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Debating whether to pay off a home loan early or invest in property? Here is what you need to know

BMT team — Mon, 09 Aug 2021 01:01:18 +0000

So, you’re in the position where you can pay off your home loan or get started on an investment property portfolio – congratulations! There are pros and cons to both. You should always seek professional advice before making any decisions, but in the meantime here are some things to consider. Paying off home loan early Advantages: Psychological benefits The relief of knowing that you own your home outright can far outweigh any of the financial considerations. Life has many unanticipated surprises. Unexpected expenses pop up all the time and changes to employment can occur with no warning. Not having to pay a mortgage can provide the ultimate peace of mind. Say goodbye to costly interest repayments Interest makes up a large portion of repayments over the lifetime of a loan. And while interest rates are at record lows in Australia, the longer you hold a home loan, the more interest you pay. Paying off your home loan early means that you will be saving thousands of dollars in interest repayments while reducing the impact of any future rate rises. Start ticking off other goals A home loan is one of the biggest debts you’ll have. Being mortgage-free means you can get on top of other fiscal goals like paying off a credit card or car loan, making more contributions to superannuation for retirement or saving for a large holiday. Cons: Extra fees Many lenders charge for paying off a home loan early, imposing exit, break or early termination fees. You need to factor such fees into your decision and discuss the options with your home loan lender. Being caught out with not enough cash flow Paying off a home loan may mean using a large chunk of savings. But just because you don’t have a home loan doesn’t mean you won’t face other expenses with home ownership like urgent repairs, insurances and much more. It’s important to maintain a cash buffer for these instances. Investing in a property Advantages: Wealth and equity creation Investing in property means you are not only benefiting from regular rental income, but you are also increasing your equity over time. Equity grows through a combination of paying the loan down and the property’s value increasing. More tax benefits There are many expenses involved with owning an investment property, including insurance costs, property management fees, repairs and strata fees. But as a property investor, you can claim them as tax deductions. Applying more tax deductions to your taxable income means you pay less tax. Deductions are applied to your total taxable income, including sources outside of rental income like a salary. In further good news, non-cash tax deductions are also available to investors. Depreciation is the natural wear and tear of property and assets over time and investors can claim it on their rental property. This single deduction doesn’t cost a cent to claim and can reduce tax liabilities by thousands. Setting yourself up for your future Rental income can provide an additional income stream, which can make up part of your ‘nest egg’ once you hit retirement age. Once you reach retirement age you can continue to use the rental property as a reliable income stream or choose to sell in the future and receive a large sum of money (taxes apply). Cons: Risks that can hit your back pocket Like any investment, property investing comes with its own set of risks. These are often in the forms of tenant-related risks causing loss of rental income, or property damage. An adequate insurance policy can mitigate many of the risks associated with property investing but it’s impossible to cover absolutely everything. High upfront and ongoing costs Forking out the cash to buy another property while still paying off your main residence is a huge financial decision. It requires significant financial outlay and can cause you to go into much more debt. Therefore, it goes without saying that you must factor in these additional costs when making your decision. Tools such as PropCalc can help you estimate the likely cash flow impact owning a specific property will make. The bottom line Before making any decision, it’s crucial to speak with a professional who is qualified to provide financial guidance, like your accountant or a financial adviser. They will assess your current situation, explain the likely outcomes and help you put a tailored plan in place to suit your individual circumstances. If you do go down the investing in property path, get a depreciation estimate early. Property depreciation has the potential to boost cash by thousands, especially in the earlier years of ownership when costs are higher. To learn more, contact BMT on 1300 728 726 or Request a Quote.

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What is an interest only loan and why do property investors use them?

BMT team — Wed, 07 Jul 2021 00:31:41 +0000

Low interest rates effectively make borrowing more affordable. With the Reserve Bank setting the cash rate at a record low, the flow-on effect to lending has been evident. If a property investor is looking to maximise cash flow, one strategy is to pay only the interest portion of the property’s loan (and not repay the capital). But this raises the question, what happens to the interest-only loans when rates fluctuate? The answer is business as usual, but first, what is an interest only loan and why do investors use them? What is an interest only loan on an investment property? Where an interest only loan used to purchase an investment property, the loan repayments only cover the interest, not the principal. In other words, the loan amount (principal) to purchase the property remains unpaid. The interest only period usually has a set timeframe, for example the first five years of a 30-year loan. Several banks and lending providers offer them. Reasons investors use interest only loans There are two key reasons why investors use this financing option. 1. To reduce expenses early and amplify cash flow Principal repayments are a substantial non-deductible cost of owning an investment property. Some choose to delay principal payments to assist their cash flow earlier on in their investment property journey. Lowering the costs early on by delaying principal repayments provide investors with more cash than they would’ve had. This allows them to reinvest cash flow to assist them in achieving a stronger financial position when the time comes to begin principal repayments. 2. To increase the loan’s tax-deductibility It’s common for interest only loans to have a higher interest rate compared to interest and principal loans. This must be considered when deciding on a loan, but a result of this is the increased tax deductions. Interest repayments on an investment property’s home loan are fully tax deductible to investors. This means the higher the interest repayment, the higher the tax deduction will be. The deductions are also higher as the debt level isn’t being reduced. The higher deductions often help when an investor also has a home loan that isn’t tax deductible, as they can use the additional funds from not paying principal on their investment property to reduce the non-deductible debt. This is all while maintaining higher levels of deductible debt, which effectively increases deductions that reduce tax liabilities. Tax deductions reduce property investor’s taxable income, so higher interest repayment claims can result in less tax to pay. According to the Australian Taxation Office, an average investor makes an interest repayment tax deduction claim of over $9,000 each financial year. Pitfalls of interest only loans 1. Higher interest rate As previously mentioned, an interest only loan usually has a higher interest rate. While this does mean a higher interest repayment tax deduction, it’s important to remember that all deductions are taxed at the investor’s personal income tax rate. So $1 in deductions doesn’t necessarily mean $1 back in cash. Furthermore, tax deductions can only be claimed at tax lodgement time (unless a Pay as You Go Withholding variation is in place). So the investor must ensure the constant cash flow impact can be managed throughout the financial year. 2. Increased future principal repayments. Not making principal repayments in the early years of an interest-only loan has consequences in the form of elevated future repayments. Let’s use an example of a $500,000 loan with a total term period of thirty years, and the first five being interest-only. The annual principal repayment will be approximately $16,660. Not making principal repayments in the first five years means the $83,330 that would’ve been paid in this period must be paid in the remaining twenty-five years. This would increase the total annual principal repayments to $20,000 per year. 3. Risk of stalled equity The only two ways to build equity is through capital growth and paying down the principal of a home loan. This means by opting for an interest-only loan the investor can only count on capital growth to build their equity. This element can be unpredictable as it largely depends on property market conditions and other macro-economic factors. Despite the pros and cons, seeking the appropriate financial advice is paramount. Financial advisors and accountants are two key consultants to engage when deciding on the best financing option for your next investment property. They will be able to liaise with you as you discuss financing options with your lender or mortgage broker. Reminder: Interest only loans don’t impact property’s depreciation Despite the fact that the investor isn’t paying off the property’s principal, they can still claim depreciation on its structure and assets. Depreciation is a process of natural wear and tear and is an exclusive tax deduction to owners of income-producing properties, including property investors. Just like interest repayments, depreciation reduces your taxable income so you pay less tax. The key difference is that depreciation is a non-cash deduction – so no money needs to be spent to claim it. On average, depreciation can yield an average first full financial year deduction almost $9,000. To learn more about depreciation and how it can improve your investment property’s cash flow, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote.

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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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Five tips to set you up for your home loan

Chan Naylor Team — Wed, 19 Nov 2014 00:55:09 +0000

With the highest auction clearance rates seen for some time more Australians are looking to buy property than ever before, but what happens if you fall in love with a home and then discover the bank won’t lend to you? Even worse, what happens if the bank turns you down and it’s your fault? Here are 5 tips to make sure you are properly set up for that home loan. 1. Check your credit file Some of my clients were recently declined by a mid-tier bank because they had a couple of gas payment defaults on their credit file. Trouble is, this was the first that my clients knew about it because the defaults related to their old home. Thankfully, we were able to get approval with a Big Four lender – but it took a lot of work. All the stress could have been avoided if they had checked their credit file before they applied for a loan. The good news is, it’s free to check your credit file, check out the details on www.mycreditfile.com.au 2. Get your savings in order Lenders like to lend to people who can show they are responsible with money. So they like to see money in an account for at least three months without the account holder having succumbed to the temptation of spending some of it. If say a relative is going to help out with the deposit, then holding the cash in your account for some time before you apply for a home loan makes it so much easier. I once had a client whose family came from a developing country which was subject to quite a few UN sanctions. His family were gifting him some money, but getting money out of this country was very difficult so the money was appearing as odd random cash deposits made all over Australia. It took me ages to prove to the bank that the applicant wasn’t a drug runner or an arms dealer! Had the cash been ready and waiting in his Australian account for some time there again, it would have been much easier. 3. Pay your bills as soon as possible When you apply for a home loan, the first thing a bank does is check your credit file. Once upon a time, the credit file just showed if you were in default or had made too many credit inquiries. Now under a new law, credit files can show who is a prompt payer. So from now on, it’s in your interest to pay any bill as soon as you can. 4. Reduce your credit card limit It might boost your ego to have a platinum credit card with a $50,000 limit but do you need all that money? When the banks are assessing how much they will lend to you, they will take that credit card limit as money already lent (even if you pay it off every month). As a result, they may well reduce how much they will lend you based on that limit. You may want to reduce your credit card limit if you don’t need all that money. Banks have been known to first request clients to reduce their credit card limit before giving a final loan approval. 5. Know your limit Not all banks are the same. For example, if you were a brand new customer and you walked into a branch then chances are that the most they would lend you is 90 per cent of the value of the property (although some may go up to 95 per cent) – even if you are a multi-millionaire (it’s just their policy). You could be an excellent home loan candidate, but if you just go to your own bank because you think that all banks are the same then you may be in for a shock. However, good brokers know what each bank’s lending policy is and know where you are most likely to get home loan approval. For further information about how Chan & Naylor can help assist you with your Home Loan, contact Chan & Naylor today or call on 1300 306 868.

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