Choice of Home Loan products

When you engage an experienced, professional mortgage broker, you get a whole lot more choice. Paul gives you access to over to 22 lenders.

Save time and money

Comparing hundreds of home loans from dozens of lenders means Paul is able to identify the right loan for you and, depending on the loan product, he can also negotiate a discount on your loan which can save you money over the life of the loan.

Paul will do all the legwork on your behalf. This includes liaising with the lenders, conveyancers, settlement agencies, real estate agents, accountants and builders.

Good education

One of the best answers to the ‘why use a mortgage broker’ question, is that the importance of informed decision making cannot be underestimated. There are hundreds of mortgage options out there, but what one is best suited to your particular situation? Every lender seems to use different terminology and product features, and of course every individual home loan is accompanied by different terms and conditions.

The sheer variety of options and the overwhelming fine print, even making an ‘apples-for-apples’ comparison of lenders is a daunting task. Paul is there to help you make that decision so much easier!

A good mortgage broker will listen to your needs and plans. They will carefully assess your situation before calling upon their years of knowledge and contacts to identify exactly the right loan for you.

Reduce the Risk of Being Declined

If you’ve been refused a loan by one lender, that does not necessarily shut the door on your plans. Other lenders have different policies and generally, with different pricing or costs, it won’t necessarily mean that you will be refused by other lenders. But knowing which lenders have different “risk appetites” or are more lenient in their lending policies, requires a Mortgage Broking Professional to sort out these nuances. It takes more than just a comparison of their websites. By engaging a broker with specialist knowledge of lender policies, you significantly reduce the risk of being declined.

An experienced and professional mortgage broker will also look after you for the life of your loan, and make sure the bank is looking after you. They’ll periodically stay in contact with you, checking that your loan is still right for you.

In an ideal world, clients will have a 20% deposit, plus costs, to avoid the cost of Lenders Mortgage Insurance* (LMI). Surprising to some, the answer to this question may be little or no savings. However, this will depend on your personal circumstances.

An experienced mortgage broker like Paul can determine which of the options below may be a suitable solution.

1. Guarantor home loan
2. 5% home loan
3. 10% plus home loan
4. Home loan with no deposit.

*Noting that the Federal Government have limited places available, for applicants with just a 2% deposit and no LMI.

Not sure where to start, or have more questions? Contact Paul.

Need a Home Loan, but a little unsure if any given loan is in your best interests?
Paul will help you find the best solution and give you the peace of mind that all borrowers aspire to.

Mortgage Brokers receive a commission, directly from the chosen Lender, in the form of a one-off upfront fee. It is generally calculated as a percentage of the loan amount. This commission is not paid for out of the borrower’s mortgage, but comes from the Lenders’ projected profit, over usually the first two years of the loan.

The commission is paid by the lender to Credit Licence holder (or Aggregator) – in this case Outsource Financial. Paul is an authorised representative of Outsource Financial. They pay the majority of the commission to the Mortgage Broker, after aggregation costs and fees have been taken out. The Broker may also receive an ongoing trailing commission, to help cover the Broker’s administration and training costs etc.

Clawback of commission

If the loan is repaid in full within a 24 month period, the Lender will generally “clawback”  the commission payment made to the Mortgage Broker.

Where it is almost certain that the client repay the loan within that 24 month period, the  broker may choose to charge the client a Credit Assistance fee, to help mitigate the potential clawback of the commission. In these circumstances, the Broker will provide an up-front quote to the client for acceptance and have this fee included in the loan funds disbursement, at settlement of the loan.

If you are buying a property and have less than a 20 per cent deposit, you may be required to pay Lender’s Mortgage Insurance (LMI). The cost is deducted from the loan proceeds by the lender and then passed on to the Mortgage Insurer, who is a third party to the loan.

LMI insures the lender, not the borrower, against non-payment or default of a borrower’s residential property loan. While it protects the lender against loss should the loan go into default, it does help stabilise or mitigate the lender risk. It can also make it possible for purchasers to buy a home with as little as a 5% deposit.

How it works

When you take out a Home Loan, you pay a one-off fee to the Mortgage Insurer, via the lender. Fees vary according to the amount borrowed and the size of your deposit. You can pay the fee up-front or add it to the total loan amount. Generally speaking, if you are borrowing more than 80 per cent of the property’s value, you will pay a LMI fee. However, there are certain circumstances – depending on the nature of the property – when this fee becomes mandatory on borrowings of less than 80%. One way to avoid the insurance cost is to contribute a larger deposit. Or, you can have a guarantor home loan.

Costs and benefits

First home buyers benefit because it allows them to buy a home sooner with a smaller deposit. In times of rising property prices, Lender’s Mortgage Insurance allows buyers with smaller deposits to get into in the market. This can increase their equity through capital growth.
The costs are calculated on a tiered basis, as a percentage of the loan amount. Tiers are determined by the Lending Ratio (or LVR). The higher the LVR, the higher the percentage of the fee and therefore the higher the cost to the client.

“Genuine” savings refers to the savings directly attributable to the loan applicant(s). This can be achieved through graduated savings over a three-month period or a lump sum that is held in savings over a three month period. 5% “genuine” savings generally needs to be verified on all LMI loans where the base LVR generally exceeds 80%. The 5% will generally relate to the purchase price of the property (or land plus construction costs for building loans). For refinances the requirement is not applicable, as clients already own the property.

A small group of lenders will take paid rent as a part contribution to the 5% savings rule. Demonstrated genuine savings behaviour provides evidence of the applicants’ commitment and capacity to service proposed home loan repayments.

Acceptable forms of 5% Genuine Savings:

• Regular savings pattern building up to the required minimum 5%
• Savings statements showing the required 5% of purchase price have been held for a minimum period of three months
• Equity in real estate owned by applicants, where such real estate is offered as security
• Shares held in at least one applicants name for a period of at least three months.
• Other criteria may apply

Unacceptable Forms of 5% Genuine Savings

• Gifts of any kind
• Proceeds of a personal loan or other borrowings
• Cash held of any kind
• Builders rebate / Incentive
• First Home Owner Grant (FHOG)
• Funds held in a business/company trading account

It is very important to note that the broker can negotiate a good interest rate if the client can prove genuine savings, especially for first home buyers. It is quite complicated for the client to get this right as the bank policies are very strict regarding genuine savings.

Many home buyers entering the property market can raise the required deposit. However, raising that money in one’s own account can be troubling for some buyers.

With this in mind, some lenders have created a non genuine savings product. Simply put, as long as a borrower can show they have the deposit (which could have come from a variety of sources) then the lender will lend them the remaining amount of the funds required to complete the purchase.

The non genuine savings product is only available from a few lenders and is very popular with first home buyers.

Home loans with 100% offset accounts may help you to decrease the amount of interest you pay on your home loan. They work best by a strategy of depositing your salary straight into an offset account. The benefit is that you immediately reduce the amount of interest you are paying, by the balance held in the Offset account.

Use your day-to-day savings to reduce your interest.

A quick guide to 100% Offset Mortgages:

• Links your home loan to an offset transaction account.
• For the purpose of calculating interest, the balance of your mortgage account is reduced by 100% of the balance of your linked transaction account.
• The more money you keep in your Offset account the less interest you pay on your mortgage.
• The key to success with the offset transaction account is to grow your savings and leave these funds in the account as long as possible.
• You still have access to these funds whenever you need them.

This is one of the most powerful ways to reduce the amount of interest paid by the borrower, as the interest savings compound over the lifetime of the Home Loan.

A “100 percent offset account” is arguably the most important tool a borrower can have to:

• Decrease the term of your Home Loan
• Reduce the amount of interest paid on your Home Loan, by using every dollar that you have to effectively reduce the balance of your Home Loan.

There can be other long term benefits to the borrower in using an Offset account as the main tool to reducing the amount of interest paid to the lender and increasing the equity held in the property. If borrowers have aspirations to invest in property in the longer term, it is very important to use this account in the correct way.

(Resource: Wikipedia – negative gearing)

Negative gearing is a practice whereby an investor borrows money to acquire an income-producing investment property and expects the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments).

The arrangement is a form of financial leverage. The investor may enter into such an arrangement and expect the tax benefits (if any) and the capital gain on the investment, when the investment is ultimately disposed of, to exceed the accumulated losses of holding the investment.

Tax benefits

Tax treatment of negative gearing would be a factor that the investor would take into account in entering into the arrangement, which may generate additional benefits to the investor in the form of tax benefits if the loss on a negatively geared investment is tax-deductible against the investor’s other taxable income and if the capital gain on the sale is given a favourable tax treatment.

Some countries, including Australia, Japan and New Zealand allow unrestricted use of negative gearing losses to offset income from other sources. Several other OECD countries, including the US, Germany, Sweden, and France, allow loss offsetting with some restrictions. Applying tax deductions from negatively geared investment housing to other income is not permitted in the UK or the Netherlands.

Another example of is borrowing to purchase shares whose dividends fall short of interest costs. A common type of loan to finance such a transaction is called a margin loan. The tax treatment may or may not be the same.

A negative gearing strategy makes a profit under any of the following circumstances:

• if the asset rises in value so that the capital gain is more than the sum of the ongoing losses over the life of the investment
• when the income stream rises to become greater than the cost of interest (the investment becomes positively geared)
• if the interest cost falls because of lower interest rates or paying down the principal of the loan (again, making the investment positively geared)

The investor must be able to fund any shortfall until the asset is sold or until the investment becomes positively geared (income > interest). The different tax treatment of planned ongoing losses and possible future capital gains affects the investor’s final return and leads to a situation in countries that tax capital gains at a lower rate than income. In those countries, it is possible for an investor to make a loss overall before taxation but a small gain after taxpayer subsidies.

Deduction of negative gearing losses on property against income from other sources is permitted in several countries, including Canada, Australia and New Zealand. A negatively-geared investment property will generally remain negatively geared for several years, when the rental income will have increased with inflation to the point that the investment is positively geared (the rental income is greater than the interest cost).

Taxation

Australian tax treatment of negative gearing is as follows:

• Interest on an investment loan for an income producing purpose is fully deductible if the income falls short of the interest payable. The shortfall can be deducted for tax purposes from income from other sources, such as the wage or salary income of the investor.
• Ongoing maintenance and small expenses are similarly fully deductible.
• Property fixtures and fittings are treated as plant, and a deduction for depreciation is allowed based on effective life. When they are later sold, the difference between actual proceeds and the written-down value becomes income or further deduction.
• Capital works (buildings or major additions, constructed after 1997 or certain other dates) attract a 2.5% per annum capital works deduction (or 4% in certain circumstances). The percentage is calculated on the initial cost (or an estimate thereof) and can be claimed until the cost of the works has been completely recovered. The investor’s cost base for capital gains tax purposes is reduced by the amount claimed.
• On sale, or most other methods of transfer of ownership, capital gains tax is payable on the proceeds minus cost base (excluding items treated as plant above).A net capital gain is taxed as income, but if the asset was held for one year or more, the gain is first discounted by 50% for an individual, or a third for a superannuation fund. (The discount began in 1999, prior to which an indexing of costs and a stretching of marginal rates applied instead.)

The tax treatment of negative gearing and capital gains may benefit investors in a number of ways, including:

• Losses are deductible in the financial year they are incurred and provide nearly immediate benefit.
• Capital gains (link to this topic in FAQ) are taxed in the financial year when a transfer of ownership occurs (or other less common triggering event), which may be many years after the initial deductions.
• If it is held for more than twelve months, only 50% of the capital gain is taxable.
• Transfer of ownership may be deliberately timed to occur in a year in which the investor is subject to a lower marginal tax rate, reducing the applicable capital gains tax rate compared to the tax rate saved by the initial deductions.

However, in certain situations the tax rate applied to the capital gain may be higher than the rate of tax saving because of initial deductions such as for investors who have a low marginal tax rate while they make deductions but a high marginal rate in the year the capital gain is realised.

In contrast, the tax treatment of real estate by owner-occupiers differs from investment properties. Mortgage interest and upkeep expenses on a private property are not deductible, but any capital gain (or loss) made on disposal of a primary residence is tax-free. (Special rules apply on a change from private use to renting or vice versa and for what is considered a main residence.)

Arguments for and against

The economic and social effects of negative gearing in Australia are a matter of ongoing debate. Those in favour of negative gearing argue:

• Negatively-geared investors support the private residential tenancy market, assisting those who cannot afford to buy, and reducing demand on government public housing.
• Investor demand for property supports the building industry, creating employment.
• Tax benefits encourage individuals to invest and save, especially to help them become self-sufficient in retirement.
• Start up losses are accepted as deductions for business and should also be accepted for investors since investors will be taxed on the result.
• Interest expenses deductible by the investor are income for the lender so there is no loss of tax revenue.
• Negatively-geared properties are running at an actual loss to the investor. Even though the loss may be used to reduce tax, the investor is still in a net worse position compared to not owning the property. The investor is expecting to make a profit only on the capital gain when the property is sold; only then, the treatment of the income is favoured by the tax system since the only half of the capital gain is assessed as taxable income if the investment is held for at least 12 months (before 2000–2001, only the real value of the capital gain was taxed, which had a similar effect). From that perspective, distortions are generated by the 50% discount on capital gains income for income tax purposes, not negative gearing.

For more information, see Wikipedia – negative gearing.

Resource:  Wikipedia Capital gains tax in Australia

Capital gains tax (CGT) in the context of the Australian taxation system applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home. Rollover provisions apply to some disposals, one of the most significant is transfers to beneficiaries on death, so that the CGT is not a quasi death duty.

CGT operates by having net gains treated as taxable income in the tax year an asset is sold or otherwise disposed of. If an asset is held for at least 1 year then any gain is first discounted by 50% for individual taxpayers, or by 33.3% for superannuation funds. Capital losses can be offset against capital gains, and net capital losses in a tax year may be carried forward indefinitely. Capital losses cannot be offset against normal income.

Personal use assets and collectables are treated as separate categories and losses on those are quarantined so they can only be applied against gains in the same category, not other gains. This works to stop taxpayers subsidising hobbies from their investment earnings.

History

A capital gains tax (CGT) was introduced in Australia on 20 September 1985, one of a number of tax reforms by the Hawke/Keating government. The CGT applies only to assets acquired on or after that date, with gains (or losses) on assets owned on that date, called pre-CGT assets, not being subject to a CGT.

Initially, the rules allowed the cost of assets held for 1 year to be indexed by the consumer price index (CPI) before calculating a gain. This meant the part of a gain due to inflation was not taxed.

Indexation was not used if an asset was held for less than 12 months or a sale results in a capital loss. Also, an averaging process was used to calculate the CGT. 20% of a taxpayer’s net capital gain was included in income to calculate the taxpayer’s average tax rate, and the rate was then applied to all the taxpayer’s gross income (ie., including the capital gain in full). So if a large capital gain were to push a taxpayer into a higher tax bracket in the tax year of sale, the brackets was stretched out, allowing the taxpayer to be taxed at their average tax rate.

From 20 September 1999, the Howard Government discontinued indexation of the cost base and (subject to a transitional arrangement) introduced a 50% discount on the capital gain for individual taxpayers. For assets acquired between 20 September 1985 and that date, the taxpayer has an option of using indexation (up to the CPI as at 30 September 1999) or using the discount method.

Also from 21 September 1999, small business CGT concessions were introduced (below), reducing tax on small business owners retiring, and on active assets being sold, and allowing a rollover when selling one active asset to buy another. The CGT discount is not available to companies and superannuation funds obtain a CGT discount of one-third.

For more information: Wikipedia Capital gains tax in Australia

What is property depreciation?

Just like you claim wear and tear on a car purchased for income-producing purposes, you can also claim the depreciation of your investment property against your taxable income. There are two types of allowances available: depreciation on plant and equipment, and depreciation on building allowance. Plant and equipment refers to items within the building such as ovens, dishwashers, carpet, blinds, etc. Building allowance refers to construction costs of the building itself, such as concrete and brickwork. Both these costs can be offset against your assessable income.

How do you make a claim for depreciation allowance?

In order to make a claim for depreciation you need a report that breaks down the property into different categories. This report is called a depreciation schedule.
The amount the depreciation schedule says you can claim effectively reduces your taxable income.
In a depreciation schedule a quantity surveyor will separate the plant items (oven, dishwasher, etc) from the structural elements such as bricks and concrete.
Why? Because different elements have different rates of depreciation, which are generally based upon how long the item will last.
For example, if an oven costing $1,000 has a 10-year life – you can claim $100 against your taxable income for 10 years using the Prime Cost Method of depreciation.

When do I need the depreciation schedule and how often should I have it prepared?

You should get the depreciation schedule prepared straight after settlement, if possible. That way the quantity surveyor will see your property in the true state of what you have purchased. And if the tenant hasn’t moved in yet, that’s a bonus, as it will avoid disruption.
The good news is – you only need to have the depreciation schedule prepared ONCE – not every year as some people think.

Is my property too old to claim property depreciation?

The simple answer is no. If your residential property was built after July 1985 you will be able to claim both building allowance and plant and equipment. However, if construction on your property commenced prior to this date, you can only claim depreciation on plant and equipment (i.e. carpet, blinds, oven, etc). But it will still be worthwhile to do so.
Commercial and industrial properties are subject to varying cut-off dates.

Who should prepare your depreciation schedule?

If your residential property was built after 1985 your accountant is not allowed to estimate the construction costs. Tax Ruling 97/25 issue by the Australian Taxation Office (ATO) has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown. Real estate agents, property managers and valuers are not allowed to make this estimate.

How will the quantity surveyor assess the property for depreciation purposes?

The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements. A trained quantity surveyor will ensure all depreciable items are noted down and photographed. This means that you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit. They will also liaise directly with the tenant or property manager in order to cause minimal disruption to the tenant.

My property is renovated. Can I still claim?

Yes. We will need to know how much you spent on renovations. This is an ATO obligation. If the previous owner completed the renovations you are still entitled to claim depreciation. In either case, where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as being appropriately qualified to make that estimation.

How much will my property depreciation schedule cost?

The cost of preparing a tax depreciation schedule varies according to the type of property you’ve purchased, its location, size and numerous other factors. Generally, most leading Quantity Surveyor companies offer a service that value adds to your investment, by providing benefits that far outweigh the costs. Quantity surveyors’ fees are also 100% tax deductible.

How much tax will I save?

Each property is different and many varying factors must be considered when preparing a property depreciation schedule. There are several depreciation calculators on the market. I suggest you Google ‘depreciation calculator’ to find one. 

How long will it take to complete my schedule?

Your depreciation schedule will take approximately two to three weeks to complete, as long as the quantity surveyor can inspect your property without delay.

I bought my property three years ago. Can I still make a claim?

Yes, you can. Your accountant can amend your previous tax returns up to two years back. There are some exceptions so please contact your tax agent or the ATO for clarification. This information was written by Tyron Hyde who is the CEO of Washington Brown and is considered one of Australia’s leading experts in property tax depreciation. He is also a registered tax agent. Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually.

A credit history is a record of a borrower’s responsible repayment of debts. The credit report is a record of the borrower’s credit history from a number of sources, including banks, credit card companies, collection agencies, and governments. A borrower’s credit score is the result of a mathematical algorithm applied to a credit report and other sources of information to predict future delinquency.

When a customer fills out an application for credit from a bank, credit card company, or a store, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files. Those gathered records are then used by lenders to determine an individual’s credit worthiness; that is, determining an individual’s ability and track record of repaying a debt. A bad credit report can result in a decline for a loan application.

The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid regularly and on time, and therefore focus particularly on missed payments and may not, for example, consider an overpayment as an offset for a missed payment.

Here’s what might be listed in your report:

• Your personal details.
  Your name, date of birth, current and past addresses, employment and driver’s licence number.
• Your credit history.
  Listings of any credit or loans you have applied for, defaults (overdue payments of 60 days or more where collection activity has started) and any other credit infringements (infringements can be listed for up to five years after they occurred, or seven years for serious infringements).
• Repayment history.
  Dates your credit payments were due, whether or not you made the payments by the due date, which dates you missed any payments
• Other information.
  Bankruptcies (for up to seven years after they occurred), court judgments, debt agreements and personal insolvency agreements (for up to five years after they occurred).

You can check your credit history on veda.com.au.

Loan to Valuation Ratio (LVR) is the lenders way of working out the true financial value of your property, and decides whether your Home Loan needs to be covered by Lenders Mortgage Insurance.

The Loan to Valuation Ratio is simply the loan amount divided by the value of your property. Lenders require the borrower to have Lenders Mortgage Insurance if they lend you more than 80% of the value of the property.

For example, the LVR of a $640,000 loan on a $800,000 property is 80%. In this instance, no Lenders Mortgage Insurance is required.

If the LVR is over 80%, then Lenders Mortgage Insurance will apply and this can be added to the base loan amount.

You must take into account that the value of a property is determined by the lender’s valuation and NOT the price you paid for it. There may a difference between the valuer’s price and the purchase price.

Paul can negotiate a good interest rate with the bank depending on the LVR. Most banks will offer a rate for risk interest rate which means the higher the LVR, then higher the rate. However, some banks don’t do this so it is very important for Paul to help you because he knows which banks don’t do this. Paul can give you good advice and provide choices, especially for first home buyers. He is very experienced with this type of lending and will be able to guide and help you.