With the current interest rate lows moving in to record territory, many first homebuyers and new entrants to the mortgage market may be in for a rude shock when interest rates move into more normal territory.
Most variable rate lending products are sitting in the high 4 to low 5% range currently, but borrowers should take stock that historic rates in a neutral economy are normally between the 6-6.7% range on a discounted variable rate.
A lot of the shrewd and more highly exposed borrowers are looking towards fixing at least a portion of their loans to look to manage the risk of increasing rates. Because even though we don’t have a crystal ball, if we model the future off historic rate movement, any fixed rate under 6% for 5 years or under 5.3% for three years over the past 50 years would have seen the customer have a win, or at the very least not have a loss.
So try to look at fixed rates in terms of where rates are headed over the fixed period as opposed to where they are now. Because rest assured, they won’t stay low for ever. There are certain rules around fixed products you need to be aware of, so any decisions should be discussed with a lending professional.
Below is a link to an article by Greg Jericho analysing the RBA’s latest decisions.
The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered and advice and relevant research carried out.
Negative gearing essentially turns your property into a business, if it costs you money to hang onto that property throughout the course of the financial year, then that loss can become a deduction off your income.
I have provided the following as a rough example;
$400,000 investment villa, purchased in 2012, built in 2010, renting at $440 per week, $3,000 per year for rates and taxes, 1,200 per year for insurance, $420,000 loan with an interest rate at 5.29% 3 year fixed.
We will divide our expenses into two areas, physical costs such as interest, rates, repairs and insurance and virtual or non out of pocket expenses such as depreciation.
The property generates $22,800 in rent a year, the client receives around 90% of this after management fees have been deducted, leaving roughly $20,592.
The interest on the property is $22,218 per year, along with rates and insurances of $4,200 per year this takes the costs to $26,418 per annum in physical costs.
The result of the above is a loss for the year of $5,826, any loss will mean the property is negatively geared.
If we say the owner is making $70,000 per annum in income, they are currently paying around $14,297 in tax giving them a net income of $55,703. If we apply the above loss of $5,826 to the clients income, this takes them down to a taxable income of $64,174, reducing their tax paid to $12,404, resulting in having to pay $1,893 less in tax, reducing their out of pocket expenses on the investment property to $3,933 per year.
The loss of $3,933 per year represents just under 1% of the property’s value per year, so as long as the investment property grows at greater than 1% per year they are in front.
Now if we throw depreciation into the mix, we can further improve on the above figures. As the building was built after 1985, we can claim 2.5% of the building cost as depreciation until the building reaches 40 years of age. If the building cost $130,000 to build, you could claim $3,250 per year as depreciation on the building. Depreciation is a good loss in the sense that it has no physical cost attached to it.
So applying depreciation to the loss will take the $70,000 income down further to $60,924, resulting now in only $11,347 paid in tax, taking the out of pocket expenses down to just $2,876 for the year, equaling just .72% of the property’s value.
So applying the figures and gearing above we have taken a loss of $5,826 per year or $112.04 per week, to $2,876 per year or $55.31 per week. Halving the holding costs and giving every chance to the property to be a better investment.
It should be noted the above is a simple example, you cannot factor in the issues you can potentially experience as a landlord and you should always consult with your accountant prior to any investment purchase or speculation.
The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered, advice sought and relevant research carried out.
Lending for a vehicle seems to be one area of lending where borrowers aren’t getting the full picture.
There are many zero percent campaigns, low rate advertisements, but in truth, you need to see the full picture when weighing up your borrowing options. Focusing on one or two pieces of the puzzle may see you out of pocket for missing the bigger picture.
There are 5 areas you need to address when borrowing for a car, these are;
Repayment
Balloon
Brokerage/fees
Term
Rate
All of the above will impact on the cost of a term loan, and any change to one will normally impact on the others. We will use the following scenario borrowing $30,000 over a term of 4-5 years.
Repayment- this is a sum total of the below, any tweak to rate, term, balloon or brokerage will change this figure.
Balloons- applying a balloon can give you an artificially low repayment, working with a brokerage of $1,000 and applying a $10,000 balloon over 5 years will reduce the repayment from $612.92 per month to $478.43, but at the end of the term, you will need to pay the lender out $10,000. A balloon is a great way to make a loan seem more affordable, but very rarely will they provide a benefit to a client.
Brokerage- to pay this loan out over 5 years it would cost you $598.87 per month at 6.7% being the delivery rate with zero brokerage. As soon as we apply brokerage of $1,000, this increases the rate to 8.12% and the repayment to $612.92 per month, so even though the rate has blown out, overall the repayment has not significantly increased. Take the time to find out what you are being charged for borrowing the money, as some financiers charge well beyond what is fair and reasonable.
Term- standard term for a term loan is 5 years, if we look at the $30,000 asset, over 5 years on a standard loan paying $612.92 per month and see $36,775.20 repaid, taking a 4 year term will cost around $738 per month, but see $35,425 repaid, whilst taking a 7 year term will only cost $463.34 per month but see $38,921 repaid. Considering the loan term you must weigh up what the asset will be worth at the end of that period and how much you are prepared to pay in interest along the way.
Rate- Ironically one of the least important factors when determining to overall cost of a term loan, but one of the most heavily advertised. Surprisingly many lenders will have similar rates, so the alarm bells should ring when a lender has a particularly low rate offering. A lot of the time, if it sounds too good to be true, it probably is.
In closing beware of slick campaigns and a sales process that doesn’t openly cover off on all of the above points, for any pricing, please get in touch.
The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered and advice and relevant research carried out.
