The lending environment is changing all the time, so it’s important to regularly review your loan or loans and make sure you’re getting the best deal you can.
Say you’ve had a loan for the last 2 years for example, chances are that you’ve missed one or more potential interest rate reductions. On top of this, your life may have changed. Have you accrued some equity? Got a promotion at work? Had children? Any changes mean your current loan may not be the most suitable for you.
One of the major reasons to review your loan is that there may be a better deal on interest rates available.
If you are paying more than you need to on interest, you are essentially donating money to the bank.
Interest rates have been trending downwards for the past decade. In fact, multiple banks have cut rates on their variable loan offerings in the past month, so it’s well worth testing the market.
There are variable rate loans out there for owner-occupiers for below 2% and investment loan rates below 3%. On the flipside, some rates are above 5%. If you have a $300,000 loan and swap a 5% interest rate for a 2.5% one, that’s $7500 a year you are taking back from the bank and using elsewhere.
Once compound interest is factored in, you save even more money because you take years off your loan.
Loans are complex beasts these days with a raft of features that can be tailored to the diverse needs of borrowers.
A couple of years out of the market could mean you are unaware that lenders are offering extra repayment options on fixed loans, better offset facilities or waiving certain fees. All of these changes can add up to money and time saved.
The flipside of this is that if you sign up to a loan with more bells and whistles than you need, you may find you are paying for the privilege of features that you never use.
And sometimes you can be trapped by a loan’s fine print…ie, the rates are great, the features are great, but you’re locked in for 2 years and can’t revalue to access your equity.
So, always look further than just interest rates, when choosing a loan.
If it’s been some time since your last loan review, you’d better believe you’re not on the best deal that bank can offer you.
See, banks count on you paying the “lazy tax”. Why do you think the bank sent people to your primary school when you were a kid to “educate” you about saving money and using deposit and withdrawal books?
It’s because they know that once people sign up with a certain bank, the vast majority never bother to leave.
Once you are on their books and have been for years, do you think they are offering you the kind of deals they are offering potential new customers?
Of course not. They don’t need to. But go online and you might find they are offering customers of other banks a $3000 cashback deal to jump ship to them. That’s because their business models are based on recruitment and retention.
But what about you? You’ve been a loyal customer for years, shouldn’t they reward you for your loyalty? The reality is that if you want access to those deals, it’s all on you.
Research what is out there at other banks. Are there lower rates, cashback offers, better features, introductory deals? If there are, you should be fully prepared to switch.
And if you like your bank and want to stay, simply go back to them and threaten to leave if they don’t match the deals. That’s where the retention part of their business model kicks in and you might just find they have something a little better up their sleeve for you.
So you want to make the most of low interest rates and rising property markets and build a bigger property portfolio?
Unfortunately, those same low interest rates make it much harder to save for a deposit the old fashioned way. But that doesn’t mean you can’t climb up the property ladder. That’s where equity comes into the picture.
Equity is the amount your property is worth minus what you still owe on it. Basically, it’s the portion of the property that you own outright. If you owe $200,000 on a property that’s worth $300,000, your equity is $100,000. If that property rose by another $50,000 in value the next year and you paid off another $10,000 of it, your equity would go up by $60,000.
If you already have at least one property, chances are that it’s gained in value over the past 12 months.
Revaluing it can unlock that extra equity, so that you can use a portion of it as a deposit on your next investment property.
Back in the days when interest rates were high, the biggest hurdle to buying property was actually paying off the loan. Deposits were easier to save because your cash was boosted by those same high rates. So, saving a 20 per cent deposit on a $100,000 property didn’t take long, but paying it off could take 30 years!
These days, super low interest rates mean servicing a loan is the easiest part. But saving a 20% deposit, plus stamp duty costs when there are returns of less than 1% interest on the cash you have in the bank is much more difficult.
And this is basically why property investors have been dominating first home buyers at the affordable end of the market in recent years. They have equity ready to use as a deposit while the first home buyers are stuck trying to save money.
First things first, talk to the experts. Zinger Finance has a team that specialises in helping people build big property portfolios by using smart financing strategies and regularly pulling equity out of their assets.
Zinger can organise a valuation on your existing property. If, like most real estate in Australia, it has increased in value since its purchase or last valuation, you will have made some equity.
But you can’t use it all. Say for example, you have $200,000 equity on a property, the bank won’t let you use the full amount to invest because it would be exposed to too much risk if there was a dip in values for your existing property, or new property.
Instead, they will allow you to access a portion of it. Usually around 80% of your existing property’s current value minus the debt still owing.
So, in the case of that example property at the beginning of this article; if it’s now worth $350,000 and you owe $190,000, your overall equity is $160,000.
But your useable equity might be $280,000 (80% of $350,000) minus $190,000. That leaves you $90,000 to invest with.
A lot of mortgage brokers set you up with loan products where you are locked in and unable to refinance for a certain period of time (usually years). This ensures they receive their full commission from the lender.
But Zinger Finance aren’t like your typical mortgage brokerage. They’re a team of Mortgage Strategist. It was founded to cater to property investors looking to build big property portfolios and one of the ways to do so is to ensure you have the flexibility to revalue and refinance as often as you need to.
Zinger’s team of strategists can help you get your properties valued and revalued regularly to unlock all the useable equity you need, at the right time to help you reach your property investment goals.
If you need help building a strategy to climb the property ladder by maximizing your use of equity and being educated on the best way to structure loans, get in touch to our team of Mortgage Strategists.
There are a number of different borrower types that banks will lend money to for property investment in Australia. This article looks at what you need to know if you want to take a loan as: an individual, a joint venture, a trust and a self-managed superannuation fund (SMSF).
Borrowing as an individual is the most common and straightforward way to get into the property market and you can use equity in your family home, the estimated rental return and your own steady employment to appease lenders. It also means you are the only one who signs off on selling, raising rent, engaging property managers and other decisions.
You are the only one responsible for your property investments and debt strategy and you won’t be affected by anyone else’s financial misfortune or mismanagement. You need to personally suit lender eligibility requirements around income, spending habits and credit history. Bear in mind that individuals with a full-time job will be assessed differently than someone who is self-employed.
Another benefit is being able to use negative gearing as a strategy, as long as it suits you. This means that if you are making a yearly loss by putting more money into the repayments and holding costs of an investment property than you are getting in return from rental income, you can offset that loss against your personal income for the year and pay less tax, while still benefiting from the growth potential of the investment. Negative gearing is not available when borrowing as a trust.
If you and one or more associates want to get into the property market but don’t have enough of a deposit or serviceability to buy alone, you can go in together on a joint venture. If the property you purchase grows in value, you might find you can sell or withdraw enough equity to each go alone on a future investment. However, there are things to be aware of. If you split the loan and serviceability requirements down the middle, each investor will be held liable for the full debt, but will only have half the rental assessed as an income. So, if one loses their job and can’t make repayments, other members of the joint venture will be held liable and in the event that you’re not able to continue the full commitment your credit record and future borrowing power might be personally damaged.
If you’re going into a joint venture, you will need independent financial and legal advice before borrowing. Ensure you agree on a financial debt structure and exit strategy and have a legal professional draw up an agreement for the venture, to be referred to down the track if circumstances change or if one member wants to take a different direction than the others.
Creating a family trust is a method of property investment growing in popularity. Under this financial structure, the assets and income are held by the trust and profits are distributed to the members/beneficiaries of the trust by an appointed trustee, who manages the investments.
Trusts offer a good way to create intergenerational wealth by passing assets to future generations without having to sell and pay capital gains tax (CGT). It also protects assets from the circumstances of individual beneficiaries: i.e., if financial disaster should befall one of the beneficiaries, the trust’s assets are not under threat from debt collectors.
The trustee can also use discretion to distribute profits to beneficiaries in a way that can reduce the amount of tax everyone has to pay. There are several different types of trust that will be considered, so engage a professional for advice on which is the best structure for you.
Every year there are more Australians establishing SMSFs in order to manage their own superannuation. One of the key reasons they do so is to invest their nest egg in property. Your SMSF can borrow for a property but it’s harder than borrowing as an individual and there are complexities.
First, there is more risk attached for lenders, so banks are more conservative. You may need more than the usual 20% deposit and could pay higher interest rates and fees than a regular borrower. Superannuation law also makes it harder to service and benefit from the loan.
For example, when making repayments, your SMSF can only use the property’s rental income, plus 10% of your personal salary (your superannuation contributions), so you need to make sure it’s positively geared and in a market with great tenant demand.
Because it’s your super, you are not allowed to access the income or equity of the property until you retire (at least age 60). Also, neither you, nor your family or friends can stay in or use the property for personal reasons.
The good news is that investing using super is a non-recourse loan, so if the loan defaults for some reason, the lender can only access the asset in the SMSF trust, not your personal assets outside of super.
If you have any more questions or want some information on borrowing and debt strategies, reach out to Zinger Finance. Our team of Mortgage Strategists can help you choose the best options for your investment journey.
The RBA decided to once again leave interest rates on hold at 0.1% at its recent March meeting, which means yet another month at the lowest interest rates ever.
In fact, if you have been paying off a mortgage at any stage over the past few years, you have been doing so in a historically low interest rate environment.
The RBA does this to stimulate the economy. The lower the interest rates are, the less money you spend on your debt, which means you have more to spend elsewhere. This extra spending helps prop up the economy.
But how you put that money to use is up to you. Recent research has shown the pandemic changed many of our spending habits, with Australian households saving an estimated extra $120 billion between April and December last year, due to restrictions on travel, hospitality and more. We seem to be more cautious about spending on material goods and luxuries and now choose to funnel extra cashflow back into our homes.
In order to take advantage of low interest rates, you need to make sure you’re paying the lowest that you can be.
Get online and check out loan comparison websites to see what else is out there. If there are better deals, you can consider refinancing with another lender; or, if you don’t want to leave your current bank, give them a call and ask them to match the better rate.
It’s a competitive market for lenders and they are keen to retain customers, so banks will often grant you a better deal if you pick up the phone and make them think you are ready to take your debt elsewhere.
Now that you’re happy with your interest rate, where to next? One option is to keep making the same mortgage repayments, or even increase them and pay down your mortgage as soon as you can. Traditionally, people would want to pay their house off ASAP. Paying a bit extra when you can manage can shave years off your repayment term and save you tens of thousands of dollars over the life of the loan. You own your own house and any money that comes in. But is that still the best option?
Paying off your house early used to be beneficial when interest rates were much higher. For example, when banks were offering an average of around 7% on standard variable products, the accumulative effect of compound interest meant you would end up paying more than the purchase price of the property in interest alone over a 30-year loan term.
Now though, it’s a different story. You can get much better returns by focusing on acquiring new, quality debt rather than paying off existing debt which is attracting very small interest. Investing in property with plenty of upside for growth and good rental return can be a great way to take advantage of low interest rates.
An option is to make lower repayments on your mortgage and free up more cash for your day to day life. That extra cash could be used to pay for something you need, or again, to invest in shares or property.
Making minimum repayments on your owner-occupier mortgage will free up even more cash to leverage into as much quality debt as you can manage.
You might use that cashflow to acquire multiple investment properties, which pay a rental income and appreciate in value throughout the rest of your own mortgage term.
Then, later down the track, you have the option to sell off some of your assets and use the capital gains to pay off your remaining debt, while keeping remaining properties for further income and equity. Or, simply keep holding the assets and benefiting from their growth and returns for as long as possible.
The mortgage market is full of options as lenders try to attract business in a competitive landscape.
Getting advice from a mortgage broker can be a great way to get an idea of what type of home loan will suit your situation, but it’s also good to educate yourself on the types of products that are out there.
Let’s take a look at two main categories when considering a home loan product: package loans versus basic loans.
Package loans have become very popular in recent years and account for more than 50% of loans written by major lenders.
Package loans usually combine your home loan with other common financial products, which may include a mortgage offset account, transaction or savings account and credit card. They are eligible for interest rate discounts off the standard variable rate, fee waivers on loan approval and valuation fees.
Basic home loans are not packaged with anything. They are ‘no-frills’ loans where you save money on upfront and ongoing fees, because you don’t have the flexible features that cost more to administer but often allow you to save much more money long term.
In return for packaging products, lenders will make it worth your while by charging one annual fee for multiple loans, rather than separate fees for each product.
If considering a package loan, find out whether that one annual fee includes the other home loan fees you may not know about, such as an application fee, property valuation fees, redraw fees, switching fee (from variable to fixed and vice versa) and offset account keeping fees. Other fees to be aware of are the application or establishment fee, bank solicitor fee and settlement fee, when setting up your home loan.
These can vary in price, but average between $150 and $700. They are usually non-refundable but major banks are often happy to waive these fees, so make sure you ask ahead or negotiate, as this could be the difference between choosing a package or basic.
Banks will often give you a discounted rate for package loans. Market comparison platforms generally find that interest on average package loan products is between 0.25% and 0.5% lower than average standard variable rate loans.
That saving alone is more than enough to make up for the annual fees which can be higher than what you would be charged for a basic loan.
Flexibility is the key for borrowers such as property investors or the self-employed who want to free up cash flow and maximise future borrowing power. Features such as interest only repayments, line of credit and others will appeal to investors as long as they choose the package that suits their strategy, while credit cards and transaction accounts are useful to small business owners.
So when would it be better to shun a package for a basic home loan? You may just want a simple, no frills home loan that you can quietly pay off.
Basic loan products will likely offer you the low interest rates you want, but there may be loan features and loan flexibility that you may not realise you need.