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Loan to value ratio explained

BMT team — Thu, 30 May 2019 23:18:37 +0000

If you are looking to buy an investment property, the chances are you’ve heard of a Loan to Value Ratio (LVR). The LVR for an investment property underpins your cash flow, the level of risk you can take and whether you have the potential to broaden your property portfolio. In this article we will explore: What is a Loan to Value Ratio? How are Loan to Value Ratios calculated? Lenders’ Mortgage Insurance Equity Recent changes What is a Loan to Value Ratio? A Loan to Value Ratio is how lenders describe the amount you need to borrow to buy a particular property. It informs investors as to how much of a property is being financed and how much equity is available. How are Loan to Value Ratios calculated? To calculate the Loan to Value Ratio for an investment property, divide the loan amount by the value of the property then multiply by 100 to get a percentage. Banks and financial institutions use this as a measure of whether you can secure the loan. When borrowers request a loan for an amount that’s near the appraised value and therefore has a high LVR, lenders consider there to be a greater chance of the loan going into default because there is little to no equity built up within the property. In general, investors with an LVR over 80-90 per cent are considered to be higher risk for lenders. Lenders’ Mortgage Insurance Lenders’ Mortgage Insurance is sometimes mandatory when the amount you are borrowing is more than 80 per cent of the purchase price. It can help you buy a property sooner if you have a smaller deposit and is designed to protect the banks against the risks involved in loaning to a buyer with a low deposit amount. Your Loan to Value Ratio determines whether you need Lenders’ Mortgage Insurance. Equity Equity is the difference between your mortgage and your property’s market value. For example, if your home is worth $400,000 and you owe $150,000, then you have equity of $250,000. Some lenders also include a Loan to Value Ratio when calculating equity. As you pay off your home loan your equity can increase, giving you options for further investment. If you own another property, then you can use the equity in that property as security for your next investment purchase. If you are borrowing more than 90 per cent for an investment, some lenders will want to see equity in other properties. Find out more about Using equity to buy a second property. Recent changes Loan to Value Ratios have recently been in the spotlight, with the government proposing changes to its regulation. The Coalition has promised to help first home buyers into the market by allowing them to purchase property with a 5 per cent deposit, meaning lenders will provide loans on a 95 per cent LVR. Under the proposed plan the government will set aside $500m of equity through the National Housing Finance and Investment Corporation to guarantee the additional amount needed to reach the standard 20 per cent deposit. Set to come into effect from 1st January 2020, the scheme would be available for first-home buyers with an income of up to $125,000, or couples with a joint income of up to $200,000. The plan would allow borrowers to avoid paying thousands of dollars in Lenders’ Mortgage Insurance. First-home buyers purchasing an investment property while renting, also known as rentvestors, are eligible to claim interest to reduce their tax liabilities, as well as other expenses involved in holding a property. Owners of any properties that generate an income may also be eligible for thousands of dollars in depreciation deductions. A BMT Tax Depreciation Schedule can provide you with additional cash flow to help you reduce your home loan faster. Request a Quote today for a free estimate of your likely deductions or contact one of our expert staff on 1300 728 726.

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What should you know about negative gearing before the 2019 Federal Election?

BMT team — Tue, 14 May 2019 02:54:42 +0000

With the 2019 Federal Election fast approaching, negative gearing has become a key campaign issue as each of the major parties offer significantly different policies should they win the election. Here we’ve outlined each major party’s election policies regarding negative gearing and the associated tax concessions. We’ve also taken a deeper look at what’s driving the debate, some key data to be aware of, what’s happening currently in the property market and the potential impact the changes could have on investors. In this article we will explore: What changes do the major parties propose? The impact of proposed ALP negative gearing and CGT changes Key facts to be aware of behind the negative gearing policy debate What changes do the major parties propose? The Australian Labor Party (ALP) have announced they plan to restrict negative gearing and Capital Gains Tax (CGT) arrangements from the 1st of January 2020. The ALP reforms will: Limit negative gearing to brand-new residential housing only from 1 January 2020. All residential property investments made prior to this date will not be affected by the changes and will be grandfathered. Halve the CGT discount for assets purchased after 1 January 2020, reducing the CGT discount from assets held longer than twelve months from 50 per cent to 25 per cent. All residential property investments made prior to the 1 January 2020 will be grandfathered. The Coalition will make no changes to negative gearing or CGT concessions. The impact of proposed ALP negative gearing and CGT changes The clear outcome will be that second-hand residential properties will be more expensive for investors to hold. Under this policy, losses can only be used to offset income from the property itself. Most properties run at a loss, any additional deductible losses over and above the rental income will be of no financial benefit while the property is owned. When the property is sold, if the CGT discount is reduced, property investors will have an increased CGT liability payable on any capital gain achieved. Additional economic flow on effects to the property market could include: a further decline in housing prices across the board less second-hand housing stock available on the market as investors hold on to grandfathered properties a possible reduction in the supply of new homes. Although owners of new properties will still be able to negatively gear, these properties when sold to investors will not be eligible down the track and this will affect their capital growth an expected decrease in available rental stock for tenants as investors withdraw from the market increasing rents as investors seek a higher rental yield to make up for the lack of tax concessions and demand outweighs available rental stock many property owners will fall into a negative equity scenario, where the size of their loan outweighs their property value putting them at additional risk of mortgage default. Key facts to be aware of behind the negative gearing policy debate The ALP argues property investors and the tax concessions they receive are helping to push up property prices. They believe first home buyers are being locked out of the market as a result. When considering negative gearing policy changes, it’s important to be aware of fluctuating trends in markets across Australia. Property prices in different cities are known to move at different times and external factors such as employment, infrastructure, population growth, migration, housing stock shortages and changing demographics play a role in property prices and affordability. Other factors, such as lending restrictions for investors by banks and depreciation legislation changes for owners of second-hand residential properties, are already having an impact on property markets. While national dwelling values have been high in recent years, CoreLogic has reported the peak occurred back in October 2017. Since this time, there has been a 7.4 per cent fall in national dwelling values to the period to the end of March 2019. This fall translates to a $40,590 decline in national average dwelling values. The peak (and subsequent fall) in property prices was led by Sydney and Melbourne. In Sydney, values are 13.9 per cent lower than their peak (a decrease of $124,739) and in Melbourne values are 10.3 per cent lower (a decrease of $71,404). Hobart is the only major capital city where values are yet to fall from their peak. With property values already falling across most of the country, the Coalition argues changes to negative gearing tax concessions would be a sledgehammer to an already struggling property market. Two other ALP arguments behind the party’s reason for changing negative gearing concessions are also critically flawed. They argue that negative gearing concessions: predominantly benefit high income-earners are allowing investors to expand their portfolios to buy their fifth, sixth and seventh properties. The latest Australian Taxation Office (ATO) data shows 71 per cent of landlords had only one rental property for the 2016/2017 financial year. This same data also showed 64.1 per cent of investors had a taxable income less than $80,000 and accounted for 60.5 per cent of negatively geared properties. High income earners with a salary more than $180,000 accounted for just 7.3 per cent of those with negatively geared properties in 2016/2017. BMT Tax Depreciation data for residential property depreciation schedule requests in the 2017/2018 financial year also shows that 93 per cent of investors ordered a schedule for just one property. We encourage you to review each of the major party’s policies in more detail and make an educated decision on polling day. To learn more about negative, positive and neutral gearing, read our negative gearing: basics for beginners article. Should you have questions, we’d be happy to help as best we can.

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Labor’s negative gearing policy changes are critically flawed

BMT team — Thu, 11 Apr 2019 00:24:10 +0000

With the federal election to occur on the 18th of May 2019, property investors should consider the two major parties’ negative gearing policies before casting their vote. Both political parties have outlined their stance on negative gearing in the recent 2019 Federal Budget and Budget Reply, with the Coalition confirming they won’t be making changes. However, The Australian Labor Party (Labor) will limit negative gearing to newly built housing from January 1, 2020 and halve the Capital Gains Tax Discount (CGT) for assets held longer than twelve months from 50 per cent to 25 per cent from the same date. Labor argues current negative gearing policy favours high-income earners and investors over aspiring home buyers. Labor has also quoted recent Australian Bureau of Statistics (ABS) data, stating 93 per cent of new investment loans go to people purchasing existing housing stock, as a reason for limiting negative gearing only to newly built housing. Despite Labor’s claims, there’s been substantial research from industry experts indicating the data behind their decision to change negative gearing is critically flawed. To help inform investors, we’ve looked at some key research to consider. How many properties are negatively geared? According to the latest ATO taxation statistics data, the proportion of Australia’s 2.2 million landlords who are negatively geared fell to 60.3 per cent in 2016/2017, the lowest level since 2003. The ATO data shows these 1.3 million landlords made rental losses, while 855,975 (39.7 per cent) were in a neutral position or made a gain. Who is the average property investor according to the data? So, is Labor right in thinking those who invest in property are wealthy and own several properties? Data from the Australian Taxation Office (ATO) and BMT Tax Depreciation doesn’t support this. The ATO data for the 2016/2017 income year shows that 71 per cent of landlords had just one rental property. In a recent study of BMT Tax Depreciation data for the 2017/2018 financial year, the number of investors who requested a depreciation schedule for just one property was even higher, at 93 per cent. This was up from 84 per cent in 2015/2016. In fact, BMT data showed just 6 per cent of enquirers owned two properties and 1 per cent owned three properties during 2017/2018. From the 2016/2017 ATO data, 64.1 per cent of property investors had a taxable income of less than $80,000 and they accounted for 60.5 per cent of negatively geared properties. Just 7.3 per cent of negatively geared properties are for investors earning more than $180,000. This data indicates most investors who negatively gear aren’t those on high incomes, but everyday Mum and Dad investors or professionals like Teachers, Nurses and Midwives or Police Officers. These are the people most likely to be adversely affected by Labor’s proposed negative gearing policy change. What do industry experts say about new investment loans data? In a recent article in The Australian Financial Review (AFR), Housing Industry Association (HIA) Chief Economist Tim Reardon said the figures quoted by Shadow Treasurer Chris Bowen are “substantially incorrect”. “The ABS simply do not collect the data necessary to make a conclusion that 93 per cent of investors loans go to people purchasing existing housing stock,” “We know from other sources the magnitude of investor activity in the new housing market is significantly higher than 7 per cent and perhaps, approaching 50 per cent on occasion,” Reardon said. The figures imply Labor’s estimation that more than 90 per cent of new investment loans are to people purchasing existing stock are impossible. From BMT Tax Depreciation’s own figures for the 2017/2018 financial year, 30.9 per cent of enquirers who requested a depreciation schedule did so for brand-new properties. This was an increase of 4.5 per cent when compared to the 26.4 per cent of investors who requested schedules for brand-new properties in 2015/2016. How would Labor’s negative gearing policy changes impact the property market? Industry experts, including our very own Chief Executive Officer Bradley Beer, are warning Labor’s negative gearing policy changes could be catastrophic for investors, developers and those in the real estate industry. One consequence of Labor’s policy could be a reduction in the supply of new homes. In a property market already under pressure, the changes are also expected to accelerate a decline in house prices. Another factor to consider is a decrease in available rental stock for tenants as investors withdraw from the market. Ultimately, the changes could impact on household confidence. The latest ANZ-Roy Morgan Australian Consumer Confidence index slid by 1.3 per cent following the 2019 Budget when compared with the previous week (where confidence rose 2.6 per cent – the biggest increase in more than seven months). According to Martin North, Principal of Digital Finance Analytics, their latest analysis shows households have fears about job security, the cost of living and their financial capacity to cope. This was reflected in comments in the AFR from HIA Economist Tim Reardon, who said “you do not free up a market by increasing taxes and restrictions.” To read an article which explains negative gearing versus positive gearing, click here. To read the article from the AFR, click here*. *Please note this article is subscription content

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A lesson in negative gearing changes proposed by Labor

BMT team — Thu, 25 Oct 2018 05:13:13 +0000

Amidst Labor’s plans to abolish negative gearing on existing properties and reduce the Capital Gains Tax (CGT) discount if they win the next federal election, let’s recap what gearing is and what the proposed changes would mean for property investors. A property is referred to as negatively geared if the rental income is less than the outgoing expenses including deductible losses. The investor will be making a cash loss on their investment property and can offset these losses against other income earned, including their salary. In turn, this reduces investors’ taxable income, meaning they pay less tax to the Australian Taxation Office. Investment properties can also be neutrally or positively geared. Positively geared properties have a positive cash flow as the investor receives a higher rental return than the outgoing expenses. In this situation, an investor must pay tax on this income earned at their top marginal tax rate. Properties are neutrally geared when the outgoing expenses and generated income are the same. Negative gearing is a popular investment strategy for Australian investors, with the greatest benefit being the reduction to their taxable income. This provides them with both a short-term financial boost and the opportunity to achieve long-term capital growth from the property. What impact would the proposed negative gearing changes have on property investors? Investors could no longer purchase existing properties and offset their salary and wage income with the net losses. However, investors would still be able to negatively gear new properties, as these would be unaffected by the proposed changes. Investors who currently negatively gear their properties also wouldn’t be affected by the changes as legislation would be grandfathered. This means that the proposed changes would directly affect investors who purchase existing properties. If Labor wins the next federal election and their plans become legislation, there is no doubt that this would change the property investment landscape in Australia. There is a widespread fear that investors would be turned off property investing and there would be a fall in new housing construction. A report from Master Builders Australia predicted that changes to negative gearing and the CGT discount would result in 32,000 fewer jobs and a $12bn downturn in construction activity within the first five years. It’s important for investors to be prepared for major changes to property investing in Australia. The extent of the effect of Labor’s proposed changes remains yet to be seen.

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