What’s happening with interest rates?

What’s happening with interest rates?

You may have seen a spate of recent headlines about lenders raising interest rates and changing lending criteria across a range of loan products – despite the official RBA cash rate remaining at an all-time low.

It’s no wonder a number of our clients are asking “What’s happening with interest rates?”

Sweeping changes in the finance industry are leaving both property investors and owner occupiers more than a little nervous. Any increase in interest rates naturally starts to raise fears about future mortgage stress – especially for those with very little ‘wriggle room’ in repayments.

WHY are these changes happening and what do they mean for YOU? Chances are you WILL be affected…

  • Why all the changes?

You would expect record low interest rates to be great news for borrowers, but in reality lenders and regulators become nervous about how borrowers will manage their debt when interest rates rise.

Many of the recent changes are the joint result of lenders attempting to ease funding pressures combined with APRA (Australian Prudential Regulation Authority) exerting pressure on lenders to slow down lending in overheated markets in some states.

In addition, despite the fact that lenders have been put on notice NOT to pass on the costs of the 2017 budget levy to customers, the full effect of this levy is yet to be seen. The result is a world of uncertainty!

  • Who will be affected?

The answer? Potentially anyone with a mortgage! For instance:

  • Loan to valuation ratios (LVRs) are decreasing so larger deposits are required (FHBs and investors)
  • Interest only loans are tightening for both investors and owner occupiers
  • Lending criteria is tightening for investors and off the plan purchases. Take note if you entered into a contract before these changes occurred!
  • Bank valuations are starting to come in lower than expected in most states…

And the list goes on.

  • How do you protect yourself?

The natural level for interest rates is around 7%. This is the level usually used by lenders to determine your capacity to repay a loan so there is a natural ‘buffer’ built into repayments.

On the other hand there is a whole generation of homeowners who haven’t experienced rates at that level – the ‘actual’ prospect can be daunting.

Apart from looking for opportunities to either make savings in your current expenditure to cover higher repayments or finding ways to increase your income, other alternatives may include:

Move to a more competitive home loan. If you haven’t refinanced for a while NOW is the time to explore alternate options. In many cases we can help you with that!

Start paying more NOW! If you have the ability, consider increasing your current repayments to a higher level to become acclimatised to higher repayments. If interest rates DO increase then you are already prepared as you will have a buffer in place that may help on those unforeseen ‘rainy days’. Speak to us first before using equity to understand the consequences.

Lock in a fixed interest rate. If interest rates increase during the fixed period your rate and repayments will not rise. This may provide greater certainty for a period of time. On the other hand, if rates decrease, you are locked into your fixed rate for the loan period. You definitely need to TALK TO US to explore if this option is suitable for your circumstances.

  • How can you tell if you’re at risk?

Those most at risk of future mortgage stress are those who are paying more than 30% of their pre-tax income on home loan repayments. A good start is to take our 4 step mortgage stress test.

CALL US and we’ll tell you how!

Renovation is the new upgrade!

Renovation is the new upgrade!

The property market remains hot news in many parts of Australia but there is one less talked about sector of the market that is ALSO booming…

Home renovations are back – in a big way!

In fact, did you know that Australians are currently spending $165 million per month on renovations?

After a slump a few years ago home renovations accounted for almost 35% of total residential building in 20162 and activity has been increasing every month since August 2016. The Housing Industry Association (HIA) expects this trend to continue predicting that renovating will be the next ‘construction’ boom.

What is driving this boom?

For owner occupiers…

Rising house prices combined with a lack of affordable supply in a number of areas in Australia often makes renovation a more viable option for potential upgraders.

With a lack of suitable properties they are instead choosing to upgrade their existing home.

For property investors…

As lending criteria for property investment loans tightens, investors seek to reign in loan to valuation ratios (LVRs) by searching for more affordable properties.

Buying an older (cheaper) property and adding value via renovations may provide a greater opportunity for either short term gain through ‘flipping’ or longer term growth as a result of higher rental and/or capital growth over time on a more appealing property.

The key to using home renovation as a strategy for future gain is to DO YOUR HOMEWORK!

Regardless of your reason for renovating there are some essential tips that ALL would-be renovators should know.

Owner occupiers

Renovating an existing home will generally attract a higher cost per square metre than building a new home. It can be a big (and sometimes emotional) decision whether to knock down your existing home and rebuild a new home instead.

Before going down the renovation path the key points to consider as an owner occupier include:

  • How old is your home? Aged wiring, plumbing etc can lead to cost blowouts from previously unidentified issues. Explore all contingencies BEFORE proceeding.
  • Location and lifestyle – do they fit your present AND future plans?
  • Can you live there while renovating? What are alternative accommodation costs?
  • Do you REALLY want the hassle of renovating?
  • Availability of tradies. Boom times could mean a shortage of skilled tradies and add significant time or a lesser result to the process.
  • New is easier to maintain, less susceptible to termites and more energy efficient.

Before deciding on renovation versus a knock down/rebuild it is essential to crunch the numbers. As part of the process perhaps consider enlisting the services of a valuation expert?

If you would like a recommendation to our preferred property valuation service please call the office.

Expert help provides a guide to current versus future values of each alternative so they can be weighed up against your estimated costs.

Property investors

Renovating could provide investors with opportunities to increase rental returns and/or the equity in their properties, however research and crunching the numbers is ESSENTIAL. It is important to follow your head and not your heart!

As a rule of thumb renovating should give you a return of at least $2 for every $1 you spend. It pays to do your homework in the local area:

  • How do sales or rental yields of renovated properties compare with those in original condition?
  • What features make some properties highly sought after while others wallow on the market?
  • What are essential renovations versus the ‘nice to have’?

Visit recent developments that are selling fast to see what builders are doing that have high appeal.

Tax benefits of renovating

Many investors don’t consider the value of the items they are throwing away during renovation. If an investor renovates a kitchen or bathroom – or even replaces carpet or a hot water system – they may have the opportunity to claim depreciation deductions under a process known as ‘scrapping’ or ‘disposal of assets’.

This rule has recently been amended to limit depreciation deductions to only expenses that have been directly incurred by the investor for properties purchased after 9 May 2017, however existing investors could still take advantage of the previous rule.

Scrapping allows investors to claim the total remaining depreciable value for items that are thrown away in the year of their removal. You should also factor in deductions you can claim for new items added to the property.

Arrange a tax depreciation schedule from a quantity surveyor BEFORE you commence renovations to avoid throwing away thousands of dollars in old items and to ensure deductions for new items.

If you need a referral to a quantity surveyor or our preferred taxation specialist then give us a call.

The common denominator…

Of course the common denominator in any decision about renovating is FINANCE. How are you going to fund your plans?

There are a number of options for financing a renovation or rebuild. The type of finance you choose will be dependent on the size and cost of the renovation and your individual circumstances. Options may include:

  • using the equity in your home
  • construction loan – for a major renovation or rebuild
  • line of credit

As your finance specialist it is our role to help you explore the option most suitable to your circumstances and your future financial goals.

Are renovations on your mind? Call the office and we would be pleased to book you in for a chat to discuss your finance options.

Protect your precious home

Protect your precious home

Underinsurance is a growing problem in Australia with an estimated 29% of homeowners having NO home and contents insurance and 40% of households WITH insurance being underinsured.

With your home and its contents usually being your single largest investment and a place of comfort and security for your family, these figures are alarming.

You might think you are SAVING money but cheap insurance won’t seem so cheap when you need to make a claim.

Sadly, most of us don’t investigate our current insurance position until after an event has occurred – and then it is TOO LATE.

Take the time to review, Many of us pay our policies each year forgetting that:

  • we haven’t reviewed our current property valuation and sums insured
  • we have made improvements to our home
  • building costs are constantly increasing and
  • we have added extra purchases (electronics, whitegoods, furniture, clothes, jewellery) to our home contents

Check your coverage

Remember to check your current insurance policy to determine if you are covered for events such as storms, floods, flash floods and bushfires. Make sure you read and understand the definitions of each. In June 2012 a standard definition of ‘flood’ was developed to give consumers clarity when choosing insurance.

Are you underinsured?

It can be difficult to estimate costs to replace your home and contents. Ideally you should obtain a cost estimate to replace your property from a qualified professional.

The Insurance Council of Australia (ICA) website also has building and contents calculators and a household inventory checklist. Go to understandinsurance.com.au/ calculators

Policies with the lowest risk of underinsurance for you are total replacement policies where the insurer agrees to pay unlimited replacement costs.

Sum insured policies have a higher risk of underinsuring you as there may be a gap between the estimated build costs and the actual rebuilding costs.

If you are unsure?

Seek advice from a professional who will be able to advise you appropriately.

If you believe you are unable to afford the appropriate policy, a professional will shop around for several quotes and consider alternatives, eg increasing the excess to reduce the premium.

Ideally you should explore making savings elsewhere in your budget as you may not be able to afford to replace your property and contents IF the worst should happen.

Call the office for an introduction to our insurance specialists.

Are you maximising tax deductions for your investment property?

According to the ATO there are around 1.8 million property investors in Australia and 2.7 million rental investment properties. Surprisingly, many landlords fail to claim all allowable tax deductions simply because they are unaware of all the expenses they can claim as a tax deduction.

There are two types of investment property strategies – positively geared or negatively geared.

Positively geared properties – where rental income is higher than interest payments and tax deductible outgoings. Tax is likely to be paid on the net income.

Negatively geared properties – where rental income is less than interest payments and tax deductible outgoings. The loss can be offset against other income earnings, reducing assessable income and therefore your tax payable.

The strategy most suited to you will be dependent on your individual circumstances and your long term investment goals and objectives.

More recently, proposed tax changes to negative gearing has been a political hot potato. Let’s face it – nobody likes the goal posts shifted half way through the match! Whatever the outcome, property investment is likely to continue being a popular path to wealth creation for Australians.

So… If YOU have an investment property are you sure you are claiming all possible deductions?

Regardless of the property investment strategy you adopt all investors will see benefits in claiming all possible deductions. As a starting point review the lists below and ensure you have paperwork for the expenses you have incurred.

Initial borrowing expenses:

  • stamp duty charged on the mortgage
  • loan establishment fees
  • title search fees charged by your lender
  • costs for preparing and filing mortgage documents
  • mortgage broker fees
  • fees for a valuation required for loan approval
  • lender’s mortgage insurance – this is insurance taken out by the lender and billed to you

Are you maximising tax deductions for your investment property?

Interest:

Interest is usually the largest tax deduction, particularly in a negative gearing arrangement. You can claim the interest charged on the loan used to:

  • purchase a rental property or land to build a rental property
  • purchase a depreciating asset for the rental property (eg an air conditioner)
  • make repairs to the rental property
  • finance renovations on the rental property

Other expenses:

  • advertising for tenants
  • bank charges
  • body corporate fees
  • council rates
  • gardening and lawn mowing
  • insurance
  • land tax
  • legal expenses for preparing a lease or evicting a non-paying tenant
  • pest control
  • property agent fees or commissions
  • repairs and maintenance
  • water charges (if not paid by the tenant)

Capital works:

You may be able to claim a deduction (usually at the rate of 2.5% per year in the 40 years following construction) for the construction cost of:

  • buildings
  • structural extensions such as a garage or patio
  • structural alterations such as adding an internal wall
  • structural improvements such as a gazebo, carport, sealed driveway, retaining wall or fence

Depreciation:

The plant and appliances in your property reduce in value over time as a result of normal wear and tear. The ATO allows you to claim deductions for this reduction in value each year. There have been recent changes for properties purchased after 9 May 2017. Check with your taxation specialist.

In order to substantiate these deductions you should consider a professional quantity surveyor’s report for applicable capital works and depreciation deductions during the life of your property.

Most importantly… make sure you keep all receipts as no receipt = no deduction

The above checklist should get you started.

For more information…

Ask us to send you the ATO ‘Guide for rental property owners – Rental properties 2017’. This explains how to treat rental income and expenses for more than 230 residential rental property items!