The bank wants to see ‘genuine savings’. What does that mean?

Applications for a home loan greater than 90% of the value of the property require you to prove to the lender that the funds you are contributing are classed as ‘genuine savings’. This policy is in place so the bank has confidence you are able to save funds and be financially disciplined over a prolonged period of time.

Classification of what makes up ‘genuine savings’ can be confusing with lenders having different policies or hurdles in place for you to clear before approval can be issued to you.

Examples of what may be considered as genuine savings:

  • Personal savings or funds held in an account or accumulated for three months or more
  • Equity in an existing residential property with ownership evidenced by a rates notice
  • Term deposits held greater than three months
  • Shares or managed funds held greater than three months
  • Work bonuses or commissions evidenced with income verification requirement

What isn’t considered as genuine savings:

  • Gifts or inheritance. (Inheritance can be classified in some instances where they have been held in the borrower’s account for a period of time, typically three months or more).
  • First home Owner’s Grant/Government Grants
  • Funds held in company or business accounts
  • Personal loans
  • Winnings such as casino or gambling proceeds

How do I get a loan without genuine savings?

  • Rental payments/history over the last 3 months may be used in some instances to mitigate a borrower who cannot demonstrate accumulated funds in a savings account over a period of less than three months. The banks recognise that the commitment to paying your rent is showing financial discipline
  • Sale of assets other than those listed above may be considered as genuine savings
  • If your available deposit is 20% or more and in your own bank account, then most banks do not require you to demonstrate how those funds have been saved

The ever-changing landscape of lender policy can make the application for a loan confusing and complex. The Genuine Savings policy is just one of a range of policies that can determine which lender is going to be right for you.

If you are unsure about lender requirements when applying for a loan then be sure to get a in contact with the team at 40 Forty Finance to be fully aware of the process of home loan lending.

Why should I speak to 40 Forty Finance?

Trying to navigate your way through the lending world can be a complex and confusing process. If you are looking to buy a property or refinance an existing loan there are numerous stages that need to happen for the end result to be a success.

It is becoming increasingly more common that people are turning to Mortgage Brokers to guide them through the finance and lending markets. Over 50% of consumers are now utilising their services and engaging a Mortgage Broker within their financial team to apply for a home loan. That percentage is even higher when you limit the data to 25 – 45 year olds who often are too time poor to manage appointments within bank opening hours.

Recently awarded the Best Finance Broker VIC/TAS Better Business Awards 2021, and MFAA Young Professional of the year VIC/TAS for 2020 and 2019, 40 Forty Finance takes a holistic approach in understanding the overall financial position and tailoring a solution that is going to best suit your needs. A ‘client for life’ philosophy enables us to recommend the most suitable and appropriate lending solution for the most important and biggest monthly expense in one’s current and future life plans.

Broker Vs Bank… the key advantages

  • Advise on the most appropriate and suitable home loan option for you from a list of over 30 lenders
  • Project manage the tricky world of a loan application on your behalf
  • You are not just another number in a big banking system. You have a single point of contact for the entire deal
  • Ability to meet at a time and location that is convenient to you
  • Committed in ensuring you are fully aware of all stages throughout the loan application and ensuring all milestones are met in a proactive manner
  • 40 Forty Finance is remunerated by the bank you decide to get your loan with so there isn’t a charge for our services
  • We rely on referred and repeat business so a positive outcome for you is the most important thing to our long term success

With more and more borrowers looking outside of the Banks for advice, 40 Forty Finance focuses on providing a customised solution that puts client satisfaction at the centre of the process.

If you wish to arrange an appointment then please don’t hesitate to get in touch.

Opportunities in a falling property market

After several years of exponential growth, Australian housing prices are on the downturn causing a falling property market. CoreLogic’s national index demonstrated dwellings within Melbourne and Sydney dropping by 3.3% and 3.5% respectively. This downturn is attributed to tighter lending standards, reduction in property investors and larger capital requirements enforced on Australian banks.

Property owners will see this downturn as a negative, however there is always opportunity in this market for the right buyers.

First Home Buyers (FHBs)

The recent housing market drop has been a favourable shift for first home buyers looking to get in to the market. With accelerated growth and the market previously being in the seller’s favour due to large competition and demand, recent events have enabled FHBs to get a foot in the door. Previous record high clearance rates that have priced FHBs out of the market have now fallen which has in turn reduced the pressure on this demographic. Furthermore, the tightening of lending to investors has significantly reduced competition in the entry level price point of the market.

In short, lower prices and less competition puts the FHB back in the strong seat.

Next Home Buyers

With record high purchasing prices previously restraining buyers upgrading to their next house, a steady reduction in property prices enables this buyer to take the next step now. A property once driven out of your price range may very well be achievable for next-home buyers as the market backs off.

The challenge is all around timing. If you are planning to upgrade, then you will most likely need to sell your current home to do so. If you sell for what you think is 5% less than what you may have achieved 6-12 months ago, this is fine as long as you get the same ‘discount’ on the new purchase. As you are moving up the property ladder, this 5% loss will be outweighed by the 5% gain on the next purchase. In other words, what you lose by selling in a down market you will make up when you buy in the same market.

Competitive Lending Options

With less transactions happening in the market, lenders have turned their focus to trying to attract those with an existing loan. Lenders are offering various bonuses and rebates to those who are willing to take the time to refinance. These incentives range from ‘cash-back’ offers of up to $2,000 or very competitive interest rates. It has never been a better time to review your lending

 

Redraw vs offset: what is better for you?

An offset account or redraw facility are common home loan features many lenders offer. These features give you the functionality to store additional repayments/savings against your loan while reducing the interest charged on your home loan. The funds remain accessible to you should you want to draw on them in at any point in the future.

Both these features have similarities but do operate in a slightly different way. It is important to understand the minor differences in order to decide which option is more suited to you.

Offset Accounts

An offset account is a separate savings or transactional account that is linked to your home loan. The easiest way to think of this account is like a ‘home base’ for your cash flow. Any incomes (Salary, Rental, Dividends etc) can arrive into the account and expenditure items can come straight out of the same account.

The key benefit of doing this is to save interest on your mortgage. The bank will calculate your interest repayments based on your Loan Balance minus your Offset Savings amount.

Example;

If you have a home loan of $430,000 and you have savings in a linked offset account of $70,000 then you will pay interest for the month on $350,000 ($430,000 minus $70,000).

On a 4.1 percent home loan, your $70,000 has saved you $273.33 in interest for the month and $3280 for the year.

Pros:

  • Having an offset account can save money in interest repayments off your home loan
  • An offset account works in the same way as a day-to-day transactional account does with money easily accessed at any time whilst simultaneously reducing your interest payments on your mortgage
  • If you have large sums of money in a savings account the interest earned would be taxable. Alternatively, placing these funds in an offset account is not earning money (rather saving interest charged) so therefore there is no tax payable on these funds

Cons:

  • Having an offset account tied to your home loan typically comes with additional costs in one of the two below forms:
    • Slightly higher interest rate
    • Higher annual fee (typically around $350pa)

 

Redraw Accounts 

A redraw facility is not a separate account but instead a feature of your loan account. This facility allows you to draw back funds that you have paid into your loan account ahead of your standard monthly loan repayments.

Example:

If your monthly loan repayments are $2300.00 but instead you pay $3000 (an extra $700), then at the end of 12 months you will have $8400.00 sitting in your redraw account. This amount can be redrawn to pay for whatever you like. Whilst the funds sit in your home loan account, you are reducing interest charged month to month.

Pros:

  • Allows you to utilise any extra funds for required purchases
  • Since the redraw account balance cannot be typically seen when withdrawing money from an ATM, you are effectively ‘hiding’ savings from yourself which may reduce temptation to spend
  • Reduces interest repayments through voluntary contributions

Cons:

  • Less flexible than an offset account as you can’t withdraw funds instantly from an ATM
  • Some banks may charge you a fee for accessing and redrawing the funds within the redraw facility
  • Some lenders may also set a minimum redraw amount thus forcing you to take out $500 or more at any one time

Choosing the right feature and understanding its potential is important to ensuring you are efficiently saving money and utilising your loan structure in the right way. By speaking to a Mortgage Broker you will be able to gain information regarding your home loan options and unlock the potential for you to reduce your mortgage faster.

 

Victoria’s new tenancy rules explained

The Victorian Government has recently passed new laws under the Residential Tenancies Act that will increase the rights of renters. These new changes will come into effect on July 1, 2020.

As a renter or investment property owner, it is important you understand what the planned changes are and how they may impact your decision-making.

Key Points:

  • Landlords will only be able to raise rental payments every 12 months instead of the current six-month legislation.
  • It is finally good news to tenants who would like to own a pet with landlords no longer allowed to automatically include a ‘no pets clause’ into the rental agreement. Landlords will now need an official order from the Victorian Civil and Administrative Tribunal to refuse the tenant the right to own a pet.
  • Rental bidding will not be allowed. This means that when there are several applicants for the property, a landlord cannot accept any bids that are higher than what is advertised.
  • Landlords must ensure that the property is maintained and meet basic standards of living such as providing functioning stoves, heaters and toilets.
  • The bond payment will now be capped at a maximum of four week’s rent.
  • Family violence victims will be able to terminate rental agreements to ensure they aren’t liable for the debts of their abusers.
  • Tenants will have the capacity to make certain modifications without first obtaining consent from the landlord such as installing picture hooks and furniture anchors.
  • New laws will also allow caravan and residential park residents to seek compensation if their park closes.

These changes shift some more power towards the renter and away from the property owner. This reflects the changing dynamic within society with more people than ever renting within Victoria.

How to avoid overcapitalising

What is overcapitalising?

Overcapitalising refers to the process of improving property beyond its actual value. For example, spending $100k renovating the kitchen and bathroom of a $600k property, doesn’t automatically mean the property is worth $700k. A sale price of your property is always going to be determined by what someone will pay for it. The ‘value’ that you have added to the property in your assessment may not be the same in the eyes of your potential buyer.

It is common for Real Estate Agents to tell their vendors (sellers) not to do any renovations as a buyer often likes to make changes/upgrades to personalise the space.

How to avoid overcapitalising

It’s easy to get carried away with renovating and believing that the hard work you are putting into improving the house will actually generate an increase in value. Being aware of your local market and what similar properties are selling for in your area is key to gaining an understanding of what your property may be worth. Understanding the median house prices or similar sale price of your property can provide you with a base to work off when deciding how much to spend on your renovations. You can acquire a full property valuation through multiple streams such as your Mortgage Broker, Real Estate Agent, your existing lender and or independent agents.

As a general rule, it is recommended that no more than 10% of the property’s value should be budgeted for aesthetic renovating.

What areas are likely to increase the value of your property?

Specific improvements such as the following are most likely to add value to your property;

  • Kitchen renovation
  • Updating or replacing floors and carpet
  • Bathroom modernisation
  • Updating lighting and fixtures
  • A fresh coat of paint

With many people continuing to depend on property investments to meet their financial goals, it’s important to make sure you have the right information and tools on your side. Running your plans by an industry professional before you start the work will ensure you maximise your profitability of your asset.

5 key questions to ask yourself before you buy

Buying your first home is an exciting time but there are some key questions you need to ask yourself before you take the leap.

1. Is it the right time?

This question needs to be asked and then asked again! The notion of owning your own home is a fantastic ambition but is it the right time for you? Pressures in buying can come from multiple trusted streams such as family, friends and or colleagues and it is hard to know what is right for you. An important question to consider is are you are getting into the market because others are or telling you to or because you are financially and mentally ready?

2. Am I financially ready and how much money do I need?

A deposit, stamp duty fees, homeowner’s insurance, removalists, legal fees are just some of the costs to consider when purchasing a property. However, the most important question is are you going to be able to service the loan? Furthermore, will your salary be stable enough to make the required repayments?

A mortgage is a long-term financial commitment that should not be taken lightly. You can’t just opt out for a few months. A sound and comprehensive analysis of your current and possible future financial situation must be undertaken before you are in a position to buy.

3. What is the goal of the property?

If buying your first home is something that you desire and you have the finance to do so then the next question is around the property type that suits best suits your goals.

  • Is it to live in for a few years, sell and move?
  • Are you buying a property that will grow into a family home?
  • Do you wish to purchase a property and rent it out as an investment?

These questions will guide the purchasing process along with the location that you wish to live in.

4. Are there any incentives?

As a first home buyer, you may be entitled to specific grants and or subsidies for particular types of properties. There are various benefits and concessions and it is important that you are fully aware of what you are eligible for when purchasing your first property. Please see SRO.vic.gov.au for more information.

5. OK, buying now is the right decision, now what?

Choosing a lender can be a confusing and daunting task with a decision on the type of loan and the abundance of options. A review of the lending market will find the lenders that are best suited to your needs. Then once the shortlist is obtained, it’s all about getting a good deal!

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.

Buying a property with friends

If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of friends may be a solution to consider. It can also be a minefield though, so here’s how to avoid a blast.

While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.

It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it. And all of this must be documented in a co-ownership agreement.

Your mortgage broker can refer you to a solicitor or conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it’s suitable for your circumstances, whilst providing the necessary legal protection for everyone involved.

The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.

However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.

Under this model, each person owns a specified share of the property’s value. These shares may be equal, but don’t need to be. So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake while they each own a 25% stake. Keep in mind that each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.

The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.

It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party (otherwise there are no restrictions on this under the tenants in common model), and selling the property altogether.

If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.

As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.

There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way.

What to consider before renovating

The decision to renovate is a common sticking point for homeowners, who can spend hours weighing up the cost benefits. Whether your motivation is to add value to your property or to add a touch of your personality to the home, renovations are expensive and debt often follows. It is important to find the right solution that benefits your long-term goal, rather than hindering any future plans.

A survey by Finder.com.au found only 27% of homeowners think refinancing their home loan to renovate is a feasible option to raise funds for the next big step. In this survey, 93% of homeowners who refinanced to renovate, said they had concerns over whether they would be able to afford the repayments, and whether the proposed renovation would actually add value to the property.

It’s important to reassess your current financial position, run through your plans and future payments, and decide if you can afford to take on more debt.

Laying the foundations

The next step is to investigate and calculate how much you need to borrow to renovate. Work out the specifics of your renovation, what the average cost to renovate is in your area and how much you are eligible to borrow. Aim to spend no more than five per cent of your property’s value on a renovation.

If renovations are likely to take over your living quarters for an extended period of time, you may need to also consider the additional cost of accommodation for the renovation period – another cost to factor in to your budget.

Getting bang for your buck

Once you decide to renovate, if you are trying to add value to a house to resell, it is important to look at the rooms and areas of the house that will add the most value. These are average renovation prices for key rooms, however prices will fluctuate based on the city and suburb.

  • Kitchen: If you are a fan of any renovation show, you will know that kitchens sell houses. According to realestate.com.au, the average renovation cost you should be spending on a kitchen is between $12,000 and $16,000.
  • Bathroom: The average bathroom space in Australia is six square metres. So look to spend around $9,000 to $12,000 as the bathroom is a highly trafficked space and needs to appeal to a wide variety of investors.
  • Other areas: An extra bedroom or a deck outside adds appeal, more living space and improves the standard of living for the homeowners.

Finishing touches

The final hurdle to look at when deciding to renovate is the council fee. The council can charge you up to $2,000 for an application fee, although prices can vary depending on your suburb. After speaking to a broker and finalising the renovation, make sure you account for an extra 10 per cent in your funds, to cover any unexpected costs.

Deciding on the type of loan   

If after the initial assessment and investigation you do decide to renovate, there are three types of loans to consider in helping refinance and renovate your house: a line of credit loan, a construction loan or increasing your existing home loan.

These options suit different people for different reasons. It is important you seek the right advice to determine what is going to work for your particular circumstances.