Tips for repaying your mortgage sooner

Make extra repayments
The most common mortgages for home buyers require you to pay principal and interest. On a typical 25 year mortgage, anything extra you pay in the first five – eight years (when most of your repayments are primarily paying off the interest) is especially good at cutting your interest bill and shortening the life of your loan. Make extra payments as early as you can because these loans are interest-heavy up front and the faster you repay the better.

Consider making repayments on a weekly or fortnightly basis to reduce interest and the term of a loan.

Mortgage offset account

A mortgage offset account can save interest on your loan. Your mortgage is linked to a savings account into which your salary and other cash can be deposited and from which you withdraw to pay bills, credit cards etc when these debts become due.

For the period of time your money sits in this account, it is ‘offset’ against your loan and so reduces your interest bill.

Make an annual lump sum payment
Use your tax refund or a windfall such as an inheritance or work bonus, and apply it directly to your principal. Check your mortgage documents to find out how often you can prepay and in what amount.

Prepay a little every month
Get a copy of your loan amortisation schedule which will show the breakdown of interest and principal. If you’re making a payment for November, for example, look at the next line down on the principal reduction line and you will see that the principal reduction for the next month, December, is say $24. Making that $24 payment early, means that your “true” mortgage balance is one payment less after the principal is prepaid. So in essence, you’d be making an extra payment each year.

Redraw facility
A redraw facility allows you to make extra payments and then withdraw them if you need them. You can only redraw the additional payments you make, and sometimes this type of loan may attract higher costs for this extra benefit.

A redraw facility means you can put all your ‘rainy day’ money in your mortgage, knowing you can get it out again if you have to. Or you can use it to save money for a specific purpose, such as a car. Competitively-priced loans with redraw facilities are increasingly common, but you may still end up paying more.
Redraw facilities often charge a fee for each withdrawal, set a minimum amount for each redraw and may limit the number of redraws per year. Consider how often you are likely to ‘redraw’ your money before deciding whether this feature suits you.

Using the redraw facility may impact on the tax deductibility of your loan. Please discuss this option with us, your mortgage specialist, and your accountant.

If interest rates drop
If you have a variable home loan and the interest rate drops, continue to pay the loan at the higher rate.

Stay informed
Once you get a mortgage, aside from making the payments, it’s easy to forget about it altogether. But staying up-to-date on interest rates and new products could save you money. You may want us to shop for another product that better suits your needs.

We recommend that you review your mortgage requirements with us on an annual basis.

Make extra payments as early as you can because these loans are interest-heavy up front and the faster you repay the better.

As our website contains general advice you might require further consultation to help secure a financial future that suits your unique situation. Please contact our office today to make an appointment time convenient to you. Phone: (03) 9633 7180

Tips For Purchasing Your Second & Future Investment Properties

Use the equity in existing property
Make your current property work for you! There’s no need to own your home outright or sell it to access enough equity for an investment purchase. Equity is simply the difference between what your property is worth and what you owe. For example, if you have a property valued at $600,000 with a mortgage of $400,000, you have $200,000 worth of equity. You may be able to borrow up to $80,000 against this equity to purchase an investment property. Using this equity and combining it with the added rental income could mean that you can buy another property sooner.

Mortgage offset account
A mortgage offset account can save interest on your loan. Your mortgage is linked to an account into which your salary and other cash can be deposited and from which you withdraw to pay bills and credit cards when these debts fall due. Use these savings for another deposit instead of paying off your current mortgage.

Save your annual lump sum payment and windfalls
Use your tax refund or a windfall such as an inheritance or work bonus to help purchase an investment property.

Save a little extra every month
$150 per week can usually support an additional property providing you have the deposit. Set up a separate savings account and set a target for a deposit. This history of savings will help you to finance another property.

If interest rates drop
If you have a variable rate loan and the interest rate drops, save the difference for a deposit towards another property rather than paying off the investment loan.

Stay informed
Once you have a mortgage, aside from making the payments, it’s easy to forget about it altogether. Staying informed about interest rate movements and new products could save you money. Over the lifetime of your loan we advocate exploring other products and facilities that may better suit your changing needs.

We recommend that you review your mortgage requirements and equity with us on a regular basis.

As our website contains general advice you might require further consultation to help secure a financial future that suits your unique situation. Please contact our office today to make an appointment time convenient to you. Phone: (03) 9633 7180

Getting Started: Property Investing Factors to Consider

Finance: Using equity to buy your investment property

Many Australians are now tapping into their “pot of gold” - the equity in their home - allowing them to invest for the future and forge ahead financially.

Tapping into your home equity (or equity from another investment property), is a great launching platform for buying an investment property. Say your home is valued at $500,000, you owe $150,000 on your mortgage (thereby giving you equity of $350,000) you may want to invest a portion of the equity into another property.

Diagram 1 illustrates the financial components of your home:

EXISTING BORROWINGS - represented by the blue section of your home. This loan amount (unless used to purchase an investment property) is not usually tax deductible.

If your home is worth $500,000 and you have $150,000 remaining on your loan, your existing borrowings would represent 30% of your home value.

20% EQUITY - represented by the orange section of your home. This is the safety net that lending institutions like to have as their safeguard against the borrowings on your home.

This is unable to be touched unless you want to pay LMI (Lenders Mortgage Insurance). In this example 20% equity of $500,000 is $100,000.

REMAINING EQUITY (what you’ve already repaid on your loan or gained through capital growth on the property) - represented by the green section of your home.

Diagram 1
shows that the remaining 50% of the value of the home is available to use as security for other purchases. To access this remaining equity to purchase an investment property, there are two options: (A) establish a line of credit; or (B) apply for a standard term loan with a redraw facility or an offset account where the remaining equity amount can be invested until required.

Usually the existing loan and the new portion of the loan would be refinanced; however it is common to split these in order to keep the non tax deductible amount clearly differentiated from the deductible investment amount. Your accountant should be able to help with this.

In this example, $250,000 is 50% of the value of your home available to purchase an investment property.

When you do find the investment property you want to purchase, you can fund the acquisition with:

A new loan for the investment property (typically 80% of the purchase price to
avoid LMI). This $400,000 loan (based on a $500,000 investment property) is represented by the grey section of the investment property in Diagram 3.

Plus: (B) Part of the green remaining equity in your home. The remaining 20% of the purchase price (usually representing the deposit) plus stamp duty, conveyancing costs and other associated expenses can be taken from this equity.

In the example it would require you to draw $120,000 (assuming $100,000 [20% deposit] and $20,000 [5% total acquisition costs*]) of the available $250,000 (represented by the yellow section in Diagram 2) leaving $130,000 of the remaining equity. This could also be used to purchase an additional investment property if serviceability allowed or you could use this equity to fund any shortfall in your new investment loan repayments.

The tax man (through tax rebates) and your tenants (through rent) help pay for the investment loan, however sometimes there is a shortfall that needs to be serviced. This should be taken into account when borrowing to ensure that the loan on the investment property can be serviced within your budget and should include some margin for any unexpected interest rate rises.

Then all you need to do is sit back and let the property take its course with capital gains generating some additional equity over the next seven to ten years, as it has proved to do so (even in tough times) over the last century.

Once you learn this strategy you can repeat it as often as you want, provided you can repay the borrowings.

Buying an investment property through a superannuation fund

Did you know that you can now use your self managed superannuation fund to buy an investment property? You will need to consult your accountant or financial advisor with regards to:
• What you can and cannot do in a self managed super fund (SMSF)
• Benefits of using a SMSF to buy a property
• Challenges and pitfalls
• Using the correct trust structures
• How to correctly source and set up
the finance
• How to buy an investment property through a superannuation fund.

As our website contains general advice you might require further consultation to help secure a financial future that suits your unique situation. Please contact our office today to make an appointment time convenient to you. Phone: (03) 9633 7180

Buying Your Investment Property: A Step By Step Guide

Step 1 – Have your loan pre-approval in place

Knowing how much you have to spend gives you the confidence to make a calculated offer on your property of choice.

Step 2 – Choose the right property in the right location

Research your chosen suburb by checking all advertised listings in newspapers, the internet and real estate agents. Make sure that you know the price of recently sold comparable properties. Choose an investment property with your head, not with your heart.

Sometimes investing in property in another state is a better financial option. Keep informed by reading reports on national property updates and best performing suburbs. Usually capital cities outperform regional areas, however some coastal options have also seen very good growth.

Step 3 – Make an offer

For properties sold by private treaty you will need to make an offer to the listing real estate agent. Obtain a copy of the contract for sale and organise for your conveyancer/ legal representative to check it.

Properties being auctioned may be open to offers prior to the auction date. If you buy at auction you will usually be required to pay a deposit of 10% on auction day. The contract for an auctioned property is unconditional and no cooling off period applies. If bidding at an auction, make sure that your conveyancer/ legal representative has checked the contract and organised pest and building inspections before you bid.

Step 4 – Conveyancer /legal representative

The contract for sale should be given to your conveyancer for advice and checking. The conveyancer will advise you of your cooling off rights (varies from state to state). Once the contract has been signed by both parties and exchanged, the contracts are legally binding. The contract will indicate when the deposit will have to be paid. If no pest and building inspections have been carried out, it is advisable that they are ordered by the conveyancer.

Step 5 – Final loan approval

We will organise loan documents for the balance of the purchase price to be prepared and signed by you.

Step 6 – Insurance

Your lender will require you to organise building insurance (except in the case of strata title properties). Most investors also invest in landlord insurance.

Step 7 – Final inspection

Arrange for a final inspection with the real estate agent. Check for all inclusions in the contract for sale and that they are in working order. Check light switches, power points, air conditioners, exhaust fans, hot water, swimming pool equipment and security system and request copies of all manuals for stove, dishwasher and other relevant inclusions.

If your property is interstate perhaps have a friend inspect it for you or jump on a cheap flight and do it yourself. Costs associated may be claimed with your tax return.

Step 8 – Settlement

Your conveyancer/legal representative will attend to settlement. This is the day on which the balance of the purchase price is paid to the vendor. Stamp duty and lender’s mortgage insurance will also have to be paid. You can collect the keys from the real estate agent once settlement has been advised.

Step 9 – Appoint a property manager

A good property manager will source and retain quality tenants, collect rent, conduct inspections and organise repairs and maintenance on your property. They will provide you with a schedule at the end of the financial year showing rental income, repairs and maintenance and property management fees for taxation purposes.

If something goes wrong

If you have signed a contract to buy a property it may be a costly exercise to withdraw even if you have not reached settlement. If the cooling off period has passed, the contract is binding. If you wish to get out of the contract you may be liable to pay compensation to the vendor. The amount will depend on the loss suffered by the vendor and is usually based on the amount it would take to re-sell the house including any loss on the subsequent sale. Read your contract carefully to be aware of the consequences of defaulting on the contract. If you do not wish to proceed with a contract, seek independent legal advice as soon as possible.

It’s more than the interest rate

Interest rates are relevant and they are an important factor to consider when deciding which loan is right for you. A higher interest rate can mean thousands of dollars over the life of your loan. So, getting a nice low rate is something you need to make certain you do.

However, purchasing a home is the biggest financial decision most of us will ever make. Make sure you consider all the factors before you jump in.

So, what else is there to look at? Well, there is the type of home loan you want. A Basic Home Loan doesn’t have many frills and is often a variable interest rate. There aren’t any complicated fees and there isn’t any option to pay off early or pay more than your required amount. These are great for people who don’t foresee any dramatic life changes coming soon.

Let’s add two more fictional characters to our repertoire: Cindy and Lee, the home buyers.
In this example, Cindy and Lee are buying their first home and expect to stay there for at least a few years. They don’t expect to get married or have kids in the near future. Their jobs are stable and they think they will be employed for the foreseeable future. A Basic Home Loan is right for Cindy and Lee. They are unlikely to have access to extra funds to pay down the principal faster or be able to effectively use an offset account to the degree that it will make a significant dent in the short term, so rather than pay extra fees and perhaps a higher interest rate, a basic loan may be more appropriate.

Honeymoon Loan

The next type of loan is a Honeymoon Loan – or introductory rate loans. These offer a very low fixed or variable interest rates for about 6 or 12 months, after which time, the standard rate applies. These are good for folks who want to do renovations and pay as little as possible on their mortgage during that time, or for people who want to make a large dent in their repayments while the interest rate is still low.
Cindy and Lee just bought a “fixer upper.” It was all they could afford after paying for their lavish wedding. However, they have some income left over every month to pay to do the house up.

The Honeymoon Loan would be good for them to fix up the house a bit, before the interest rate rises. However once the rate comes off the Honeymoon period, usually the interest rate is quite a bit higher and it is a shock to the budget and system when you are used to paying a smaller monthly payment.

Redraw Loan

Another popular type or feature is the Redraw Loan. This clever loan allows you to save for the future while paying down your principle. This loan allows you to put extra funds into the loan, thus paying off the principal. If you need the money in the future, you have the option to withdraw it.

Cindy and Lee are now looking to have children and would like to save for the period when Cindy is not working. They get a loan with a redraw feature. Every month, some extra money is placed into the loan. The principal is paid down with the extra money. However, if a “rainy day” ever hits, or she wants to take 6-12 months off work – they can withdraw that money. It’s a great safety net. If they never need the money then they have access to the extra principal that they have paid off the loan.

Equity Line of Credit

The Equity Line of Credit is also quite in fashion. This is similar
to a big overdraft at home loan rates. These loans are popular with people looking to gain access for investment or renovations, or perhaps people on commission only type roles, because they are interest only and all your income sits in the one account making it easier to pay down. They often require very good budgeting and control as the amount of principal you pay off your loan is solely determined by you.

Cindy and Lee already own a home but it’s old and in need of renovation. They get an Equity Line of Credit. They use their home as collateral and get $50,000 to renovate the bathroom and kitchen. It was easier for them to gain access and only pay interest on what they used rather than getting the whole $50,000 in a lump sum and paying interest on the full amount. Also, they are adding value back into their home by doing the necessary renovations. However, the money borrowed does not have to be used within the home. You can use the money for anything you like.

There are many more types of home loans, but these are the most common for the typical home buyer.
You can even split a loan into part fixed and part variable; well, your mortgage broker can. As you can see, from just these few types of loans, interest rate matters, but so do other factors. With the bewildering varieties of loans, and loan terms and conditions available it can be easy to lose your footing, especially if you are a first-time home buyer. A mortgage broker can sit down with you and guide you through the process, while ensuring you get the loan you need.

A broker has access to so many more loans; in fact, some loans are only available to brokers. With that in mind, your broker will show you a few loans that fit your needs, and you can choose the one you like the most. These sorts of options and this level of individual customer service can be found through the best brokers.

The best brokers are accredited by the MFAA or the FBAA. Remember, these bodies require members to have a high level of education and ethical standing. They also have guidelines in place for removing members who do not continue to meet the standards. So when you hire an accredited mortgage broker, you can rest assured that the member is in continued good standing.

Purchasing your investment property: Overview

Why investing in property may be the answer
A property investment plan is one that works towards building your wealth and securing your financial freedom. For some, the future may seem a long way off, but the time to act is now because the future waits for no one. The housing market is generally a seven to ten year cycle: there are always highs, lows and steady patches.

The decisions you make today will determine the lifestyle choices you have in the future.

The following factors should be taken into consideration when purchasing property as an investment:
• The likely return - yield and capital growth
• Buying and selling costs
• Cost to borrow money, ie interest rates
• How attractive the property will be for likely
tenants or future buyers.

Do your homework
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. 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. Find out the area’s average rental yields and the services infrastructure in place and planned. Also research the property price growth that has been experienced and what is expected. Invest the time to fully understand the market - it could make a big difference to future investment returns.

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. Include water and council rates and items such as insurances and maintenance in your planning phase. Don’t forget your property management fees if you are considering having your property professionally managed. Your accountant may also take the opportunity to charge you more for the extra work in preparing your tax return. However a good accountant is worth their weight in gold.

Interest rates move constantly, so you will need to allow room in your budget for interest rate increases and other unforeseen additional spending. When interest rates drop, simply maintaining the same repayments is one of the fastest ways of paying off more of your loan and building a buffer if they rise again.

Think very carefully about the different loan product offerings available and how these relate to you and your spending and saving habits. Consider options such as an offset account that will enable you to take advantage of using any excess cash to save on interest. It’s also a great account to use to save for your next investment property.

Plan ahead - you may find a long-term tenant or you may find that your tenants come and go. Make sure your cash flow is sufficient to cover the mortgage and other outgoings if the property is empty. Don’t think that you always have to increase the rent either. Sometimes it is more cost effective to have the same long-term tenant in your property than have weeks of vacancy trying to achieve a higher rental yield.

Every property will have compromises, but don’t miss a good opportunity because you are waiting for the ‘perfect’ house or apartment. If it sounds too good to be true, it probably is.

Your selection criteria should include:
LOCATION: is it close to schools, shops, day care and sporting facilities?
TRANSPORT: is it close to bus stops and train stations?
DEMOGRAPHICS: especially population numbers, growth and density.
SUITABILITY TO RENT: are the rooms big enough and are there usable living spaces inside and outside and other features such as garaging and storage?
FUTURE POTENTIAL: can the property be renovated or developed? Are there any plans to develop surrounding properties, eg high density dwellings?
AFFORDABILITY: stay within the second and third quartile of prices in the suburb for price and rent.

Good Debt vs Bad Debt

Living life creates debt. Owning your own home, cars, dining out, and generally enjoying life, all cost money – money that is typically borrowed from a financial institution.

While debt is an essential part of everyday life, it can also wear out its welcome, and wear down your desire to dream for a better tomorrow. One of the reasons why so many Australians are restricted in their ability to achieve their financial goals is because they are simply ‘drowning’ in debt.

When you are deep in debt, you restrict your ability to build wealth before you’ve even had the chance to start.

That’s why you need an effective debt elimination strategy, a customised plan of action, and a clear understanding of the difference between ‘good’ and ‘bad’ debt.

A qualified mortgage broker can assist you in setting up strategies to maximise your good debt whilst repaying your bad debt faster. And overall getting to zero debt faster!

The difference between these two types of debt can be distinguished as follows:

Bad Debt

• Is used to make lifestyle acquisitions
• Does not generate an income stream
• Interest cannot be claimed as a tax deduction
• The interest and the debt needs to be repaid from personal ‘after-tax’ income
• Must be eliminated as quickly as possible.

Good Debt

  • Is used to acquire investments
  • Generates an income and appreciates in value
  • Interest is tax deductible
  • Income generated from investments is used to pay off the debt

Since the debt is largely self- funding, there isn’t the same urgency to pay it off. A loan used to secure a residential investment property is an example of smart debt. Financial independence is within your reach.

Financial independence is the result of building wealth and this requires discipline, the discipline to consider every dollar you spend and every dollar you save, because wealth (unless it’s handed to you) takes time and commitment to accumulate.

Choosing The Right Insurance

risk vs insurance

Insurance is about the balance between protecting what you have now and what you will need in an unforeseen event.

Figuring out what is right for your needs. The level of cover you will need is likely to change throughout your life, the secret to finding the right insurance is to understand your current needs and ensuring you have the right level and type of cover.

A good way to waste money is to over-insure yourself, but the flip side of having too little insurance in place is a financial risk.

Types of Insurance Important to Each Life Stage.
The beginning; early in your career you will most likely realise that valuable assets such as your car need to be insured. However you may not realise your most important asset is your ability to earn an income over your lifetime. As you get older and your level of income increases you take on more debt, such as a home loan, investment loans, it becomes crucial to adjust your insured amounts to reflect the right amount of your income and possibly life cover.

New Family
Life and TPD become essential once you have a partner and potentially a new family. It’s especially important for your family’s financial security if you were to become permanently disabled or pass away out of the blue. Both partners need to have appropriate life and TPD cover in place, not just the main income earner.

Financial expenditure is usually at its peak when raising a family, increasing the importance of income protection. The older you get the chances of experiencing serious medical conditions such as coronary attacks or cancer increase, making Trauma cover worthwhile. Trauma cover will pay a lump sum benefit to help with medical and other costs in the event of a serious illness.

Home Aloners
Retirement is further away than ever for most Australians as we choose to work until much later in life than before, income protection insurance is required up until the day you throw away your work boots. The kids may have grown up and are experiencing the world on their own, life insurance can still play a crucial part.

Insurance In Super
An affordable, easy option is to set up insurance through super as most Aussies are set up with a superannuation fund. Most of Australia’s superannuation funds provide automatic life insurance while some funds allow you to nominate the level of cover you would like. Either way, it’s a wise move to check if you even have cover, and if you do how much is in place. Setting up insurance through super means  you don’t have to use your hard earned cash to pay for the cover, it allows the premiums to be taken from your super account, representing good value and the potential to be very tax-friendly (but always check with your accountant). This is an affordable way to have insurance in place if you don’t have excess funds, however it requires you to use your retirement savings to fund the cover.

What level of cover do you have? 

It’s important to make sure that the level of cover you have with your super fund is adequate for you and your family’s needs. It should be easy to increase your insurance if it looks as though the level of cover in place is not adequate by simply contact your super fund. There’s a possibility that your cover is unit based meaning as you get older the cover amount shrinks. Keep in mind, there may be complications if you change super funds if you have purchased insurance through your super. Cancellation of your insurance cover is a big possibility, as well as the terms of insurance offered from your new fund may be different to what you previously had. Your level of cover and premiums could be affected, as well as  you may be underinsured if you change super funds. Your Financial Adviser will be able to assist you avoiding this issues if you’re thinking about changing super funds.

Binding Nomination.
If your cover is set up through your super fund, it’s essential to have a binding beneficiary nomination in place that states exactly how much and to who you would like the benefits from your life cover and your super fund to go to if you pass away.

When insurance is held in super, the benefits payable are subject to superannuation law, which means a condition of release has to be met before the trustee of the superannuation fund can release the payment. The tax implications of benefit payments are complicated, so it’s wise to consult with a Financial Adviser about your best options.

With the incorrect structure you may not receive any benefits in your own name or you may have to pay a large amount of tax on your disability benefit; due to strict superannuation laws and regulations this can make it very difficult for you to access your benefit money in your superannuation fund, your benefit money may not make it your desired dependant or you may have to pay tax on your benefit money!

Mortgage Reduction – Five Important Things You Should Know

mortgage reduction

When was the last time that you reviewed your current loan structure, interest rate or looked at how long you had left on your current mortgage?

Are you looking at purchasing an investment property but don’t know how to structure the finance? Do you need to consolidate some of your current personal debt?

Our goal here at Direct Super Management is to listen to our clients, gain an understanding of what they want and need then set them up with a loan structure that suits their financial goals. With the right loan structure in place our clients end up saving years off the life of their loan.

As an established mortgage broker in the industry we can save you time and money by comparing the lenders who may appear to be offering a good deal with those who are actually offering a good deal. Our focus is not just to get you the best loan but as a client of ours we will follow up regularly to determine how we can continue to help you improve your financial position and achieve the financial goals you desire.

Five Important Things You Should Know

  1. By refinancing and implementing the correct loan structure it can save you thousands off the life of your loan.
  2. You do not need a deposit to purchase an investment property if you have usable equity in your home. This does need to be structured correctly to protect your home though. Contact us to find out how.
  3. Experience is essential when looking at finance. Collectively in our office we have a combined 25 years in the industry. Across the team, you can have peace of mind knowing that we are looking after you.
  4. On average 1/3 of Victorians have never refinanced and are paying a significantly higher interest rate than needed. Is it time for a review for you?
  5. Refinancing does have costs involved but as part of our comparison we will determine whether or not it is beneficial for you to change.

Self Managed Super Funds

self-managed-super funds

The Government changed the regulation in 2007 allowing you to borrow inside of superannuation and use your existing superannuation as a deposit.

SMSF’s are the fastest growing superannuation sector seeing remarkable numbers of Australians migrating across to the SMSF space.

SMSF’s allow you to take control of your superannuation and invest your money where you see fit. In particular, a SMSF can give you the ability to take your standard superannuation and convert it into an investment property.

Our initial client meetings generally uncover that our clients existing retail or industry superannuation funds are predominantly invested into the share market resulting in positive or negative results based on the share market performance.

We typically find that our clients preference in regards to their retirement nest egg is to be invested directly into SMSF = Property rather than Retail or Industry Superannuation Funds = share market.

SMSF gives you the ability to take your standard superannuation and convert it into a residential investment property.