http://www.htw.com.au/Downloads/Files/213_November_2009_Month_In_Review.pdf

“As of 22nd October all eligible Homeside customers can now request a repayment holiday. A repayment holiday allows these specific customers to request a break from contracted repayments for an agreed period, when they are ahead. Reasons that a customer might find this benefit useful are that if they wish to study, take maternity leave or help a son/daughter pay for their wedding. However, it should be noted that this option has not been designed for customers experiencing hardship. Homeside has specialised programs which are available to these customers.”

In practice this means that if your loan was say $2,000 in advance and your monthly repayment was $500, you would be able to apply for a 4 month repayment holiday. The lender would simply add the deferred payment to your loan balance until such time as it reached the approved limit. It’s only a little thing, but a nice touch from a major lender.

Lenders process a huge volume of loan applications every day and most have introduced credit scoring systems in order to cull the loan applications that are unlikely to meet with approval once they are placed before a credit officer. Unfortunately because these systems are not perfect, some good applications are declined and once a lender declines a loan it’s hard to get them to change their mind. Not only that you end up with another entry on your credit report which further reduces your credit score!

Be consistent with information you provide lenders, especially in regard to your income and your employment and residential history. Bear in mind that almost all mortgage loan applications require a final approval by the Lender’s Mortgage Insurer and most lenders use one of two LMI providers who keep data about all borrowers on file and compare information provided by borrowers in subsequent loan applications over many years. Even if you get past the credit scoring system and the lender’s formal approval process your application can be declined by the Lender’s Insurer for inconsistent information.

For that reason it’s important to keep a record of your employment and residential history (so you provide the same start and end dates for example) and to ‘smooth out’ those histories wherever possible. I’m not suggesting you provide false information to lenders but if for example you’re a young person and you move around a bit, perhaps flatting with friends, I’d recommend you keep your family home as your official place of residence and keep having your mail addressed there. You will receive a higher credit score if you’ve been at one address over the last 2-3 years.

Similarly with employment, if you’ve had a brief fill-in job between employment, it may be better not to submit details of that job, as it increases the number of jobs you’ve held in a certain timeframe. Most importantly, remember that full years of employment will give you a higher credit score. If you’ve been with an employer for 1 year and 11 months, I’d wait a month before you apply for a loan so you can say you’ve been there for 2 years.

Make a full account of your assets on the application form. Your total asset position is considered in light of your age and income to determine (in a very rough way) your spending habits. So for example if you earn $100,000 a year and have been employed for around 5 years, yet have no assets, your credit score will be lower. So include every deposit account no matter how small the balance and provide a full estimate of the replacement value of your home contents, as well as the make and model of any motor vehicle, boat or trailer. It all adds up and it all counts. Apart from deposit accounts and real estate, lender’s usually don’t ask for proof of assets but don’t be too cheeky; if you declare a $200,000 Ferrari you might be asked for a copy of the Registration in your name. 

Keep your loans in order. Lenders ask for the latest statement of every loan account you have, including credit cards, and quite often they want the loan statements to cover a 6 months period. One late payment on a loan account can be sufficient to have a loan application declined. For Low Doc loans from mainstream lenders a single late payment is an almost automatic decline. Set up automatic balance sweeps of your credit cards if you can, or at the very least have the minimum required payment made by Direct Debit each month.  Administrative error is not a good enough excuse; lenders expect you to keep your financial affairs in order.

Keep your credit report clean. Every time you apply for a loan an entry is made in your credit report and the higher the number of entries on you report, the lower your credit score. This includes those interest free arrangements to buy white goods. They are credit contracts; it’s just that the store has built the cost of the interest into the price of the goods.

Don’t allow a default to be recorded on your credit report. If you are in dispute with a creditor (telcos are the most common source of credit defaults) pay the account and argue later. Once an entry is lodged it’s hard to have it removed and it can affect your creditworthiness for 5 years. By the way you can obtain your credit report at ‘mycreditfile.com.au’.

We don’t know how deep credit scoring systems go into loan applications because the lenders are quite secretive about the process however I suspect they can go very deep and can be cranked up and down to suit lender appetite for new business. At a time like this I’d be inclined to be very thoughtful about the detail provided in any loan application. For example if you are asked for the phone number, fax number and e-mail address of your employer, providing all three rather than just one is probably a good idea, just in case they’re down to that level of detail. Credit people are queer cattle (take it from me; I used to be one)!

As always if you have any questions please don’t hesitate to call or e-mail. We are specialists in providing property finance for investors but we can also assist with general mortgage work.

Bob Coleman, MBA, AFAIM, JP
Phone 1300 573 441
Or e-mail bob@mkpl.biz
International + 61 2 6655 1271

Assume you will be approved for a Term Loan (to be secured against the Investment Property) of 85% of the Purchase Price (Full Doc applicants can borrow up to 90% and that’s what you should apply for; however leaving a slight buffer here will assist if the valuation comes in lower than the purchase price). An 85% LVR loan will give you $360,000 to contribute to the purchase. You will then need $121,500 to complete (ie, $481,500 less $360,000).

In an average interest rate environment (which we are heading back to) an investment property will cost around 4% per annum to hold (not taking into account tax deductibility - which I suggest you consider as a bonus) or in this example $18,000 per annum. I recommend keeping a cash-flow shortfall reserve of at least 12 months. Therefore you would need to increase the loan secured against your home (assuming that’s where your equity is) by $139,500 (ie, $121,500 + $18,000). Make sure any new loan funds are made available in a separate Loan Sub-Account so deductible and non-deductible debt are not commingled.

The reason I suggest going through the above calculation, instead of advising you to release as much equity as you possibly can into a Line of Credit or Deposit Offset Account, is that when you approach lenders for the Term Loans (ie, the 90% loans secured by each Investment Property), any loan limits you have available are treated as ‘fully drawn’ and impact your serviceability in the eyes of the lender. It’s the same as for Credit Cards, the lenders don’t much care if you only owe $250 on your card. If you have a limit of $5,000 they’ll assume you have a monthly commitment of $125 (2.5% of the limit) and your borrowing capacity is reduced accordingly (by about $3,500 for every $1,000 of credit card limit).

Remember that loans are taking quite a long time to get approved at the moment (by mainstream lenders at least) so if you can, negotiate a lengthy Finance Clause (7-10 days) and a reasonable Settlement Period (42 days rather than 35 for example). In any case please don’t fully commit to any purchase until you have Unconditional Approval of both the Increase to your existing loan and the Term Loan to be secured by the investment property. Your lawyer / conveyance will advise you further on this point.
Please let me know before you go too far how much you are considering paying for your investment property so I can ensure the purchase falls within your maximum borrowing capacity.

This article was drawn from actual advice provided to a customer recently, so please excuse any remaining context.

We are specialists in arranging finance for property investors. Please don’t hesitate to call or e-mail.

Bob Coleman, MBA, AFAIM, JP
Phone 1300 573 441
Or bob@mkpl.biz
(International + 61 2 6655 1271)

Some people like to keep a PIWA for each investment property but that’s a lot of book-keeping if you have a large property portfolio. We have a separate PIWA for each ownership structure. For example for the properties we own in a Property Investment Trust, we operate a single cheque account in the name of the Trustee (in our case a Company Trustee) as Trustee for the respective Trust.  For properties owned in our joint names, we use a single Line of Credit in our joint names, and so on.

You can use a deposit account or a loan account but if it’s a loan account make sure it has transaction account flexibility. And be careful using a redraw facility for your PIWA. Some lenders have a minimum redraw amount and charge a fee for each transaction.  I also saw an example recently where a loan account with a redraw facility went into credit and the lender immediately cancelled the limit. The customers had to apply for the loan again to re-establish it!

Another thing to say about using redraw is that if you pay down an investment loan, then redraw the loan back to the original amount, you can’t claim the entire loan’s interest unless you can clearly demonstrate that the redraw was used to fund an investment. You’d be better putting the money into a Deposit Offset Account attached to the investment loan.  When you later withdrew the funds the ATO would not be interested in what you used the funds for. This is because the ATO does not view putting money into an offset account as ‘paying down’ the loan. It has the same effect of reducing the interest payable each month along with the amount that you can claim as a tax deduction for that period, but is not considered to be a principal repayment. So transferring a regular amount each month into an offset account could be a great means of forced savings, regardless of whether the savings are to be used for a car or for a deposit on your next investment property.

I saw a good example of getting it wrong recently.  A couple had a Line of Credit (”LOC”) secured by their home and had used it to purchase two investment properties.  To reduce interest on the LOC they’d been having their salary paid into it (along with the rental income from their investment properties). They’d also been using credit cards for all their personal expenses, then repaying the credit cards from their LOC. I explained to them that the ATO would view each salary deposit as a repayment of principal and each credit card repayment as a separate loan for personal purposes, resulting in a reduction in the deductible portion of their LOC debt.

So don’t give your Accountant a hernia and don’t give the ATO the opportunity to dismiss your deductions and penalise you. Keep separate accounts for personal and investment cash-flows and never commingle them.

 If you’d like to read more on the subject of ‘Saving Tax on your Investment Property’ there’s a very good  book with that title by Noel Whittaker and Julia Hartman. You can order it at http://www.noelwhittaker.com.au/ . Most importantly always check what you are doing with your Accountant. They are professionally qualified to advise you on matters of Accounting and Taxation.

We are specialists in arranging finance for property investors. Our services usually add significant value, yet come at no cost to our clients.

Please don’t hesitate to call or e-mail.

Bob Coleman, MBA, AFAIM, JP
Phone 1300 573 441
Or bob@mkpl.biz
(International + 61 2 6655 1271)

Many self-employed borrowers used Low Doc loans when credit was easy. Instead of providing Financial Accounts and Tax Returns all you had to do was self-declare your pre-tax business income. In my mind the provision of Low Doc loans by all the major banks at the same interest rates that applied to Full Doc loans was recognition  by the lenders of the fact that self-employed people ‘live’ through their businesses to some extent and are generally responsible enough not to enter into any financial commitment they can’t meet.

That’s certainly been my experience. Not one of the Low Doc loans we’ve introduced to the lenders over the last 4 years is in default.  Unfortunately, because some greedy twits in the U.S. went out and purposely lent hundreds of millions of dollars to people who had no chance of repaying, severe lending restrictions are now in place.

If you want to Increase or Vary your Low Doc loan you’ll now need to provide your Financial Accounts or a combination of Business Activity Statements and Trading Account Statements in order to qualify. It is now virtually impossible to re-finance a Low Doc loan with another Low Doc loan, certainly not at 80% Loan to Valuation Ratio (”LVR”), which was the maximum LVR available under Low Doc arrangements. ‘Cash out’ is also now severely restricted under Low Doc. Cash out is money made available for an unspecified or future purpose.

For example some borrowers established a Line of Credit against the equity in their home or an investment property to use as their Property Investment Working Account or to have as a ‘buffer’ / cash-flow shortfall reserve. Loan funds will now only be released for a clear and present purpose.

In most cases Low Doc lending is now restricted to 60% LVR and the margin (or difference) between Low Doc and Full Doc interest rates have increased substantially. One of the non-conforming lenders (lenders of last resort) is offering Low Doc up to 80% and will refinance existing Low Doc loans but their current rate is 7.99%; that’s almost 3% above the most competitive Indicative Variable Rate available today.

The point to make here is that if you have a Low Doc loan, now is the time to see if it can be converted to Full Doc while interest rates are relatively low. Use one of the on-line serviceability calculators to see if your current income will support your current level of borrowings or let us do it for you.

We are specialists in arranging finance for property investors. Please don’t hesitate to call or e-mail.

Bob Coleman, MBA, AFAIM, JP
Phone 1300 573 441
Or bob@mkpl.biz
(International + 61 2 6655 1271)

However the problem with Fixed Rate loans is that when a bank offers, for example, a 5 Year Fixed Rate of 6.5% it has calculated (as best its economists can) that the AVERAGE Variable Rate over that 5 year period will be lower than the Fixed Rate they are offering.

 In other words they’re trying to ensure you will pay about the same, or more, if you Fix. And on top of that they’ll charge you for the privilege by way of a Rate Lock Fee or Switching Fee!

 I’ve heard in industry circles that data collected over 20 years in Australia indicates that very few borrowers have actually benefited from taking out a Fixed Rate loan or converting a Variable Rate loan to Fixed. In my mind the only good reason to Fix is if you need ‘certainty of repayment’; i.e., to know for a period of time exactly what your monthly commitment will be.

 I’ve been a fence-sitter on this subject in the past and have only said that if you Fix at around 7% (which is the long term average Australian Variable Rate for housing loans) you’re probably not going to be significantly disadvantaged in most cycles. My current recommendation is “don’t Fix” unless your objective for doing so is ‘certainty of repayment’ because unless you’re dealing with a bank that has a big heart, you’re betting against their economists and the evidence suggests it’s a bet they usually win.

 If you already have a high Fixed Rate loan at the moment, take heart from the fact that banks are currently lifting their Fixed Rates in anticipation of us having reached the trough of the current interest rate cycle.

 One final thing to say on the subject is that if you Fix in a falling interest rate environment and your circumstances change, say for example you lose your job and have to sell before your loan contract expires, the early repayment penalties can be significant. In one example recently of a loan Fixed at 8.4% for 10 Years (the Variable Rate at the time was 5.6%) the ‘break costs’ exceeded $50,000!

 As always if you’d like more information don’t hesitate to call.

Bob Coleman
Director, Mortgage Knowledgebase
Trading as Property Investment IQ
PO Box 278 Bellingen NSW 2454
(02) 6655 1271
bob@mkpl.biz

Private loans can now be formally documented using relatively simple kits available at www.fosik.com.au and www.ioukit.com.au .

Fosik also provides a marketplace for private loans where you can bid to either lend or borrow money at significantly lower than bank personal loan rates. For example, personal loan rates are currently around 12.5% but at Fosik you can borrow at around 7.5% if your credit report is clear and even if it’s not you can still get a loan, you may just have to pay more for it.

This could be a great personal debt consolidation tool!

As always please don’t hesitate to call if you have any questions.

Bob Coleman - Director, Mortgage Knowledgebase - (02) 6655 1271 or e-mail bob@mkpl.biz .

PS - If you end up using Fosik or IUO Kit please let me know about your experience.

 The benefits are clear. You reduce the risk of investing in areas you don’t know particularly well. You achieve geographical diversification, an important factor in risk management (and minimising Land Tax), you save time (especially important when there is an investment ‘window’ open) and you avoid the often frustrating process of dealing with Selling Agents.

 So how much does it cost? For residential property purchases you’ll pay the Buyers Agent around $1,000 as an engagement fee and then around 2.5% of the purchase price at settlement. On a $350,000 purchase that’s close to $10,000. It seems a lot but in my experience most people over-pay for their investment properties and using a Buyer’s Agent would probably save them money.

People over-pay due to a combination of factors including emotion, taking advice from the Selling Agent, lack of market knowledge, poor negotiation skills and frustration. And quite often they don’t just pay more than they needed to; they end up with a sub-optimal investment with an opportunity cost many times the price of taking professional advice on their purchase.

Using a Buyers Agent reduces the risk of over-paying and can sometimes result in a significant discount on the purchase price. Specialist Buyers Agents, those that focus on the needs of investors, can really add value by locating properties that have some type of potential or investment ‘twist’.

Another way to look at the cost of using a Buyers Agent is that every month you don’t own a $350,000 investment property even in an average growth area (not that we’d invest in one of those) could be costing you $2,500. So the 6 months you’ll spend working it all out yourself could cost you $15,000 and you still might overpay!

I work with experienced Buyers Agents in most locations and am happy to provide an introduction and assist you write the investment brief. However if you’d like to contact a Buyer’s Agent direct and make your own enquiries, following is a list of the ones I recommend.

As always please don’t hesitate to call me if you need assistance.

Bob Coleman

Director, Mortgage Knowledgebase

Trading as Property Investment IQ

PO Box 278 Bellingen NSW 2454

(02) 6655 1271

bob@mkpl.biz

Property Investment IQ - Buyers Agent Panel 

• In Sydney (all areas but with a focus on the North Shore) - Rich Harvey or Amanda Segers of Property Buyer - info@propertybuyer.com.au - Property Buyer truly is an award winning business and rightly so based on the testimonials on their website ‘www.propertybuyer.com.au‘.
• Also in Sydney (specialising in Eastern Suburbs, Lower North Shore and Inner West) - Pino Tedesco from Michael Yardney’s Metropole Group - ptedesco@metropole.com.au - Pino is a Registered Valuer and being part of the Metropole Group you can be assured of his focus on the specific needs of investors. His portfolio of recent purchases is very impressive.
• In SE QLD, including Brisbane - Julie-Ann Cronin from The Home Straight - clientmanager@thehomestraight.com.au - Julie-Ann has a good understanding of the Brisbane Growth Corridors that we anticipate will achieve significant growth given SE QLD is likely to remain the population growth centre of Australia for many years.
• In Tasmania - Rob Zubin from My Property Hunter - rob@mypropertyhunter.com.au - Rob is very experienced and very focused on the specific needs of investors. Tasmania provides a great environment for investment with very strong yields in some areas and low entry cost.

Sorry, no-one I can recommend in Melbourne yet but I’m working on it.