An offset account, do I really need one?

An offset account, do I really need one?

by | Nov 9, 2020 | Property Loans, Tax

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.

When is the right time to refinance your loan?

When is the right time to refinance your loan?

by | Oct 5, 2020 | Financial Planning, Investments, Wealth Management

A study by the Reserve Bank of Australia (RBA) earlier this year found the average home loan that is more than four years old is paying an interest rate 0.40% higher than what is currently available for new loans. This may not seem like a lot but on a $500,000 loan it means you are paying $2,000 of extra interest each year that you could probably avoid. During the current pandemic, clients have been looking at ways to reduce their expenses and refinancing activity has reached historical highs. Is now the right time for you to refinance?

Reducing your interest repayments may not be the only reason you could look to refinance. Depending on your personal circumstances, refinancing can also help you to:

  • Renovate your property – you can borrow extra funds to build an extra room, landscape the back yard or renovate your current kitchen.
  • Consolidate your debt – if you have a credit card, personal or car loan, you may be able to fold these into your home loan saving significantly on interest.
  • Releasing equity – you can borrow against the equity you have in your home to fund the deposit on an investment property or just to have extra funds if you need them.
  • Change to loan features that better suit your circumstances – this may include switching from an investment to owner occupied loan or moving to a loan which offers an offset account and credit card.

Refinancing requires you to complete a full application for the new loan. The lender will assess whether you can afford the loan based on your current circumstances, so if you have had a recent reduction of income, or increased expenses, it may affect whether the loan application is approved. Lenders have also adjusted their credit policies in light of the current pandemic and the rules that applied when you were first approved may have changed. You must also consider what has happened to the value of your property since you purchased it. If the value has fallen, it may mean that you are unable to borrow the same amount that you had previously. Conversely, if the value has risen it may present a great time to release equity.

Another factor to consider in refinancing your home loan is the costs associated with moving to another lender. Whilst you may save on repayments, the costs of discharging your current loan and the application fees for the new one may leave you worse off. This becomes more prevalent if you have a small balance or when you are on a fixed rate.

Depending on the change in funding costs of the borrower, it can be very expensive to break a fixed loan before maturity. When they mature, fixed loans will revert to variable which are often less competitive to others in the market. This is an excellent time to assess whether you can move to not only a lower rate, but a loan with the right features for you.

Lenders have recognised that the associated costs of refinancing may hinder your ability to change loans and regularly offer ‘cash back’ incentives of up to $4,000 to overcome this barrier. Whilst it certainly helps, it is important to do the analysis on each scenario. Often those lenders without a cash back offer, but a slightly lower rate, will save you far more over the medium to long term. This is where a mortgage broker can help assess your options.

I always suggest that clients review their loan every two to three years simply to ensure they have the most appropriate product available. Often it will not be the right time to change lenders, but doing the research gives you confidence that you are not overpaying.

Downsizing? What a ‘Super’ Opportunity!

Downsizing? What a ‘Super’ Opportunity!

by | Sep 25, 2020 | Financial Planning, Investments, Wealth Management

I was recently having a chat with a prospective client who mentioned t her mother had put her house up for sale and was looking to downsize. Her thoughts were to simply add a portion of the proceeds from the sale to her existing share portfolio.

This had me thinking that many people, including advisers and accountants, were unaware of a relatively new part of legislation which allows those over 65 years old who meet certain eligibility requirements, to choose to make a ‘downsizer’ contribution into superannuation of up to $300,000 for each person from the proceeds of the sale of their home.

Eligibility Criteria

The eligibility criteria in making a downsizer contribution are:

  • you are over 65 years old at the time you make a downsizer contribution
  • the contribution is from the proceeds of selling your home
  • your home was owned by you or your spouse for 10 years or more prior to the sale (calculated from the date of settlement of purchase to the date of settlement of sale)
  • your home is in Australia
  • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption
  • you have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer
  • you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement
  • you have not previously made a downsizer contribution to your super from the sale of another home

If your home that was sold was only owned by one spouse, the other spouse may also make a downsizer contribution, or have one made on their behalf, provided they meet all of the other requirements.

What about my Transfer Balance Cap of $1.6m?

The downsizer contribution can still be made even if you have a total super balance greater than $1.6 million. What’s also important to note is that this contribution will not affect your total superannuation balance until the end of the financial year. Because this is not considered a ‘non-concessional’ super contribution, if you are still eligible to make a contribution to super before the end of that financial year, you may do so.

However, it will eventually count towards your transfer balance cap (TBC), currently set at $1.6 million once the end of year accounts are completed.

You can only access the downsizer scheme once. This means you can only make downsizing contributions for the sale or disposal of one home, including the sale of a part interest in a home, and it can’t be more than the proceeds from the sale of your home.

There is no requirement for a couple to make equal downsizer contributions. For instance, one spouse could make a $250,000 contribution while the other spouse may make a $130,000 contribution.

Timing of your contribution

You must make your downsizer contribution within 90 days of receiving the proceeds of sale. You may apply for an extension if there are situations beyond your control for making the payment.

So what’s the process?

You will need to complete the Downsizer contribution into super (NAT 75073) form. You need to provide this to your super fund when making – or prior to making – your contribution.

And then within 90 days of receiving the proceeds of sale, make sure you make the contribution.

An extension of time should be requested before the 90-day period from the date of settlement has expired.

Part sales of property

Fractional property investment firm, DomaCom received binding advice from the ATO that people may sell part of their home and still qualify for the downsizer contribution.

DomaCom have a platform whereby investors can purchase a portion of a property asset from sellers. Its Seniors Equity Release Platform provides this as an option for seniors looking to access cash through the sale of part of their home.

As mentioned previously, sellers are only able to use the downsizer contribution once, so once they sell a portion of their home and utilize it, they cannot do so again.

The contributions would still be capped at $300,000 per spouse and could be made as several contributions over a period of 90 days from settlement of the property.

With many Australians having large amounts of their wealth tied up in their home, the downsizer contribution may be very effective in allowing them to boost their income in a tax effective structure, regardless of whether you are over 65 and cannot meet the work test rule.

As with all these strategies, it’s important to get the right advice as each person’s situation may be different and there may be implications which affect you.

Find out how this can work for you on 03 99757070 or at info@stewardwealth.com.au

How has applying for a loan changed in Covid19?

How has applying for a loan changed in Covid19?

by | Sep 7, 2020 | Property Loans

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?

by | Mar 31, 2020 | Financial Planning, Investments, Property Loans

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.