Andrew – Page 11 – Peach Home Loans

ASIC update offers clearer home loan guidance

Apr 7,2011 Leave a comment

A new update from the Australian Securities & Investments Commission (ASIC) to the regulatory guide for the National Credit Act will offer lenders better, clearer guidance on assessing the ability of borrowers to repay their loans.

The amendments provide “important protection for consumers”, according to ASIC commissioner Peter Boxall.

He said the changes came about over concerns that older borrowers were being refused loans because their employment will cease or reduce before the end of the term of the loan.

Commenting on this “unnecessarily restrictive approach”, he pointed out that while responsible lending requirements offer essential consumer protection, they should not pose an “inflexible barrier to credit for any segment of the population”.

The updated guidance is likely to affect those applying for Australian home loans, as all businesses engaging in consumer credit activities – including credit unions, finance companies, brokers, banks and payday lenders – have been subject to responsible lending obligations under the National Credit Act from the beginning of this year.

All property buyers should make themselves aware of the full cost of their purchase before applying for a loan – especially those who are purchasing their first residential home.

The Real Estate Institute of Victoria asserted that a home loan comparison service could be useful for prospective buyers, as rates can vary between lenders.

Why are lenders cool on studio or managed apartments?

Nov 13,2010 Leave a comment

Studio apartments may seem an ideal way to get a foot in the property market, or an attractive high yield addition to an investment portfolio, but lenders aren’t very keen on them. A person might find getting finance on a 2 br unit or a house no problem at all, but the same person looking at a studio will have to find a bigger deposit and face less favourable terms. Why is this so?

The most obvious reason is simply that you can always build more apartments. A house comes with land, and – apart from Dubai and some volcanic islands – no-one is creating more land. With apartments however, developers can sense demand and build up higher and higher, or fill land where houses once stood. Occasionally they’ll become far too excited and build too much to be bought at any given time.

This keeps a lid on prices or might even cause them to drop. This is what really has lenders on edge. They fear that if there is a glut in the market from over enthusiastic development, they will be left with a security that is worth less than the money they are owed. They therefore want to create a bigger buffer by insuring the buyer provides more of the purchase price so that any price drops don’t affect the lender.

This makes sense, but why are studios even less attractive than normal apartments? You can stack two and three bedroom flats on each other as much as you can with studios and studios often give an investor a much higher return.

The answer here is that studios are only suitable for a small number of people. Who wants to live in 25 sqm unless they’re young, low income, single and don’t intend to live there indefinitely? Not many! Even though this limited demand is already reflected in lower prices, lenders aren’t interested in the rental return they simply want to make sure that they can sell a property quickly if they foreclose. The buyers are out there, but they can’t be found as quickly as the lenders would like. So they tend to be wary.

Likewise returns on student accommodation can be very attractive, however keep in mind that apart from improving an investors ability to service a loan, the lender has no interest in rental returns. Any managed property such as student or even serviced apartments have a more limited market into which the lender can sell the property ie: if the management agreement gives the manager exclusive rental rites for say 2 years then the property can’t be sold to owner occupiers and therefore the potential number of buyers is dramatically reduced.

When buying property remember that lenders are cool on properties which are less likely to hold their value because it is easy to produce more. They also don’t like properties that they can’t sell quickly to a wide market if they foreclose. Finally keep in mind that if you encounter obstacles raising finance on a studio, when it comes time to sell your prospective buyers will also encounter obstacles, even further reducing the potential market.

What about Co-Ownership?

Aug 10,2010 Leave a comment

The property market can look a little daunting to many home buyers and investors today. They know they want to “get a foothold”, but the prices are so high. So they and their friends, who are in the same boat, grumble and moan until…eureka! Each one of them alone can’t get a foothold, but if they join forces….

It is becoming more common for groups of friends and investors to jointly purchase properties, and lenders are putting out a large range of products to cater for them. These products may allow you to buy property when you couldn’t before. But there are important issues to consider, such as the effect on your borrowing power and possible legal entanglements..

Let’s imagine two friends, Andrea and Peter. Each of them is renting, but they wish they were buying instead. Both of them have savings, but not enough for a deposit, and their incomes aren’t quite big enough to cover a mortgage near the places they want to live and work. Andrea and Peter decide to pool their resources with a co-ownership product. Together they have enough for a deposit on a two bedroom apartment, and their combined income is enough to cover the loan repayments. They now own their piece of property.

Andrea and Peter are close friends, but they’re not that close. They want to keep their finances separate. So they made sure they found a product that allows them to pay their loan automatically out of different bank accounts. They’re in each other’s house, but they don’t need to be in each other’s accounts. They also have different opinions on financial matters. Peter is pessimistic about where interest rates are going and wants a fixed interest rate. Andrea isn’t concerned however, fortunately their loan can also cater for their different choices in matters like this. Peter can fix his part of the loan, and Andrea can leave her rate variable.

Co-ownership products provide a way for people to buy property who were previously locked out of the market, and they increasingly allow the partners to keep much of their independence and make choice according to their individual preferences. There are some very important issues to keep in mind however, and some important downsides.

The first, minor, issue, is that whilst both of them are buying their first home, they have to share a single First Home Owner’s Grant. There’s only one grant to a property purchase, and they’ll never get it again. Much more importantly, Andrea and Peter may be getting a piece of property pie, but each of them is liable for the whole debt on the property. This can be a blow to their borrowing power in the future. Lenders will see the whole debt liability, but only part of an asset and a terrible income debt ratio. Even if the property becomes an investment the entire loan is considered a liability while only half of the rental income is accepted. As a result lenders will be much more wary of lending them money than they usually would be.

Now say that Peter finds the love of life and wants to get a house all of his own. He can only use the equity he has in the half share if he stays with the same lender and even then only with Andrea’s permission and probably with her as a guarantor. If he wants to go to another lender he would have to convince Andrea to agree to a refinance or simply forget the equity he has. Even so he may struggle to secure a new loan because of the existing debt against his name, so he wants to sell out his part of the property. But who is he going to sell it to? Andrea may not be willing or able to buy him out. They could try to find a replacement for him, but there’s not much of a market for halves of apartments, and Andrea may not be comfortable in a financial relationship with someone else.

What if Andrea falls behind on her payments? Is their agreement prepared for this? Can Peter carry the debt, after all the bank still expects to be paid. If these agreements go wrong – and over the life of a mortgage many unexpected things can happen – it is a recipe for litigation nightmares.

The products becoming available have agreements designed to cover many of the issues that can arise, such as defaulting or a partner wanting to sell out, but they can’t account for every problem. It also needs to be well sorted out in advance. This requires rigorous legal advice and consultation with your broker. It may seem a hassle, and perhaps a strain on a relationship, but lawsuits are even worse – and a lot more expensive!

Co-ownership products may be a good option for you if you want to buy a home or invest in property, but consider all these issues before you get in. They provide a lot of opportunities that wouldn’t otherwise be there, but a lot of potential problems as well.

Investors Beware of the ATO

Jun 9,2010 Leave a comment

Property investment is one way to reduce assessable income through the range of tax deductions available to landlords. This year the ATO has flagged landlords among those it will be paying closer attention to at tax time.

Each year the Australian Taxation Offices announces a number of areas that they will be paying particular attention to at tax time. Included in their list for this year are investors, including investors with rental properties. The ATO tells us the reasons for their focus include the large number of new investors (the number of Australian tax payers owning rental properties has grown by 100,000 in the past 2 years to 1.6million) and the wide range of common mistakes made on claims.

What is the ATO looking for?

The ATO uses sophisticated software that identifies property investment claims that potentially contain patterns which suggest mistakes or deliberate deceptions in the tax returns. Tax payers identified in this process are then targeted for some form of follow up or audit. The characteristics of tax payer claims the ATO identifies as containing mistakes include:

unusually high claims for rental deductions
low rental income in relation to rental deductions
high claims for interest expenses, and
high claims for borrowing expenses.

The ATO lists some of the most common mistakes property investors make as:

Claiming deductions for rental properties not genuinely available for rent.
Not apportioning expense claims where the property is only available for rent part of the year, such as a holiday home.
Overstating interest claims on loans taken out to purchase, renovate or maintain a rental property.
Claiming the full cost of a visit to inspect a property when it is combined with a private purpose, like a holiday.

Some tips

If you are looking for some deductions before the end of the financial year, at this stage you may be limited to repairs and maintenance, prepaid interest or insurance or body corporate charges.

Ensure that you differentiate between repairs & maintenance and construction & improvement costs. Repairs and maintenance can be claimed as a deduction in the year incurred, construction and improvement costs are classified as capital expenditure and depreciation expenses may be claimed over time. For example, replacing an entire fence would probably be considered to be capital expenditure, where as repairing a damaged section would be classified as repairs and maintenance.

Ensure the property you are claiming deductions for is a rental property – not your weekender. If you do use the property for some of the year and rent in out for the rest of the year, revenue and expenses must be apportioned between the two uses appropriately.

Make sure that interest on your property loan has been claimed correctly; e.g. if you have a loan that is for both personal and investment use, interest must be apportioned (or talk to Peach about restructuring your loan to make things simpler!).

The ATO plans to write to new entrants to the property market with some information on the dos and don’ts of investment property deductions to let them know where to obtain more information. The ATO also publishes a booklet called Rental properties providing a guide to tax obligations for property investors. The publication can be accessed through the ATO website at: http://www.ato.gov.au.

Your Number One Enemy: Sometimes it’s You!

Apr 6,2010 Leave a comment

In our newsletters we often talk about the issues that come from the complexities of real estate laws, interest rates and the vast variety of loan products that are out there these days. We need to understand all these things to safely buy and invest in property. Today though I want to talk about another complexity that is just as important to remember when dealing in property, the human brain.

It’s called the ‘endowment effect’, and it’s a popular topic of research amongst Psychologists and Behavioural Economists. In short, just having something makes us think it is worth more than we would if we didn’t already have it. This attachment to things we own means we think the items that make up our personal property are more valuable than they really might be. The researcher who first identified the phenomenon was Richard Thaler who in 1980 did an experiment in which he gave coffee mugs to one set of people and asked what they’d sell them for. He asked another group of people what they’d pay for the mug. Keep in mind these weren’t even people’s favourite mugs, just mugs they’d been given. Even so, those contemplating selling asked on average $7 for their mug while those saying what they’d pay for the same mug offered on average $3. The effect is stronger if we own the mug for longer.

In some ways this is a great little trick our brains play on us. We’ll automatically be more happy with most things than we’d thought we’d be, just because we have them. It’s a built in “no regrets” feature and it seems to have evolved to make sure we protect what we have. It’s also exploited by companies offering money back guarantees. They know that just having the blender or espresso machine for a while will ensure satisfaction with them and as a result fewer returns.

So what does this have to do with real estate?

When analysing a valuer’s report with a disappointed client selling their home we invariably hear the statement “one sold next door and it was no where near as nice as ours”. One, perfectly reasonable explanation is that valuers tend to be on the conservative side – firstly because markets rise over time and they base their valuations on past sales, and also because they’re more at risk of being sued for negligence for an over than for an under-valuation. But the endowment effect could also be rattling around there as an explanation? Try to keep this in mind for example when you’re trying to sell and the crowds just don’t seem to realise that your property is as wonderful as you think it is. While you may have reconciled yourself to its weaknesses and just love its attractions, buyers will be more dispassionate. They don’t have the attachment you do and you may need to find a price based on similar properties rather than your feelings.

For the buyer the lesson is more immediate. The endowment effect can take root in your brain remarkably quickly and it’s something that real estate agents play on continually. Sometimes you don’t even have to have bought something, just the idea of buying a certain thing can be enough. You may get attached to a house you’ve inspected and have your heart set on. This may lead you to offer a higher price, quite understandable. However if you are a little tight on deposit or equity remember the lender’s valuation may not agree and that can have serious and expensive repercussions. This is particularly crucial when bidding at auction as a mistake here can be dreadfully expensive. Do your home work, we recommend if possible invest $250 and have a professional valuation completed. It is fine to buy with your heart, just make sure your brain is connected with two feet firmly on the ground. One thing that’s worth doing is bringing along a friend to your second inspection. Try to keep them away from the hype and even from your own enthusiasm for the property and then ask them what they think the downsides are, and what their valuation is.

But remember that you only live once. If you’re buying a property to live in, and you plan to do so for a long period of time, and – of course this is crucial – you can afford it – then the rational thing to do is to bid a little above the odds if it’s necessary to secure the property. You only live once.

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