How to pay off your mortgage sooner and accelerate building your wealth

How to pay off your mortgage sooner and accelerate building your wealth

For most people, their mortgage will be the largest debt they will have in their lifetime. Because there are no tax benefits on this type of debt, it’s worth considering paying it off (or at least partially down) quickly so can make the most of the opportunity to accumulate wealth outside the home.

So, here are a few tips which can help you get that mortgage down.

1. Get the right loan from the start

There are so many factors to consider when deciding which is the most appropriate loan. And the loan your friend has may not be the best loan for you. Just like the loan with the lowest advertised interest rate could cost you more in the long term.

2. Understand how to use your loan

Once you have gone to the effort of structuring your loan correctly, it’s important that you know how to get the most benefit out of it. For example, an ‘offset’ account may not help you pay your home loan quicker unless you have the discipline to use it as it should be used.

3. Increase your repayments – every dollar helps!

Whether it be a lump sum payment or increasing your monthly repayments, every extra dollar will result in a saving to your interest cost and thus will reduce the time to repay your mortgage. At a 2.5%pa interest rate, an additional $200 per month repayment on the average mortgage will save approx. $30,000 in interest costs. At a 4.5% interest rate, this increases to approximately $60,000 in interest costs

4. Work on your loan early

During the early years, a higher proportion of your loan repayments are going towards paying the interest expense, with a smaller portion reducing your principal owed. So, commiting to make larger additional/lump sum repayments during the initial years of your loan will repay a larger amount of the principal and so will save on the interest costs.

5. Ask your bank for a discount

You’ll be surprised with the reduction you may get on your interest rate if you just ask.

6. Better still use a pro-active mortgage broker

A great mortgage broker is invaluable. From recommending the best loan specifically for you, to explaining how to best utilize it to getting on the front foot and asking the financial institution for a discount. Our lending manager, Cameron Purdy was able to secure our client a further discount 18 months into her loan by simply getting on the front foot and negotiating with bank. It resulted in a saving of over $900 per month!

7. Build Wealth while accelerating your mortgage repayments

A ‘debt recycling’ strategy enables you to simultaneously pay off your home loan sooner, while building an investment portfolio.

So rather than wait until you pay off your loan before commencing the build up of your wealth/investments, you can start doing it now!

And while the investment portfolio is growing, the income it generates is directed towards the home loan acting as another source of repayments and accelerating the time taken to be mortgage free!

Debt recycling is an extremely effective strategy and while popular among many professionals, it is something all who have a mortgage should consider.

Australian residential property is on fire!

Australian residential property is on fire!

The latest statistics coming out of the Australian residential property market indicate we’re seeing a remarkable rebound, with approvals and finance applications soaring and prices likely to follow. For now, the real driver is free standing houses being bought by owner occupiers.

Record construction approvals

Approvals to construct new houses jumped 15.8% in December to a record high, with strength seen right across the country. CBA’s economics unit pointed out that compared to December 2019, housing approvals rose “an incredible 55%” – see chart 1.

Chart 1: Dwelling approvals were strong across the whole of Australia

Blog chart 1

While apartment approvals are nowhere near as impressive, being 19% below a year ago, they are still 44% above the low point reached in June last year when the market had been crushed by national COVID lockdowns and forecasts were for housing markets to collapse.

Residential propery prices expected to follow

While CoreLogic reports that national home prices have risen a relatively modest 1.5% compared to a year ago, with Sydney up 2% and Melbourne down 2.2%, those markets that have enjoyed less COVID disruption were stronger: Perth was up 3.7%, Brisbane 5.3% and Adelaide 6.7%.

 However, given weekly auction clearance rates and loan applications tending to be a reasonable leading indicator for house prices, the outlook for prices, especially for free standing homes, appears to be very positive. Clearance rates have roared to a four-year high – see the chart 2 below – and the value of new housing loan commitments in December jumped 9% to hit a record high of $26 billion, putting it 31% higher than a year ago.

Chart 2: Auction clearance rates have hit a four year high

Blog chart 2

Chart 3: Owner occupier borrowing has shot up

Blog chart 3

UBS forecasts Australian house prices will rise by 10% in 2021, while CBA is calling for an 8% increase.

Perfect storm

What we’re seeing is the culmination of various factors that, when combined, amount to a huge tailwind for the property market.

Interest rates: the Reserve Bank has cut cash rates to an all-time low of 0.1% and indicated they have no intention of raising them any time soon. Borrowers could have two to three more years of super low interest rates up their sleeve.

In addition, the big banks are benefiting from the Reserve Bank’s Term Funding Facility that enables them to borrow a total of $200 billion for home lending at the same rock bottom rate of 0.1%.

Banks have responded by offering fixed rate loans as low as 1.75%, with no fewer than 25 different loans currently below 2%. Not surprisingly, fixed rate loans now account for 40% of new loans, up from 15%.

Relaxed lending standards: In October last year the government announced the removal of the bank regulator’s responsible lending laws, which required banks to undertake thorough due diligence on a borrower’s capacity to repay a loan. The Treasurer said at the time the move was aimed at providing easier access to credit to help Australia’s recovery from its first recession in more than 30 years.

Stimulus spending: the stimulus packages announced in the wake of the COVID pandemic by the Australian government added up to 13% of GDP – newly created money shoved into the economy. That saw household savings jump to an almost 60-year high in June last year – see chart 4.

Chart 4: Household savings hit an almost 60-year high

Blog chart 4
A huge portion of those savings were bound to find their way into the economy through consumer spending, which we saw in the December quarter last year when the CBA Economics Unit said spending on their bank’s credit cards was 11% higher than the year before.

HomeBuilder Grant: the Federal Government also announced grants of $25,000 to qualifying borrowers who were either buying or renovating a home to live in. By the end of 2020, 75,000 applications had been received, blowing past the government’s forecast of 30,000. The scheme has been extended until March, although it’s been reduced to $15,000.

Stamp duty concessions: New South Wales and Victoria announced stamp duty concessions of between 25-50% on residential property purchases up to $1 million.

Job security: thanks largely to the stimulus juicing the economy, the NAB Business Survey shows business confidence and business conditions have rebounded to be well above their average for the last 30 years. That’s in turn prompted the labour participation rate to jump to a 35-year high and the underemployment rate to drop to its six-year average, while job vacancies are at the highest for at least 12 years.

Not as great for investors

While property prices are tipped to do well over the course of 2021, rental markets are not looking  as promising for property investors.

Nationally, CoreLogic reports rental rates went up by just over 1% for the year to the end of January 2021. That means they failed to keep pace with property prices, meaning the yield on an investment property, already notoriously low in Australia, was even worse.

Rents in apartments were markedly worse, possibly reflecting a sharp fall in international students and immigrants. In Melbourne, unit rents dropped 8% over the past year while in Sydney it was 6%.

Key takeaways

  • For those looking to buy a home, the market looks set to rise over this year.
  • While capital gain for investors is always attractive, there may well be risks in finding a tenant at current market rates.
  • Qualifying borrowers can still benefit from the federal government’s HomeBuilder grant until March.
  • For those looking to borrow to buy a home, rates are at all-time lows.
  • For those already with a mortgage, now is a great time to refinance.

Looking to buy a residential property or refinance your existing home?

Call Steward Wealth today on (03) 9975 7070 to find out how we can help you achieve a highly competitive home loan rate.

Units or houses; which is a better investment property?

Units or houses; which is a better investment property?

Prior to national lockdowns many were expecting the Australian housing market to correct anywhere from 10% to 30%. Moving forward a mere nine months and record low interest rates, home loan holidays and working from home have led to a remarkable resilience. With consumer confidence now at record highs, coupled with forecast low interest rates, stamp duty reforms (in NSW and Victoria) and talk of vaccines, all indications are that house prices across the nation are on the rise again.

After several years of decreasing investor appetite, the October 2020 ABS statistics show a significant uptick in investor loan commitments in all states except Victoria (see chart below). Whilst it is clear many believe now is the right time to be investing in property, a common question is asked is whether units/townhouses or free-standing houses provide the best investment opportunities. You will not be surprised to learn that there is no definitive answer so below we consider the advantages and disadvantages of each.

Picture1

Units and townhouses

Advantages:

  • Units prices are generally more affordable than those of houses in the same area. This also means that the deposit needed to enter the market is also lower.
  • The lower cost of units allows property investors greater means to diversify their portfolio across different markets.
  • Historically units offer greater rental yield over the long term, so they suit investors with a yield focus. They tend to be more attractive for tenants in urban areas, due to demographic trends and preference towards high-density urban accommodation.
  • Units and townhouses suit investors who wish to take a hands-off approach to the maintenance of their property as most of the upkeep is taken care of by strata management.
  • Units often contain more fixtures and fittings than a house. This generally allows the owner to claim against a greater number of depreciable items in the unit (e.g. carpets, light fittings and dishwashers). Additionally, owners of units may be able to claim depreciation deductions for common property; that is, assets shared by all property owners in the development. Deductions will always vary, and you should seek the advice of your accountant prior to making a purchase.

Disadvantages:

  • Strata fees can be a high ongoing cost depending on the level common facilities.
  • Any possible renovations or changes must be approved by strata management which results in a limited ability to add capital value to the property.
  • Most banks consider units in general, but more specifically those less than 50m2 (excluding balconies and carports), to be far riskier and hence it can be quite difficult to receive approval for your loan application. Banks are also more hesitant to lend against units anchored to a specific purpose, like student accommodation, as the factors that influence these are largely beyond their control.
  • Historically units offer less potential for capital growth
  • Units are generally suited to single or coupled tenants without children so tend to attract shorter term rental agreements.

Houses

Advantages:

  • When you buy a house, you own both the land and dwelling, which both have the potential to appreciate and produce a significant capital gain when you sell. As a result, historically houses offer greater potential for capital growth.
  • As you own 100% of the property, apart from council approval, you have an unlimited ability to renovate and add capital value to the property.
  • Houses generally come with extra space, more bedrooms and features sought after by families. As such they tend to be longer term tenants providing a less volatile yield.
  • As houses have both a land and dwelling value, banks consider these less risky and are more accommodating when applying for a loan.
  • While individual situations may vary, houses, usually, tend to be more negatively geared than units mostly due to their higher financing and maintenance costs, and lower rental yields.

Disadvantages:

  • House prices are generally less affordable than those of units in the same area. For property investors this can lead to a less diversified portfolio.
  • Historically houses offer a lower rental yield than units.
  • Upkeep and maintenance of the property is your sole responsibility and can prove to be time and cost intensive.
  • Large one-off maintenance costs, for example roof replacement, can prove to be very expensive and cannot be shared amongst others.

Conclusion

Choosing between investing in a unit, townhouse or house is only one in a long list of factors to consider. Each have their advantages and the decision should be based on what strategy or objective you are striving to achieve. For example, an investor who has the time, cashflow and inclination to improve the property may be more suited to a house. A time poor investor seeking diversification and an income stream may prefer a unit or townhouse. Other factors such as demographics, supply and demand, affordability and broader economic factors should all be considered.

It’s important to remember that direct property is only one sub-asset class and there could be others that are more suited to your risk/return expectations. For this reason, we recommend you speak to a professional, like Steward Wealth, to ensure that your investments are aligned to a broader financial plan.

An offset account, do I really need one?

An offset account, do I really need one?

When searching for a property loan the first thing people tend to look for is a low interest rate but getting the right features with your loan can be just as important. Most people have heard of an offset account, but do you really need one and, if so, are you getting the most out of it?

How does an offset account work?

An offset account is an everyday transaction account that you can deposit all your spare money into and is linked to your mortgage. When interest on your loan is calculated, the balance of this account is combined with your loan to ‘offset’ the amount charged. For instance, if your mortgage was $500,000 and you had a balance of $100,000 in your offset account, interest would be calculated based on a balance of $400,000. Over the life of your home loan, placing any additional savings into your offset account can significantly reduce the time taken to pay off your loan.

There are generally two types of offset account, partial and 100%, which, as the names imply, offset different proportions of the mortgage balance. Also, the majority of offset accounts are linked to variable home loans with only a small number of lenders offering this feature with a fixed rate.

Offset account vs redraw facility?

While each lender tends to label them differently, most lenders offer you the choice of loans. A ‘basic loan with a redraw facility’ allows you to make extra repayments towards your loan which you are then able to withdraw at any time. It is important to read the fine print as some redraw facilities limit the amount or frequency you are able to access these funds and some even charge a fee for the privilege.

‘Packaged loans’ generally include an offset account together with other features such as a credit card and provide more flexibility around making changes to your loan without additional cost, for example fixing your rate at a future date. This usually attracts a flat annual fee of between $200-$400 and some lenders even offer a reduced interest rate compared to their basic product.

If both an offset account and unlimited redraw facility allow you to make extra repayments, whilst maintaining access to the funds, then which one do you need?

Home loan offset accounts

If you are purchasing the property to live in, or a holiday house that you do not intend to rent out, then applying for a ‘basic’ loan with a redraw facility may be appropriate for you. It will save you any ongoing fees associated with a packaged loan and in some cases you may even receive a better rate.

An offset account becomes attractive if you prefer instant transaction access to the funds, including BPAY and EFT, rather than being limited to the terms of the redraw. This works well for people who receive higher levels of income who can pay their salary, and any commissions or bonuses, directly to the account offsetting interest whilst expenses are then periodically paid from the facility.

Remember that you generally receive a credit card with the packaged loan so cancelling your current one, and the annual fee often associated with it, could net the extra cost. A common strategy is to select a credit card that provides an interest free period on your purchases and use this to pay your everyday expenses. The credit card is then paid down in one monthly payment thus maximizing the balance of the offset account whilst not accumulating any interest on your expenses. This approach requires discipline to ensure credit card repayments are made on time and may not be for everyone.

Several lenders also offer the ability to have more than one, often up to 8-10, offset accounts linked to the same home loan. The cumulative balance of all offset accounts then acts to reduce the interest accrued. This can be a useful budgeting tool where you separate your income into different categories or ‘buckets’, helping you to save while still reducing interest and paying off your loan more quickly.

 Investment loan offset accounts

 Offset accounts attached to Investment loans are where the real benefits become apparent. Investment loans are lending for properties, or other investments, from which you draw an income usually in the form of rent. Due to the transaction capabilities of an offset account, it provides a great way to keep all your investment property-related income and expenses together in the same account.

The interest on the loan, and other related expenses, are generally tax deductible, which is one of the significant benefits of owning an investment property. If you access the extra repayments from a redraw facility, the redrawn amount is treated as a separate loan to you and would prevent you from claiming this as a tax deduction, unless you can demonstrate that you are using those funds for investment purposes. Issues can arise, for example, when you withdraw money to take the family on a holiday or buy a new car. If your extra repayments are accessed directly through an offset account, the ‘fund purpose’ test would not apply, and all interest accrued on the loan would continue to be deductible.

This benefit can be significant when you purchase a second property to move into and convert your current one to an investment. In most cases you would benefit from reducing the loan on the new owner-occupied property and maximise the investment loan for tax purposes. If you transferred extra repayments to the new loan from a redraw facility, those repayments would fail the ‘fund purpose’ test and would not be deductible. By accessing the funds from an offset account, you can therefore maximise your deductions. Its important to note that these examples can significantly vary depending on your personal circumstances and you should always consult an accountant for personal tax advice.

Finding the best rate combined with the most appropriate loan features can be a complex, time consuming task that Steward Wealth can help you with. Feel free to get in touch.

How has applying for a loan changed in Covid19?

How has applying for a loan changed in Covid19?

The economic impact of Covid19, and its resulting uncertainty around employment, has forced many people to reassess their current lending arrangements to ensure they are in the best position to ride out the proverbial storm.

While new housing finance has experienced a significant hit in 2020, refinancing has reached record highs increasing 25% in May. To put this in perspective, refinancing has historically made up about 26% of total lending but jumped to 43% in June. With so many choosing to refinance their loans what have lenders changed when assessing your application?

1. Certain industries and types of work are being treated with caution

Obviously Covid19 has had a disproportionate impact across certain industries with jobs in tourism, hospitality, entertainment, retail, personal transport (Ubers and taxis), personal services (beauty) and sporting professionals most affected. If you work in any of these industries, you can expect to be ask for additional information and be prepared for the lender to contact your employer to find out your true status and whether that’s likely to change any time soon.

If you are currently on JobKeeper payments or enforced annual leave, some lenders may take this into account and even use it as a reason to deny your application. Select lenders have excluded lending to these industries completely but on the flip side some are offering incentives for certain in demand industries such as healthcare.

2. Tighter assessment of income

Lenders are concerned that applicants may see a dip in their income compared to what they had earned pre-Covid-19. When verifying income, you may be asked for the very latest payslips and even evidence that these payments had been deposited to your bank account. Lenders are also especially tough on borrowers with less stable income types such as commission, contract, probation, overtime, bonus or casual income.

If you are self-employed, you may be required to produce current BAS declarations in addition to your latest tax returns to show recent revenue has not been significantly affected.

3. Change to how rental income is assessed

Prior to Covid-19 most lenders were generally happy to count around 80% of the rent you receive from an investment property towards your income. However, with COVID-19 reducing the ability of some tenants to meet their rental obligations, banks have subsequently reduced the amount of rental income they will count, in some cases down to 50%.

Further to this reduction, given the current restrictions in place, rental income generated from short-term accommodation or Airbnb are not being counted at all in certain circumstances.

4. Lower loan to valuation ratios for some borrowers.

In the past borrowers have been able to lend up to 95% of the value of their property with applications over 80% requiring the borrower to also apply for Lenders Mortgage Insurance (LMI). During Covid-19 select lenders have now restricted certain borrowers, for example the self-employed, to a maximum lend of 80% and industries that have felt the full impact of Covid-19 limited to 70% in some cases.

5. Proving your identity and signing documents have moved online

Previously your lender, or mortgage broker, was required to identify you in person by sighting your current identification documents. Most lenders have now changed their policies to allow this identification to take place electronically via platforms such as Zoom or Skype.

Likewise, prior to Covid-19, most lenders required you to physically sign and return your application and loan documents. Now almost all lenders have moved towards various electronic signing options for all documents including mortgages in New South Wales, Victoria and South Australia. Documents that still cannot be electronically signed inlcude guarantees as well as mortgage documents in other states.

6. Delayed processing times

With the influx of refinancing applications, plus increased scrutiny of each application on top of customers applying to have their repayments paused, some lenders have been overwhelmed by the additional workload and average turnaround times have significantly increased. Some lenders, particularly those with offshore processing, are taking more than 4-6 weeks, whilst others have managed to keep timeframes as low as 2-3 days.

It must be stressed that each lender has taken a slightly different approach to how they have adjusted to Covid-19 and the summaries in this article do not apply evenly. Seeking assistance from a mortgage broker has never been more valuable to help navigate the nuances of finding the best available lending solution.

How can I pause my home loan repayments and how does it work?

How can I pause my home loan repayments and how does it work?

With an estimated 1 million people facing unemployment as a result of the current crisis it’s no wonder that the ability to service what is most household’s largest expense, mortgage repayments, will be placed under stress. If you’re in this precarious situation, or know someone else who might be, you may ask “what are the options and how does it work?”

Each lender has provided those in hardship with a six-month payment holiday. This article summarises the big four banks’ policy response but all lenders have implemented similar measures, with slight variations.

Commonwealth Bank

You will be able to defer home loan repayments for up to six months and, instead of making your repayments, interest will be capitalised, in other words, added to your loan balance. That balance will be recalculated at the end of the period and extended so repayments stay the same as they were before you started the deferral.

Westpac

You will be able to defer repayments for three months initially, with a possible extra three-month extension available after review. The deferred interest will be capitalised and when payments resume, they will increase slightly for the remainder of your loan term.

NAB

You will be able to defer your repayments for up to six month and there will be a three month ‘check in’ point with the bank. Like Westpac, the deferred interest will be capitalised and when they resume, payments will increase slightly for the remainder of your loan term. You will still be able to redraw during the repayment pause if you have made additional repayments to date.

ANZ

You may be able to put your repayments on hold for six months and interest will be capitalised. The bank will check in with you after three months and at the end of the period your minimum repayments will slightly increase to account for the increased loan balance.

What do I need to provide to have my payments suspended?

Again this will vary for each lender but in most cases you won’t have to provide any evidence that you’ve suffered substantial loss of income, or have contracted corona virus, but you may have to sign a declaration as such.

You should only defer mortgage payments if you really have to

It’s worth noting that there’s no advantage deferring the loan if in fact you can afford the repayments as capitalising the interest will mean that your repayments will increase over the life of the loan. For example, if you paused the interest repayments on a $300,000 loan with a current rate of 3%, after 6 months the balance of the loan will increase to $304,500. In most cases when you recommence your repayments, the minimum amount will be calculated based on this increased loan balance.

If you, or someone you know, unfortunately falls into this category you will need to contact your lender’s financial hardship team which can guide you through the application process. As always, please feel free to get in touch if we can assist in any way.