If you only knew the truth about your interest rate…

At a time of almost constant changes in the finance world – and an absolute overload of information online – it’s easy to see why some consumers are becoming ‘switched off’.

A recent study about financial literacy found 36% of respondents didn’t realise if they reduced the length of their loan they would also have reduced the amount of interest they paid! It also found 35% had done nothing to educate themselves on banking products and services.

What does that tell us? Well…

It tells us there are potentially a LOT of people who could be enjoying savings on their home loan AND other loan products – if only they knew how.

So how important is financial literacy? Let’s face it, many of us find the ever changing world of finance and banking complex. And yes… pretty dull. But a lack of interest in educating ourselves about our home loan – usually the BIGGEST financial commitment we have – is often costing us money!

It’s interesting that the same survey found 74% of us don’t know what a comparison rate is…

Do you? And what SHOULD you know?

Comparison rates

Lenders are legally required to display a comparison rate
when advertising most loans.

This is a tool to help identify the true cost of a loan by combining all components into a single percentage rate*. It also takes into account loans with a lower introductory rate that reverts to a different interest rate after a set period of
time.

It includes:

• the loan amount
• the loan term
• the repayment frequency
• the interest rate, and
• the fees and charges connected with the loan**

For example at the time of writing this article, one lender was advertising an interest rate of 4.44%., but the comparison rate was 5.49%. Now that’s a difference of $1,050 interest each year for every $100,000 of borrowing you have. That is a little over $4,100² per annum on the average Australian loan.

The mandatory comparison rate was initially introduced to stop lenders advertising very low interest rates that lured borrowers into loans that actually ended up costing more than they expected. A low rate may look attractive at first glance but it doesn’t always mean it is the cheapest rate.

While the comparison rate can be used as a guide it is also important to consider the features of the loan and how these may benefit your particular circumstances and future goals. The rate alone should NOT be your sole consideration when obtaining finance.

Remember, whether you are looking to buy your first home, upgrade, downsize, refinance, invest in property or even buying a new car, as your finance specialist it is our job to do the research for you to determine the loan product most suitable for your circumstances.

Mortgage brokers now account for more than 50% of the home loan market. There is a good reason for that! We have to constantly adapt with the times, the lending policies and the changing finance market to provide more than just a loan
service.

We are your finance concierge, educator, confidant and specialist working for YOUR best finance options without the trickery of advertising low interest rates as a lure for your business.

If you are thinking of reviewing your current loan – DON’T do
it alone!

Our role as your finance specialist is to help you make the best financial decision for your personal situation. We consider factors such as:

• how long you are planning on having the loan
• your employment status, age and financial position
• what job/personal circumstances may be happening in
your future
• your family situation and potential future financial expenses (known and unforeseen)

AND we look at more than one lender for your solution.

Call us TODAY. We’re here to answer any financial queries you may have.

10 Steps to successful property investment

Property has been considered a popular path to wealth creation for Australians for many years. It has the potential to generate capital growth (an increase in the value of your asset) as well as rental income. There are also tax advantages associated with negative gearing. However, when buying an investment property it is wise to remember that you are making a business decision and it’s worth taking the time to plan.

1. Do your homework

You are not buying from the heart, but from the head, so it is important to assess your current financial position. What are your cash reserves and what equity do you have in your present home? Look at your long term objectives and factor in potential changes to your current situation (eg. the birth of a child or the loss of one income).

2. Understand negative vs positive gearing

Positively geared properties – rental income is higher than your loan repayments and outgoings. Tax is likely to be payable on the net income. Negatively geared properties – rental income is less than your loan repayments and outgoings. The loss can be offset against other income earned, reducing your assessable income and therefore your tax payable.

3. Decide how to fund it

You’ll probably need a property investment loan. The deposit can come from your savings or alternatively from equity in the home you live in. It can also be possible to invest in property via a self managed superannuation fund.

4. Choose the right loan

There are generally two types of loans: ‘principal and interest’ and ‘interest only’. Interest only loans defer the obligation to repay the principal. The best loan type will be dependent upon your individual circumstances so it is best to talk to us.

5. Find out how much you can borrow

This is an essential step to be realistic in your expectations and focus your property hunting time on properties you can afford.

6. Calculate your up-front costs

Remember to factor stamp duty, loan application fees and legal costs into your plans. A building and pest inspection is also a must to avoid expensive headaches down the track.

7. Estimate ongoing costs

All properties incur ongoing expenses (eg rates, insurance etc). You’ll use your rental income to cover most or all of these but you might need to have some spare cash set aside until you start receiving rent (most agents pay the owner at the end of each month so you won’t receive rental income straight away).

8. Finding the right property

This is obviously the area in which you will spend the most time. It doesn’t have to be a home you would live in. Think about which features are universally appealing and of course remember the old adage – location, location, location!

9. Find a good property manager

It could be a good idea to look for personal recommendations from tenants and landlords you may know.

10. Cover yourself with suitable insurances

Some insurance companies now combine building cover with specialist landlord insurance. You should also consider life, tpd and income protection insurance to ensure your family doesn’t suffer financial hardship repaying loans if the main income earner is unable to work.

 

Energy costs…our greatest financial grief

Average annual electricity bills in Australia hover around $1,600 per state, even hitting as high as almost $2,000 in South Australia.

For example, a family of five’s average annual electricity bills can climb to as much as $2,576.28.

Our varying Aussie climate coupled with a growing population place increased demand on energy use.

Q. How do you compare? Your energy bill may hold the answer

Most electricity providers publish helpful information on your bill statements including power used, what it costs and how your usage compares to customers in your area.

Q. What are the main factors that determine the average cost?

Electricity usage – how often energy efficient appliances and higher energy consuming appliances, such as clothes dryers and air conditioners, are used.

Electricity prices – the price you pay for power, along with the usage, will determine your overall costs.

Canstar blue, an online comparison site, offers an electricity comparison tool to help you get the best deal possible.

The power is in your hands (pardon the pun) to reduce your energy bills:

1. Get the best deal possible, and
2. Control your energy usage!

Q. How can you control your energy usage?

These tips from Energy Australia could help make a difference to your next energy bill.

Heating and cooling

Reduce the energy you use by

• Closing doors to unused rooms.

• Closing curtains or window shades.

• Using blankets, electric blankets, wheat bags or hot water bottles instead of heating the room.

• Cleaning your air conditioner or cooler so it doesn’t need as much energy to run.

• Turning off heating or cooling when you are not home and overnight.

The family room

Switch off appliances at the wall – appliances still use energy in standby mode.

Use a power board – switch off all appliances with the one switch.

Use lamps or spotlights – use these small amounts of light instead of main lights.

Use energy-saving globes – change old globes to fluorescent ones.

Too many lights on – turn off lights you are not using.

Kitchen

Microwave oven – uses less energy than an oven.

Stovetop – keep lids on to reduce the amount of time and energy used.

Dishwasher – use the economy cycle and only when full.

Laundry

Washer or dryer – only use with a full load. Use a clothesline instead of dryer whenever possible.

Bathroom

Water use – install water-saving showerheads, shorten showers, set the hot water temperature to 50 degrees.

Appliances – switch off when not in use.

Outside

Timers and sensors – to light outside areas.

Solar – for garden and outdoor areas.

Lighting – separate the lights to choose which areas to light.

Create good habits

Many of us set financial budgets to help manage our cash flow. We can take the same approach to our energy bills:

1. Set an energy spend in your yearly budget and track your spend

2. Make some of the changes mentioned to reduce your bills

3. Review your energy bills on a regular basis to keep on track

With smart budgeting and energy saving tips, you can manage your cash flow and put more dollars back in YOUR pocket.

Planning for your future is just as important as managing your budget and household expenses.

Call the office for your very own ‘Our Household energy rules poster’

Ease your investment property cashflow burden

Get them NOW – your investment property tax returns on pay day

Whether you are a first time property investor or a property portfolio owner, cash flow is critical. There are many ongoing, and sometimes surprising, costs associated with holding investment properties.

Numerous unending costs include insurance, body corporate/strata fees, council and water rates, property management fees, land tax, maintenance and repairs.

Let’s not forget other challenges of managing property investment cash flow:

• Vacancies – there may be times when your property is not tenanted and you may have to cover the costs yourself
• Interest rates – if interest rates rise, larger repayments could widen your income versus expenses gap

Plus there are considerations at the time of buying and selling such as entry and exit costs and property valuation fees.

Can you afford a cash flow shortfall?

Managing your income (rent from your tenant) versus your expenses is important in managing your overall surplus or shortfall.

As reported by CoreLogic in their ’25 years of housing trends report’ as of March 2018, property investors were 42.8% of the mortgage demand – more than double the proportion of 25 years ago. Now that’s a lot of investors having to manage their cash flow.

If you have negatively geared properties in your property portfolio (where the income from your investment is less than the expenses) then you would be contributing your own money to hold the property.

Most investors then boost their tax return at the end of the financial year through tax-deductible rental property expenses.

This may seem straight forward for single investment property owners, but for those with a portfolio, the ongoing costs could put a strain on their own funds and cash flow.

Let’s look at an example from ASIC’s Money Smart site:

Case study: Juhyan and Jennifer consider an investment property

Juhyan and Jennifer are considering buying an investment property. They spot a unit that ticks all of their boxes: it’s close to a train station and is a 10 minute walk to restaurants and shops.

The property price is $550,000 with buying costs of $23,000. They have a deposit of $150,000 so they will need to borrow $423,000 to complete the purchase. Their monthly income and expenses are expected to be:

Income and Expenses $
Rental income $2,250
Less loan repayment -$2,725
Less allowance for expenses -$225
Less strata fees -$216
Less allowance for repairs and maintenance -$500
Monthly shortfall -$1,416

Juhyan and Jennifer can cover the monthly shortfall with Jennifer’s salary, which they currently save. They also have an emergency fund they can draw on if they were suddenly without tenants for a while.

If Juhyan and Jennifer were to purchase say another three similar negatively geared properties, then they would be in for quite a shortfall!

Did you know you can use the tax system to your advantage?

Instead of waiting for your end of financial year tax return, you may be better off paying less tax throughout the year to subsidise the continuing outgoing expenses of your properties.

By completing the ATO PAYG withholding variation application, you can vary or reduce the amount of pay as you go (PAYG) tax that is withheld from your salary each pay period. This may be preferable if your normal rate of taxation leads to a large refund at the end of the year because it does not take into account your investment deductions. See the ATO website for more details.

How does it work?

Your regular cash flow is increased (less tax paid each pay – so more in your pocket) allowing you to: accelerate your debt reduction; put more in your offset account to reduce the interest accumulating; build up a deposit along with your current property equity for your next purchase and of course to help you with any shortfall for covering your property costs each month.

Beware – conditions apply!

The Australian Tax office clearly states that “We will process your application only if you:
• have lodged all required tax returns and activity statements or notified us in writing if you were not required to lodge tax returns in prior years
• did not receive a debit assessment on your last tax assessment (if you also had an approved withholding variation for that year)
• do not have any outstanding tax debt owing to the Australian Government
• do not have any outstanding debts under any other Acts administered by us.”

The application is valid for one financial year only. So that better be on your to-do list each financial year if you intend to continue using this strategy.

Seek advice

Importantly, don’t dive into investment property ownership without assessing your overall asset strategy, cash flow and budget management – you don’t want to be caught short each month!

Investing in property can be daunting. Let us help you to make it a rewarding step in your life by starting with our ‘10 Steps to successful property investment’.