Australian Mortgage and Loan Information

Should you get your home mortgage finance pre-approved before you go hunting for a home to buy?

The boy scout motto of “be prepared” applies to most things in life, especially our finances. So knowing what a Home Loan Mortgage Lender is prepared to lend you to buy your home or investment property is a must.

Most competent Mortgage Brokers will have a calculator to help you work out what you can affordably borrow. Some will even offer a pre approval. What does pre approval mean? In some cases nothing, it will just be a ploy to get you to deal with the broker, so that when you get serious about getting a house and a loan you will choose them, these guys will generally overstate the amount you can borrow. In other cases it will be a written undertaking from a mortgage lender stating an amount they are prepared to lend you based on your proven financial information. The written undertaking is the best option.

Once you have your written pre approval you will pretty much know how much you can spend so it will make buying a home pretty easy. Make sure you get an itemised list of all the loan costs involved with the home loan with your pre approval letter. Including: up front and delayed application fees, ongoing fees and charges, legal fees, documentation fees, valuation fees, cheque fees, total loan stamp duty’s if applicable, mortgage insurance, discharge fees, early termination fees, missed payment and arrears fees get them all. A good thing to ask for is a copy of typical “mortgage offer document” from your broker, this should have everything disclosed so you can ask the relevant questions, with the aim of becoming well informed.

With your home loan pre-approval in your hand you can confidently head off to the open inspections and auctions. Your job now is to get the best property you can within your budget. Happy home hunting.

Sharing risk and profit an acceptable outcome

The real question here is how comfortable you are with being in partnership with your mortgage holder. It is very likely you will make a profit when you sell your house, so will you be ok cutting the Mortgage Lender a check for 40% of your profit. I mean if you buy a house today for $400,000 (including all fees and stamp duty) with the help of an Equity Finance Mortgage loan and sell it for $500,000 in six months, will you be happy to send your Mortgage Lender a check for $40,000? If you think this will be ok, then I say you can have a chance at a successful partnership with your Mortgage Lender and an Equity Finance Mortgage should be one of your options.

An Equity Finance Mortgage has great potential to help owner occupiers leverage their current buying power and afford a better address or even survive a credit crisis. For example, a first homebuyer who may only afford a property worth $400,000 may be able to purchase a property for $500,000 with the help of an Equity Finance Mortgage. A current home owner may be able to refinance to reduce current monthly mortgage repayments by as much as 20%, and free up their cash flow for other important family expense’s or to top up their superannuation.

The new Equity Finance Mortgage needs to be evaluated whatever your situation. I suggest you ring your Mortgage Broker and find out if you can make it work in your favor. Mortgage rates will always fluctuate, just look at the historical rates, but the right sort of Mortgage Loan will make life easier.

25% more buying power for first home buyers and up-graders

John Howard’s legacy

The 2003 Prime Minister’s Home Ownership Task Force formed by then Prime Minister John Howard, fielded a large number of new ideas about increasing the affordability of home ownership in Australia. One of them has become a reality.

A new type of mortgage has been unveiled this year that can boost a home buyer’s spending power by 25%. Called an Equity Finance Mortgage, this new mortgage product will allow owner occupier home buyers to purchase a home up to 25 per cent more expensive than they might have been able to afford using a traditional stand alone home loan. Without paying more per month.

This is good news for first home buyers especially, you now have a better chance of gaining a toe hold in the housing market. Up-graders or itch cycle home buyers will also benefit, allowing them to head to more up-market address’s sooner.

The potential mortgage holder or home buyer must have a 5 per cent deposit. They must also qualify to service a conventional home mortgage equal to or less than 75% of the purchase/valuation price of the home. The rest of the purchase can be funded by an “Equity Finance Mortgage”.

What’s the catch? Well, one Bank is calling their offering a Shared Equity Mortgage, that is Bank speak for joint venture. Your lender is offering to do a joint venture with you. When you sell your house in the future you will have to share 40% of any gains with your lender. That’s right! 40% of the gain as a substitute for 25 years of loan repayments. It sounds to good to be true, so there has to be some devil in the detail and I strongly recommend you consult a quality Mortgage Broker.

It is worth a look, but get some advice. I for one will be exploring the possibilities.

Will they or won’t they?

If the reserve bank puts up interest rates in August, I think we could see house prices fall across the board. My gut feel is that many home owners are on the brink. Successive rate rises have seen household budgets stretched to almost breaking point, especially those who have purchased in the last four years. The RBA should ignore inflation figures as they have been fuelled (Pardon the pun) by the flow on from skyrocketing fuel prices. Home owner’s have already felt the pain at the pump and the supermarket, they should not be punished further. Maybe we have to live with a little inflation, after all the world is changing. China is thirsty for fuel and needs to sell manufactured goods to the world for continued growth and world domination of manufacturing.

Of course, one man’s pain could be anothers gain if you are cashed up at the moment and can time your purchase. There will be some bargains to be had. I suggest esplanade/seafront/waterfront addresse’s or very near. Some wealthy folks are about to take a big hit if the RBA tries to strike a blow against inflation.

Take a look at the historical home loan mortgage rates for the last fifty years. See a trend you would like to comment on?

Oh! And if rates do go up, check your statement for any errors. A rate rise is an opportunity for a lender to over charge.

How close are you to your mortgage broker or finance specialist?

If you are thinking of buying a home, adding to your property portfolio or about to embark on your first investment property purchase, it is time to get to know a competent finance professional. Your finance can make or break you, It is as important as location is to your property choice.

There is little doubt that we are in the midst of a credit squeeze. Banks and other lending institutions have tightened their assessment criteria for new loans and refinance across the board. It is now much harder for Mortgage Brokers to get approvals for Low Doc and No Doc loans. Some lenders have stopped taking applications for No Doc loans altogether and many have reduced the maximum LVR for Low Doc loans down to around 65%. Even full disclosure (Full Doc) loans are being scrutinized more thoroughly. So it is harder to get new money and generally you will be paying more for it.

My advice for owner occupiers and current/prospective property investors is to renew your friendship with your mortgage broker or find a new one. Invite them around for a cup of coffee and have them bring you up to date with how the current lending environment effects your situation. Get close to them, make yourself their favourite customer so they will give you the good service and advice you need and deserve. Remember, the finance is as important as the property you purchase with it.

Claiming your rental property deductions

With more people earning income from property investments than ever before, the Tax Office will again scrutinise rental property deductions when people lodge their 2007-08 income tax returns.

To help you meet the tax obligations associated with your rental property investment, the Tax Office offers some important advice.

If you have a rental property, you can claim a deduction for certain expenses you incur for the period your property is rented or available for rent.

There are three categories of rental expenses: expenses you can’t claim, expenses for which you can claim an immediate deduction in the year you incur the expense, and expenses which are deductible over a number of income years.

Some of the common mistakes that occur in claims for rental property deductions include:

• Claiming the cost of carrying out initial repairs, such as rectifying damage, defects or deterioration that existed at the time of purchasing the property as immediate deductions. These costs are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when they were carried out.

• Claiming construction costs, which are eligible for capital works deductions, as decline in value deductions (previously known as depreciation).
• Claiming renovation costs as deductions for repairs, these are expenses of a capital nature and may be claimed as capital works deductions. The Tax Office is investigating claims for repairs which are really capital improvements, such as remodelling bathrooms and kitchens and adding a deck or pergola.

• Including the cost of the land in capital works deductions (ie as part of the cost of constructing the rental property).

• Overstating interest deductions by including amounts related to private borrowings, interest on a loan taken out for both income-producing and private purposes, such as the purchase of a rental property and a private motor vehicle, needs to be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for the private purpose.
• Not apportioning travel costs where a visit to inspect the rental property is combined with another purpose, such as a holiday.
• Claiming deductions for a property that is not genuinely available for rental or not apportioning deductions where the property is rented for only part of the year.

Another issue that causes confusion is how to identify a depreciating asset. To address this the Tax Office has produced a list of over 230 items found in residential rental properties and identified them as either depreciating assets and eligible for a decline in value deduction, or as assets eligible for a capital works deduction.

Depreciating assets commonly found in residential rental properties include:
• air conditioning units (excluding ducts, pipes and vents);
• removable floor coverings;
• window curtains and blinds;
• dishwashers;
• electronic security assets;
• freestanding furniture;
• heaters;
• hot water systems (including solar hot water heaters);
• refrigerators and freezers;
• stoves, cook tops and range hoods;
• swimming pool filtration and cleaning systems;
• television sets; and
• washing machines.

The full list can be found in the Tax Office’s Rental properties 2007-08 booklet, but I recommend you gather your paperwork and make an appointment with an accountant.

Source: Australian Tax Office.

Watch out for exit fees when you want to change mortgage providers.

Most bank and non bank mortgage providers now have exit fees built into their mortgage products. This means that if you refinance to a new lender your old lender will slug you a hefty fee to discharge your old loan. Exit fees of up to 4% of loan value are being levied by mortgage lenders.

Please read the fine print on your loan offer documents before you commit to a refinance deal, it may not be worth it to switch. A reputable mortgage broker will generally explain the hidden fees to you.

If you deal directly with a bank or one of their own mobile lenders, get a second opinion of their loan offer before you sign. These guy’s are under a lot of pressure to meet their targets and these hefty fees can be glossed over in the pursuit of a sale.

Get your mortgage documents out and have a read. Get a second opinion from a reputable mortgage broker if you are unsure or unhappy.

Credit card, the silent thief in your wallet or purse?

If you are a regular credit card user, either stand alone or debit, I have some disturbing news for you. There is a better than even chance that you have been over charged fees or overdraft interest or both in the last five years.

My message is short, but not so sweet, check your credit card and loan statements. Be especially vigilant if you have a credit card attached to your mortgage loan or line of credit. Set up your own spread sheet to track your credit accounts or purchase a reliable ready to use software program. But do it today, the longer you wait the more you are likely to be loosing.

Your next task will be get your money back. This task will be made easy if you have kept all your statements and use an accredited loan checking program. I suggest you go back at least five years if you can. It may even be worth ordering back statements from your credit card or mortgage loan provider. They will normally charge a fee and try to make it difficult for you, but remember they may owe you hundreds or thousands in over charged interest or incorrect fees.

The consumer watchdog ACCC huffs and puffs about competition keeping a lid on credit card interest rates and fees, but fails in my opinion to address the single biggest problem with credit cards. The blatant gouging of everyday consumers by credit card providers. Mistakes are commonplace amounting to thousands of dollars in some cases. Most will go undetected, as the Banks and other credit providers do their best to confuse and befuddle their customers with more and more complex statements and regular changes to conditions of use.

Beware when you get a letter from your financial institution that claims to be simplifying things for you. It is code for: “We want to make more profit out of you, but don’t want you to feel violated as we probe the delicate parts of your finances.”

So, read, attempt an understanding of the fine print and check your credit card and loan statements.

The Reserve Bank of Australia decided to leave official interest rates unchanged at 7.25% at their recent July 1 meeting. This is the fourth month that rates have remained on hold. The reason given was that tighter financial conditions have taken pressure off inflation, but inflation is still a concern so the situation will be closely monitored.