We have all heard of credit reporting, but have you heard of credit scoring?

Your credit file is one of your most important financial assets. Safeguarding this file is an important part of the finance application process.

Your credit file contains
– credit applications
– overdue credit accounts
– payment defaults
– clearouts (as a missing debtor)
– commercial credit information
– public record information.

You will have a credit score calculated from your credit file.

Did you know that a score of less than 500 will severely affect your ability to gain finance from many lenders?

Read our one page guide – “Keeping Score” – to find out more: https://www.mortgageaustralia.com.au/email/files/keepingscore.pdf

Do you know the difference between how much you ‘can’ borrow, and how much you ‘should’ borrow?

There might be a very big difference between how much a lender is willing to give you, and how much you can comfortably afford to repay.

So how do you work out your real ‘should’ borrowing capacity? Don’t you want to be sure that you can afford to make the repayments on your loan?

Lenders will take into account your ability to repay the loan, based on what you earn, how many dependants you have, what your credit rating is, and your declared living expenses.

However, lenders only know what you tell them, and there are a few things you need to take into account that might not be considered by a lender when deciding on your borrowing capacity:

Job Security

How secure do you think your job is? If you’ve worked for the same company for several years and earn a decent wage, your lender will view this very favourably.

But have you been hearing murmurs about a possible restructure? Do you work in a department that could potentially be outsourced offshore?

You’re in a much better position to assess your job security than a lender is, and you need to be realistic. If you commit to the maximum loan amount and then your role is made redundant, you might struggle to keep up your end of the bargain.

Job Satisfaction

Your excellent employment history was a definite tick for your lender, but how do you feel deep down about your job?

Have you just been hanging on until you can get finance approved? If this is the case, think carefully about how much you should borrow.

You might need to take a pay cut early on, if you decide to move into a different line of work.

Family Planning

You answered ‘zero’ when asked about your dependants, which contributed to the assessment your lender made when offering you a bumper loan.

But what if you were suddenly expecting a child, or if you decide to expand your family a few years down the track?

Your Lifestyle

You might be able to ‘afford’ the repayments on a big loan, but what happens when mother’s day, your brother’s birthday and your car registration all come around at once and you need some extra cash?

Or maybe you would like to take a holiday at some stage next year. Don’t leave yourself short, or it’s going to be a very long 25 to 30 years.

Your other goals

Would you really love to continue your studies in a few years? Do you dream of taking off for a few months to take the kids around Australia?

Don’t forget about your other dreams and goals when you work out how much to borrow.

You still need to have a life, and some things are more important than having a spare room for your shoe collection.

How to buy with a friend – without killing the friendship or your credit rating

Have you ever heard the expression, ‘no friends in business’?

It’s an oldie but a goodie.

This is the attitude you should bring when considering buying property with a friend.

Many good friendships have gone under the bus, and lots of people have taken a bullet to their credit rating by not giving this decision adequate thought.

So what are the risks involved with co-ownership, especially when you purchase with a friend?

What if one owner wants to sell?

One of the biggest problems with co-ownership is when one owner decides they want to sell the property, but the other owners don’t agree.

This often ends up in court, and the process can be costly and upsetting for everyone. And needless to say – the friendship probably won’t survive.

Buying could be harder in the future.

It might seem like the dream scenario to invest now with your best friend.

But if you decide in a few years to purchase a home to live in, the lender will assess your financial commitments based on the whole loan for the first property, not just the portion that you agreed to cover.

This could make it very difficult for you to get another loan.

You could be left holding the baby.

If something happens and your friend is unable to make their repayments, you could be left in the difficult situation of repaying the entire loan by yourself.

Coupled with your other living expenses, you might not be in a position to cover the whole amount yourself.

But there are some ways that you can reduce the risk, if you are keen to purchase property with a friend:

1) Put a legal will in place. It’s important to make arrangements for what will happen to your assets if you pass away or become incapacitated.

2) Draw up a co-ownership agreement. If you can think about any issues that might possibly come up in the future, and have an agreement in place to solve them, you’re less likely to wind up in court trying to work things out.

3) Choose the right structure – tenants in common, or joint tenants. Tenants in common can own a different portion of the property, and they need to specify in their will who will inherit their portion if they die. Joint tenants jointly and equally own the property, and if one person dies, their share automatically goes to the other(s) regardless of the instructions in their will.

4) Choose the right person. It’s important to discuss your financial goals and values before you enter into this sort of arrangement. You need to feel comfortable knowing that your friend will be financially secure enough to keep up their end of the bargain – otherwise you might be left trying to cover the repayments alone.

It’s important to think about your own relationships as well, if your partner is keen for you to buy a house together next year, you might want to think about how this first investment might impact your borrowing power.

Should you buy or build your next home?

Many buyers struggling to find the right home are going back to the drawing board and building rather than buying an existing home.

There are obvious benefits to a brand new home: you can build exactly what you want and enjoy shiny new surrounds, with no wear and tear costs for years to come. But there can be downsides to creating your castle.

Let’s look at some of the pros and cons of building versus buying.

THE PROS OF BUILDING

You get what you want

The great pleasure of building your own home is choosing what you want for today’s lifestyle. If building, you have two options: a project home or a custom-built one.

Project homes offer a suite of designs, usually with options to mix and match or upgrade some features. They are cheaper than custom-built homes because the builder works on an economy of scale for the building materials and products and knows exactly how much money will be made on each design.

The other benefit is that you can tour display villages and see exactly what you will get.

A custom, or architect-designed, home will cost more but allows you to create your dream home. Just remember, the higher the quality of your materials and fittings, or the harder they are to source, the higher the cost. Size also matters, with builders working on square meterage.

You can go green

The Nationwide House Energy Rating Scheme requires all new homes to have a minimum energy rating of six stars (one being the lowest and 10 being the highest), which means lower energy and water bills for your household, plus the feel-good factor of helping the environment.

Green design includes the home’s aspect to make the most of natural cooling and warming, water tanks, energy efficient lighting and better-insulated windows.

You can be part of a new community

In a world where increasingly few of us know our neighbours, a new home in a new estate can help knit you into a community.

New estates are generally located in high-growth areas that attract young families, a plus for those with kids who want to feel part of a neighbourhood.

These estates are also carefully planned, often with new parks and purpose-built shopping centres. Some are even large enough to have their own schools, heightening the sense of community for residents.

THE CONS OF BUILDING

Time and stress

Building a new home, even if you opt for a project design, requires your input and time. Even the simplest projects can take their toll, especially if couples disagree about certain fixtures, bad weather impacts timelines or the builder gets something wrong.

Busy people might struggle to find enough time to make decisions, liaise with the builder and other contractors and visit the building site. If that’s the case, buying an existing home might be a less stressful option.

Locating land

While new homes are generally part of new communities, the trade-off is that the land is often located in outer suburbs, with fewer public transport options and longer commutes.

Finding vacant land in established areas is nigh impossible in some cities, so older homes in poor condition are being snapped up and knocked down. For many, the cost of buying and demolishing a home and building a replacement is prohibitive.

If you are looking to settle in an established suburb with ample infrastructure and amenities, buying a home and renovating it to suit your needs may be more affordable and convenient.

Downsizing? – How to invest those extra dollars:

So, you put the family home up for sale after many years, and moved into a home that better suits your lifestyle. What did you do with the extra money from the sale?

If you’re still trying to work out the best way to maximise the proceeds, the six ideas below should start you on the right track.

First – Get advice from a financial planner

Nothing is a substitute for good qualified financial advice. A financial planner can sit down with you and explain the implications and benefits of every option for you. They can help you to avoid creating a tax nightmare for yourself and create as much wealth as possible with your surplus cash.

There are a few different options that you can generally choose from when you have extra funds because you have downsized your home. Keep in mind – your financial adviser is the best source of information, and this is in no way intended to be seen as personal advice.

Deposit money into a high-interest account

If you want a low-risk option and you don’t want any nasty surprises, depositing the funds into a high interest yielding account could be the best option for you. Banks offer great deals on term deposits, if you’re happy to have the money locked away for a specific period of time.

Re-invest the money in property

If you’re keen to build a property portfolio and try to grow your capital, property investment could be the way to go. You will need to consult your accountant or financial planner about the tax implications, and if you need to take out a mortgage to cover an extra amount, make sure you can afford to make the repayments.

Even if you plan to rent the property out, it’s worth planning for short periods where it may sit unoccupied and not generate rental income.

Invest in your superannuation

If you choose to invest money in your superannuation, make sure you discuss the tax implications with your accountant or financial planner, but generally speaking you can make some lump sum payments into your super.

Invest in shares

Shares are overwhelmingly the most risky choice for investing your extra dollars. If you don’t understand a lot about the share market when you start out, you might want to read a few of the many horror stories out there, and consider if this option really suits you best.

Otherwise, there are experts who can provide advice and give you the best chance of success in the share market – but keep in mind there are never any guarantees.

Invest in fixed-interest government bonds

Another option which is very secure if you want to earn decent interest, is to invest in fixed-interest government bonds. These are guaranteed by the government so you shouldn’t have to worry about losing the lot with this option – unless our government really drops the ball during your fixed period.

Remember, your accountant or financial planner should be your first port of call before you jump into any of the above investment options. But at least now you can turn up to your appointment ready to talk the talk!

Now here is a Quick Guide to starting a Property Investment Portfolio.

While it’s hard to predict where the housing market will head in the future, there are some clear signals that investing in property will remain a solid option for long-term wealth generation – and the sooner you start the better.

One of the key factors to consider is the demand for housing. Australia typically faces a housing shortage, with home ownership on the decline and renting on the rise.

While some argue it’s partly due to people marrying later in life and preferring to rent rather than be tied to a mortgage, the more likely reality is that many first-time buyers have found it harder than previous generations to save a sufficient deposit, thanks largely to the increased cost of homes.

At the same time, our population continues to grow (more than eight per cent in the past five years, according to the Australian Bureau of Statistics), rental markets remain tight, interest rates are low and house prices have dropped about five per cent on average in the past five years.

Opportunity is knocking for those with equity in their home who are looking to invest in property. But there are some key facts to consider before you open the door.

RENTAL RETURN OR CAPITAL GAIN?

It’s important you decide what you want from your investment as this is likely to determine what type of property you buy and where.

Are you looking for maximum rental return or are you prepared to negative gear (where any losses help reduce your taxable income) and aim for capital growth over the longer term?

Whether it’s cash flow or capital gain you are after, be careful not to over-stretch, particularly in the current environment. Negative gearing has its pros for tax purposes but cash flow is still king when it comes to day-to-day living, so aim to strike a balance between your immediate rental return and longer term goals.

TIMING

One of the benefits of investment property is that you can choose to sell when the market is high, and buy back in when it flattens. Most of us don’t have this luxury with our own homes because we need somewhere to live. We tend to sell and buy in the same market.

Now may not be such a good time to offload an investment property, but it could be a good time to acquire, with a view to building a healthy capital gain when the property cycle turns around.

LOCATION

Choosing the location of your investment property is very different to deciding where you will live. Tenants are often looking for very different things to owner occupiers. The first is usually convenience. Look for properties near good amenities, particularly shops and transport.

If you are looking for solid rental returns right from the get-go, consider a unit or townhouse in an affordable suburb with a high percentage of renters and low vacancy rates. Inner-city properties may be too pricey, but you can often find well-priced, easy-to-rent properties in suburbs close to universities and hospitals, full of students and workers eager for convenience.

If capital gain is more important, look for properties in suburbs that are next to those that are already in demand. Over time, the amenity and appeal of one suburb tends to creep into the next, pushing up prices.

NEW VS OLD

New properties require less maintenance and generally carry increased tax benefits but older properties still have their advantages, especially if you are looking to add value with improvements or renovations (see our Renovate Right article).

One of the key tax advantages of buying properties built after 1988 is depreciation, where wear and tear is accounted for and offset against your income tax. It applies to the external structure and internal fixtures on a property, so even if your rental is pre-1988, you may still be able to claim depreciation for any renovations, including those undertaken prior to purchase.

To claim this tax benefit, you need to have a depreciation schedule prepared by a qualified quantity surveyor. This generally costs anywhere from $300-700, with many companies promising your money back if you are unable to claim back at least the cost of the survey in depreciation in the first year.

RESEARCH

Prior preparation and planning are the keys to property investment, no matter where or what you buy. Research the area’s sales history and also look ahead by finding out if there are plans for nearby infrastructure, such as public transport, major road improvements, hospitals, schools and parklands.

Find out what various properties rent for and check out demand by researching the area’s vacancy rates and inquiring how many applications have been lodged for advertised properties. Posing as a renter is also a clever way to get some inside knowledge and find out what tenants are looking for.

Tax information: the information contained in this article does not constitute advice. As taxation legislation is complex, I recommend you speak with your tax advisor or contact the ATO for further details and expert advice in relation to your personal circumstances.

If you are applying for your first home loan – here is the pain free alternative:

The first time you apply for a loan, you could feel a bit like a deer in the headlights.

With so many questions to answer, you might start to wonder if your mortgage broker is hatching a secret plot to kidnap you and steal your identity.

Understanding what lenders are looking for can help to make the process easier for you, and improve your chances of being approved for a loan.

There are five ‘C’s when it comes to lending…

Credit History

Your credit record can have a big impact on whether you’re approved for a loan.

Your lender will want to know about money that you have borrowed in the past, and how quickly you paid it back. Credit cards, phone bills, car loans and many other sources of credit are examined when determining your credit rating.

Capital

Your lender will want to know that you have assets and funds accumulated. Particularly, they will want to know how much you will be contributing to the purchase.

Collateral

You will need to offer property as security against your loan. Usually this just means that you offer the house as security, so that if you don’t repay the loan, your lender can sell the property to get their money back.

Capacity

Your lender will assess your ability or capacity to meet repayments. This is done by examining your income and financial commitments such as living expenses, other loan repayments and dependants to determine if you are capable of servicing the loan.

Character

The lender will also take into consideration other details about you, such as your working history and length of employment, how long you have lived in your current residence, and any other available information that might help to determine your suitability for a loan.

Mortgage holders may be reluctant to make moves in the property market right now, but plenty are interested in making moves with their home loan.

The AFG Mortgage Index indicates around 35% of new home loans were due to refinancing. At the same time, a survey for Ernst and Young by Quantum Market Research found 65% of borrowers were looking to be rewarded for loyalty with lower fees and better rates. However, a third of potential switchers admitted they gave up because there were too many choices to wade through with too complex information. In other words, we would like a better deal, but many of us find it too hard or lack the time to find one.

Now, however, is a good time to strike a better deal. A flat property market means fewer new loans for lenders, so many are keen to create churn among existing borrowers.

Why switch?

As the Ernst and Young survey highlights, many borrowers believe they are currently getting a raw deal. This sentiment is amplified by many lenders’ reluctance to pass on official interest rate cuts in full. Australian banks had, on average, passed on 116% of each rate rise and only 84% of each cut, according to the Australian Economic Record.

Quite simply, the best reason to switch is to get a better deal so you can pay your house off sooner. You might also be shopping around so you can bundle personal debts, such as credit cards, store cards, car loans and personal loans, into your home loan. While this is a smart move – it will slash the amount you fork out in interest payments – it won’t help you pay your mortgage off sooner because you’re adding to your overall loan amount.

Let a Mortgage Broker take on the burden

You won’t know if you can get a better deal until you start looking, which is where many throw up their hands in surrender. Talk to your broker first so he or she can share their insights about the broader home loan environment.They deal with dozens of lenders and hundreds of loan products so they have their finger on the pulse, plus resources at their disposal that will take the heavy lifting out of the homework – the very reason why many claim they can’t be bothered to switch.

The costs of switching

It’s important you understand upfront, it costs to switch. The good news is that it generally costs less than it used to, thanks to the scrapping of early exit fees since July last year. However, there are still fees and charges involved in moving loans, and break fees are still applied to fixed rate loans.

Generally, you can expect to pay:

A discharge and registration of mortgage fee of about $190.
A settlement fee of $100 to $250.
An application and valuation fee of about $600.
Some lenders entice borrowers with payments to help offset switching costs. Most lenders will also offer a discount on the application fee, or waive it altogether, if existing customers are switching to a different loan product under their umbrella.

Lenders are now also charging one-off annual fees for interest rate discounts for the life of the loan. These are often attached to off-set loans, where the loan account acts as a line of credit. The more you pay into the account, the less you pay in interest, and you can deposit and withdraw at any time, just like a regular savings account. With the average mortgage now tipping $300,000, the $300-500 fee is well worth the discounted rate on these offset facilities.

The pitfall with this arrangement is not the fee, but how borrowers choose to use the account. If you are taking full advantage of the offset facility and paying down the amount you owe, you will come out well on top. If, on the other hand, you keep drawing down on the money available, you are probably paying way more in interest than you would with a traditional home loan.

Get the facts

One of the best ways to understand all of the pros and cons of a loan product is to ask the lender for a fact sheet. Many lenders don’t offer fact sheets upfront, but they are now required to provide one if you ask.

Key fact sheets provide information in a set format so it’s easier for you to compare loans. They also highlight important information, such as the total amount to be paid back over the life of the loan.

Beware of shrinking values

In some cases, property values have dipped, so one of the trickier aspects of switching is knowing how much equity you have (the current value of your home, minus what you owe). If you bought in recent years and borrowed near or to your limit, you may find you have insufficient equity to secure a new loan, or that you have to pay additional hefty charges in the form of lenders mortgage insurance (LMI).

If you need to borrow more than 80% of the value of a property, you will be charged LMI to cover the lender if you default on the loan. It can add thousands to a loan and, what’s more, it’s not portable. If you already have LMI incorporated in your loan, you will have to take out a new policy with the new lender if you switch.

Your circumstances

Whether you make the switch or not, will always come down to your circumstances. Critical factors include:

How much you owe on your existing loan and how long it will take to pay it off.
Your earning potential now and in the future.
How long you plan to stay in your existing home.
Whether your living costs will increase in coming years (having children, for example).

Your Mortgage Broker is the best person to weigh up all of these factors, work out whether you should switch and then help find the best new loan for you. They will also manage all of the paperwork to help make the switch as simple as possible.