 15%
Pension 0%

* Includes Medicare levy and the temporary deficit levy

SMSF benefits have proved particularly attractive for:

  • Retirement planning for retirees seeking to utilise the flexibility of SMSFs to manage and pay their own pensions but retain control of the underlying investments. This includes those approaching retirement age who are switching from the accumulation phase to the pension paying phase
  • Small business operators and self-employed workers who are attracted to SMSFs lower-cost alternative for higher account balances or to enable them to hold their business real property in their SMSF
  • High net worth individuals seeking to utilise the concessional tax treatment for holding investments in this environment and the flexible estate planning features
  • Property investors looking to invest directly in property using their superannuation savings and/or in combination with a LRBA.
  • Potentially more cost effective on larger balances as the costs are often fixed dollar amounts compared with managed funds charging fees as a percentage of funds under management
  • Greater control over life and disability insurance options
  • Flexibility in managing the protection of superannuation assets from creditors in the event of bankruptcy

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How do I compare individual vs a corporate trustee structure?

Points to consider Individual Trustees Corporate Trustee
Change of member / Trustee:

When a member joins or leaves there is a change in the SMSF. Hence the SMSF must ensure all titles and names on assets are updated accordingly, including bank accounts, shares, managed investments. If held within the Corporate Trustee structure, the names, titles on assets and bank accounts stay the same even if members change.

 

Change of Trustee:

There are similar complications for individual Trustee SMSFs when a member wishes a person appointed under an enduring power of attorney to become Trustee in their place. Secondly, a member’s death means changes and may require new Trustee appointment. Corporate Trustees can continue on the death of a member. In both situations, less admin is required in the case of a Corporate Trustee as the assets remain in the company name which continues to act as Trustee. The Trustees will however need to ensure ASIC is notified of the change in directorship within 14 days.

 

Costs:

The costs of a Corporate Trustee, particularly in the establishment phase, are higher than those for individual Trustees. Setting up a company for the particular purpose of SMSF Trusteeship, carries with it the cost of incorporation plus an annual ASIC fee. If a company is to be Trustee of a SMSF then it is prudent that the company’s only function is to act as the fund Trustee. That is, it is generally not a good idea for a fund Trustee to also be the company running a member’s business or acting as Trustee of another Trust. It is also important that the Constitution is specifically designed for the purpose of the company – i.e. to operate a SMSF.

 

Knowledge:

If a company is chosen, it is important that the relevant parties familiarise themselves the company rules (i.e. the constitution), as well as the SMSF Trust Deed rules. The company rules will generally include the power to make decisions in certain circumstances, including decisions about changing the rules on rights and obligations, and what happens when the directorship or shareholdings change. Therefore, for SMSFs with a Corporate constitution, there are two sets of rules for members to contemplate – the Trust Deed rules and the company rules. For SMSFs with individual Trustees all the rights and obligations will be set out in the SMSF Trust Deed.

 

Liability:

As Trustee of a Trust, a SMSF Trustee can be subject to litigation. An example is where a contractor is injured while repairing a rental property owned by the SMSF and the contractor subsequently sues for damages. A limited liability Corporate Trustee may provide greater protection of the personal assets of SMSF members than will generally be available to a SMSF with individual Trustees. Individual Trustees may be found liable for the settlement or damages. Your SMSF may purchase appropriate insurance to reduce liability risks.

 

Single member funds:

A Corporate Trustee provides the member the option of being the sole director – i.e. there is no need to involve any other person in the Trusteeship of the SMSF. In contrast, where the individual Trustee option is chosen, the member must be one of two individual Trustees.

 

Separate ownership of fund assets:

One legislative requirement for all SMSFs is the separation of a member’s fund assets from their personal assets. This is particularly relevant in the case of real property as the lands titles office only record the owner of the property, not the capacity in which it is held. More administration is required for individual Trustees to appropriately document the ownership of real property purchased with assets of the fund, compared to when a Trustee company is the legal owner of the real property. A Corporate Trustee structure therefore, can help avoid confusion regarding which assets belong to the SMSF.

 

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What is a limited recourse borrowing arrangement?

The Superannuation law was amended from September 24 2007 to allow SMSFs to borrow, but only under a limited recourse borrowing arrangement (LRBA), via a Bare Trust. That way, the Bank’s recourse against your SMSF and the Property Trustee can only be limited to the underlying asset i.e. the purchased property.

Limited recourse borrowing arrangement

Your SMSF must comply with the following legislation & rules:

  • The Trustee of your SMSF may be an individual(s) or an incorporated non-trading entity (A Corporate Trustee)
  • The purchased property is held by a separate holding Trust. The purpose of this requirement is to help protect the other assets of your SMSF if the loan is in default and the lender seeks recompense to satisfy the debt owed by your SMSF. So, the Property Trustee purchases the property (subject to finance approval) for an investment property from an arm’s length vendor and becomes the legal owner. The property must be held on Trust for your SMSF by the Property Trustee. The Property Trustee must be a company and not an individual. On settlement, the Property Trustee will mortgage the property to the Bank. The Trustee of the SMSF must NOT purchase the property. So, if the property is located in Victoria, then on the contract of sale simply put “and/or nominees”, so can be amended by your solicitors prior to settlement.
  • NB: You need a new Bare Trust for each property asset, so if you want to buy multiple properties then you need multiple Bare Trusts.
  • The Property Trust Deed is the main document between the SMSF Trustee and the Property Trustee. There may also be an “Ownership Certificate” between the Property Trustee and the SMSF Trustee. These documents confirm that upon the purchase of the property, the Property Trustee holds the legal interest in the property on behalf of the SMSF Trustee which holds the beneficial interest.
  • Your SMSF applies for a loan, and proves appropriate structures are in place
  • The borrowed funds are applied for the purchase of a ‘single acquirable asset’ i.e.:
  • A single asset such as a property or
  • A collection of assets, all of which are identical and each with the same market value (e.g. a parcel of BHP shares) – this collection of assets must be treated and traded as a single asset and therefore the individual assets cannot be sold down over time
  • You cannot use borrowed money to improve or develop a property. Instead, you use funds held in your SMSF to do this.
  • You may not substantially change the nature of the property – for example, subdivide or develop a property, which may include rezoning or multi-development.
  • Your SMSF’s Solicitor acts on the purchase in the usual way
  • Your SMSF pays the deposit on the property, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the usual way.
  • Your SMSF holds a beneficial interest in the asset that is held within the Bare Trust
  • The Bank lends to your SMSF. Your SMSF has a right to acquire legal ownership of the asset, generally after the repayment of the loan
  • When loan is paid out in full and mortgage is discharged, title to the property can be transferred to your SMSF or the Property Trustee can continue as registered proprietor for the purpose of disposing of the property.

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Next Time Buyers

What is a bridging loan?

  • Designed to allow the purchase of a new property prior to the sale of an existing property
  • Loan amount will depend upon the equity in the existing property
  • Repayment requirements vary from lender to lender and may be interest only, principle & interest or on occasions interest may be partially or fully capitalised (added to the loan) up to a pre-determined maximum combined loan to value ratio (LVR)
  • When the existing property is sold, the residual debt becomes the ‘end loan’
  • ‘Capacity to repay’ is either calculated on the peak debt which makes it tough for borrowers to satisfy or else on the ‘end loan’ only

Scenario

Mr and Mrs Jones currently have an ANZ home loan of $150,000 secured by their current home valued at $400,000. They are looking to sell this property and have purchased a new home for $500,000. As the new property will settle prior to their existing home, they require an additional loan of $525,000 to cover purchase price and associated costs.

This would result in a peak debt of $675,000 (current home loan $150,000, purchase price $500,000 and costs of about $25,000) with security held totaling $900,000. LVR on peak debt is 75%, which is acceptable  as it falls under 80%.

In order to set up a bridging facility ANZ would need to ascertain what Mr & Mrs Jones would clear from the sale of their current home. In this instance we would estimate this at $360,000 (estimate sale price $400,000 less 10% in costs of $40,000). That would leave a residual debt of $315,000. This leaves a LVR of 63% against the purchased property.

Loans would therefore be set up in the following manner:

  • Bridging loan of $360,000 interest only over a 6 month term secured against both properties
  • Residual loan of $315,000 principle & interest over a standard 30 year loan term

NB: The bridging loan above is the amount they will payout once the existing property is sold. Applicants must show they can service the residual loan plus 6 months of interest only loan repayments on the bridging loan.

Benefits of a bridging loan

  • You are able to purchase a new property without having to sell your existing property first
  • If you are building a new property you may remain in your existing home until completion
  • A bridging loan term of six to 12 months means less pressure to sell quickly
  • Most lenders offer standard interest rates instead of paying an inflated ‘bridging rate’, which means interest savings to you.
  • Flexible repayment plan to suit your individual needs.

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How do I seek an early release of the purchaser’s deposit?

Many people can’t afford to buy a new home until they sell their current one. From a cash flow perspective it can be difficult, as you need a deposit for the home that you are buying. While some people apply for a deposit bond to bridge the gap, there is also the option of applying for an early release of the deposit from the home you have just sold.

Section 27 of the Sale of Land Act says that the deposit paid by a purchaser on the purchase of real estate can in certain circumstances be released to the vendor prior to settlement.

In simple terms this means the vendor has to serve a Section 27 Statement on the purchaser or their representative which discloses details of any mortgage or caveat affecting the property.

The purchaser then has to be satisfied that the amount owing does not exceed 80% of the sale price, and all conditions of the Contract of Sale must be fulfilled and the purchaser has signed and returned the Section 27 Statement confirming they are agreeable to the early release.

Should the vendor be successful in obtaining receipt of a duly signed Section 27 Statement from the purchaser, the vendor may then request the selling agents to release the deposit funds less the estate agents commission and any other selling expenses.

Benefits of an early release

 You could use the deposit paid on your sold property towards your deposit on a new one.

  • If you have a long sale settlement, taking the deposit out of the Solicitor’s trust account and either paying down your loan or putting it into a deposit earning account may be financially worthwhile.
  • If you have a simultaneous sale and purchase settlement you may require these deposit funds towards your purchase.

 Disadvantages

  • It is never guaranteed that the early release will occur prior to settlement
  • It can take quite a while to undertake the administration, obtain the information and required authorisations.

 Things to consider

  • Always seek advice from your Solicitor or Conveyancer
  • If you are the purchaser and you were to release the deposit (or part of the deposit) to the vendor, and then prior to settlement they go bankrupt, you will have just lost your money
  • Having the Section 27 Statement completed is generally relied upon by real estate agents so they have their commission paid early.
  • In some cases the purchaser’s Solicitor will automatically object to the early release of the deposit. This eliminates the “28 day countdown” to automatic release. The purchaser’s Solicitor then advises the purchaser not to sign a Section 27 Deposit Release Statement because of the risks associated with “acceptance of title” and loss of the deposit if the vendor spends it prior to cancellation of the contract.
  • Vendors are always informed that they must not rely on early release of the deposit. If a vendor wants to use the deposit for the purchase of another property, we advise that they should make payment of a cash deposit conditional upon release of the deposit paid on their own sale, and does not request one if it’s a 30 day settlement – or simply apply for a deposit bond instead.

The Process to obtain an early release

  • The contract of sale must be unconditional.
  • The vendor obtains details of any mortgage or caveat over the property in writing from the vendor’s lender.
  • The amount owing on any outstanding loans must not exceed 80% of the sale price. Some loans with redraw or lines of credit can make it very difficult to determine exactly how much the vendor will owe on the mortgage at the time of the settlement.
  • The vendor provides a Section 27 statement, including mortgage and caveat details to the purchaser.
  • The purchaser signs and returns the agreement to the vendor
  • The vendor’s Conveyancer or Solicitor advises the holder of the Trust account of the completed Section 27.
  • The Real Estate Agent will retain/be paid their commission and any other expenses they are entitled to, with the balance being paid to the vendor.

The holder of the Trust account releases the remainder of the funds to the vendor.

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What is a deposit guarantee?

In Australia, when a person enters into a contract to purchase residential property it is common practice for the purchaser to lodge a cash deposit of up to 10% of the purchase price with the vendor’s solicitor as security for the purchaser’s obligations. The deposit gives the vendor (the seller) a fund against which they can claim if you fail to complete the transaction. A deposit guarantee or also known as a “Deposit Bond” is a substitute for the cash deposit between signing contracts and settlement.

A deposit guarantee is a convenient way of securing a residential property purchase when funds are tied up. The guarantee that we organise is issued by “Lombard Insurance Company Limited” to the vendor for all or part of the deposit required. A deposit bond can be issued for all or part of the 10% deposit amount required. You can only apply for a deposit bond through us once you have a conditional approval “subject to just a valuation”. This means once your chosen lender verifies your recently signed contract of sale and then notifies us they’ve ordered a valuation on your new purchase, is when we will get you to complete and sign a two page application form for a deposit bond.

So, if you fail to complete the purchase of the property, the vendor or the holder of the deposit bond has the right to present the deposit bond to the insurer and claim the full amount of the deposit bond. The insurer will then seek reimbursement from you for any monies paid by it plus any other costs and expenses (because you have signed their ‘counter indemnity agreement’). In essence, a deposit bond enables you to defer your 10% deposit until settlement. The deposit bond is not a policy of insurance. It is a form of surety or guarantee.

Before you agree to purchase a property (or bid at an auction) you should check with the vendor that they accept deposit bonds instead of a cash deposit. You should also ensure that the vendor’s solicitor inserts the relevant clauses into the “contract for sale” to enable the deposit bond to replace the cash deposit.

Reasons why a deposit bond would be popular

  • Buyers that have no ready access to cash: Buying and selling at the same time, first home buyers short on the required 10% deposit, retirees downsizing are usually asset rich but cash poor.
  • More convenient to use a deposit bond: Property investors prefer to have their own cash working harder elsewhere, and for those that want to buy an off the plan purchase do not want to lose access to their cash.

Scenario

If you were buying a $450,000 property and the vendor insists on an upfront 10% deposit of $45,000, and you agree to provide only $15,000 once you receive your unconditional approval, then you can simply apply for a deposit bond for the difference – in this case, a $30,000 deposit bond.

Generally, you would apply for a deposit guarantee:

  • If you prefer to keep your savings earning interest right up until the day of settlement
  • If you have sold your current home but funds are not yet available for the deposit on your next property
  • If you are a first home buyer and don’t have the full 10% cash deposit required
  • If you do not want to pay the penalty for breaking a fixed investment or selling shares
  • If you are an investor and effectively borrowing 100% of the purchase price
  • If you may want to attend more than one auction before you decide which home to purchase
  • If you want a cheaper and quicker solution to arranging a deposit, than securing short term finance

It’s quick and easy:         You return a completed and signed double sided application form to us and the deposit bond will be issued within 48 hours to your Solicitor/Conveyancer, us and the vendor’s real estate agent.

It’s flexible:                       Deposit bonds can be used for private sales and auction purchases. Check with the vendor of the auctioned property if they will accept a deposit bond instead of cash or a cheque before you commence bidding, and in the case of a private sale, check with the vendor before you make an official written offer.

It’s cost effective:           It only costs a one off flat fee of 1.3% of the deposit bond amount that you’re applying for. In the example above, a deposit bond of $30,000 would therefore only cost you $390.

For even more information feel free to visit www.depositpower.com.au or simply call us to clarify what has just been explained.

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What our clients say

We could not have done it without him!

Matt and Blue Key Finance helped us throughout our first home purchase, from meeting with us to explain all the in and outs of applying for our first home loan, answering all our questions time and again over the phone and email (always with a quick and informed response), to securing the finance required when we found our home to purchase. Matt made it simple for us, and quite frankly, we could not have done it without him! Will definitely be in touch again for any future finance requirements. Thank You Matt and Blue Key Finance!

Blair Huggins