October 20, 2018

Author Archives: Dominic Beattie

About the author  ⁄ Dominic Beattie

Use a Mortgage Broker or Go Direct?

Australia’s home loan market is huge, with nearly $390 billion in new residential loans approved over the year ending July 2018, according to the latest ABS housing stats. That is a lot of money changing hands. Unsurprisingly, there are a lot of industries that make serious money from this substantial property trade, with mortgage broking being amongst the largest.

What is a mortgage broker?

A mortgage broker is essentially a person or institution who plays matchmaker between property buyers and lenders – i.e. helping borrowers get home loans and helping lenders get customers. Mortgage brokers work on the borrower’s behalf to arrange the appropriate finance for them to purchase their home, offering advice and guidance throughout the process. Generally, they have arrangements with specific lenders to offer particular home loan products to their clients and typically receive commissions from lenders for every loan arrangement.

Using a mortgage broker vs. DIY

More than half of all new home loans written in Australia are through a mortgage broker, a factor which drives the more than $2 billion per year in fees that they as an industry make from the market, according to ASIC.

This widespread utility speaks to the fundamental need amongst consumers for expert advice and help in navigating the process of getting a home loan. The alternative to using a mortgage broker is for people to do it themselves, which is sometimes referred to as going ‘direct’.

This raises several questions:

  • What are the major differences between using a mortgage broker and going direct?
  • Is one better than the other?
  • Can people access the same home loan products directly that are offered through a mortgage broker?
  • Does one way cost any more than the other?
  • Is it better to choose one way over the other depending on the type of property being purchased or the complexity of the loan (e.g. if other existing property loans need to be included in the new loan)?
  • And how are both buying methods being affected by the ongoing rapid march of technological development and the appearance of ‘fintech’ players in the market?

What mortgage brokers offer

Lets start by looking at what Mortgage Brokers do best, and that is to provide convenience and comfort to consumers.

Most people have very little idea of what it takes to get a new home loan, so brokers provide convenience by helping to identify a suitable home loan (amongst the more than 1,000 available in the market), and guiding people through the process laid out by the chosen lender to ensure that the loan can be settled to meet the needs of you, the customer.

Many people view shopping for a home loan as akin to opening Pandora’s box, because there are real risks involved in getting it wrong (costs, timing, etc.).

So there is something of a fear factor that many people have, and essentially they will often look to a mortgage broker to help them navigate the process and provide them with that level of comfort in making the decision.

The cost of using a mortgage broker

But at what price and sacrifice to product choice does this convenience and comfort come? Does using a mortgage broker cost you any more than it would if you dealt directly with the lender?

On the surface of things, the answer is no.

Mortgage brokers are paid by the home loan lender, and not by the consumer getting the home loan. However, many industry pundits (particularly those on the ‘direct side’) point to the pricing of home loans accessed through the mortgage broker channel as being higher than what can be sourced by going direct.

Trying to prove this point is a real challenge, and it is at best a grey area that consumers need to be aware of. Consumers can try and navigate through this grey area by comparing the loans their mortgage broker suggests with other ‘direct’ options available to them in the market (by using free tools like home loan comparison sites).

The revenue model currently used in the mortgage broking industry is one where the home loan lender pays brokers an amount upfront upon settlement of the loan (a percentage of the loan value – usually in the vicinity of 0.6%). Lenders may also pay mortgage brokers a smaller annual payment (also based on the loan amount – usually around 0.1 to 0.15%) while the borrower remains a customer of the lender.

So this money has to come from somewhere right? Do you end up paying more? Or do the lending institutions consider these upfront and ongoing fees (paid to the brokers) as ‘marketing costs’ required to bring a new customer on board, just as they would view having to pay for an ad in the paper or in Google Adwords?

The only real true test here is for consumers to do their own research on the range of interest rates (and fees) that are available to them through both the direct and mortgage broking channels.

The other potential limitation in using a mortgage broker is that they only have a limited number of home loans (from a limited number of lenders) for you to choose from. Without going into prescriptive detail, whilst they may have quite a large range to choose from, it will not represent the whole market.

That said, in trying to get a home loan direct, many home loan comparison sites do not contain information on the entire market either, in that some only list lenders and specific products that they get paid to refer onto those lenders.

So why would someone want to try and step through the home loan process on their own?

Quite simply, it seems that it most often comes down to confidence and control.

Many consumers have existing relationships with their bank (or banks) through other products such as savings accounts and credit cards, which can make engaging directly with a home lender a somewhat simpler and less intimidating affair.

Another driver which is seeing a large number of people going direct (for their home loan) but not through their existing banking relationships, is the growth in usage of the financial blog and home loan comparison sites. Their utility, free from what some think as conflicted broker advice, is a great way to maintain complete control of the process. To do this, you have to have a fair degree of confidence in your ability to be able to recognise quality information, information which is complete and can be, in your own mind, trusted.

But as mentioned previously, it is critical to understand just how much of the market (eg. lenders and their specific home loan products) is actually listed on these sites. Secondly, understand that many of them are simply ‘referrers’ in that after you have used them to research the market and create a ‘shortlist’ of home loan product options, when you click on a particular option, you’ll simply be referred through to that specific lender’s sales teams to begin the process.

Again, this option is going to suit the type of person who has not only the time to do this, but also the confidence and the need for direct control over the process.

Outside of the financial blog and comparison site sector, there has also been a rise in the number of online lenders in the marketplace, who have built smart-but-easily-navigated technology systems that make the process of getting a new home loan both simple and easy to execute.

Just to clarify, whilst they are called ‘online’ lenders, the good ones will actually advertise on their website that they have a phone number you can call in on, to speak with their team of lending specialists (so it’s not all ‘automated’ and you can actually talk to a human being).

Savings.com.au’s Two Cents

The decision to go with a mortgage broker or not in your quest to get a home loan is probably more about your own individual circumstances than it is the specific merits of using them vs. going direct and doing the work yourself.

Brokers not only provide you with convenience and control, but also an ongoing contact to touch base with even after you have settled on your new loan and home.

This is because they are paid an annual fee by the lender whilst you have that loan, and hence they have a vested interest. Additionally, if you decide at some point in the future that you want to refinance with another lender to get a better deal, the broker could be able to help you through this process as well.

Alternatively, doing it all yourself is also a viable option when you’re looking for a home loan. Probably the greatest factors that should determine your choice of which resources to use here are around how much time you have (to do the research, engage with lender, etc.) and how confident you are.

Many people who are time poor but are somewhat sceptical about the limited range a broker may have to choose from will do their own research on the market ‘direct’ (eg. using a financial blog/comparison site) and then provide the broker with a list of product options that they have to try and better.

This way, the person knows (if they’re confident in their own researching abilities) that they are getting a good product and price (interest rate), and that if the broker can get a similar deal through their own network of home lenders, they also get the convenience and comfort of knowing that the process is being managed by the broker.

Of course, picking the right home loan with a great interest rate and other product features that you may be able to utilise (e.g. redraw, offset account, etc.) over the life of your loan is going to put you in the box seat to be able to save money. And that is what it’s all about.

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Has negative gearing had its day?

Opinion: David Lammey – Firstmac’s General Manager of Digital Brands

Negative gearing seems to have slipped off the radar in recent times, with the banking royal commission providing far juicier alternative headlines around topics like responsible lending and tightening credit policies, and what these are going to do to the property market.

But with a federal election due in the first half of 2019 (where Bill Shorten and Labor have touted a substantial winding back of existing negative gearing benefits) and a slowing property market-making conditions increasingly difficult for some investors, negative gearing is probably not too far away from coming back into the news headlines.

Benefits of negative gearing: Still a relevant money-making strategy?

Putting the potential political changes aside, is negative gearing as attractive an investment strategy in a slowing property market as it was when values seemed to be on an ever-increasing trend northwards?

Many people would probably think ‘no’, but probing into the details around what makes a good negatively geared investment can help us better answer this question for ourselves.

To make money out of a negatively geared property, an investor relies on the capital growth made on a property (their ‘sell’ price minus their ‘buy’ price minus any capital additions made along the way i.e. renovations) being greater than the cumulative net losses they incur while owning the property. I say net losses, because the loss on a property (i.e. when the income/rent is less than the sum of all expenses including loan interest, council rates, insurance, maintenance, etc.) needs to be adjusted for the tax benefit an individual investor gets by being able to offset this loss against their salary income.

Negative gearing example: Calculating net loss

An investment property with a $450,000 loan (and an interest rate of 5% p.a.) has a rental income of $400 per week ($20,800 for the year – assuming 100% occupancy for the full year)

Its expenses are $29,830 (loan interest – $20,250, Property Management fees – $2,080, Landlord Insurance – $2,500, Council Rates & Water Utilities – $3,500, and Maintenance – $1,500)

Therefore the loss for the year is $9,030.

The individual investor earns an annual salary of $110,000 – which is in the 37% income tax bracket ($87,001 to $180,000), meaning that by reducing their $110,000 income by the $9,030 property loss, they save $3,341 (i.e. pay $3,341 less tax).

So the ‘net’ loss to the individual (from the negatively geared property) is not $9,030 for that year, but rather $5,689 ($9,030 minus $3,341).

Negative gearing in a slowing property market

In a slowing property market, it can feel like you’re going backwards on a negatively geared property. While the capital growth on a property is largely influenced by the ups and downs of the broader property market, the investor still has a primary lever of control in the timing of the property sale.

So as long as the investor can afford to subsidise the cash flow shortage driven by the rental income being less than the combined expenses (the negative gearing), they still hold the ‘whip hand’ when it comes down to determining when they should sell the property to maximise the capital growth.

But the longer you hold onto a negatively geared property, the bigger your accumulated losses become (even with the individual tax benefits explained in the example above). So the timing around a negatively geared property investment is also critical. If you have to wait too long for the value of the property in question to go up (to create the capital growth), you may accumulate too many ‘losses’ to then make a profit when you sell the property!

The key here is to always have a handle on what your accumulated losses are (at any point in time), along with a rough idea of how much capital growth you might have achieved.

This information (combined with your forecast of what the property market is going to do in the short to medium term and your forecast expenses over the same time periods) will help you determine the best course of action around the timing of the property sale (and realisation of a profit or loss on the negatively geared property investment).

Does having a higher income help with negative gearing when the property market is turning down?

A slowing property market will mean different things to different people. Each property investor utilising a negative gearing strategy will also have their own unique set of circumstances relating to when they brought the property; how much they both paid and borrowed, the equity growth (or decline) they’ve experienced since buying it, the list goes on. And yes, while a higher salary income is going to mean a larger income tax offset (see example below) being achieved on the property investment, it is not a pre-requisite to achieving a good investment outcome from a negatively geared property.

Example:

The difference between the top two income tax brackets is 8% (eg. $90,001-$180,000 = 37% & $181,001 and over = 45%)

So a person on the top income bracket (45%) will save $800 more than someone in the next bracket down (37%) from a $10,000 annual loss via a negatively geared property (assuming the tax rates apply to all of the $10,000).

The higher income earner (in the example above) would accrue $4,000 of savings more than their peer on the 37% tax bracket over a 5 year period. The magnitude of this (income level) benefit could easily be surpassed in the end profit made on the negatively geared investment through factors such as negotiating well and purchasing the property at a discounted rate at the front end of the investment, or getting the timing of the property sale right, not to mention superior negotiating skills (when selling the property) to achieve a higher sale price.

Again the list goes on, and quite clearly, not being in the top income tax bracket should not dissuade someone from trying to make money from a negatively geared property investment strategy.

The importance of timing

A much bigger factor in the success of a negatively geared property investment (compared to the level of income tax offset) can be the timing of the ‘set plays’.

When I talk about set plays, think of the critical moments in an investment, namely both when you buy and when you sell the property.

Buying ‘well’ does not only mean purchasing in a period prior to future property market growth (and achieving capital gain over that period). It also refers to the negotiated price reached in the purchase, which could be influenced by micro-timing factors such as finding a buyer who is willing to sacrifice a portion of their potential sale price for the benefit of a quick sale and settlement.

Some of these abnormal factors can occur around arbitrary (but critical) time factors such as the end of financial year, or indeed the end of the somewhat unforseen (and unfortunate) circumstances of a business or personal relationship breakdown. Achieving a ‘lower than market’ price in these circumstances is often viewed as getting some capital gain at the very front end of your investment.

Alternatively, at the back end of your negatively geared property investment (i.e. when you are selling), timing is also very important to the success of the venture. As recommended above, it is always prudent to have a good idea of where your investment stands ‘today’.

If you sold the property today, what would the profit be, taking into account the sale price you’d be likely to achieve (particularly after you’ve taken off your ‘rose coloured’ glasses), your purchase price and the accumulated net holding costs? Understanding this ‘position’, and how it might change in the context of the dynamics of the property market is also critical in helping you to choose ‘when’ to sell.

Savings.com.au’s Two Cents

Despite the threat of upcoming government-led changes to the rules around negative gearing, negative gearing can still be a valid strategy to employ in property investment. While a slowing property market (like the one we’re entering into now) certainly does change the dynamics of using this type of strategy, most would argue that it should not preclude it from being used.

Similarly, investors already employing this strategy in their property investment should not look at the changing market as a clarion call to exit out of their investments. Instead, they should consider their own individual positions by keeping a precise and up-to-date analysis on the details of their investment and make prudent decisions based around the balanced view that these and their clearly defined investment goals will provide.

This advice is general and has not taken into account your objectives, financial situation, or needs. Consider whether this advice is right for you. Consider consulting a qualified financial planner before making any financial decision and always read the product disclosure statement of any financial product.

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11 Things to Consider Before Refinancing Your Mortgage

Refinancing your home loan can be a shrewd way of taking control of your debt to either generate savings or leverage your wealth growth. But like many things in the money world, refinancing can sting you if you’re not careful, so there are a few things you should mull over before you shake things up. 

Your motives

Take the time to properly consider exactly why you want to refinance your home loan.

Ask yourself:

  • Do you want to get a cheaper rate?
  • Do you want more flexibility in the loan (e.g. with an offset account or redraw facility)?
  • Are you consolidating debt?
  • Do you need to access the equity to pay for something major such as a renovation?
  • Do you want to increase or shorten your loan term?

Having a clear understanding of what you hope to achieve by refinancing can help you make a better decision.

Costs

The numerous costs of refinancing a home loan can sometimes set you back thousands, leaving you wondering whether it was worth it.

To avoid any ugly surprises, look at the terms and conditions of both your existing home loan and the loan you’re looking to refinance with, to discover what the ‘change’ costs will be e.g. discharge fees, valuation fees, break costs etc.

If you’re refinancing to get a lower interest rate, you should first calculate how much less you’ll pay in interest at that rate (you can do this using our home loan repayments calculator) and compare this saving to the total cost of refinancing. That should give you an idea of whether the refinance is worth it.

You may find that through the interest savings, you’ll make back the refinancing costs within months.

Property value & your equity

Whether you’re refinancing to secure a lower interest rate or to access more funding, you need to consider the current value of your property and how much equity you have in it. Your loan-to-value ratio (LVR) reflects your equity (e.g. if it’s 70%, your equity is 30% of the property’s value). If your property value has risen, your LVR would be lower and you’ll have more equity in the property.

Keep in mind, the lender may value your property less than what you think it is worth.

When refinancing to get a cheaper interest rate, a lower LVR will generally stand you in good stead. But if you try to refinance with an LVR that is higher than 80%, you may struggle to qualify for a cheaper rate. If you’re refinancing to another lender, you may also face having to pay for Lenders Mortgage Insurance – even if you already paid for it when you first took out the loan.

When refinancing to access some of your equity (e.g. to pay for a renovation or to invest it in another property), you’ll generally be able to borrow up to 80% of the property’s value minus the outstanding debt. For example, if your property was worth $1 million and you had $600,000 owing on the mortgage ($400,000 in equity, 60% LVR), you may have up to $200,000 in equity available to borrow. Borrowing any more than that will push your LVR over 80%, which many lenders avoid.

Credit rating

Have you checked your credit rating recently? If it’s not so great, you might find it working against your efforts to refinance.

Also, since refinancing represents an application for credit, it appears on your credit report and can influence your credit score. Lenders can be wary of those who refinance too often, so having numerous mortgage refinances on your credit report can affect your interest rate bargaining power or indeed your actual eligibility to be able to refinance.

Interest rate environment

Read some of the latest news on what interest rates are doing in the home loan market and what a variety of experts are predicting. If interest rates are expected to rise over the next few years, you might want to consider refinancing to a fixed rate product.

You should also consider whether some lenders will raise rates soon. It can be pretty upsetting when you switch to a new home loan for its low interest rate before getting whacked with a rate rise within a few months. Very generally, if a lender has recently cut or raised its rates, that lender is fairly unlikely to move rates again soon afterwards.

Revert rates

Do you know if you’re refinancing to a loan with an introductory or honeymoon rate? If so, do you know what rate the loan will revert to at the end of the introductory period (often one to three years)?

You should also consider this for interest-only and fixed rate home loans – what will the rate revert to after the interest-only or fixed-rate period has passed? Revert rates are almost always higher.

In some instances, borrowers face the risk of being stuck with a high revert rate and unable to refinance to another lender at a lower rate – effectively becoming a prisoner to their mortgage. This could be because a lender’s lending criteria has tightened, your credit score has worsened or your property value has fallen for some reason – raising your loan-to-value ratio (LVR).

Loan term

Think about what loan term you’re refinancing to – is it going to be longer, shorter or the same as the remaining term on your current loan? Be wary that while refinancing to a longer term can reduce your regular repayment amount, the total cost of the loan will be more (because interest is accruing over a longer period).

Refinancing to a shorter term has the opposite effect of increasing your regular repayment amount, but saving you on the total interest payable.

Loan features

A loan with a cheaper rate doesn’t necessarily represent the ‘best value’. When refinancing to find a better deal, consider useful home loan features such as a redraw facility or an offset account.

Debt consolidation

If you have significant debts outside your mortgage, (such as a car loan, personal loan or credit card debts) you could consider consolidating these into the mortgage when refinancing.

This can make it easier to manage your debts because you’re repaying them all through the one regular repayment (weekly, fortnightly or monthly). The consolidated debts will revert to the interest rate of the mortgage, which may be significantly lower than the interest rates you were paying when they were standalone debts (credit cards can have interest rates of over 20% p.a.). However, because of the longer term of the loan, the total interest payable for the consolidated debts may be higher.

Your timeframe

Are you definitely going to continue owning the property long-term?

If you sold the property shortly after refinancing to a lower interest rate, you may not have had enough time to accrue the significant interest savings required to make the refinance worth it.

Your current lender

If you haven’t already, you should call your current lender before refinancing somewhere else. Many lenders have large teams of people on hand to retain their current customers because it’s easier to keep one than find another.

To encourage you to stay, your current lender may offer you a better deal on your home loan than what you were considering elsewhere, so don’t be hesitant to pick up the phone to negotiate!

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8 Expenses You Need to Consider When Budgeting for a New Home

The upfront and ongoing costs you should consider before buying property… 

Buying a home can be one of the best financial decisions you’ll ever make. You get to take control of your home, safe in the knowledge that as long as you pay your mortgage each month, you’ll have your own safe haven to live in while never having to worry about rental inspections, rent prices going up or risking your sizeable rental bond by hanging a picture on a wall .

For this incredible freedom, there are costs to keep in mind – aside from the purchase price of course.

Upfront costs

Lenders Mortgage Insurance

When it comes to your home loan deposit, the general rule that applies is ‘the higher the better’. A deposit which represents at least 20% of your purchase price is ideal, as it keeps you out of the costly lenders mortgage insurance (LMI) zone (80% LVR), which can add thousands of dollars to your upfront ‘transaction’ costs. Don’t forget, a higher deposit may also mean lower monthly payments through making it easier to negotiate a lower interest rate.

Legal Fees

Another cost that you’ll need to address as part of the purchase transaction is legal fees. These come in the form of having to pay for a solicitor or conveyancer to prepare the required documentation and be your go-between with the bank and the party that you are buying the property from. There will also be fees that you’ll need to pay for around registering both the land transfer and mortgage.

Stamp Duty

Stamp duty can be a huge expense and is often the most complained about cost when it comes to buying a property. The cost of stamp duty varies from state to state, as do the myriad of concessions that some state governments make for certain sections of the community such as first home buyers as well as different types of properties (eg. newly built instead of existing).

An example of stamp duty costs for an established home valued at $500,000 in New South Wales is over $17,000. Not all lenders will allow you to capitalise this cost into the mortgage, so you should expect to have to pay for this cost upfront in addition to your deposit.

Building and pest inspections

Building and pest inspections are a must for any property purchase. As the name suggests, they are designed to essentially check that there are no problems with the building itself or with the existence of pests which could cause substantial damage to your property (eg. termites). Inspections can cost anywhere between $400 and $800, and often you will be able to get the one professional to carry out both the building and pest components.

Not only is this service valuable from the perspective of providing a greater level of certainty on the condition of your property, it can also provide you with a bona fide opportunity to renegotiate on the price you may have already arrived at with the seller (in a private treaty situation – as opposed to an auction) due to the discovery of potential issues.

Price reductions are usually arrived at by quantifying what a reasonable cost of fixing the identified issue/s is likely to be. Once this is done, a seller can then either pay for and get the issues fixed themselves (and leaving the existing negotiated price the same), reduce the previously negotiated price down by the quantified amount (and leave it to you to fix the issues post-purchase) or they can risk the sale not going through by refusing to either fix the issues or reduce their asking price.

Buying your home is likely to be one of the largest financial investments that you will ever make, so inspections are a must for peace of mind.

Ongoing costs

Local Council Authority Rates

Council rates are charges that usually arrive on a quarterly basis and are very specific to your own property. Different councils will have different methods for determining the cost of your property’s rates, but many are indexed against the land value. Some council rates include water supply, but over the past 10-15 years, many have been spun out on their own so that some people will get a separate quarterly bill for their land rates from their local council, while getting another bill from their local water authority.

Rates and water charges are not cheap! They will generally run into the thousands of dollars per year and definitely need to be factored into your budget to ensure you can meet them as well as maintain the repayments on your home loan.

Strata and body corporate

If you’ve purchased an apartment, unit or townhouse, you could be up for body corporate or strata charges. These generally cover the maintenance of the shared areas around the property, building insurance (note, this building insurance does not cover the contents in your apartment) and of course the administrative fees to run the body corporate / strata management (as it is often outsourced to a professional service provider who understands all of the details required to run a successful and compliant administration).

Home and contents insurance

Home insurance is vital for house owners. As the name suggests, it insures you against the damage or loss of the building and structures which make up your property. Again, the cost of home insurance can vary greatly from property to property, as well as from insurer to insurer, so be sure to research the market well and compare at least two to three policies on not only their price, but on the key features which differentiate them (i.e. accidental damage, motor burn out, claims excess, etc.).

Contents insurance can also be a very important thing to have as a homeowner. It generally covers all of the contents within your property including furniture, TVs, etc.

Regular maintenance & repairs

You’ll also need to budget an amount of money each year for regular maintenance and repairs on your property. These types of expenses tend to be pretty irregular but when they do occur, you often need to have the money aside to address them.

Maintenance can be things like painting your property (inside and out) and gardening (eg. getting a tree professionally trimmed if it has grown to a level that is causing issues).

Your ‘repairs’ budget can be for things like getting your hot water system fixed or replaced when it breaks down in the middle of winter.

There is no hard and fast formula for how much you should budget each year for repairs and maintenance, but it’s wise to put some money aside each week and consider it like a ‘sinking fund’ that you often see in body corporates where they plan together for future events so that they have the capability to deal with them when they occur.

The Savings Lesson

By keeping these costs front of mind when you’re building your deposit to purchase your new home and making your plans around how you are going to service the loan, you’ll be in a strong position to determine your own luck and be much more in control of the way you move forward and build your future position.

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What you should know about rentvesting

Owning a home is considered a big part of the great Australian dream. However, with the ever-increasing prices of real estate, it has become extremely difficult for many Australians to gain a foothold in the property market, let alone being able to buy in an area where they want to live. As a way of both owning property and living in a desired location, Aussies are increasingly adopting a practice known as ‘rentvesting’.  

What is rentvesting?

Rentvesting is the practice of living in a rental property while simultaneously renting out an investment property that you own. Rentvesters typically rent property they want to live in (but can’t afford to buy) and buy property they can afford (but don’t want to live in) and rent it out as an investment property.

For example, if your dream home is a three-bedroom home situated close to or within the the city fringe, the prices are usually quite high and you may not be able to afford it.

Essentially, you are splitting out the two factors of ‘property affordability’ and ‘quality of living’ and trying to optimise each one without having to deal with the baggage of the other!

But is rentvesting a good idea? Here are some key points to think about:

Your purchasing power doesn’t affect the lifestyle that you want

Rentvesting makes it possible for you to live your preferred lifestyle or quality of life and at the same time, get onto the property ladder and create an extra income stream.

The rapid growth in property values across the broader market in Australia over the past decade has not been matched by rental growth. Due to this, gross rental yields (eg. annual income as a percentage of the property value) have declined to a level that is around 3% p.a for housing (averaged across Australia). This has been a key driver of the rentvesting trend simply because the effective cost to rent a property has fallen below the cost to own the same property.

Example:

$750,000 house

A partly renovated house located in a sought-after area within a 6km radius of an Australian capital city is valued at $750,000. With annual interests costs of $27,000 (4.5% on a $600,000 loan) and annual ownership costs (for insurances, maintenance and council rates, etc…) of $6,000, total annual holding costs equate to around $635 per week. Using the average gross rental yield of 3% p.a as a guide, the same house would cost you around $430 per week to rent.

Rentvesting can help you buy a property sooner

Since rentvesting allows you to buy a property purely from an investment perspective (eg. a focus on capital growth and rental yield – as opposed to ‘how much you love the property’ from a quality of life perspective), it’s likely you’ll be able to get onto the property ladder quicker.

This is because you can target properties which are substantially cheaper than your dream home, so you’re not required to save up as much for a deposit. Also, since the properties are cheaper, the 20% deposit required to avoid Lenders Mortgage Insurance (LMI) is more within reach, so you’re a better chance of both avoiding LMI altogether as well as negotiating a better interest rate from having an LVR (loan value ratio) of 80% or less.

Buying an investment property offers tax advantages

One of the biggest advantages of rentvesting is that all of the expenses associated with your investment property are tax deductible (eg. home loan interest payments, property maintenance, insurance, council rates, depreciation, etc). So if for some reason your property investment makes a loss (i.e. the expenses are more than the gross income from rent), you can leverage those losses to reduce your taxable income from your own salary. Take note that Savings.com.au always recommends to people that for any matter relating to taxation, they should talk to a professional for qualified advice.

Some property investors actually set up their property investments to make losses so that they can leverage these against other incomes which are taxed at top marginal rates (eg. 47-48%+). This is known as negative gearing. While it sounds like a clever way to minimise tax, this strategy assumes investors are able to service the home loan debt and other expense commitments and that the value of the property will increase over time (why else would you make a loss on an investment?).

You are more likely to make a smart decision when purchasing a property

Buying a home usually comes with a lot of emotions since it’s your dream and you already have a picture in your mind of the kind of life that you and your family will have when you live in the house. On the other hand, buying an investment property doesn’t come with the same level of emotional engagement – you’re likely to be more focused on a property’s potential return on investment (ROI).

So, is rentvesting a good idea? It really depends on your goals and the level of sacrifice you are willing to make to get ahead in life. If living within 5km of the city is a must for you so that your commute to work is less than 15mins and you’re surrounded by your favourite restaurants and coffee shops, then rentvesting can be a valid route to get you onto the property ladder without greatly sacrificing your aspirational quality of life.

However, if you are hell-bent on building your future position as quickly as possible and are willing to make material sacrifices in your quality of life to do so, you are just as likely to build your future position through buying a property in an area where you can afford it, and living in it. If this property grows in value over time, you will not pay any capital gains tax from its sale, whereas the sale of an investment property (as part of your rentvesting strategy) will attract capital gains tax which will, in turn, eat into any profits that you make from its sale.

The Savings Lesson

Rentvesting can be a good strategy to help you build your future position through property ownership while maintaining a certain quality of life. The one big health warning to be heeded here is that the success of this strategy is almost always reliant upon solid growth in property values over the period of your investment.

Bear in mind that this method of entering the property market is not for everyone. Be sure to understand how investing in real estate works and determine if rentvesting could work well for you based on your own time frames and financial objectives. As is always the case, don’t be hesitant to seek professional advice.

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10 Popular Real Estate & Property Apps in Australia

Aussies have a historical love of property, but more recently, we’ve also fallen in love with smartphones. As any trip on public transport will showcase, our eyes are incessantly glued to these devices. It thus stands to reason that property apps offer the perfect way to satisfy these two obsessions.  

Listed below are some of the most popular property and real estate apps in Australia available for both Android and Apple (iOS) devices.

For Buyers, Sellers & Renters

Realestate.com.au

With the most downloaded real estate app in Australia, realestate.com.au describes itself as “the #1 place for property”. The website and app is a product of international real estate advertising company REA Group, which is majority-owned by News Corp Australia.

After establishing itself as Australia’s most popular real estate website, realestate.com.au launched its app in December 2010, attracting one million downloads in less than two years. By June 2018, the app had been downloaded over 7.9 million times.

Source: Realestate.com.au

Key details:

  • User ratings (out of 5): 3.8 on Google Play (14,000+ reviews) and 4.7 on the App Store (50,000+ reviews)
  • Search for houses, apartments, rooms or land to buy or rent in Australia
  • View estimated values for Australian properties on and off the market
  • Look at the sales history of properties
  • Create custom ‘collections’ of saved properties (e.g. ‘dream homes collection’, ‘holiday houses collection’).
  • Smart notifications that provide updates on the status of saved properties
  • View upcoming inspection times and auctions for all properties that match your search
  • See closest schools to any property based on Government data (ACARA)
  • Set up a profile for your own property to keep track of the estimated value
  • Home loan calculator (including upfront costs) that saves your info

Domain

With over 6.5 million downloads (as at August 2018), Domain’s app is a close second to realestate.com.au in the popularity stakes. Largely owing to the rivalry between its majority-owner Fairfax Media and REA Group’s News Corp Australia, Domain has for many years battled realestate.com.au for the mantle of being Australia’s top real estate platform. The battle recently escalated into court proceedings when REA Group objected to Domain’s advertisement in 2017 which claimed it was the “#1 property app in Australia.”

At the time of writing, Domain advertises itself as “Australia’s highest rated real estate app” and has amassed numerous awards over the years for the app’s design and functionality. In 2016, it was named as one of Google Play’s Best Apps for 2016. It is also currently certified as an ‘Editor’s Choice’ app on Google Play.

Key details:

  • User ratings (out of 5): 4.3 on Google Play (19,000+ reviews) and 4.6 on the App Store (24,000+ reviews)
  • Look for Australian houses, apartments, townhouses or land to buy or rent
  • Search specifically for new houses, land, apartments or designs (helpful for first home buyers hoping to secure a government grant)
  • See the price estimates and sale histories of over 13 million properties
  • Filter property searches by price, bedrooms, bathrooms, parking, land size and other features (e.g pool, study)
  • Receive alerts when properties that match your saved searches become available
  • Draw on maps with your fingers to search for properties in your favourite locations
  • See school catchment zones for any property
  • Add upcoming inspections to your phone’s calendar or the app’s in-house inspection planner
  • Track your property’s value with the Home Price Guide estimate

View.com.au

Originally launched as realestateVIEW.com.au in 2001, Victoria-based real estate portal view.com.au drives itself to be positioned as “the number one source of national real estate data”.

View.com.au’s app first launched in late 2011 and has had over 50,000 installs on Google Play.

Key details:

  • User ratings (out of 5): 3.1 on Google Play (200+ reviews) and 4.6 on the App Store (1,000+ reviews)
  • Search through hundreds of thousands of Australian properties to buy or rent
  • Heat maps to explore median sale and rental prices in the area and key points of interest (parks & recreation, hospitals etc.)
  • See the latest sales information and auction results on properties
  • Shortlist favourite properties and receive instant alerts about them when things happen
  • Filter searches by location, price, property type, home features and more
  • Easily phone or email agents

Property Value Search/Onthehouse.com.au

Onthehouse.com.au is a subsidiary of Australia’s largest provider of property data and analytics, CoreLogic (formerly RP Data), who describes the business as the “#4 online real estate search platform in Australia”, with over 1.5 million unique website visits a month. As alluded to by the website’s domain name, onthehouse.com.au offers free listings for real estate agencies and agents. It also provides data and interactive tools to help give buyers, sellers and investors a more in-depth understanding of the market.

According to Google Play, Onthehouse.com.au’s Property Value Search app has had over 100,000 downloads, however it’s also had a flurry of negative user reviews in recent years over a range of technical issues.

Key details:

  • User ratings (out of 5): 2.9 on Google Play (600+ reviews) and 2.3 on the App Store (100+ reviews)
  • See descriptive profile reports on every property in Australia (number of bedrooms & bathrooms, land size, land value etc.)
  • Access sale histories of individual properties (sale price, sale date, type of sale etc.)
  • Use Real Estate Exchange (REX) analytics service to see property value movements by region
  • Access property value ‘guesstimates’

For Renters

TenantApp

TenantApp is a property search app for renters created by Brisbane-based property management software company InspectRealEstate (IRE).

This app has had over 50,000 downloads from Google Play and is ranked at #4 on Google Play’s top apps for “House & Home”.

Source: inspectrealestate

Key details:

  • User ratings (out of 5): 3.0 on Google Play (less than 100 reviews) and 3.0 on the App Store (less than 100 reviews)
  • Search for rental properties throughout Australia and filter by price range, property type, number of bedrooms, locations and features (e.g. pet-friendly, pool, bath)
  • Shortlist desired properties and book inspections directly
  • Keep track of your tenancy applications and inspection times
  • Affiliated real estate agents include Ray White, McGrath, RE/MAX, Professionals and First National

Rent.com.au

Describing itself as “Australia’s #1 website dedicated to rental property, rent.com.au was founded in 2007 and listed on the ASX in 2015. It has around 1 million visitors to its website a month.

Despite only launching in August 2018, Rent.com.au’s app has already racked up over 1,000 downloads on Google Play and is ranked #6 on Google Play’s top apps for “House & Home”.

Key details:

  • User ratings (out of 5): 5.0 on Google Play (less than 100 reviews) but no available reviews on the App Store 
  • Search for rental properties with lifestyle filters (e.g. good for families vs singles, peaceful vs vibrant)
  • Create a personal renter resume
  • Book inspections and make applications
  • Pay finance bonds, check tenancy record, purchase contents insurance
  • See a suburb’s ‘walk score’ ‘transit score’ NBN status and rental pricing

For Renovators & Home Designers

Houzz

Popular Californian home renovation and design website Houzz first launched in Australia in 2014, tapping into the nation’s multi-billion dollar obsession with property improvement. In 2015, it reported that more than 1.4 million Australians were using its mobile and online platform each month, 24,000 of which were active renovation and design professionals from over 60 different trades.

Houzz’s app has had over 10 million downloads around the world on Google Play and won the “Best App” award at Google’s inaugural Play Awards in 2016.

Key details: 

  • User ratings (out of 5): 4.6 on Google Play (350,000+ reviews) and 4.6 on the App Store (800 reviews)
  • Browse millions of home interior and exterior photos (sorted by style, location or room) to gain design ideas
  • Find active renovation and design professionals to hire or collaborate with (e.g. architects, interior decorators, repair professionals)
  • Shop for products and materials – discover and purchase products/materials directly from home design images
  • Preview what products would look like in your home with the My Room 3D feature which utilises your device’s camera
  • Read articles, industry news and guides from design experts
  • Watch Houzz TV for home inspiration videos and how-tos
  • Exchange design ideas among the Houzz community and get advice from experts

For Property Professionals

RP Data Pro (CoreLogic)

Property data and analytics giant CoreLogic describes its RP Data Pro product as “Australia’s best property professional tool”. The company first launched its app for iOS in July 2015 before releasing a version for Android in June 2017.

Despite being restricted to RP Data Professional subscribers, CoreLogic reports that the RP Data Pro app has over 50,000 weekly active users.

Source: CoreLogic

Key details:

  • User ratings (out of 5): 4.6 on Google Play (less than 100 reviews) and 4.8 on the App Store (less than 100 reviews)
  • Only available to those with an RP Data Professional subscription (packages from $150/month)
  • View the latest data on Australian property (value and rental estimates, sale details, ownership details, rental history etc.)
  • Read market insights and research trends
  • Generate property/suburb/valuation reports for clients with one click via email or MMS
  • School catchment information

For Auction Lovers

GAVL Live Auctions

Australian tech startup GAVL launched its live-streaming auction app in 2017 and has since broadcast over 5,000 auctions with millions of views from around the world.

GAVL claims that the app has been downloaded in 50 countries while on Google Play it has been downloaded over 5,000 times.

Source: GAVL

Key details:

  • User ratings (out of 5): 3.5 on Google Play (less than 100 reviews) and 4.5 on the App Store (less than 100 reviews)
  • Watch and bid in real estate auctions in Australia & New Zealand live and free in HD from anywhere in the world
  • See the results of auctions seconds after they finish
  • Browse listings & shortlist properties
  • Follow auctioneers and communicate with agents
  • Live alerts based on your search criteria
  • Display prices in different currencies
  • Control of the auction process for agents

For The Budget Conscious

Property Calculator Australia

Created in 2015 by Australian business Zaindy Pty Ltd, the simple Property Calculator Australia app has had over 20,000 downloads.

Key details:

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How to pay a deposit on a home

It’s probably the biggest block of savings you’ll ever hand over, so it’s natural to want to understand exactly how and when to pay that precious home deposit.  

When to pay the deposit on property

The time to cough up the cash for a property deposit depends on the type of the sale.

For a private sale (also known as private treaty), the buyer needs to pay a deposit to the seller or the seller’s real estate agent after the property’s sale contract (which specifies the offered price for the property, the date of when the deposit will be paid and the settlement date)  has been signed off by both buyer and seller. It’s an exchange that can take time to organise, so buyers are often afforded several days to arrange the payment.

For property purchased through an auction, the contract must be signed immediately after the fall of the hammer, so the deposit is expected to be paid on the day. Before most auctions, it is standard practice for the agent or their representative to inform prospective buyers what the required upfront deposit is, as one of the standard terms of the contract of sale. This deposit is typically at least 5-10% of the winning bid.

Keep in mind that while the seller may be satisfied with a deposit of 5-10%, your lender may charge you Lenders Mortgage Insurance for having a deposit that’s under 20% of the property valuation or sale price (whichever is lower).

Don’t forget, a house deposit does not include other costs such as stamp duty, conveyancing, registration fees and inspection costs, so you’ll need to have enough funds aside to cover those expenses.

What is a holding deposit?

A holding deposit is a portion of the full deposit that buyers pay as part of their offer to signify their serious intent to buy the house, however the seller is still free to consider other offers. These deposits are typically 0.25% of the offered price (this varies by state).

Unlike the full deposit you pay after the contract has been signed, a holding deposit does not guarantee that the house will be yours.

Holding deposits can be fully refunded if the seller accepts a separate offer (i.e. you were gazumped) – it’s important to get a written confirmation of this from the agent. There are no refunds for other costs incurred though, such as conveyancing fees, valuation fees and inspection costs.

Real estate agents often request holding deposits from buyers, but they are not compulsory. While they can make you stand out from other prospective buyers, there’s a danger that the agent will use your holding deposit as a bargaining tool to secure a higher offer from another buyer.

How property deposits are paid

Housing deposits are paid to the property’s seller, not the home loan lender. Payment of the deposit can be made in a variety of ways:

  • Personal cheque: A personal cheque is written by the buyer for funds to be drawn from their personal account.
  • Bank cheque: A bank cheque is issued by a bank, with the funds drawn from the bank’s own account. A buyer will have to pay a fee to the bank for a bank cheque to be drafted.
  • EFT (electronic funds transfer): An EFT is simply an online transfer of funds from one bank account to another. Don’t forget that many accounts have a daily transfer limit that you’ll probably have to increase to allow the transfer to take place.
  • Deposit bond: A deposit bond is an instrument issued by an insurer which guarantees the seller that the deposit will be paid on the settlement date. If the buyer is unable to pay the deposit on settlement date, the insurer will cover the seller for the full value of the payment. Deposit bonds are common in off-the-plan purchases and with investors whose funds are tied up in illiquid assets. Some sellers may not accept deposit bonds, since they may need a deposit instantly to enable the purchase of their next home.

Cash?

Agents are unlikely to accept a housing deposit in physical cash, because it’s inconvenient and risky – not to mention suspicious. (Sorry Walter White, but you’ll probably have to leave those fat stacks buried in the desert).    

It’s worth checking with the agent about which payment method is preferred.

Given that auctions require a deposit paid on the day and the fact that banks are closed over the weekend (when most auctions take place), bank cheques or deposit bonds need to be pre-arranged – requiring buyers to estimate what their maximum bid would be. If their successful bid is less than this max, it just means there’ll be a larger deposit in the property, making the LVR (loan-to-valuation ratio) lower.

Personal cheques are comparatively easy to use for a house deposit in an auction, since an exact amount can be written in your chequebook as soon as the winning bid is confirmed. You may need to have personal identification with you though.

In a private sale, you can get your conveyancer or lawyer to outline in the contract the conditions under which the deposit is refundable during a cooling-off period (e.g. you can’t secure financing or your partner doesn’t agree to it). This creates a clause that allows you to get most of your deposit back if you decide to not go through with the purchase.

That’s right, most of the deposit, not all. Depending on the state or territory, you may have a financial penalty deducted from your deposit if you cancel the contract during the cooling-off period. This penalty is often the size of a holding deposit – such as 0.25% of the purchase price in NSW or QLD.

After the deposit is paid

After the contract is signed and the deposit is paid, the money is typically held by the agent in a trust account until the property’s settlement day – when the ownership officially passes from the seller to the buyer.

Cooling-off periods

Contracts are legally binding after they’re signed, although for private property sales there may be a cooling-off period for the buyer. A cooling-off period is the time during which a buyer is allowed to cancel the contract and get their deposit refunded. Ordinarily, there is no cooling-off period for buying at an auction.

If the property’s state or territory has a cooling-off period, this begins after the contract is signed by both parties.  Correct at the time of writing, these are the different standards around the country regarding cooling-off periods for private property sales:

State Cooling-off period Financial penalty for cancellation
NSW 5 business days 0.25% of purchase price
VIC 3 business days 0.20% of purchase price
QLD 5 business days 0.25% of purchase price
WA None n/a
SA 2 business days Up to $100
TAS None n/a
ACT 5 business days 0.25% of purchase price
NT 4 business days 0.20% of purchase price

Settlement period

After a cooling-off period has passed, property sale contracts become unconditional. Cancelling an unconditional contract can have severe ramifications, so talk to a lawyer before you consider doing this.

You may need to consider taking out home insurance for the property immediately after the contract date. In some states and territories, the risk of damage to the property passes from the seller to the buyer on the contract date – not the settlement date. Each contract can be different, so be sure to check yours to find out exactly when you become responsible for the property. Keep in mind that some lenders insist that home insurance is taken out on the property as soon as the contract is signed.

On settlement day, which can be over a month after the contracts were first signed, the buyer’s conveyancer/solicitor meets with the seller’s conveyancer/solicitor and a representative from the bank to exchange contracts and finalise the transfer of the remaining sale funds. After that, the buyer will be notified that they can pick up the keys from the real estate office and start paying off that mortgage!

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Should You Make Monthly, Fortnightly or Weekly Mortgage Repayments?

Monthly is the default repayment frequency for many home loans, but repaying fortnightly or weekly can help you ‘trick’ yourself into paying off your mortgage years earlier and save tens of thousands in interest.  

How fortnightly or weekly repayments can save you

Since there are 12 months in a year, but 26 fortnights and 52 weeks, fortnightly or weekly payments can help you make an extra month’s worth of monthly repayments each year without you even realising it. For instance, if you were making monthly repayments of $1,000, you’d be repaying $12,000 a year. But if you switched to fortnightly payments of $500 (half your monthly payment) or weekly payments of $250 (a quarter of your monthly repayment), you’d be repaying $13,000 a year. This is because different months have either 28 (29 in a leap year), 30 or 31 days, while weeks always have seven days.

But this trick only works if the fortnightly repayment is exactly half the monthly repayment (or exactly a quarter if repaying weekly). Some lenders calculate the fortnightly repayment figure by multiplying the monthly repayments figure by 12 then dividing by 26. While fortnightly repayments calculated this way will be lower than if they were exactly half the monthly repayment, they don’t help you pay off your loan earlier – so check with your lender about this when changing your repayment frequency.

Also, home loan debt accrues interest on a daily basis. This is important because it means that the more frequently the debt is repaid, the lower the cost of interest. For instance, if in one month you made two fortnightly payments of $1,000 instead of one monthly payment of $2,000 on a $300,000 balance, you’d be accruing interest on $300,000 for one half of the month and $299,000 for the other half of the month – as opposed to being charged interest on $300,000 over the whole month.

Fortnightly or weekly repayments can also allow you to synchronise your costs with your fortnightly or weekly income, making it easier for you to budget. So, if you’re paid fortnightly, you might want the fortnightly mortgage repayment to be direct-debited from your account the day after you get paid to prevent you from overspending and not leaving enough in the account to meet the repayment.

Don’t forget, no matter your repayment frequency, you can always make extra repayments, or save on interest by parking spare cash in an offset account.

Case Study: Louise and Jim consider paying fortnightly instead of monthly 

fortnightly repayments case study

Louise and Jim are looking at taking out a $450,000 home loan for 30 years at an interest rate of 4.42% p.a. They are unsure whether to pay monthly or fortnightly and decided to calculate how much they could save by paying fortnightly.

Assuming the fortnightly principal and interest repayments are exactly half the monthly repayments. 

Paying fortnightly: 5-year saving on Interest Paid

Fortnightly Monthly
Repayments per year $1,129 x 26 = $29,354 $2,258 x 12 = $27,096
5-year total repayments (principal & interest) $146,770 $135,480
Total interest saved over 5 years $1,378 n/a

Paying fortnightly: 10-year saving on Interest Paid

Fortnightly Monthly
Repayments per year $1,129 x 26 = $29,354 $2,258 x 12 = $27,096
10-year total repayments (principal & interest) $293,540 $270,960
Total interest saved over 10 years $5,898 n/a

Paying fortnightly: Entire loan term

Fortnightly Monthly
Repayments per year $1,129 x 26 = $29,354 $2,258 x 12 = $27,096
Total repayments (principal + interest) $752,164 $813,148
Total Interest cost $302,164 $363,148
Total interest saved $60,984 n/a
Time to pay off loan 25.62 years 30 years
Time saved 4.38 years n/a

Source: Savings.com.au Mortgage Calculator  

Louise and Jim decide to pay off their mortgage fortnightly to save on interest and help them pay off their loan four years and 139 days earlier.

Weekly vs Fortnightly Home Loan Repayments

But how much more could be saved by paying weekly over fortnightly? The truth is, not much.

In Louise and Jim’s case, repaying weekly instead of fortnightly would only save them $319 over the life of the loan – enough to buy them dinner and bottle of wine at a fancy restaurant.

Fortnightly Weekly
Repayments per year $1,129 x 26 = $29,354 $564.50 x 52 = $29,354
Total repayments (principal + interest) $752,164 $751,845
Total Interest cost $302,164 $301,845
Total interest saved n/a $319

By paying weekly instead of fortnightly, Louise and Jim are still paying off the principal at the same rate of $29,354 per year, but since interest accrues daily, they make a slight saving.

Mortgage repayment frequency restrictions

So long as the total amount repaid over the month isn’t less than the minimum monthly requirement, most lenders are generally willing to let borrowers make fortnightly or weekly principal and interest (P&I) repayments. However, for interest-only (IO) loans, lenders don’t normally allow weekly or fortnightly repayments – usually only monthly repayments are required. Lenders can also be less flexible with fixed-rate loans.

How to change your mortgage repayment frequency

The method of changing your home loan’s repayment frequency depends on the lender, but many allow you to do this yourself through internet banking. If your repayment is direct debited from an external account, you may need to call the lender.

Don’t forget to check with the lender how the fortnightly (or weekly) repayments are calculated, because if the repayments are not exactly half (or a quarter, if weekly) the monthly repayment – you won’t pay off the loan earlier and save as much.

The Savings Tip

  • Repaying a home loan fortnightly (half your monthly repayment) or weekly (a quarter of your monthly repayment) results in an extra month’s worth of repayments on your mortgage each year, which helps you pay off the loan years earlier and save thousands in interest.
  • Interest accrues daily, so repaying weekly will save you more interest than repaying fortnightly, but not by much.
  • Synchronising your mortgage repayment frequency with how often you get paid is a great way to help you to budget.
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Lease a car instead of buying it with a car loan?

The debate over whether it’s better to buy or rent a house has been hotly contested for years, but can there be a similar argument between buying or leasing a car? 

Aside from a car loan or cash, an alternative method for Australians to pay for a car is with a car lease, which essentially involves ‘borrowing’ a vehicle and regularly paying for its use over a set period – typically two to five years.

Like renting a house, leasing a car does not grant you ownership rights over it and there may even be some restrictions around its use. But while a leased car is not technically yours, it still largely serves its purpose.

Types of car leases

The main types of car leases in Australia include:

Novated leases

A novated car lease is an arrangement between three parties – an employee, their employer and a finance company – where the employer agrees to make car lease payments to the finance company from the employee’s pre-tax salary (salary sacrificing), which reduces the employee’s taxable income. This type of activity will attract fringe benefits tax though, which is payable by the employer. The car does not have to be used by the employee for work – it can be 100% for personal use, so most employees are eligible for a novated lease if they have their employer’s approval. The lease can be packaged up to include operating costs (fuel, maintenance, insurance etc.). At the end of the lease, the employee could either keep the car after paying a balloon payment, sell/trade-in the car and lease another car, or extend the lease on the same car.

Finance leases

Cars used by businesses can be paid for through a finance lease where the vehicle is bought by a finance company and rented out to the lessee over a lease period. At the end of this period, the lessee is obligated to either purchase the car from the finance company by paying the residual value or lease the car again.

Operating leases

Operating leases are like a finance lease, except the lessee is not responsible for the residual value at the end of the lease – the car is simply handed back to the finance company. Some businesses with a high turnover of vehicles use operating leases to reduce administration costs.

So if you’re thinking of buying a car with a car loan, is it worth considering a car lease instead? A look at some of the pros and cons of both options could help provide a better idea of what’s more suited to you.

Leasing a Car vs Buying a Car with a Loan: Pros & Cons

Car Lease Pros and Cons

Pros:

  • Cheaper recurring payments: Compared to a monthly car loan repayment, a monthly lease payment is often cheaper. This lower cash demand can free up money for other needs.
  • Drive the latest models: With leasing, it’s easy to switch to a new car every few years, allowing you to have some of the latest car safety and technology features.
  • Easy maintenance: Many car leases come with a maintenance package, with maintenance costs included in the regular lease payments.
  • Tax benefits: Leasing a car for commercial purposes or under a novated lease arrangement can generate significant tax savings for some. For more info about this, talk to a registered tax agent.

Cons:

  • You do not own the car: Since you don’t own it, you cannot claim the car as one of your assets for other financial purposes.
  • You cannot make modifications: You cannot alter a leased car’s design or performance.
  • Driving restrictions: Many leases have restrictions on how many kilometres you can drive the car over the set period and how much wear and tear it endures. Breaching these will attract extra costs.
  • High long-term cost: When you do the total calculations, continually using car leases is often more expensive over the long-term (such as five two-year leases over ten years) than simply buying a car with a car loan and sticking with that same car for a decade.

Car Loan Pros and Cons

Pros:

  • You own the vehicle: Buying a car with a car loan makes you the owner of the vehicle, so the car becomes an asset in your name for as long as you like. With each loan repayment, you’re increasing your equity in it. After the loan is paid off, you own it outright.
  • You can do what you want with it: As the owner of the vehicle, you’re free to drive it as much as you like, wherever you like or modify it however you want.
  • You can sell the car: The car will have resale value which you can recover. Since you cannot sell a leased car, lease money is irredeemable.
  • Power to compare: There are many providers of car loans in Australia offering secured or unsecured car loans at fixed or variable interest rates. Car loan customers have the power to shop around to find a good value product with the right features for them.

Cons:

  • Higher recurring payments: Since you’re paying off the total cost of the car (instead of merely paying for its use), car loan repayments are usually higher than lease payments.
  • Repair bills: As the car gets older, more expensive repairs will need to be done.
  • Selling hassle: If you want to get a new car, you’ll have to deal with the hassle of selling the car or trading it in.
  • Depreciation: Cars usually significantly depreciate in value, particularly in the first couple of years. As the car’s owner, you’ll have more money tied up in this depreciating asset.

Car Leases vs Car Loans: key things to remember

  • When leasing a new car, you’re essentially paying for the vehicle’s depreciation, with the car’s value falling by as much as 60% in the first few years. By repeatedly taking out a lease on a new car at the end of each lease term, you’re basically always paying the top price.
  • Generally, the longer you’re going to hold the car, the more you’ll save by buying it instead of leasing it.
  • Beware of agreeing to a lease if you’re not sure you can commit to it over the entire term. Leaving a lease early will see you having to pay the remaining lease and the residual value.
  • Like a car loan, car leases require a credit check. If you have a bad credit rating, you may be denied a car lease.
  • If you’re driving a car significantly less than what the car lease permits (the maximum mileage), you’ll be doing an unnecessary favour for the finance company when you trade it in at the end of the lease. You’ll have paid for wear and tear that you didn’t even cause.
  • Many car leases do not allow you to choose your own insurance, so you may be stuck paying for a poor value car insurance policy.
  • If you were to lose your job while under a novated lease, the lease will become a consumer lease, meaning you will lose the benefits of tax deductions or a maintenance package.
  • A novated lease is paid with your pre-tax salary so, depending on a range of factors such as your salary and the cost of the car, it can make your dollar go further and reduce your tax payable, making it cheaper to lease the car instead of buying one with a car loan.
  • It can be risky to rely on tax benefits, since government regulations can change. With Australia’s car manufacturing industry close to extinction, the Government may soon consider winding back the tax benefits of car leasing because there might not be an industry to support anymore.

Car Lease vs Car Loan Case studies

Kendall is an auto tech fan who prefers leases

woman novated lease

Kendall is obsessed with cars and loves driving the latest in car tech. She enjoys driving a flashy new car every couple of years and gets bored driving the same car for any longer than that, so she prefers to pay for cars through a novated lease. Kendall believes that driving a nice car every day keeps her happy in life, because it helps her enjoy the long commutes to and from work (45 mins each way), plus she saves on tax. Kendall understands it might be cheaper for her to buy one car and hold it for several more years, but she believes the joie de vivre (enjoyment of life) she gets from leasing new cars is worth the extra cost.

Shinji chooses a car loan to buy his dream car

Shinji has fallen in love with a particular new car on the market. He doesn’t have the cash to buy the car outright but he knows he could either buy it with a car loan or pay for it with a novated lease. He understands a novated lease might save him money, but doesn’t think he’ll stay with his current employer for much longer and he’s not sure if a future employer will agree to a novated lease arrangement. Also, since it’s his dream car, Shinji wants to be its owner so that he can have the freedom to drive it as much as he wants and modify it with a new sound system, metallic wrap, hydraulics and underglow neon lights.

The Savings Tip

The biggest saving opportunity with a car lease often comes from the tax benefit you can leverage by paying for it with your pre-tax income. The risk here of course is that a change of employer could mean that you lose this ‘pay-with-pre-tax-salary’ capability and your benefit could disappear overnight. Without this tax-driven benefit, you’re more than likely better off buying the car with a car loan, particularly if you plan to own the car for a longer period of time (eg. more than 5-6 years). Cars are an asset class that do generally depreciate quite quickly at the front end of ownership. However this rate of depreciation can come down substantially in the ‘middle’ years of ownership from year five to year eight which means the that if you do own the car (after having paid off your car loan), these years can provide you with very cost effective motoring through slowing depreciation, even after taking into account the higher maintenance costs that come with cars as they age.

Regardless of your decision, if you are considering a lease for what you believe will be tax benefit purposes, it is always wise to consult a registered tax agent such as an accountant for their professional advice on the matter.

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What is Lenders Mortgage Insurance (LMI)?

Buying a property without a chunky deposit could see you whacked with the oft-dreaded cost of Lenders Mortgage Insurance. But in a different sense, the time it takes to save up the deposit could also cost you.

While some say good things come to those who wait, others say the early bird catches the worm.

In the context of buying property in Australia, those who wait to buy property until they’ve saved up a sizeable deposit can save money by not having to pay for Lenders Mortgage Insurance (LMI). But the early birds who buy property sooner after saving the bare minimum 5% deposit have the opportunity to catch their dream house before prices rise, and potentially build a capital gain as their property value increases in a rising market.

These early birds will probably have to pay for Lenders Mortgage Insurance, but perhaps this cost is worth it? Statistics suggest many borrowers might think so, since around one-quarter of Australian housing loans are estimated to be covered by LMI (according to the RBA).

Or maybe many of these borrowers don’t understand what Lenders Mortgage Insurance actually is? In 2016, Banking Analyst Martin North from Digital Finance Analytics told ABC News that around 70% of households think Lenders Mortgage Insurance covers them, which is incorrect.

So this begs the question…

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI for short) is an insurance policy which covers the mortgage lender against any loss they may occur in the event that the borrower can no longer pay loan repayments (an event known as a ‘default’ on the home loan). This is not to be confused with mortgage protection insurance, which covers borrowers for their mortgage in case of death, sickness, disability, or unemployment.

If a borrower defaults on their mortgage, the lender can recover what is owed to them by repossessing the property which the home loan is tied to. But if the property’s value has fallen, the lender can suffer a loss. This is the risk which LMI covers. With this risk of loss passed on to the Lenders Mortgage Insurer, lenders are more willing to approve loans at a higher loan-to-value ratio (LVR), often up to a maximum of 95% of the property’s value or sale price (whichever is lower).

The introduction of Lenders Mortgage Insurance to Australia in 1965 thus created more opportunities for people to get a home loan and also encouraged lenders to charge lower interest rates. The two largest providers of LMI in Australia are:

  • Genworth Financial
  • QBE

The lender decides which LMI provider to go with – the borrower has no choice in the matter.

While LMI only covers the lender, it is usually the borrower, not the lender, who has to pay for it. For many, paying for an insurance policy that only covers a financial institution seems like the worst form of charity. So what does it take to avoid it?

Deposit requirements to avoid Lenders Mortgage Insurance

Typically, lenders exempt borrowers from having to pay for Lenders Mortgage Insurance if the deposit on the property is over 20% (80% LVR) of the property’s value or sale price (whichever is lower). This is because lenders perceive borrowers with deposits over 20% as less likely to default on a loan. Also, a 20% deposit is viewed as a large enough buffer to protect lenders from a fall in the value of the property – giving them a strong chance of recovering the amount that’s owed to them if the borrower defaults.

Some circumstances may require a larger deposit though. In specific suburbs that a lender perceives as having high default rates and / or at risk of a large fall in prices (eg. like what was seen in some of the regional mining towns when the capital infrastructure boom ended), the lender may require a bigger deposit (such as 30%) for the borrower to be exempt from LMI.

Other ways of avoiding Lenders Mortgage Insurance

Borrowers can be exempt from having to pay LMI for other reasons, such as:

  • Having a guarantor: Many lenders will waive LMI on the loan (no matter how small the deposit) if the borrower is backed by a quality guarantor (such as a parent) that legally accepts responsibility for the mortgage repayments if the borrower cannot make them.
  • Working in a highly-regarded profession: Borrowers working in specific professions that are considered to be highly paid and relatively stable can sometimes borrow up to 90% LVR without having to pay LVR. Such professions can include:
    • Doctors (GPs, dentists, optometrists, GPs)
    • Accountants (e.g. actuaries, CFOs, auditors)
    • Lawyers (e.g. solicitors, judges, barristers)

Sometimes a combination of other factors can also see LMI waived on the home loan, such having a perfect credit history and requesting a modest loan amount for property in a low-risk suburb.

How to pay Lenders Mortgage Insurance

LMI premiums can be paid as an upfront once-only fee at settlement (loan drawdown).

Alternatively, they can be capitalised into the loan (added to the loan amount) and gradually paid off in the regular mortgage repayments. This means the premium will accrue interest though, costing you more over the long term.

Cost of Lenders Mortgage Insurance

The upfront cost of LMI premiums typically varies by the size of the loan and the LVR, as illustrated below. They can also depend on what type of borrower you are. For instance, first-time borrowers often pay a higher LMI premium than existing borrowers, even at the same LVR and loan size.

Estimated Lenders Mortgage Insurance (LMI) Premiums for First Home Buyers
Estimated property value 95% LVR 90% LVR 85% LVR
$200,000 $5,073 $2,718 $1,479
$400,000 $12,768 $6,912 $3,842
$600,000 $25,707 $13,176 $6,630
$800,000 $34,276 $17,568 $8,840
$1,000,000 $42,845 $22,050 $11,135

Source: Genworth LMI premium estimator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years

Can you get a refund of Lenders Mortgage Insurance premiums?

When you refinance to a different lender or buy a new house, it’s unlikely that you’ll get this premium back. You may even have to pay for LMI again if your LVR is still above 80%.

However, in cases where the loan is terminated early (i.e. in the first two years), you may be eligible for a partial refund of LMI premiums. Qualifying for an LMI refund also depends on the lender’s LMI policy provider and meeting certain criteria, so it’s worth checking with your lender to see if you’re eligible.

Case Study: Brianna’s LMI dilemma

LMI case study

Brianna has $40,000 in savings and wants to buy a $400,000 property. Her $40,000 in savings would be worth a 10% deposit, putting her LVR at 90%. This would see her charged an LMI premium of around $7,000. Brianna could save herself from having to pay this $7,000 by waiting till she’d saved up a 20% deposit ($80,000). At her current wage and expenses, she’s saving $20,000 per year, so this would take her two years to save up a total deposit of $80,000. Brianna might decide it is worth the two-year wait to save $7,000.

But what if the property’s value is increasing at a rate of 5% per annum? By the time Brianna has saved up the $80,000, the property would be worth $441,000 and Brianna’s $80,000 would be worth only 18%. Had Brianna bought the property two years’ earlier with just her 10% deposit, she could’ve paid off a significant portion of her loan and earned $41,000 in unrealised capital gains. In that case, the cost of LMI seems worth it.

The Savings Tip

LMI is a tricky one, because you could save either way. Without it, you obviously save money by not having to pay premiums. But if property value increases during the time it takes you to come up with a 20% deposit, you could pay more on the purchase price than you would have if you’d snapped it up back when you just had a 5% deposit. You may even be shocked to discover that because prices have risen, what you thought was a 20% deposit is now only worth 15%. That’s not to mention the intangible emotional costs that can come with having to wait longer – such as missing out on the chance to buy that dream house you’ve always loved that’s rarely been put on the market.

Of course with LMI, you’re paying thousands for insurance that doesn’t provide any cover to you, which can seem like a big waste of money.

Perhaps then its best to aim to have at least a 20% deposit, but be willing to buy with less and bear the cost of LMI in special cases where:

  • you’re very confident the property’s price will rise significantly enough in the near future to outweigh the additional cost of LMI; or
  • it’s your dream house (you have a strong emotional connection to it) that you intend on living in long-term and you don’t think you’ll get another chance to buy it in the near future.
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