Firstly, there are two common types of property ownership in Australia including:
Tenants in common
- If a tenant in common passes away, the share of the property they owned does not automatically go to the other person on the title of the property. The asset will be distributed as per their will (see below)
- Tenants in common also provide a way for new investors to pool their funds and increase their borrowing capacity to buy that first property together and get into the market.
- A joint tenant generally involves defacto’s or married couples who own a property together. Under this structure should one of the partners die, the other partner will automatically claim the rights of the property.
Most of the time, the person listed on a property’s mortgage is the same person listed on the property’s title, or deed. For example, if a couple buys a property with a mortgage, both are typically named on the mortgage and deed. However, under some circumstances someone may want to be on the mortgage but not on the deed.
Since borrowers who are not on the title deed, are not legal owners of the property, they cannot pledge the property as collateral. Therefore, these borrowers, by default, become guarantors. Legally, the difference is significant. Co-borrowers are responsible for making monthly payments as are primary borrowers. Guarantors are only responsible for loan balances after default by primary borrowers.
So lenders will typically want the borrowers to be on title so that you can offer the property as collateral for the loan. This can be dependent on the lenders’ policy so choosing the right lender is important to achieving your strategy.
There are some risks if you and your partner are on the mortgage but you are not on the title including that your partner has the power to sell the house because you aren’t a legal owner (depending on the legal situation). Changing the title later in order to add you can be complicated and expensive too so it is important to get this right from the start.
Why consider this at all?
- Tax benefits: – if you are the higher income earner and listed on the title, you can claim the tax benefits that come with property ownership if it is an investment. This includes all the depreciation benefits such as building, fixtures and fittings, interest on your loan, council rates, agents and body corporate fees. This will improve the household cash flow as the primary income earner can reduce their taxable income for tax purposes leaving more money in their pocket.Land tax is also an important consideration as to whose name you put on the title of the property to ensure you don’t pay unnecessary land tax. It is a state based tax levied on the value of the land on all owners where it is not their principle place of residence. In addition, to avoid land tax you may want to purchase your next property in another state which also gives the added benefit of diversifying your portfolio. In NSW the land tax threshold for 2017 is $549,000. This means your land tax assessment is calculated on the combined value of all the taxable land you own above this threshold.
- Protecting your asset from creditors; – giving your partner title protects your home from creditors if anyone wins a lawsuit against you and wants to claim your assets.
- In the event of death; – generally speaking, creditors come before your beneficiaries. Your deceased estate must pay all your debts before a distribution can be made to beneficiaries and this includes your mortgage. If that means selling your assets to pay the debts, the executor must do so; even if it reduces the assets available for distribution to beneficiaries. There are however some exceptions as some assets can’t be touched by creditors including superannuation, proceeds of life insurance policies or compensations claims in which case you would need to authorise your executor to use life insurance proceeds to pay off a home mortgage.
The Home Loan Company can help structure your finance to achieve your goals and that may include referring you to specialists such as tax, legal and financial advisors if necessary. Talk to us and we can help you with these important considerations.
There are very competitive home loan rates in the market for owner occupiers if you are prepared to choose principle and interest and this is a great time for you to consider a home loan health check. I’m sure we can help you save $1000’s in home loan repayments.
But what about for investors? You may recall on 31 March 2017 APRA sent a letter to all ADI’s to immediately take steps to reduce their exposure to interest only residential mortgage loans to 30% (currently representing approx 40% of bank lending). An important component of investment lending is to utilise interest only (IO) repayments so generally this affects investors more. IO is popular with investors for a few reasons including the assumption that the property is going to increase in value and create equity for their next property purchase, investors can maximise their cashflow and use the tax deductibility of interest on their investment loan repayments. IO may also offer the option for investors to prepay interest for the upcoming financial year, allowing them to claim next financial year’s benefits in the current one.
In the last month most lenders have increased their interest only rates on loans by around 0.3%. In addition, if the purpose is for investment, many have an additional interest rate loading of 0.2% so it all adds up. Some lenders will no longer offer you an interest only option on owner occupied properties and others have reduced how much you can borrow if interest only is required.
As for investment loans, the higher the loan balance and longer the IO period, the more an investor can maximise their tax-deductible benefit so your strategy shouldn’t change just because of the rate. As we enter the new financial year, lenders may relax their focus on capping interest only appetites through rate hikes … that is until they head towards 30 June again and need to watch their loan book exposure all over again. The Home Loan Company can help you compare the best and most competitive investment home loans available for you. Get in contact with us and we’ll help you achieve your strategy.
Whilst this won’t necessarily be helpful for first home buyers close to the city, it will be for NSW as Stamp Duty Exemptions have been announced for first home buyers who are purchasing existing properties worth up to $650,000 will be exempt from stamp duty from July 1st.
At present, the exemption is only available for those buying new homes.
There’ll also be stamp duty discounts for first home buyers purchasing properties worth up to $800,000, while stamp duty charged on mortgage lenders insurance will also be scrapped.
First home owners and downsizers are the winners in the Budget – Note: These changes are proposals only and may or may not be made law.
Here’s a quick summary of how it impacts our housing market. Please let us know if we can help you in these circumstances:
- If you’re a first home buyer: From 1 July 2017, 1st home owners can make voluntary super contributions up to $15k pa and $30k in total to use towards a home deposit. With the new First Home Super Savers Scheme, savers can contribute from their before-tax income into their superannuation fund. You will be able to withdraw that cash, along with any earnings, from July 1, 2018. The deposit will attract the tax benefits of superannuation — contributions and earnings will be taxed at 15 per cent, and withdrawals will be taxed at 30 per cent below the marginal tax rate.
- If you have a mortgage: Australia’s 5 biggest banks will pay a new 0.06% levy on their liabilities, raising $6.2b over 4 years. Liabilities of course include home loans. Mortgage holders will be watching to see what the banks to do to interest rates to pay for the levy.
- If you are a property investor: As anticipated, negative gearing remains, but property investors won’t be able to claim travel expenses and some depreciation deductions beginning July this year including plant and equipment items such as washing machines and ceiling fans. From budget night, you will only be able to claim the deductions if you actually purchased the item yourself. In the past, successive investors were able to claim depreciation on the same items, well in excess of their value.
- If you’re a downsizer: From 1 July 2018, people over 65 can contribute $300k into their super from the proceeds of selling their home. This is aimed to encourage retirees to free up stock for young families entering the market. They must have held the home for at least 10 years and it has to be their principal place of residence. And both partners in a relationship can do this, meaning combined they can contribute up to $600,000 to super.
- If you’re investing in property through your superannuation: When a new Limited Recourse Borrowing Arrangement is established, the loan balance will be included in the individual’s total super balance.
- Affordable Housing CGT discount: from 1 January 2018, eligible people will receive a further 10% CGT discount.
- If you’re a foreign property owner: Effective immediately, foreign property owners will no longer receive the CGT exemption on their principle place of residence. A new CGT rate of 12.5% will apply.
- Increase to Medicare Levy: From 1 July 2019, the levy will increase from 2% to 2.5%. This is to help fund the National Disability Insurance Scheme. Those on an income of $50,000 will pay $250 extra a year for the levy, those on $150,000 will pay $750 extra a year for the levy.
With further changes to investment lending by APRA at the end of March, it’s even more important to use your mortgage broker to make sure your lending strategy stands the test of time and you can continue to hold and build wealth through property.
Going back to December 2014, APRA outlined a range of measures to be complied with by ADI’s (Authorised Deposit Taking Institutions – banks). These included a cap on new residential investment lending to 10% growth pa and minimum interest rates for assessment purposes to ensure borrowers capacity to repay their monthly mortgage. APRA have said they expect that interest rate to be at least 2% above the loan product rate with a minimum of at least 7%. ASIC also acted bringing in the non ADI’s to kerb the growth of investor lending.
Among other things, with the GDP sitting under 2% and not getting to the 2%-3% range which would justify a rate increase by the RBA, on 31 March 2017 APRA sent a letter to all ADI’s to immediately take steps to also address interest only residential mortgage lending which currently represents 40% of lending by ADI’s. APRA have now restricted that lending to 30% and within that, strictly limited interest only lending above 80% of the loan to property value ratio. They will also be further monitoring lending at high loan to income ratios, lending at high LVR’s, long interest only periods and loan terms. So there will be more changes to come. APRA’s concern is the environment over the last few years including according to their letter “high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates and strong competitive pressures.” The RBA in their April 2017 cash rate decision also noted growth in household borrowing outpacing household income and that supervisory measure should help address that. So, ASIC, APRA and the RBA have come together to put additional measures in place to slow down lending in the investment property market.
To highlight the impact of these changes, for an investor with lending of $1m and interest only repayments at 4.7% over 30 years, they would currently be paying $47,000 pa in repayments. When their interest only term expires assuming the same interest rate, they would be put onto principle and interest repayments of around $62,000 pa and the investor would need to find an additional $15,000 pa to pay the mortgage from net income.
APRA have also requested ADI’s to reassess interest only loans when they expire where the borrower applies for a further interest only period. So it isn’t as easy to phone up your lender and extend your interest only repayment period and the restriction on interest only doesn’t just apply to investors … it includes owner occupier loans. This isn’t to say you cannot get interest only repayments extended but you will now need to show you can service the loan at principle and interest repayments and some lenders have this week put this into practice already. Not all lenders are the same and there are options including refinancing to another lender if needed.
If you’re an investor, keep informed and surround yourself with the right people all the way along the property wealth chain that considers your personal financial situation. From sourcing your property portfolio with the right yield and capital growth potential, putting in place the right finance with the right lender and getting tax advice on managing your portfolio.
If you have an interest only loan that will be ending soon, safeguard your portfolio and start planning with your broker now so you are ready for the next cycle and can continue to hold and build future wealth through property.
Sometimes a purchaser doesn’t have the cash ready to pay a 10% deposit on the purchase of a property. A deposit bond or guarantee is an alternative to a cash deposit. However, it is important to understand what it is and know its limitations … so read on.
A deposit bond is essentially an insurance policy. It means the insurance company will pay the 10% deposit to the vendor in any of the circumstances where the deposit would be required. No money actually changes hands with a deposit bond. Instead, all purchase funds are paid at settlement by the purchaser in full, and the deposit bond simply lapses.
Why Use a Deposit Bond?
The most common use of deposit bonds is where:
- The purchase is off the plan – Long term deposit bonds last up to 4 years. This means you have extra time to save up for your property.
- The purchaser is waiting funds to come through from another source – including the sale of an existing property. This can be a more affordable alternative to bridging finance.
- Purchasers intending to bid at auctions – While the deposit bond amount is fixed, the vendor and property details can be left blank for you to complete, should you become the successful bidder at an auction.
- First home buyers – waiting on a government grant which can’t be accessed until settlement
How do you get a Deposit Bond?
To qualify for a Short Term Deposit Bond of up to 6 months you need to be able to show you have sufficient funds to complete the property purchase at settlement. For example a loan approval, a copy of the contract of sale, savings, a term deposit, share certificates, evidence of equity in an existing property, evidence of other funds that will assist in the purchase including a First Home Owners Grant.
How do you get a Deposit Bond?
If you’re buying a property for $500,000 and need a 10% deposit of $50,000, it will cost you around $650 for a deposit bond. If you’re purchasing a property for $1m and need a 10% deposit, it will cost you approximately $1300. For private treaty purchases, you can also negotiate a 5% deposit with the vendor which would essentially halve the cost of the deposit bond. For auction however this may not be possible.
Be Aware of the Restrictions
Some vendors may refuse to accept a deposit bond, especially when they are requesting early release of the deposit and need access to it in order to secure a new home. Prior consent needs to be obtained from the vendor, real estate agent or developer in writing to ensure you can use a deposit bond for your purchase.
The Home Loan Company can put your Deposit Bond in place for you.
To buy first or to sell first? That is the question, but the answer’s a little more complicated. Bridging finance is a flexible solution, so consider whether it’s right for you. Read through this article from Simeon Manners Mosman and make sure you’re prepared.
With lenders moving their home loan rates up last week out of cycle, it’s good to see the RBA didn’t change the cash rate today leaving it at 1.5%. But time is running out … contact me now to take advantage of low home loan rates before they go up again … I’m confident I can get you less than 4% on your home loan.
With home loan rates changing constantly in the market and our low interest rate environment, there’s an opportunity for you to save money on your home loan and invest it or spend it on what you really want. Many of our clients save thousands each year by managing the cost of their most expensive asset and we can all do with a little extra saving. Even if you received a discount on your mortgage a few years ago from your lender, it is most likely it is no longer competitive.
So don’t set and forget… that just costs you money. Let’s have a look at your mortgage and see what it’s doing for you. No obligation and it’s easy to do. Don’t miss out on the opportunity while you can.