Australian Mortgage and Loan Information

When I was planning to become a property investor back in the 80’s a wise old man gave me a simple piece of advice. Treat your property investment as a business. If it is a business then the home loan used to finance the business must also be good for business.

To this end my mortgage broker and I agree interest only mortgage loans are the number one type of loan for a property investment in Australia. So why are they number one?

Interest only home loan mortgage.
As the title indicates, an interest only mortgage or home loan means your repayments only have to cover the interest portion of the loan. You do not have to reduce your original home loan principle. After all it is only the interest you pay that is tax deductible, paying off principal just reduces your cash flow. Cash flow is king, as you need it to succeed in any and every business.

Freeing up the principal component for use for other investments is good business acumen. Inflation, demand and supply will take care of the value of your property against the amount of your loan. By lowering the ongoing servicing costs you will keep one step ahead of the principal and interest pack. Most major banks and other major home loan mortgage lenders will allow you to choose an interest only period of up to 10 years, if you can get a longer period of interest only on your investment home loan or mortgage, take it.

Some lenders even let you pay interest only in advance. This will give you significant tax savings in the early years if you have the means.

Interest only home loan mortgage statements are also easier to check for errors. I suggest you still consider some pc based mortgage checking software. Mortgage lenders and banks make mistakes. Recent surveys reveal over 50% of loan statements have errors. Please check your statements.

Personal wealth has been and still is the pet of the popular media, be it TV, radio or news print. In Australia we even have a current or perhaps former financial planner, as a presenter on the most popular breakfast current affairs and news show. His advice is confusing at best, and in my opinion Benny Hill like in the main. He sits firmly on the fence about most investment issues and repeats the meaningless drivel from the major financial institutions when challenged on any property investment, home loan or mortgage issue. It is not his fault, he is just playing the cards the Network deals. The Network must keep it’s advertisers happy and fill in some of the boring moments. Gee I feel better now I have got that off my chest, so what about personal wealth though property investment or other means?

Well we have a camp that promotes the share market as the key medium for obtaining wealth and you have the property for wealth camp. In between you find the build your own business group who extol the virtues of hard work and single minded focus. I think they all have a place, as it is without doubt “horse’s for course’s.” Even though that is a terrible cliché, it describes the reality of human endeavour full stop, not just obtaining wealth.

My take on this subject is simple: deciding to become wealthy is a good thing, we should all be wealthy. Deciding how we become wealthy is the hard thing. It is hard, because most people are generally afraid to make mistakes. So they may decide they want to be wealthy, but they never decide on the how, though fear of failure. I say, it is hard to loose money on a conventional property investment if you plan to keep it for at least ten years, so stop being afraid. By conventional property investment I mean purchasing and renting out, either a residential or commercial property that has its own land land title. (Not a high rise apartment or similar)

So now you have stoped being afraid, I have to mention that I am not providing any formal financial advice here. I will not give you any guarantees other than doing something toward your goal of being wealthy is better than doing nothing. I am really just giving you the benefit of mine and many others experience, who have never lost on a property investment.

Now there are plenty of people and companies out there who will be willing to give you financial advice about property investing at a price! You will see them mentioned on the popular media and the internet. They offer riches in property if you follow their magic formula and pay them $3000 to $15000 for a seminar. Without doubt some of these course’s or programs or seminars have some value, but unless the promoter’s are willing to hold your hand though the process, you would be better off buying a book on the subject of wealth through property.

Keep it simple, treat the process as a business venture as well as an investment venture. Look for a property that you feel good about. Your gut feel is so important, as it will never let you down. If you make a bad or wrong decision at least it will be your decision, it is better than being manipulated for someone else’s gain. Don’t make a hasty decision, or be hurried by an agent. If you miss getting the property because you are undertaking some due diligence, so be it. There will be other opportunities. Visit the property several times, take digital photos of it inside and out and from all angles. Examine the property for faults that could be expensive to fix or areas that make it hard to rent. Knock on the doors of the neighbouring houses or commercial properties, ask about the property, ask about their property, as they might want to sell as well and you could have uncovered some development potential. Visit the council and find out what their plans for the area are? When you have satisfied yourself the property meets your gut feel, ask yourself one more question: Would I live in it or operate a business from it myself? If the answer is yes, make an offer subject to your choice of finance and call your mortgage broker and start on the road to wealth through property investment. You can repeat this process for every property purchase. Your mortgage broker will help you work out the finance going forward. Use them as a finance or mortgage coach. A good mortgage broker will have every resource you need to help you succeed including: what if? mortgage calculators and mortgage statement checkers.

There are a few programs and websites that I thing are worth a look, and you should also check out the Australian Tax Office website for details on the tax treatment of rental properties and other property investments. But, try my simple process, It has worked and continues to work for me and many others.

Don’t stress about having to find a accountant to take care of the book work, get a good rental property management program, a mortgage statement checker program and lodge your returns yourself. If you must use an accountant try www.taxsolvers.com.au they give incredible service and are extremely cheap.

Save the Murray River!

The rent paid on time and no hassles with finding tenants?

Having a Soldier, Sailor or Fighter Pilot as a tenant and having the Australian Government paying off your mortgage via rent, sound too good to be true?

If you are first time property investor and serious about building wealth by accumulating a residential property portfolio then I urge you to consider the offering from Defence Housing Australia, a Commonwealth Government Business Enterprise.

In my opinion, the Defence Housing Australia (DHA) offering is one of the best ways to break into the rental property market. The DHA offering, gives you what is essentially a Government Guaranteed cash flow. I mean you have enough to worry about with interest rate fluctuations, so not having to worry about the rent coming in to cover your mortgage home loan repayment is a perfect situation.

The following quote is from the Defence Housing Australia website:

“Defence Housing Australia: safe as houses

The primary function of DHA is to provide high-quality housing solutions to members of the Australian Defence Force and their families, to meet the operational needs of the Department of Defence. DHA manages around 17,000 properties throughout Australia, worth approximately $6 billion. New properties are acquired through a mix of construction, acquisition and leasing. The sale of property to investors is DHA’s primary source of capital for funding new housing, and plays a crucial role in helping DHA improve the standard of Defence housing throughout Australia

How the program works

DHA sells a limited number of properties to investors each year. Properties are located throughout Australia, in areas where the Australian Defence Force has a presence. They are of a high standard and feature a comprehensive level of inclusions. Each property is sold with a DHA lease, which means you agree to lease the property to DHA for a specified term, and pay DHA a fee to manage and maintain the property. In return, you receive:

Long term lease with Government Business Enterprise.
Rent paid to your mortgage from date of settlement until end of lease.
Zero vacancy risk for the term of lease.
Property management and maintenance for a single fee.
Restoration provisions at the expiry of most lease terms.
Except for the first and last payment, rent is paid monthly, in advance, direct to your home loan mortgage account if you wish.
DHA even pays rent if the property is vacant, and does not charge any letting or advertising fees.
Rent is reviewed annually to market valuation, by licensed valuers.
To provide greater certainty to investors, DHA’s current lease incorporates a minimum rental guarantee. This means rent will be reviewed annually, but if market rents fall, your rent will never drop below the starting rent.
DHA’s standard lease terms are 9 or 12 years, and include an option for DHA to extend the lease by a fixed term, generally 3 years. This long-term lease, provides security and overcomes many of the risks and worries associated with conventional residential property investment.

Hassle-free property management and maintenance

Possibly two of the biggest worries for property investors are maintenance and tenant damage. Not only can they be potentially expensive, but they can also prove to be a headache for the property owner and manager. The DHA lease incorporates a comprehensive property management and maintenance service to ensure properties meet Department of Defence standards. For a single fee (deducted monthly), DHA undertakes all property management, including inspections and reporting. DHA also takes care of most non-structural repairs and maintenance, including the replacement of fixed appliances when required.

Lease end restoration provisions

DHA’s lease end provisions mean that when the lease expires you can rest assured your property is returned in good order. Where the total lease term (including any option period exercised by DHA) is six years or more, DHA will paint the property internally.
Where the total lease term (including any option period exercised by DHA) is nine years or more, DHA will:

replace floor coverings
polish any timber flooring, and
paint the property internally and externally (except where external painting is the obligation of a body corporate or similar entity).

Taxation benefits

Income producing properties, such as DHA investment properties, can have substantial taxation benefits. You may be able to claim a number of expenses related to your DHA investment property as a tax deduction. You may also be able to claim a deduction for the decline in value of certain items, known as depreciating assets, which you acquired as part of your property. A tax compliant depreciation schedule is provided free-of-charge upon settlement of each investment property. Each depreciation schedule is provided by a professional quantity surveying firm, and will be tailored to the property and purchaser details.”

So what’s the catch?

You need to make your own investigation, but I don’t think there is a catch. If you are a property speculator the program would not be for you. If you were extremely picky the properties seem to be located in outer suburbs of capital cities and regional centres, so potential growth may not match more sort after suburbs. The single fee mentioned for maintenance and management is around 16% whereas most property managers seem to charge around 10%, but you have to provide your own maintenance.

All and all I think it is worth investigating further. Another clue is the major banks and other major lenders seem to love DHA property as security for mortgage’s and home loans. Borrowing over $300,000 may even make you eligible for an interest rate discount.

Mortgage holders need an up to date Will.

Ever heard of the term “died intestate”? Roughly it means dying without a valid will. The consequence is that your estate including any property you own, will be divided according to the law, regardless of your wishes. The result is often not what you intended for your family. Residential or Investment Property that you wish to keep in the family or provide to specific individuals may effected or have to be sold. Even the family home may have to be sold in extreme circumstances.

A “Last Will and Testament” drafted professionally, is an essential risk management tool for property owners, especially mortgage holders. Properly drafted, it should not only determine various parties’ property rights, but also appoint an administrator to follow your instructions and ensure your estate is distributed in accordance with your wishes.

Lawyers preach that pro forma wills should be avoided as they are supposedly inaccurate and frequently challenged. However, something is better than nothing. I believe in this instance that you get what you pay for so the cheapest pro forma will may not be the best. Shop around for a product that suits you best. Your mortgage broker will know a reputable source for a DIY Will.

Your will should be reviewed every 12 months and be updated when your circumstances change, for example:

• Home purchase or mortgage refinance• Retirement
• Marriage or remarriage, divorce or separation
• The birth of children and grandchildren and their change of marital status
• Financial commitments

Powers of Attorney are other useful risk management tools for property owners and should be considered as essential as a will.

Organise a will today, it is good risk management. A will is a sure way to “speak from the grave” and have your plans carried out. It is as important as your mortgage interest rate.

More properties = more wealth?

Even in this new world of responsible lending by Major Banks and other mortgage lending institutions, building wealth through property is still king. But only if your numbers stack up. 10% home loan mortgage rates should not discourage you. Plenty of investors got rich through property investment even when rates were 19%. Take a look at the historical home loan mortgage interest rates 1959-2009, many a multi millionaire property owner got their start in the peak. You will however, need a competent Mortgage Broker to find and advise you on the right finance deals to suit your wealth creation goals and needs.

People are dying to come to Australia (Literally, getting on boats and travelling through pirate infested seas to get here) and there is a scarcity of prime property in our cities already, so property will always be in demand and if you can acquire and service the mortgage’s on multiple properties you will be giving yourself every opportunity to become wealthy through property investment. However, If building wealth via property was measured by the number of home units, flats, town houses, warehouses, shops, offices or houses you own, then maybe anyone who could sign their name to a mortgage loan document would become rich overnight wouldn’t they? Many people have got rich by accident, but I bet many more have failed by accident. I mean you would not fail on purpose, so it must be an accident. So to be successful in property investment we have to be good risk managers.

What are the attributes of a good risk manager? Tune into my next blog!