Buying a second property? Consider all options first

Buying a second property requires hard work with a disciplined and strategic approach. If done correctly, a second property as an investment can set you on the path to building greater wealth for your future.

Just because you have purchased one property doesn’t make the second one any easier and below you will find some areas to consider before you buy again.

Managing your finances and cashflow

The most critical and initial question you should ask yourself is are you covering your current home loan repayments comfortably? A comprehensive analysis of your current financial situation and projected future outlook will provide you with the understanding as to whether you can embark on a second home loan.

Considerations

  • If you lose your job will you be able to cover two loan repayments until you find your next job?
  • Have you considered the impact of pregnancy on your financial situation if you plan to expand your family in the near future?
  • Do you have a back-up plan if any unforeseeable issues or major life changes arise in the future?
  • Have you factored in the additional costs of the investment property such as body corporate, rates, maintenance and repairs?

Lenders want to see that you have the capability to service two mortgages as well as your ongoing cost of living. A comprehensive assessment will be undertaken to assess any existing assets and liabilities along with projected income verses expenses. This is fundamental to ensure a positive cashflow to fund the costs of holding both properties.

What to buy?

Having a clear goal in mind is fundamental when researching to buy your second property. Are you buying to renovate and develop? Are you buying a beach house or rural property to spend some time in? Are you buying to rent it out as an investment property?

These key questions and reasons why one option is more suitable than another must be considered when researching the location and market situation of the ideal property. Your decisions regarding the type of property you’re after will guide the purchasing process so ensure you have clearly thought it through and have confidence in why you are buying again.

Loan structure and choosing the right mortgage

The mortgage type and structure is dependent on how much you can borrow in accordance with your current equity in your home, property valuation, income, expenses and the asset you are looking to buy. A full assessment of products with the right loan features to match your investment goals is essential to ensure a free-flowing purchasing process.

How important is a property valuation?

What is a property valuation?

A property valuation is the process of acquiring information involving the construction and physical characteristics of the property, the size and any issues that may be involved. Data collated from comparative sales within the area also considered when determining the value of the property.

This is completed to determine the value of the property and security against the home loan. Should the bank need to sell the home due to specific reasons then it has the capacity to recover the outstanding amount owing following the valuation undertaken initially.
 

When is a valuation needed?

A property valuation is required when you are using a lender to finance the purchased property. This is to ensure that the lender is not providing more than the actual value of the property.

Bank valuations are also be used for refinance and also accessing equity in your home.

Who orders a valuation?

Your Mortgage broker will order and arrange the valuation for you. If it is a valuation on your own home, you may be required to be in attendance to let the valuer through the property.

How much do valuations cost?

Property valuation costs can differ between banks to independent valuers and the location of the property will also influence the cost, example rural to city.

Mortgage Brokers may or may not forward costs on to you when a valuation is requested depending on the lender institution.

Can I use one valuation with multiple banks?

If the valuation returns with an unfavourable outcome then you are entitled to seek an alternative valuation through another institution. It isn’t uncommon for valuers to report differing opinions so requesting another valuation is at your prerogative.

What happens if the valuation is less than what I paid for the property?

Should a bank valuation come in less than what the property was purchased at then you may have a problem in acquiring the initial borrowing amount you applied for. This does happen from time to time and it is up to the borrower to find money elsewhere or the entire home loan may be rejected entirely.

Can I dispute a valuation result?

Disputing a valuer’s report can be conducted by providing evidence of similar property sales within the area.

How do comparison rates really work?

Comparing apples with oranges doesn’t make sense. To make finding the right loan easier, and to make advertised rates as transparent as possible, we have comparison rates.

You’re looking for the best mortgage deal and you see something advertised at ‘3.8%’. Underneath that seemingly too-good-to-be-true rate it reads ‘4.9% comparison rate’. What does this mean?

In 2003, an amendment was made to the Uniform Consumer Credit Code (UCCC) that required comparison rates to be included in advertising. This change was made so that customers were not easily misled when it came to home loan interest rates.

The comparison rate is designed to help show customers what the true cost of a loan is. The comparison rate includes all of the fees and charges that can be applied to a home loan as well as the actual interest rate over the loans full term. In some instances, lenders offering the lowest rate may not actually boast the cheapest loan, which is what a comparison rate can show.

This allows consumers to compare apples with apples, to an extent. It does make it much simpler to hold two loan products side by side and, regardless of whether one has a slightly higher interest rate and no fees while the other is a super-low interest rate with high fees, see at a glance that one is the better deal financially.

However, it isn’t always this simple. Fees and charges, the rate at which principle is paid down and the total interest paid over the loan term all change depending on the loan amount and on the term, so you need to delve a little further into how that comparison rate is calculated.

While the comparison rate itself must be as prominently displayed as the interest rate – not buried in tiny fine print – somewhere on the advertisement, there will be a statement along the lines of ‘Comparison rate calculated on a loan of $150k for a term of 25 years, with monthly repayments’. If your proposed loan is $900k the comparison rate for your loan will be vastly different. An annual fee of $500 on a $150k loan is going to make a bigger difference to the customer’s comparison rate than the same fee on a $900k loan balance.

To get around this, all 40 Forty clients are provided analysis of 3 or more loan products at the borrowing amount needed to fulfil their objectives. Modelling is done to show the true monthly cost as well as the cost over the longer term. That way, we can truly compare apples with apples.

Guaranteeing your child’s loan

Rising house prices are making it increasingly difficult for the next generation to enter the market. An increasingly common way for parents to assist their children to enter the market is via a guarantor loan. Although there are significant benefits of this loan structure, it is important to understand how this can impact the parents’ financial position too.

Being a guarantor generally means using equity in the parent’s property as security for their child’s home loan. It can help a first-home buyer to secure finance for a property they can afford but may not have a large enough deposit for.

There are other significant advantages:

  • This structure allows the new purchaser to avoid paying Lenders Mortgage Insurance
  • Recent jumps in house prices have seen many getting priced out of the market as they can not keep up with the deposit requirements to get into the property. Guarantor loans avoid the need for large deposits as the parent’s property is used to secure the loan
  • You may be able to buy in a more desirable location and a home that better suits your needs. If you purchased on your own, you may need to go further out of the city or perhaps settle for fewer bedrooms

The Risks

Parents may want to help their child but it’s important that all risks are clearly outlined so they don’t go into the transaction blindly.

The main risk of guaranteeing the loan is that, depending on the structure of the guarantee, the parent could be liable should their child default on the repayments, either by taking over the repayment schedule or handing over a full repayment of the outstanding debt.

In the event you can’t make the repayments, the lender may also sell the home used as security. If this is still not enough, the lender may also require you to sell any other assets to meet outstanding debt.

If the parents need to borrow money for another purpose, the property used as the guarantee security cannot be used to secure further finance. It is already ‘tied up’ in the guarantor transaction.

Minimising The Risk

There are ways to minimise the risks. First and foremost, an exit strategy must be clearly outlined and agreed to by all parties. The goal would be to have the child repay as much of the debt as possible over a shorter timeframe so the parents security can be ‘discharged’ from the overall position. This will remove the guarantor portion and ensure the child is now financially standing on their own two feet.

Another way to avoid the risks of being a guarantor is to alternatively provide a monetary gift or private loan. This involves the parents borrowing money against their property in their own name, and then gifting these funds to their child. There are now pretty standard legal agreements that can be put in place to protect these gifted funds.

Another way to avoid the risk is to buy the property jointly between parents and child. This means all names are on the title and a certain percentage entitlement is stated. This does have some negative tax implications that need to be considered.

When it comes to guaranteeing a loan, it’s always sensible to speak to a professional. Every families financial situation is different so the strategy needs to be tailored to ensure all parties understand their risks and best way forward.

 

Offset accounts: should you have one?

A common request from borrowers is that they ‘need’ an offset account. When asked to explain why, it’s amazing how many people say “my friend has one and they love it, so I thought I should have one too”. They suit most borrowers, but to know if one will suit you, let’s first understand exactly what an offset account enables you to do.

How do they work?

An offset account gives you the freedom to “park” your own funds (savings) in an account that is linked to your mortgage. The funds that are parked in there offset the interest charged on the total loan. These funds are freely available for you to use for your everyday transactions just in the same way you would use funds from a savings account.

In numerical terms, if you have a $100,000 mortgage at 5% interest rate with no offset account, your annual interest charge would be $5,000. If you had the exact same loan with $10,000 in your offset account, your annual interest charge would be $4,500.

The way to think of it is simple. The funds in your offset account don’t earn you interest, rather they offset the interest charged. When thinking about the opportunity cost, if the interest rate of your savings account is less than the interest rate of your home loan, then your funds will produce a more positive effect when held in your offset account.

Are they right for you?

For other people with owner occupied home loans, convenience and interest savings are the major benefits. The savings in interest are the same whether you use an offset or whether you pay the funds into the loan itself… but… having the funds in a separate account can provide convenience and flexibility especially when it facilitate transactions just like any other savings account. Your cash can be saving you interest right up to the time it is needed.

For investors, if you are claiming a tax deduction on the interest charged on your loan, then most accountants will advise you not to deposit your own funds into your offset account and draw them out. In the wash up, it is usually more beneficial to keep your investment debt high and personal debt low.

So, should you have an offset account? One of the great things about an offset account is that it can be beneficial no matter if you are a saver or spender. For a spender, you can have your salary paid directly into your offset account as the money will have an immediate impact on the amount of interest you pay.

If you are a saver, you may find that an offset account is more beneficial than a savings account as you may earn less interest on a savings account than what you would save on your home loan.

What’s on offer?

The majority of lenders offer products that can have an offset account attached to the loan. For this, some will charge a slightly higher interest rate, however some simple sums can see if the extra cost is worth it.

When researching and comparing home loans, it’s worth looking at any possible fees or restrictions to moving money around that may be associated with the offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account and these fees could end up costing you more than the interest you would save.

Before making any decisions, you will need to carefully research your options and speak with your broker and weigh up their advice as to what will work for you.

 

What is the real cost of your daily coffee?

Having the financial commitment of a mortgage really makes you think about the value of your money. It forces you to watch your dollars a lot closer and brings into question the opportunity cost of doing one thing over another. It is surprising to see the impact that small financial habits, like your morning coffee, make over the long term.

If you’re a one-a-day coffee drinker, that is an annual cost of around $1,300. On a $500k mortgage over a 30 year period, if you were to forgo your coffee and put these funds towards paying back your loan, this would cut 2 years and 4 months off the length of your mortgage and save $30k+ of interest repayments.

As a Melbourne based broker, I know telling clients to give up coffee isn’t going to win me many friends… but… its more about the power of your dollars over the longer term. Do you have a regular financial outgoing that you could reduce or get rid of that could assist you in repaying your mortgage quicker?

  • Bring your lunch from home
  • Cancel your gym membership that you never use
  • Shop around for a cheaper health/life/car insurance product
  • Go out drinking only once per weekend
  • Book smarter holiday options
  • Do you really need that expensive car with large monthly repayments?

It may not be one thing in particular but the sum of multiple ‘sacrifices’ that can create financial gain in the long term.

Maybe you will think twice before ordering that second coffee for the day…

 

What is pre-approval?

For those getting ready to stride into the world of home ownership, the uncertainties of pre-approval can cast a shadow of doubt over an otherwise exciting time. When is it necessary? How long does it last? And what does it involve, exactly?

Pre-approval is a lender’s assessment of your likelihood of being approved for an suitable loan. The appraisal is made on the basis of your ability to repay the loan by looking into your living expenses and liabilities, your credit history, your employment circumstances and how often you have moved home or employment in the recent past.

As it is performed prior to a property being found and chosen, it does not take into account the particulars of a specific property and valuation, which is why uncertainties can arise.

Pre-approval is helpful for those who want to know how much they can borrow before attending open homes, and can be reassuring for new borrowers.

Once you have pre-approval, it provides a very clear limit on your borrowing capacity. This ensures you can budget properly and saves you wasting time looking at properties that are out of reach.

Pre-approvals are usually valid for up to 90 days but, depending on the lender, may be renewed to allow more time to find a property. This is done by re-confirming your financial situation via pay slips and updated savings balances.

It is very important to note that a pre-approval is not a guaranteed loan. It is your potential lender’s way of signalling how much they expect to lend you. This may change on your official application.

Lender policies are changing day-to-day so for anybody with a conditional approval, it is important to have an attentive broker who can update them on any changes that may affect their lending situation.

Changes to your financial situation between getting pre-approval and buying a property can also influence the likelihood of the lender to provide final approval. If you go and add debts to your name like credit cards or car loans this will negatively impact your capacity to borrow.

Pre-approval is not a guarantee but is a very useful tool for anyone looking for a property. Just like my last blog, pre-approval needs to be done before you start looking for a property.

 

Chicken or the egg? Property or the finance?

It’s easy to get carried away with the fun part of buying a property – looking at houses – but delaying the less compelling task of arranging finance will weaken your negotiating position on both the property and the loan.

Looking for a property to purchase is an exciting time. Choices regarding location, size, number of rooms and local amenities often see house hunters carried away in a deluge of daydreams and anticipation.

But, before you get carried away, it’s important to check off the essentials first. Although organising your finances may seem drab in comparison to perusing sales listings, gaining pre-approval with a lender will give you confidence about how much you can afford to borrow.

First and foremost you need to determine if you’re eligible to borrow money from a lender. Apart from showing you have the ability to repay the loan, lenders will also assess a range of other hurdles for you to overcome like credit scoring. You don’t what to find out after you’ve made an offer that your credit history or deposit is not up to scratch.

Arranging finance before finding the perfect property will put you in a good position when it comes time to make an offer. When you do find the house you have always wanted, you can present to the seller and estate agent as a prepared applicant who is serious and reliable.

Sellers are most interested in completing their sale fuss-free and with steadfast funding, and showing that you are capable of both will help put you at the top of a potentially competitive list of applicants. This is especially important in the off-the-plan market.

In the instance that you find and secure purchase of a home without having your loan pre-approved by a lender, there are a few pitfalls that you risk running into. Should you not be able to secure finance for the property, you may have to forfeit your initial 10 per cent non-refundable deposit.

Arranging your home loan at the last minute also leaves less time to find the most suitable loan and have it approved ahead of settlement. Any lender that has a special rate or product on offer will most likely have a longer turn around time than their competitors and as such you may not be able to obtain these products.

Unlike the Chicken Vs Egg debate, this one is simple. Finance pre-approval certainly comes before the Property.

Seven keys to winning at auction

The majority of Melbourne property is sold at auction. To be successful you will need to be armed with as much information as possible. The below sets out my 7 key steps that will put you in a strong position come auction day.

1. Bring In The Professionals
Property is most likely your biggest financial commitment you will ever make. Do all that is required to ensure you don’t run into avoidable hazards. When you are super keen on a property, get a building inspection and engage a solicitor to review the contract of sale and provide advice around how to sign the contract correctly.

2. Obtain Pre-Approval
It is scary to think that people go and purchase a property without formal pre-approval from a lender. This is a MUST as there is never a guarantee that you will be eligible for a home loan.

3. Understand Auction Rules
Some auctions will require you to register to bid. Ensure you ask the Agent well before auction day if there is anything you need to know about the auction process.

4. Do The Research
The last thing anyone wants is to be successful at auction only to find out they have overpaid. You need to critically analyse the property and its surrounds in an unemotional business-like manner. Good mortgage brokers will have access to property reports showing similar sales in the area and may know of any future developments that will add or detract value from the property you’re keen on.

5. Know Your Limits
Pre-approval will give you a maximum purchase price, however that doesn’t mean that every property you look at will be worth the same. Place a maximum value on the property you’re bidding on and stick to it. Auctions are so popular with vendors as the hype can attract foolish bids… don’t let it be you!

6. Auction Day Tips
Auctions are a show, so you have to perform. Here are some ideas to try and spook other bidders on the day:

  • Have direct line of sight to other bidders and the auctioneer. Try and stand near the front. Don’t lean on cars / fences. Look like your there to buy and nothing will hold you back
  • Bid confidently and loudly. You want to appear to have bottomless pockets. Always counter a bid against you quickly. As long as the property is below your limit, you should act like you have no limit
  • If you are a younger buyer, ask an older family member or friend to bid on your behalf. They can make it look like it’s their 10th investment property and that price isn’t an issue
  • Dress nicely
  • Don’t seek guidance from your support crew during the auction, it shows you are a novice

7. Get Used To Auctions
You should attend auctions in the area you are keen to buy in to scope out the bidders and the way the auctions work. You wouldn’t play a grand final without going to training a few times, so why should spending half a million plus be any different. Try and pick up on any tactics that seem to work and take notes… one day it will be your turn to shine!

Why should you use a mortgage broker?

Purchasing a property will be one of your biggest financial decisions. Engage a Broker to ensure you get it right the first time.

With more than a thousand different home loans on the market, this overwhelming choice has led a strong increase in the popularity of using a Mortgage Broker. Within Australia, around 53% of residential home loans are put in place with the assistance of a Broker.

To help understand why there has been a huge increase in the number of people utilising this service, below you will find my top 5 advantages of using a Mortgage Broker.

Top 5 advantages of using a Mortgage Broker

Choice

Going direct to a lender means you will only have access to their products. This means that you will not necessarily get the best loan structure or interest rate. Brokers are accredited with multiple lenders, which ensures the right product is found for your borrowing needs.

Save Money

Having access to multiple lenders allows Brokers to find competitive rates for you. Brokers actually have access to specialised products that can only be obtained by using their services. Additionally, Brokers are able to ‘sell’ your story to the lenders in return for a interest rate discount.

Get it Right the First Time

Taking the time to ensure the product suits your needs prevents unexpected costs being incurred during the life of your loan.

A lot of products have significant break fees. Without using a Broker, you may sign yourself up for a product that doesn’t meet your needs. Refinancing that loan into something more suitable may incur fees and charges.

A good Mortgage Broker will carefully assess your situation, then work hard to find the right mortgage for you.

Save Time

Don’t stress yourself over what one bank does compared to the next or what fancy terminology is used to explain complicated fees and charges. Brokers will do all the research, comparisons and explain in understandable language how your loan will work for you.

Brokers will also do all the paperwork for you. No need to fill in bank forms or complicated financial statements. Just a couple of signatures are all that’s needed.

Long-term Support

Once you have found a great mortgage Broker, you’ll stick with them. Your Broker will become your touch point for all lending enquiries over the life of your loan. Additionally, your Broker will stay in contact with you to ensure you have the right mortgage from the right lender at the right price.