Rainmaker Financial Group Q & A Forum

22nd May 2012

House and land considerations

If you’re in the market for a new home, a house and land package can offer a relatively straight forward option.

Without a doubt, building a property from scratch can be an intimidating task. A house and land package offers a popular solution for home buyers who would like all of the benefits of a new home – without the hassles. At heart, a house and land package is basically an off-the-shelf home, but there will be varied degrees of scope with which to tweak the design and inclusions, according to your personal taste and needs.

Certainly, the biggest appeal of a house and land package is the convenience it offers. Unlike doing it yourself, there will be no need to deal with architects, builders and tradies. Instead, the developer will take care of everything for you. That said, you’ll still have a degree of choice with regards to colour schemes, bench tops, floor coverings and so on, depending on the developer, the package and of course, your budget.

Another advantage of a house and land package is that it will usually come with a ‘fixed’ price, which can reduce the danger of a budget blowout, all too common among owner-builders. Furthermore, most developers offer a guaranteed build time, so it’s easier to time your living arrangements.

While there are certainly advantages of choosing a package, you’ll still need to proceed with caution and make the relevant considerations. For example, while a ‘fixed’ price can make budgeting easier, you need to carefully assess exactly what is included in that price. Different builders will offer different inclusions so you’ll need to know what you’re getting in order to avoid any nasty surprise expenses.

Also be sure to do your due diligence to ensure you make an informed selection. Conduct thorough research of what’s on the market so you know what types of options are available, what your price guidelines are, what should be included for what price and where packages are available. Conduct your research online initially but be sure to hit the pavement and visit a range of villages and sites. The more research you do, the better versed you’ll be to make a smart decision.

Once you’ve narrowed your search it’s also important to know what terms and conditions will apply to any purchase, and where there are any warranties or structural guarantees in place. And don’t forget, it’s imperative you do your due diligence on the property developer, to ensure who you’re dealing with is trustworthy and reputable.

Buying a property and doing your homework

Do your home work

There is much to consider and plenty to research. First you need to work out how much you can borrow. This is where our services will really help you. Make sure you have an accurate and detailed budget that takes into account all expenses associated with purchasing a property, including stamp duty, council rates, and other fees. We can help you identify these extra costs. Click here for our budget planner if you don’t already have one.

Research your area

Ensure you go to many open inspections and do your research on the internet before purchasing to ensure you have a good indication on property prices in your desired location.

Account for all costs after the purchase

A mortgage is a big commitment and you may have to make changes to your regular spending practices if you are to meet your repayments with ease. Many first home owners forget to budget for things they haven’t been used to paying for themselves like electricity, water and other utilities and for items such as insurances. Budget for maintenance and even simple things like stocking up the fridge and pantry for the first time – many of the things we take for granted when living at home. Make sure you do not stretch yourself to your limit. You need to fully understand the impact of your regular spending levels on your new budget. Interest rates move constantly, so you will need to allow room in your budget for interest rate increases and for other unforeseen additional spending. When interest rates drop, simply maintaining the same repayment is one of the fastest ways of paying off more of your loan and building a buffer if rates rise again.

Consider options suited to your requirements

Think very carefully about the different loan product offerings available and how these relate to you and your spending habits. There are a number of products on the market and it is important that you find a product that best suits your needs. Consider options that may help you reduce the loan faster to avoid the very expensive costs associated with long term debt. This is where our guidance can be invaluable to you.

8th May 2012

Q: What is a Pre-Approval?

A: A Pre-Approval is a 'non-binding' letter given by a lending institution to say that they are happy to lend you an amount of money to purchase a property. In most cases the 'Pre-Approval' is given using base information only and is usually subject to lenders mortgage insurance, a valuation and in some cases, funder acceptance. We offer Pre-Approvals as a pre-cursor to a full approval. We ask for all the information up front, so that we can make an informed and accurate decision that means you can shop for property with confidence. Pre-Approvals are usually valid for 3 months, and can significantly hasten the process of unconditional or formal approval. As the name suggests, most of the 'pre' work has been done. With a Rainmaker Financial Group Pre-Approval, the only outstanding items are usually a valuation on the property, and mortgage insurance approval (if applicable). We offer Pre-Approval free of charge - click here to contact us for an application form.

Q: What is Lenders Mortgage Insurance (LMI)?

A: Lenders Mortgage Insurance (LMI) is one of the most popular ways to achieve the dream of home ownership sooner, for borrowers that do not have a large deposit. Many lending institutions require borrowers to contribute a 20% deposit before they will agree to provide a loan. This is largely to protect against the risk associated with providing the borrower with the loan in the event that they default. By using LMI, lenders are able to pass on this risk to mortgage insurers such as Genworth or QBE, which in turn enables them to offer the same loan amount but with less of a deposit.

LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability. LMI protects lenders against a loss should a borrower default on their home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, the lender is entitled to make an insurance claim to LMI for the reimbursement of any shortfall, calculated in accordance with the terms of the insurance policy.

LMI is payable by the borrower on a sliding scale - the higher the loan against the value of the property (LVR), the higher the premium. In some cases, the 'premium' payable by the borrower can be added to the loan, thus reducing the funds required to settle your new loan.

Q: What does a Mortgage Manager do?

A: Since the late 1980's, mortgages have become cheaper*, and one of the reasons for this is increased competition. Back then the bank's margins on a mortgage could have been as high as 4%, but with the introduction of people and companies like John Symond/Aussie Home Loans, the mortgage market got a whole lot more competitive. Aussie was one of our first Mortgage Managers - he secured funds from bigger competitors and lent it out under his own brand. Things today haven't changed - Rainmaker Financial Group secure funds from some of Australia's largest Banks. Our proposition allows us to obtain funds at a competitive interest rate, which in turn allows us to lend to our clients at interest rates cheaper than those of the 4 major banks.

Our special rate for all Glen Ross Properties Customers is a low 6.58% ( AAPR 6.66%)**, which gives you the ability to redraw free of charge. Customer service is handled locally so there is no bank queues to wait in, no overseas call centres and only exceptional customer service to be received. Click here for more information on this special offer.

Are Mortgage Managers safe? The short answer to this is yes. Back in the early 90's, a building society by the name of Pyramid Building Society in regional Victoria went broke. From that day on, governances say that non-bank lenders, mortgage managers, credit unions and building societies need to involve a 'trustee' to handle the day to day transactions of the lender. Therefore if the funder goes broke, the trustee controls all transactions and mortgages, whereby the banks have to have 3 times their current outstanding mortgage book value in deposit held.

*Interest Rates at the time were in excess of 18%

**AAPR (Average Annualised Percentage Rate) based on a borrow of $300,000 over 25 years

24th April 2012

Q: I have been hearing a lot lately about NRAS. Can you tell me what it is and how it would be beneficial for us?

A: Well Nicole and Michael, I know that your property has appreciated in the time you have been a client of mine and I hope that the following information will be useful in your search for your next investment property.

The first thing you should know about National Rental Affordability Scheme (NRAS) is that it isn't for everybody. It's a scheme introduced by the government back in 2009 to give investors tax incentives to assist in the construction of 35,000 new homes around Australia.

A budget of $623 million dollars has been allocated to support investors. For Australian real estate investors, this means a rare opportunity to acquire cashflow positive rental properties with minimal capital outlay.

Investing In NRAS Requires Research

Investing in any real estate requires proper research into the best location, property type, price range, finance package and more. But there is one clear advantage that NRAS properties have over other real estate investments.

The simple basis of the NRAS scheme is this: You accept rent at 20% to 25% below the market rate for a similar property and you get a tax credit of $9,524 per year for 10 years.

What does that mean? If you buy a $350,000 NRAS approved house that would usually rent for $350 per week, you would rent it out for say $280 per week. In other words over a full year you give up $3,640 in taxable income and receive in its place $9,524 of tax free income.

But not all NRAS properties are equal. All the other research still needs to be done to ensure a stable and secure investment. Contact us today to find out how you can benefit.

Did you know that most people retire with far too less superannuation to continue their lifestyle in their twilight years. Just a simple calculation will show you what you need to retire with to avoid the aged pension...

Retirement is something we all dream of doing some day, but if you retired today would you have enough super to live a comfortable life? For most Australians, the answer to this is no. If you do a simple calculation that suggests the cost of living as a couple without rent, car repayments, etc., it equates to $50k per annum. The life expectancy of the average Australian male is 79, and Australian female is 80*, and you retire at the age of 65. This would mean that you will have 14 years of life following retirement! 14 years times the average cost of living of $50k will mean that you need to retire with at least $700k in your super fund. When you have been paying on average 9% of your salary, and the returns on most funds over the past 3 years being negative or at most neutral, you will be lucky to be getting the aged pension of $262 per week each once your money runs out.

It is never too late to boost your super! Contact us for an obligation free consultation to get your retirement back on track.

*Statistic from the Australian Institute of Health & Welfare

10th April 2012

Q: What Government assistance is available for First Home Buyers?

A: First Home Owner Grant (FHOG)

The FHOG scheme was introduced on 1 July 2000 to offset the effect of the GST on home ownership. It is a national scheme funded by the states and territories and administered under their own legislation. Under the scheme, a one-off grant of up to $7,000 is payable to first home owners who satisfy all the eligibility criteria. Eligible first home owners can receive the grant regardless of their income and the area in which they are planning to buy or build. The grant is not means tested and no tax is payable on it.

Because the grant varies from state to state, please click here to find out more information on your eligibility from the First Home government website.

Stamp duty concessions

When you buy a home in Australia, the government imposes a stamp duty tax. This tax is added to the purchase price of your home and is assessed on the sale price of the property. Stamp duty and concessions vary from state to state. First home buyers may be eligible for rebates in the form of stamp duty rebates or exemptions. We will assist you to calculate your stamp duty if applicable.

First home saver account

If you:

are aged between 18 and 65;
have not previously purchased or built a first home in which to live;
do not have or have not previously had a first home saver account; and
provide your tax file number to the provider,

you can open a first home saver account. This account provides a simple tax effective way for Australians to save for their first home through a combination of Governmentcontributions and lower taxes. The Government will contribute 17% on the first $5,000 (indexed) of individual contributions made each year. This means an individual contributing $5,000 will receive a Government contribution of $850. For further details, click here.

Q: Debt or deposit?

A: It’s a common dilemma facing many aspiring home buyers. You’re trying to put as much money as you can towards a deposit for that much revered first purchase, but what about those bothersome debts that just won’t seem to go away?

Perhaps you took out a loan to buy a car. Or maybe you’re still paying off that trip through Eastern Europe you took last year. Whatever it is, it bears the question about where you should be allocating all of your hard-earned cash. Or should you be putting all of your money towards your deposit for a house?

Ultimately, this is a personal decision and will depend on your own personal circumstances. But when it comes to the fundamentals of good money management, one key rule of thumb to always remember is that debts should be paid down as quickly as possible, because of the interest costs they accrue.

Moreover, the interest costs of personal debts such as credit cards, car loans and personal loans tend to be quite high and can easily offset any interest you might earn in a savings account.

For example, a personal loan might attract an interest rate of 14 per cent, while a savings account might earn you just six per cent in interest – if you’re lucky.

Just doing the interest calculations on a personal loan paints a useful picture. On a $15,000 personal loan at 14 per cent interest on a five year loan term, you’d be looking at total interest expenses of $5,941.43 (based on minimum repayments) – that’s a big chunk of cash which could certainly go a long way towards your savings goals.

Paying off those expensive debts first will help you avoid such interest charges and enable you to work on saving your deposit sooner.

By reducing and eliminating other debts, you’ll also increase the amount you’re eligible to borrow, with lenders’ serviceability assessments influenced largely by borrowers’ existing debt obligations – as well as the propensity to take on further debt. In other words, even if your credit card is paid in full, a $30,000 limit for instance is going to hit your loan eligibility, because you could, in theory, rack up another $30,000 in debt very easily.

While it may seem frustrating to put your savings goals on hold, in the end you’ll be in a much sounder financial position if you address your debts first.

The key is to work on paying your debts down as quickly as possible. And do your absolute best to avoid missing payments. One or two defaults on your credit history can really make it that much more difficult to secure a home loan.

Q: What is a Pre-Approval?

27th March 2012

Q: What happens if I get into trouble and can't repay the mortgage?

A: During the term of your loan, circumstances outside your control can change - illness or losing your job will affect your ability to make repayments. In many cases, we can negotiate a proactive solution if we are given the opportunity to work with your lender to ensure your best interests are taken into consideration. You will be given 'expert advice' from many of your friends and family during this process. Make sure the advice is backed with evidence and feel free to share this feedback with us. Many people offer advice who have never even purchased a home or investment property.

Steps to take:

Contact your lender to discuss how payments can be made in the future. Most lenders aren't looking to default borrowers and put them out on the street. Your lender should assist you by offering to delay payments for a period, usually 3-6 months depending on circumstances. The interest for this period is tacked on to the end of the loan, to be sure that the lender won't be missing out on interest.
Make a plan of how to get back on track, with a worst case scenario of selling the property if things become dire.
Contact us if you have no joy with your current lender.

TIP: Take out appropriate insurance - coverage against job loss, sickness, accident and death will ensure that your mortgage is kept up to date whilst you are unable to make repayments.

Click here if you would like further information regarding the above mentioned coverage. Rainmaker Financial Groups' Financial Planner will put together an affordable and comprehensive package to suit your needs.

Q: What's the difference between 100% Offset and Redraw?

A: 100% offset is usually a separate account of which the balance is offset against your mortgage (eg. if you have $2,000 in your 'offset' account and the balance on your mortgage is $202,000, then the interest on your mortgage is calculated at $200,000). Although this can be handy, it can be very confusing if you are also using the 'offset account' as your transaction account. Most lending institutions believe that the more of their products you have, the harder it is for you to leave. Adding an ooffset account' adds another product for you to have with the lender.

Redraw is the easier to work out method of the two, as you don't have a separate account - all monies are held in your mortgage so you can see the benefit straight away. You must make sure though that the lender is offering you free redraw.

Using either method as a 'mortgage reduction' tool makes sense. The best way to do this is to have all your income go into the mortgage or offset account, and put all your monthly costs onto a credit card. As interest is calculated daily on your mortgage, the longer the income/cash stays in the mortgage, the more beneficial it will be for you. As we are not a totally cashless society, you can redraw money as required. At the end of the month before the payment due date on your credit card, transfer the whole balance outstanding of your credit card to pay it in full. This will mean that you have had the best of both worlds by not paying any interest on your credit card whilst paying less interest on your mortgage. These systems do take a little bit of financial management, but you can save thousands of dollars in interest. They also save you tax because if you were being paid interest in your savings account where you hold your income, come tax time you would pay your equivalent tax rate on interest earned. By paying the income into your mortgage, you are in effect being paid interest at the rate of your mortgage.

Basic budgeting can save you thousands!

Click here if you need help structuring your mortgage correctly - we can help!

Q: Investment Property: Part 2 - Managing the downsides

All investments involve risks, and property is no different. In this section we look at some of the drawbacks of investing in property – together with ways to manage these risks.

High purchase costs

When it comes to purchasing property, whether as an owner occupier or as an investor, buyers face a range of upfront costs. It is important to factor these costs into your investment budget. Some of the key purchase costs are listed below:

Stamp duty

Stamp duty is a state government tax based on the purchase price of a property. Do note, the cost of stamp duty is added to the capital value of your property, so although it cannot be claimed as an immediate tax deduction, it can be used to reduce the value of any capital gains tax you pay when you sell the property. The duty payable is based on the location - not the home address of the investor.

The following table sets out the websites of each state and territory’s revenue office, which provides details of the stamp duty you can expect to pay.

State	Website
QLD	www.osr.qld.gov.au
NSW	www.osr.nsw.gov.au
ACT	www.revenue.act.gov.au
VIC	www.sro.vic.gov.au
WA	www.dft.wa.gov.au
SA	www.revenue.sa.gov.au
TAS	www.treasury.tas.gov.au
NT	www.revenue.nt.gov.au

Lenders Mortgage Insurance

If you borrow 80% or more of the value of a property, you will generally be asked to pay Lenders Mortgage Insurance (LMI). This involves paying a one-off premium, and your lender will provide the figure – you don’t need to shop around. But be aware, this type of cover protects the lender (not you, the investor) in the event that you cannot keep up the loan repayments. The LMI premium is based on the size of your mortgage and the purchase price.

One of the best ways to reduce the cost of LMI is to have a larger deposit. Where this is not possible some lenders — like RFG, let you add LMI to the value of your loan. This is called ‘capitalising’ the cost, and it lets you pay the LMI bill gradually rather than adding it to your other upfront expenses.

Miscellaneous costs

Purchasing a property involves other additional costs, which are listed below. One advantage of purchasing property as an investor is that many of these costs can be used to reduce the taxable income generated by the property. For example, borrowing costs can be written off (claimed as a tax deduction) over a period of five years. Other costs, like legal fees, can be added to the cost base of the property to reduce capital gains tax payable when you make a selling profit.

Borrowing costs
Loan application fee
Lender’s valuation fee
Lender’s legal fees
Pest and building inspections
Legal fees (also known as ‘conveyancing’ fees)

Remember, holding onto your investment for the long term should ensure that growth in your property’s value outstrips these costs.

Additional risks

Loss of rent through periods of vacancy

Manage this risk by thoroughly researching the market to determine that your property offers broad tenant appeal. Seeking the opinion of property experts will help ensure the rent you are asking is fair market value. You can also mitigate the risk by taking out "landlord" insurance which is a reasonably priced insurance to from loss of income whilst you property is not tenanted.

Exposure to rising interest rates

Always allow for the possibility of higher rates when determining how much you can comfortably pay for an investment property. If rate fluctuations cause a strain, think about a fixed rate loan.

Lack of access to your cash

Property is an ‘illiquid’ asset, meaning it can take months to access the funds tied up in your asset - and this can often only be done by selling the entire property. To reduce this downside, always aim to have a spare pool of cash on hand for emergencies.

Exposure to property market downturns

All asset classes move in cycles, this is why property is generally recommended as a long term investment. If your property investment is your major investment asset then you may have little or no diversification in your portfolio. If the property market goes down so does your whole investment. By holding onto your asset for at least five years you should smooth out the effects of any property market highs and lows.

‘Problem’ tenants

Most tenancies run smoothly, however you can reduce the odds of encountering a difficult tenant by using a property manager who thoroughly screens prospective tenants and maintains a regular program of property inspections, like Glen Ross Properties.

It is also wise to take out landlord insurance that provides protection against property damage or loss of rent through tenant disputes. While it is important to be aware of these downsides, it is also worth pointing out that the vast majority of property investors enjoy strong returns, trouble-free tenants and a regular source of rental income.

TIP: Take a long term approach. All investment markets experience periods of peaks and troughs, so your rental property should be regarded as a long term investment - one that you are prepared to hold onto for at least five to seven years. This way, your returns will be evened out across periods of market upswings as well as downturns.

Did you know?

Most Australians are under insured... with around 10% of the workforce having ample insurance to cover them against financial ruin, if they were unable to make repayments or cover the cost of living due to sickness, accident, job loss or death... What would you do?

13th March 2012

Q: Is it time for a 'home loan health check'?

A: Maybe the question should be 'when is a good time for a home loan health check?'.

The answers are:

if your current mortgage interest rate is in the 7's;
if you have two or more personal debts that make cash flow limited each month;
if your bank is changing interest rates independently of the Reserve Bank; or
if you just want a better deal!

Refinancing your current mortgage can be very advantageous if done for the right reasons - consolidating debt, releasing equity for the purchase of an investment property, or just looking for a better deal.

Click here to contact us and find out how advantageous it could be for you.

Q: Fixed or variable?

A: In my experienced belief, fixed interest rates have bottomed and in some cases, lenders have begun to increase their fixed rates. The variable rate market though could have one or more Reserve Bank Australia (RBA) reductions, which would see variable rates down towards the low 6's, as long as the lenders pass on the full reductions announced by the RBA. I would consider fixing, but only part of your mortgage. We have a 50/50 each way bet loan fixed for three years special for Glen Ross Properties customers at very competitive interest rates, with our variable portion being much lower than all of the big four banks. Click here for more information.

In conclusion, a fixed rate can been seen as the lenders guess on what the future interest rates are going to be (e.g. if a lender is offering a 3 year fixed rate at 6.25%, then they believe that rates are going to stay fairly steady for the next 3 years and you are not going to lose if you fix your loan at this rate for the next three years). My suggestion would be look at fixing part of your loan, and concentrate on reducing the variable portion of the loan over that fixed period.

Q: Investment property: Part 1 - Good reasons to invest in property

Residential property is a compelling investment. It offers the potential for regular, tax-friendly income along with concessionally-taxed long term capital growth. Buying a rental property is also a major decision – one that is worth some planning and careful research.

Thinking of becoming a landlord? You’re not alone!

Australians have a strong history of property ownership. Around 70% of us own our home — one of the highest rates across the developed world. Almost 1.7 million Australians also own an investment property. The majority of these people (42%) earn an income between $34,000 and $80,000 annually. So you don’t need to be a high income earner to be a successful property investor. However you are more likely to maximise the benefits of investing in residential property if you have a clear idea about what’s involved – the pluses as well as the potential pitfalls.

Regular rental income plus healthy yields

As a property investor, you will earn regular rental income. Residential tenants typically sign up for leases lasting 6 or 12 months but many tenants remain on a periodic (week to week) lease once the formal lease has expired. While it is sensible to allow for one or two weeks of vacancy each year, a well located rental property can provide a stable source of investment income. The weekly rent is known upfront and this makes rental income easy to budget for as well as aided personal cashflow.

Healthy yields

The ‘yield’ on an investment refers to the income it generates in relation to its value. For instance, a $500,000 property that commands annual rent of $20,000 would have a gross (before costs) yield of 4% ($20,000/$500,000). The yield is important because it allows comparisons between different types of investments.

As the chart below shows, in May 2011, the gross yield across Australian cities was 4.2% for houses and 5.0% for units. This is more than the interest you could earn on many savings accounts. Remember, yield only considers rental income. Residential properties also generate valuable capital growth over time.

A rental property — more affordable than you may realise!

Many of the costs associated with a rental property are tax deductible, which increases affordability.

Ongoing costs

As a landlord, you will be expected to pay for a range of expenses associated with owning and maintaining your property. Some of the regular costs you can expect include:

Accountant’s fees
Bank charges
Body corporate fee
Book-keeping costs
Council and water rates
Insurances
Lease expenses –including legal fees for drafting leases
Land tax
Letting and re-letting costs
Management fees paid to real estate agents
Maintenance
Mortgage interest
Repairs

While this list may seem extensive, remember that these expenses can normally be claimed as a tax deduction. For investors on the highest personal rate of tax this can have the effect of virtually halving the costs involved.

Next newsletter: Part 2 - Managing the downsides

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