Buying at auction

Auctions are a fast, practical and effective way to make a home purchase or investment. If you’re considering buying at auction, here are a few pointers to give you a head start over the competition:

• Have pre-arranged finance: It’s a good idea not to place a bid on a property until you have pre-approved finance. It will cost you an enormous amount of money to break the contract if you do not have the finance to complete it. In addition, by having pre-approved finance you’ll have a good indicator of how much you can spend, allowing you to bid within your means.
• Read the contract: Source a copy of the sales contract as soon as you can or at least before the property goes to auction. The estate agent should be able to send a copy through. Ensure that you receive some legal advice on the contract to ensure it’s suitable. If you’re serious about bidding on the property, you can also negotiate on some of the terms of the contract before it goes to auction.
• • Do your research: Research the area, property prices and past and current sales to give you a good idea on what the property is worth. While you might have formed an emotional connection with the property, ensure that the investment stacks up financially and that there are good prospects for capital growth.
• Inspect thoroughly: Inspect the property inside and out before the auction and take note of all its defects. Also arrange a pest and building inspection before it goes to auction. What may first seem like a bargain may not be the case if you need to spend money redoing the plumbing, electrical/structural work, or demolishing an illegal structure on the land under Council order.
• Treat it as a business deal: Considering the bidding process as a business deal will help you to remain objective and make clear decisions.

If you are an impulse buyer or have an emotional attachment to the property, ask a trusted family member or friend to bid on your behalf. They will have no emotional attachment and will help you to make clear decisions on the big day.

Size does matter

A unit can be a sound investment, but with so many styles of units available, it can be hard to determine which will provide the greatest return for you.

There are pros and cons associated with each purchasing decision.

Ultimately, one of the most important factors to consider before purchasing a unit is its location.
A well positioned unit does present many advantages and often provides very attractive returns. If you need assistance researching the market, as a broker I can help you access property reports and other related information.

Moreover, investors should make sure they buy in a block that is well positioned, desirable and well-maintained.

With these key points in mind you can start to consider the style of unit that best suits your needs. Here are some of the pros and cons with each:

STUDIO APARTMENTS
• Pros
A new demand is emerging for accommodation that services career oriented, single people and independent retirees.
Escalating levels of divorce and separation are also fuelling demand for trouble-free affordable accommodation, and studios are becoming increasingly attractive to both young and older Australians. This can help ensure strong interest from tenants and potential rental returns.

• Cons
The main disadvantage of a studio flat – other than its size – is that it may not rise as quickly in price as one and two bedroom units. Moreover, mortgage lenders’ acceptance of studio apartments as security has traditionally not been as strong as one and two bedroom units, potentially making securing financing more difficult.

ONE BEDROOM APARTMENTS
• Pros
Investors should expect to see a high rental return and should not have too much of a problem sourcing tenants for the property, provided it is close to the inner city. A one bedroom unit is generally larger than a studio apartment and can therefore command a greater rental fee from the occupant/s.

• Cons
Data from Residex has found that many young professionals today are looking for a unit that has two or more bedrooms, so that they can use the second one as a study or work studio.
In addition, renters sometimes seek a property that can fit into any future lifestyle changes, e.g. having a child, which may result in the ending of their tenancy.

TWO BEDROOM APARTMENTS
• Pros
Two bedroom units usually achieve the highest rental return for investors. And provided they are located near water, close to the city, or in an overall good location near transport, shops and schools, finding occupants is generally easy. Additionally, two bedroom units usually have a greater resale value.

• Cons
Two bedroom apartments are traditionally more expensive than one bedroom or studio apartments; the entry level price is therefore higher and can be a barrier for some buyers.
Remember, while there are differences to each type of unit, your investment selection will most probably be dictated by how much you’re able to comfortably borrow and service. If you’d like to explore your investment options and borrowing capacity give me a call.

Loans for the self-employed

The credit crunch and resulting squeeze on liquidity, coupled with the Australian government’s recent crackdown on responsible lending, has made it harder for the self-employed to secure a home loan.
But with one in 10 Australians now self-employed, there is still a strong industry servicing this sector and opportunities are still available for self-employed borrowers – they just need to know where to look.
Here are a few steps that will help self-employed applicants find a home loan to suit their needs:

• Talk to a broker: A mortgage broker can assess your financial situation and help find a loan that suits your needs. They’re a good starting point for self-employed borrowers as they can also give you a range of other information to help make the process of securing financing more simple, and importantly, less stressful.
• Keep record: Ensure all your business records are up-to-date, simple to review and well structured – and this in not just for tax purposes. If you can highlight a savings history, regular income and a functional, well structured business that turns a profit for at least a two year period, you will significantly broaden your borrowing opportunities.
• Look beyond the banks: Non-bank lenders, including credit unions and building societies, may offer low doc and other loan products not offered by the banks. They may also have different requirements, so it pays to see what the alternative lenders are offering.
• Serviceability: Self-employed borrowers can be attractive to lenders if they can demonstrate ability to service a loan, regardless of business/cash flow fluctuations. Highlight other commitments you’ve been able to service on a regular basis. Again, your broker can help package up a good case for securing finance.

The brakes are failing

The Reserve Bank is trying to put the brakes on our major housing markets by increasing the cost of borrowing. John Lindeman, Head of Research at Residex – Australia’s oldest and leading provider of residential property data – explains why this policy can’t work.

“In the last thirty years, house prices rose fastest during 2001 to 2007, even as the RBA was aggressively raising interest rates.

Raising interest rates failed then and the strategy will fail now, because interest rates hit first home buyers far more than existing owners.

First home buyer loans fell by nearly 50% in the March quarter compared to a year ago. It appears that the RBA’s policies are working with respect to first home buyers. Our figures confirm that house prices are falling in the first home buyer markets of Sydney, Brisbane, Adelaide and Perth.

Yet house prices in million dollar suburbs have soared and the RBA brakes have no effect at all. Sydney suburbs such as Naremburn, Lane Cove North, Chatswood, Willoughby and Vaucluse rose by more than 8% in value during the last three months, while Melbourne’s Elwood, Sandringham, Camberwell, Hawthorn, Balwyn and Kew went up even more by an amazing 10%.

Increased equity is the key. Owners are playing leap frog as each seller buys again further along the line, but they use the equity that growth in the market has given them. In the last twelve months, the median value of a Melbourne or Sydney home has grown by around $100,000.

Now is the time to seriously consider using your increased equity to invest in the housing market. Such an opportunity to take advantage of market growth comes rarely and should not be missed.

Speak to your mortgage broker to find out how much your property could be worth, how you could unlock equity and explore some of your refinance options,” comments Lindeman.

Economic wrap - July 2010

After three consecutive rate rises, the Reserve Bank of Australia (RBA) left the official cash rate on hold in June.

The RBA has raised the official interest rate six times since last October, pushing it from the historic low of 3 per cent last year to a more neutral setting of 4.5 per cent.

Renewed signs of global economic weakness have brought the RBA’s spate of rate hikes to a grinding halt however.

Escalating debt problems in Europe have had a significant flow on effect on global markets and the RBA is still trying to establish the potential impact on domestic inflation pressures.

While the European Union has worked hard to contain the Greek sovereign debt crisis, the RBA said in its June board meeting that it would take a ‘wait and see approach’ to the actions of European nations to bring budget deficits under control.

As such, economists are speculating that the RBA will keep interest rates on hold for the foreseeable future.

AMP chief economist Shane Oliver says the problems in Europe as well as softening housing demand will push the RBA to keep the official cash rate at 4.5 per cent until at least August.
The latest statistics from Residex show that while demand for housing has weakened compared to earlier this decade, the house market still grew in value by 1.9 per cent in the last few months while the unit market increased by 3.4 per cent.

In the two dearest markets, Melbourne’s house median value grew by 7.7 per cent and Sydney’s by 3.5 per cent. Overall, all capital city house markets except Perth increased in value in the last twelve months.

Although rates have remained stable, borrowers should consider reviewing their home loan to ensure it’s still the most appropriate for their needs. If your situation has recently changed – for example you have a new job or a child on the way – your current mortgage may not be the best for you.

Please give me a call and we can discuss your situation and current opportunities.

Should you purchase off-the-plan?

Buying a property off-the-plan has been a popular strategy for many years however there are a number of issues that need to be considered.

Upsides
One of the main benefits of purchasing a property off-the-plan is that you can secure a new property at today’s prices, even though it might not be ready to move into for six months or more into the future.

In a market that has bottomed out and is on the rise, the property may have increased in value once it has been completed – giving you plenty of scope for price growth. In addition, you typically don’t need to commit too much upfront in terms of finance.

Developers usually require a 10 per cent deposit to secure a property off-the-plan, with the balance payable once the property is complete. You can therefore use this period – which might range from a few months to a number of years – to save, thereby reducing the mortgage required to secure the property.

This strategy can be very effective for first home buyers seeking to minimise their mortgage commitments or possibly purchase a larger house – or one in a more desirable suburb. It can also be a sound option for those that want to live in a new home but don’t really want to handle the stress of building one themselves.

Purchasing off-the-plan can be a prudent option for investors as well, particularly those that are looking to maximise their cash flow to inject funds into other investments – be it shares, managed funds or other asset classes. Investors can also benefit from tax incentives
when purchasing new properties.

Downsides
While there are numerous benefits of buying a property off-the-plan, it does come with certain pitfalls that you need to be aware of.

Most importantly, should the value of the property decrease during the period between placing your deposit and final settlement, you may struggle to secure the valuation required to secure a mortgage – leaving you out of pocket.

For this reason it’s essential to do your research on the area where you’re buying as well as its long term prospects.

For example, should there be a building surge in the area – and a subsequent oversupply of property – investors may struggle to attract tenants. It may also reduce possible rental returns.

Also, do your due diligence on the developer – there have been numerous cases where developers have run out of funds and unable to complete construction. A developer with a good track record – and even better, one that has been referred by a satisfied customer – is always worth considering.

If you’d like to chat through strategies for purchasing off-the-plan, or need details on financing an off-the-plan property, please give me a call.

Help your children purchase their property

Rising property prices are making it increasingly difficult for first home buyers to save the deposit required by banks to secure a mortgage.

Coupled with rising property prices, it’s becoming more and more difficult for budding buyers to step onto the property ladder.

There are some solutions – including being a guarantor on your children’s property.
Early last year, the Commonwealth Bank conducted a survey which found 87 per cent of parents would like to help their children purchase a home.

Through a parental guarantee on a mortgage, first home buyers can buy their property sooner as well as avoid extra costs like lenders’ mortgage insurance (LMI).

Lenders’ mortgage insurance is usually required when you borrow more than 80 per cent of the value of a home. To avoid paying this sum, many parents are willing to be a guarantor for their children for 20 per cent of the value of their property.

Consider all issues
Others may choose to be a guarantor for the whole amount of the mortgage. However while this option may benefit your child, there are various associated pitfalls.

No matter how it is marketed, acting as a guarantor is considerably more than a mere formality. It essentially means you become responsible for the loan if your adult child cannot make the repayments.

In this respect, if you’re concerned about your personal financial circumstances, or are yourself leveraged on your mortgage, it may be prudent to investigate other options.
One alternative is to help your child raise the deposit for their home.

Have you thought about co-ownership?
Conversely, you might choose to purchase a property with your child, which would not only give them a leg-up into the housing market but also provide you with an investment property.

In this scenario, you can choose to be tenants-in-common rather than joint tenants, as this will change the way you structure the mortgage (i.e. two individual mortgages for one property). The split also does not have to be 50:50, however the percentage difference of ownership would be reflected in the final payout should you sell the property.

If you do choose this strategy, documentation is a must.

While you may not be squabbling with your child now, for example, who knows what’s around the corner?

Of course, there are some drawbacks to this option as well.

First, your child may not qualify for the first home owners’ grant. Second, you may be liable for capital gains tax when you sell your part of the property, as it is not your primary residence.

Whatever route you decide to take, remember it is essential to document everything and leave nothing to chance.

If you would like to find out more about being a guarantor, or other options available to you as a parent, please don’t hesitate togive me a call.

Finding a great loan
If you don’t want to buy a property together with your child, another strategy that can prove effective is to help cover some of the expenses associated with their home purchase.
While first home buyers can receive some government concessions to help cover costs – for example stamp duty waivers under $500K in NSW – there are other costs, including legal fees conveyancing costs, building inspections, or even furnishing a new home, you can assist with.

New or old – which investment is suitable for you?

Property investment is not just about whether you decide to buy a unit or a house, you also have the option of new or old.

There are advantages for both styles of properties, and it really comes down to your short and long term objectives. Where you intend to purchase the property will also influence what type of properties are available in a particular geographic location.

Purchasing a property off-the-plan – which allows you to lock in today’s prices for a property that may be finished in a year or two in the future – can be an effective investment strategy as you will not have to make any mortgage repayments until the property is ready for habitation. The only cost will be the deposit.

The key potential pitfall with an off-the-plan purchase is that there is no guarantee that the property you buy today will have grown or even maintained its value.

The downside of this is that your lender may not be willing to fund the entire purchase price, which will leave you with a shortfall.

There are also pros and cons associated with the purchase of an existing property.
One of the key benefits is that during a slower market you might have greater scope to negotiate on price. In addition, you may be able to add value through renovation – which will modernise the property and possibly help you achieve higher rental return.

On the flip side, existing properties may require more maintenance or have serious structural defaults – which can be expensive to fix. It might also be more difficult to attract tenants to older properties.

Feel free to give me a call to chat through your options as well as investment property financing strategies.

Tax considerations
A dwelling – unlike the land on which it is situated – is a depreciating asset, under Australia tax law. While land values generally increase over time, dwelling values (including their fixtures and fittings) decrease.

What this means for you is that you can claim as a tax deduction the depreciation of your investment dwelling and its inclusions. New homes tend to depreciate faster than old ones in the first ten years so this might be a consideration when you’re making an investment.
But your first move should be to speak to a professional adviser, such as your accountant,
who can walk you through your options.

Add value through renovation

Regardless of whether you plan to sell your property now or years into the future, some simple home improvements will not only add value to your property, they will also increase the quality of your day-to-day home life.

The first and perhaps most important method for increasing your property’s value is to de-clutter – which will instantly give the impression of a bigger property, more spacious property.

And the best aspect of this strategy is that you can do it yourself for free, or you can spend less than $500 and a professional will do it for you.

Another hip-pocket friendly value-adding strategy is to install a sky light.

A home awash with natural light looks bigger than one with artificial lighting. Moreover, a skylight or solar tube will also lower your energy bills.

Also focus on the exterior of your home
First impressions can make or break the sale of a house. If your garden is unkempt, or if you have a wonky front gate or slippery pavers, your property’s value can decrease significantly.
So make sure everything outside the house is working, serviceable and as liveable as the inside. A new mailbox or welcome mat can be purchased for under $30, for instance.
Colourful flower beds or pot plants beside the front door can also give your property a much needed lift while bring a sense of personality to your home.

Top tips for maximising value on a budget

• Replace the fixtures in your bathroom
• Paint, paint, paint. A light cream or off-white can make your house seem more spacious
• If first impressions count, a nice front door is a must. For a couple hundred dollars you can spruce up the entryway to your house
• Place fresh flowers throughout your house to help brighten even the ugliest room
• Make the beds. Always keep your house spick and span for the illusion of space

Economic Wrap - April 2010

The Reserve Bank of Australia (RBA) pushed the official cash rate up 25 basis points to 4.25 per cent this week.

The hike to the cash rate was by no means a foregone conclusion with economists split over how the RBA would act in April. But an improving economy and a strengthening housing market – as well as growing retail sales over the earlier part of this year – were enough to prompt the RBA Board to bump rates up for the second time this year.

According to the Australian Bureau of Statistics, retail sales rose a higher-than-expected 1.2 per cent to a seasonally adjusted $20.14 billion in January from $19.91 billion in December, offsetting the 0.9 per cent fall in December.

Rates have now risen five times over the last six RBA Board meetings, and it would appear that the surging strength of our economy, the falling unemployment rate and rising home prices will prompt further rises as the year wears on.

Indeed, most major bank economists expect the official cash rate to settle around the 4.5-5.0 per cent mark by year’s end.

In his comments to the market following the March rate rise, RBA governor Glenn Stevens said the Australian economy continued to show signs that it was in “good shape” and “stronger than expected, after a mild downturn a year ago”.

“Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year,” Mr Stevens said.
While borrowers might be disappointed with the rate increase, at 4 per cent the cash rate is still well below its historical average and a long way off the 7.25 per cent it hit in March 2007.

There is also increasing competition in the mortgage rates offered by lenders with a considerable gap remaining between the standard variable rates of the major banks – so borrowers would be wise to explore whether their current mortgage is still the most competitive in the market and suitable for their needs.

If you’d like to run through your options, or discuss how the most recent rate rise will impact your mortgage and repayments, please feel free to give me a call.

Economic Wrap

Interest rates have now risen for the third consecutive month bumping up the cash rate by three quarters of a per cent since its low of 3 percent between April and September 2009.

But for most homeowners, mortgage rates have increased above the cash rate level as the banks have looked to offset the impact of higher funding costs at the expense of the borrower.

This is a concept that is confusing for borrowers because there is an expectation that the Reserve Bank of Australia (RBA) dictates where interest rates should sit - and in normal circumstances that would be the case.

Unfortunately we are still not in a 'normal' market as far as funding is concerned. Though Australia has well and truly sidestepped the recession that has gripped much of the developed world, our banks and financial institutions are still very much dependant on the international money markets for our mortgage funding.

You may wonder why we depend on the financial markets at all for mortgages - surely the banks bring in deposits through one door and lend them through another? The reality is that today there are fewer savers out there than there are borrowers and so the banks must look elsewhere
to fund their customers' property purchases.

But while the December rate rise may have hit us a little harder than expected there may be a silver lining.

One of the reasons the RBA increases rates is to cool consumer spending. With the banks bumping rates up even higher there is a reasonable chance that the cash rate may stay at its current level for a while longer.

The reality is rates are still at historic lows and there is a fair way for them to go before they reach normal levels. While we hope that this transition will be a slow one, it makes sense to start factoring the potential for higher repayments into your budget.

Your first port of call should be to target reducing any high interest debts such as credit cards and store cards. If you're concerned about your debt levels, or are unsure what rates you are paying, feel free to give me a call to discuss.