One of the biggest decisions when considering your mortgage is whether to choose a fixed rate or variable rate home loan, or a combination of the two. With fixed rate home loans currently the lowest on the market they’re a popular choice for new mortgagees but breaking your loan down the track can be an expensive process.
A fixed rate home loan is a mortgage that locks in an agreed interest rate for a certain amount of time and is different to a variable rate home loan where the percentage of interest you pay fluctuates with the market. This is a legal contract guaranteeing that you’ll repay a fixed amount of interest on a loan for a specified time period.
Variable interest rates are often more popular with borrowers when interest rates are high to avoid locking in a high interest rate for a long period of time and in the hopes that they’ll be able to take advantage of a lower rate if the market shifts.
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Fixed rate home loans tend to be more appealing when interest rates are low. Thanks to historically low cash rates fixed rate home loans are proving one of the best options available right now. A fixed rate home loan also makes it easier to keep to a budget and offers peace of mind knowing your repayments will be the same month-to-month, as well as offering some insurance against rising interest rates. However, a fixed rate home loan locks you into your mortgage, meaning if you plan on selling you’ll have to pay fees and other costs to break your contract.
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A fixed rate home loan gives you peace of mind that your repayments will remain consistent, but if also gives your lender peace of mind that they’ll receive repayments for the given length of time.
If you choose to end your contract by selling your property, switching loans or lenders or refinancing, your lender will require you to compensate them for lost interest.
A fixed rate home loan is considered broken with the borrower switches to a different product, makes extra loan repayments outside of contract stipulations, repays the loan in full before the end of the fixed rate period, or when the loan is in default.
When lenders agree to lend you money at a fixed interest rate, we obtain money from the money market at wholesale interest rates based on you making your payments as agreed until the end of the fixed rate period. If you don’t, and wholesale interest rates change, we can make a loss.
The most common fees associated with breaking a fixed rate home loan are break costs and exit fees.
You may also be required to pay a discharge fee to cover administrative costs, typically around $300-$400, which also covers the cost of the lender removing the mortgage that was registered on the title of your property.
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A break cost will apply:
Each of these events is considered a “break”.
When there is a break, you will also need to pay an administration fee regardless of whether a break cost is payable.
Most lenders will allow for some early repayments each year for fixed rate home loans without being charged additional fees.
Each lender will have their own set of terms and conditions that will detail when break costs will apply and how they’re calculated.
However, break costs are more likely to be applied when the current cash rate is lower than the rate when you took on your mortgage, and the lender is set to lose money when they establish a new loan.
If current interest rates are higher than your fixed rate, they might be more willing to let you out of your mortgage contract without charging costly break fees as they benefit from your exit.
When you agree to your mortgage contract your lender borrows money from the wholesale money market using the current Bank Bill Swap Rate (BBSR), which is locked in at the same time as the interest rate of your fixed rate home loan.
The lender agrees to pay this debt back but does not have an option to repay a loan early so when you break your loan they will need to lend the money back out to another mortgagee. If this new loan is taken out at a lower interest rate than your initial loan the lender loses money on the loan you broke.
While break costs can seem like an unfair fee, this is a way for the lending institution to recoup some of their lost funds.
While breaking your fixed rate home loan might not always incur large break costs, if the interest rate is not in your favour this can become quite a high cost.
Your break cost is calculated by finding the difference between the cash rate at the time you took out your mortgage and the current market rate, and using this to calculate the loss to the lender if they were to lend out the fund allocated to you at the current market rate.
Generally, you will need to pay a break cost if, at the date of the prepayment or switch, current Wholesale Interest Rates are lower than your original Wholesale Interest Rate.
Wholesale Interest Rates are lender estimates of the current cash rate at which lenders can transact fixed rate funds with the money market.
Among other things, the break cost formula takes into account:
Each lender will have their own calculations that they’ll use to determine the break costs and should be able to provide you this formula as well details on their specific policies.
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An early repayment means early repayment of the whole, or part, of the unpaid balance of your loan account, before the end of the Fixed Rate Term that was current at the time. An Early Repayment Cost or Early Repayment Adjustment may be charged when you repay a fixed rate loan before the end of the fixed rate term. This will occur when the cost of funds at the start of your fixed rate loan exceeds the cost of funds at the time of repayment, resulting in a loss to the lender.
Early Repayment cost amounts can change from day to day. We recommend speaking to your lender to find out what your early repayment costs could be and what options they recommend.
From 1 July 2011, the National Consumer Credit Protection Regulations 2010 (National Credit Regulations) prohibited early termination fees for residential loans, subject to some limited exceptions.
According to the Australian Securities & Investments Commission many home loans and loans for residential investment properties have early termination fees, which are payable if a customer terminates a loan within a specified time (e.g. three to five years). Early termination fees can be a barrier to consumers switching loans by ‘locking’ them into loans with unfavourable interest rates if the early termination fee is also high.
An early termination fee does not include any fee or charge that is payable regardless of whether the loan is repaid early or not (e.g. standard discharge fees and charges).
This type of fee is said by lenders to be charged to recover the economic cost to the lender of a customer terminating a fixed rate loan before the end of the fixed rate term. It is not charged for variable rate loans. *
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Given that break costs are calculated using the daily interest rate the applicable break cost for your mortgage changes day-to-day. However, lenders will generally provide an estimate that is valid for 2-5 business days depending on your lender. Once your quote expires you’ll need to seek a new one at the current interest rate.
Words by Danielle Austin
Is your current interest rate still competitive? Contact one of our mortgage brokers to compare your options and find a deal that suits you.
Buying a home is likely the biggest and most important purchase you’ll ever make. Thankfully, it’s also one of best investments, making all of those years of diligent saving worth it. Although getting a deposit together is the hardest step, it’s not the only transaction involved in buying a home.
There are many additional costs — both big and small — that are often overlooked by first time buyers. This can leave buyers blindsided and out–of–pocket with extra costs to cover. We’ve compiled a guide listing the upfront and hidden costs involved in buying a home to ensure you’ve covered all bases.
There are various upfront expenses you’ll need to pay your lender when securing your mortgage. These are usually consolidated into a lump sum and included in your overall loan.
Apart from your deposit, stamp duty is usually the second–largest upfront cost. Stamp duty is the tax you must pay on your property purchase and like your deposit, it’s calculated based on the value of the home you’re buying.
Lenders Mortgage Insurance
LMI is a one–off payment, usually between 1–3% of your loan amount. You can waive this cost if you have a deposit of more than 20% or if you have a guarantor.
Title transfer fee
This is a fee charged by the local government to transfer ownership of the home from one person to another. It varies from state to state, but generally costs are between $100 and $140.
Mortgage registration fee
Another government fee which registers your physical property as security on your home.
Some lenders prefer you to pay for stamp duty via other means, such as your savings. However, in many cases your lender will include stamp duty (potentially your Lenders Mortgage Insurance too) in your overall loan amount.
Yes, you will need to pay your deposit — also known as a down payment — to your lender upfront to secure your mortgage. However, there are some exceptional circumstances where a no deposit home loan is available. If you already own a property, you can also use any existing equity in place of a down payment.
Unless you’re exempt under the First Home Owners Grant, you will be required to pay stamp duty — which is tax charged by the government on your property purchase. If you use your property as an investment property, you will also need to claim it as income in your annual tax return.
Most upfront fees tend to be fairly well–known among buyers. Here are the hidden fees that tend to fly under the radar:
Moving in to your home can be more costly than you think. A Guide to the Cost of Home Purchase estimates a bill between $550–$3500.
Legal and conveyancing fees
It’s wise to hire a licensed conveyancer or solicitor to ensure your transfer goes smoothly and your legal documents are airtight.
From visiting your lender to being on site for the inspections, it’s important to keep petrol, parking and toll costs in mind. These smaller travel expenses can add up quickly.
Unfortunately, the costs of being a homeowner don’t stop after the settlement date. Some ongoing costs to factor in include:
You’ve worked hard to buy your new home — now it’s time to protect it. Many mortgage providers actually require you to purchase home insurance (sometimes also contents insurance) in order to cover your home when repairing and rebuilding. The cost of this can vary by as much as $1,335 in Australia, so it pays to shop around.
Strata fees and council rates
Usually billed quarterly, council rates are your contribution to local projects, infrastructure and the maintenance of public spaces. The amount you pay will depend on where you live. If you live in an apartment or townhouse, you will also need to pay strata fees to cover the upkeep of common areas like the pool or laundry, or even the building itself.
Whether your home requires some fix–ups now or later, it’s important to factor in foreseeable renovations when choosing a home.
Utilities and household bills
Unless you rent your property out, gas, electricity, internet and water are all ongoing expenses you’ll need to cover. The amount you pay for gas and electricity depends not only on your provider but also the size and location of your property.
While selling your home is far kinder on the wallet, there are still some costs involved. These include:
If you still have a mortgage owing on the property you’re selling, you will need to pay your lender an early exit or discharge fee. This discharge process can also take between 14 to 21 days.
Ask your lender upfront how they expect to be paid. Some agents work with a flat rate, while others will ask for a percentage of the sale price. Some agents also use bonuses as an extra financial incentive to try and sell the property above the agreed–upon reserve.
Much like buying a home, it’s recommended that you use a professional conveyancer or solicitor to handle the title transfer of your home
While real estate agents will generally recommend a marketing plan, it’s up to you to foot the bill. These costs can include professional photographs of your property, copywriting for your listing, creating a floor plan, signage and more.
Better known as conveyancing, legal ownership of the home must be transferred from one person to the other. While you can choose to do this yourself, it’s best to consult a licensed conveyancer or solicitor to ensure settlement goes through without a hitch.
Hiring a solicitor or conveyancer can cost you anywhere between $500 to $2000.
There may also be some additional disbursement charges, which are charges paid by the conveyancer to a third party. These include settlement fees, certificates and searches such as land tax and heritage listing.
Technically there’s nothing stopping you from handling your own conveyancing. Some states such as Victoria and Queensland even offer DIY conveyancing kits for around $100, which guide you through the process. However, it’s important to note that conveyancing can be quite time–consuming and overwhelming. It can also be quite costly if you make an error and set back your settlement process. If you’re not well–versed with legal terms or comfortable handling complex paperwork, it’s best to hire a qualified conveyancer or solicitor.
You can generally expect it to take between 4 to 6 weeks from putting in your mortgage application until the settlement date.
Some solicitors and conveyancers do accept payment via credit card, up to a certain amount.
Yes, a conveyancer or solicitor will normally conduct a search of property title records during settlement. They can also order other appropriate searches, such council or water rates, roads, land tax searches and heritage listings.
The conveyancing process can take anywhere from 30 to 90 days depending on where in Australia you live, so be sure to check in with your local guidelines.
The cheapest way to buy a house is not always the best, as it’s more important to ensure the property is a robust long–term investment. However, there are some ways you can reduce the costs involved in buying a home. You may choose to look in a more affordable area or purchase a cheaper fixer–upper that will increase in value with renovation. It’s also a good idea to take advantage of the First Home Owner Grant if you are eligible, as this can make purchasing a home considerably more affordable.
Research shows that only 10 to 20% of home transactions are done without the assistance of an agent. While there’s no legal requirement to use a real estate agent, there’s a good reason most people choose to do so. Real estate agents are likely to have a much better understanding of the suburb and market you are buying in. Agents will also have better negotiating skills, meaning you’ll be left with a better deal.
Although first home buyers are expected to pay the upfront and administrative costs mentioned, they may be eligible for a range of concessions – depending on the state or territory and property price. Each Australian state and territory has their own version of the First Home Owners Grant, so be sure to check out our guides to your area.
Words by Emma Norris
By making sure you’re aware of both the upfront and hidden costs involved in buying a home, you can approach a lender with confidence and avoid any unpleasant surprises. Need help getting a home loan? At eChoice, our experienced brokers can assist with your application and help you find the right mortgage for you.
The renting versus buying debate has raged on for years. Many people feel that it’s unaffordable to buy a home, so they prefer to rent. Others think renting is a waste of money and would prefer to buy.
So, is buying a house rather than renting the best choice for you? Well, this depends on your circumstances and on where you choose to live. Let’s look at the pros and cons of renting and buying a home in greater detail.
Many people classify renting as dead money. Here’s the deal: basically, when you pay rent you are paying off someone else’s mortgage or providing them with an income. Therefore, your money is not working for you, but it is working for someone else. Thus, your money appears as ‘dead’ or of little value to you.
What’s the bottom line? Well, before you rush into buying a home you must also look at the costs as paying off a home loan can be more expensive than renting. So, if you find that you are in this situation because of the location you’re renting in, then there is a way you can make renting work for you. Simply invest your money elsewhere. This will then allow you to grow your wealth and create a better financial future.
You can invest in a few ways. Firstly, you could buy an investment property in a more affordable area, while you rent a property in an area that is more expensive. Over time, your tenant will pay off your investment property mortgage for you. Secondly, you could buy stocks and shares and then watch these grow in value.
Buying your own home is what many people refer to as the great Australian dream. Factually speaking, this term is true, as when you buy a home you are forcing yourself to save and to build long-term wealth. In addition, you’re also developing your own security and controlling your financial decisions.
Of course, if you’re concerned about the level of financial commitment when buying a home, then one option you should consider is renting out a room in your home to help you cover costs. This way you won’t overstretch your budget and you’ll be able to watch your home appreciate in value.
The best way for you to decide whether buying a house rather than renting is for you is to review your current financial circumstances. You can do this by looking at the purchase prices for property you’d consider buying in areas that you like. Research the market. Look at sales data and go to open inspections. There’s a massive difference between thinking you can afford to buy a home and knowing you can afford to buy a home.
Next, look at the costs of homeownership and compare these to renting, before you decide to rent or to buy. It’s also important for you to consider your lifestyle and flexibility. If you plan to move for work or study, or travel around Australia or overseas, then it may be a clever idea for you to rent rather than to buy a home.
Want to know the best part? You can easily calculate the costs of buying a home and find out your borrowing power by using stamp duty and borrowing power calculators. There are also rent versus buy calculators available that will allow you to gauge whether you’d be better off renting or buying.
While you’re able to earn an income, you have financial security. But, if your ability to earn gets compromised due to an accident, illness, or old age, then you’ll need an alternative means to provide you with an income. For many people, owning their home gives them peace-of-mind that if they need to they can sell this asset so they will have enough money to live on. The same does not apply to renting.
When you own your own home, you make the rules. You can renovate your house, welcome your furry friend and do simple things like hang pictures on the walls. These are freedoms that are often not available to renters and can impact your quality of living significantly.
The process of moving from home to home is laborious- and a challenge that serial renters know all too well. Having a home to call your own will mean that you have the security to stay and leave as you choose. You will no longer have to deal with the anxiety of the landlord kicking you out – which is common in Australia where residential leases typically only span six to twelve months.
We all dread paying tax, but with selling your own house you don’t need to worry about all your money falling into the pockets of the government. This is because Australians are exempt from the Capital Gains Tax when they sell their primary place of residence, so you will be the one profiting when you sell your home.
Buying a home typically allows you to create wealth, with rising house prices and low interest rates being the optimum formula. This is because equity will be increasing.
Equity is the difference between the value of your property and the value of your mortgage. It can be used for further investments, or for other business/financial purposes.
Let’s say that you bought your home for $420,000 and 12 years later an agent values your home at $580,000. Over the 12 years, you’ve also reduced your mortgage from $260,000, down to $90,000. Therefore, the amount of equity you have in your home is its current market value of $580,000, less what you owe on your mortgage being $90,000, which equates to $490,000.This equity, which you’ve built-up, could then put you in a position to be able to secure the purchase of an investment property
Buying a house doesn’t have to be a far-fetched fantasy only available to the wealthy. Data from the November 2019 ANZ CoreLogic Housing Affordability Report has revealed that there are regions in Australia where it is actually cheaper to buy than rent.
These are all very different areas. Some of these places are rural, some are suburban, and some are tourism hotspots. Begging the question, what is making these areas cheaper to buy in?
The ABC has identified various trends in the areas where it was found to be cheaper to buy than rent. For instance, mining towns were cheaper to buy due to the high numbers of fly-in mining and construction workers which has created a demand for rental properties.
Similarly, regions such as the Gold Coast, Whitsundays and Alice Springs, which appear on the list, can thank the booming tourism in the area that has made it cheaper to buy due to the high rates of rental occupancy.
Research from Domain has also found that the combination of declining interest and mortgage rates has increased the number of suburbs where buying is cheaper. They also noted that many of the regions were in lower socio-economic areas.
Seemingly, the only thing more boring than mortgage talk is insurance talk. Despite this, sometimes renegotiating your mortgage is necessary, especially if your current deal is ripping you off.
As life goes on circumstances change, and if you refuse to look at giving your mortgage an update, you could be missing out on a better – money saving – mortgage deal. Lower interest rates, a higher income, new job or just the fact you’ve paid off a lot of your current loan could all earn you a better home loan.
Although it might seem daunting, renegotiating your mortgage is not hard. Like most things, it’s just a matter of knowing what to do, so to help you out we’ve compiled a list of tips to help you renegotiate your mortgage with confidence.
When you first sit down with your lender to renegotiate your mortgage, it’s important to have a clear idea of what you’re trying to gain, otherwise you might walk out with a deal that doesn’t reflect your interests.
What are your goals for the renegotiation? Are you looking to decrease your monthly repayments? Lower your interest rate? Or are you just looking to add features to your account, such as access to redraw facilities?
It’s also important to be able to tell the lender why you want these things. Are you saving for a renovation? Looking at investment in the future? Or do you just know that you could get a cheaper deal elsewhere? Clue the lender in and you’re likely to have more success.
No matter how many debate championships you’ve won, if you’re campaigning for an impossible deal, chances are your lender is going to say no. Likewise, if you’re not asking for enough, you could also be letting yourself down.
For this reason, it’s important to know the competition. What kind of deals would you be eligible for if you moved elsewhere, instead of renegotiating? Compare other lenders’ mortgage rates and products with your own. Look at their interest rates, fees and charges and print them out to take to your meeting.
While research might be tedious, being more informed increases the likelihood that you could walk out with a better deal – or at the very least, if your lender says no, you’ll know where to go next.
Seriously consider the costs of refinancing your mortgage with another lender – and add them up! If your current lender can’t offer you what you want and someone else can, how much is going to cost you to move? Are there break fees? Any closing fees? Would you need to re-pay lenders mortgage insurance? Whether or not the cost is worth it, once you know where you sit you will be able to better negotiate with your current lender.
All lenders are different, and all lenders are going to have different capacities as to what deals they can offer when renegotiating. If you’re with a smaller lender, they might not have the same backing behind them to offer a better, more risky deal than a bigger lender might have. At the same time, if you’re self-employed or there is something ‘non-standard’ about your application, there might be a limited number of lenders with the flexibility to offer what you’re asking for.
By all means, ask for what you want but understand that despite your best efforts, a renegotiation with your current lender might not always be possible.
Words by Kathryn Lee
Want a better mortgage deal? Refinancing might be an option. Contact eChoice and we’ll put you in touch with one of our friendly mortgage brokers who will be able to help guide you through your options and find you a better deal.
Now that we are living longer, retirement can be a three–decade period, sometimes more. That’s a long time to be worrying about debt.
Despite its significance, a large number of Australians aren’t thinking about retirement early enough. As a result, more and more Aussies are now working into what used to be considered ‘retirement’ years to pay off their mortgage. On the other end, those who do retire are more likely to experience financial insecurity.
But with some planning, you can make a big dent in your debt and improve the quality of your retirement.
Significantly more Australians are retiring with debt, according to a recent study by the Australian Housing and Urban Research Institute (AHURI). With house prices rising and wage growth on a slower trajectory, many retirees are struggling to keep up with mortgage debt.
Between 1987 and 2015, the average mortgage debt for over–55s jumped from $27,000 to over $185,000.
It was found that mortgage repayments were the largest expense for retirees, eating up to one third of their spending. With ongoing repayments some retirees are left without enough funds to cover basic living costs. About 8% of older Australians with mortgages have reported falling behind on utility bills, compared to the 3% of outright homeowners.
Looking at data from the Australian Bureau of Statistics’ survey of income and housing, there are similar findings, with an increase in homeowners owing money on mortgages across every age group between 1990 and 2015. But the biggest rise in debt is among homeowners approaching retirement.
It is undisputed that being indebted adds to psychological distress. Alarmingly, these impacts are more profound for older individuals who have less ability to recover from financial shocks.
This growing debt has also increased the chance of poverty during retirement. With unwelcome risks including forced retirement due to health or an employment shock, plans to keep up with repayments may be derailed.
From 2000 to 2010, approximately half a million Australians age 50 and over lost their homes.
Financial planners suggest that you should be looking to pay off your home at least ten years before you retire. To do this, you need to map out how you will reduce your home loan debt.
Words by Michelle Elias
Want to know more about your options for investing in property during retirement? Contact eChioice and we’ll help you find the right deal. Our brokers have access to 100’s of home loan products, so we’ll be able to find you the right mortgage.
If you’ve never built before, then getting your head around a construction loan can be confusing. Once you understand that these loans work a little differently to conventional loans, it becomes much easier. We’ve broken down what a construction loan is, in detail, so that you won’t lose any sleep over the logistics when it comes time to build.
Simply put, a construction loan is a type of loan designed primarily for people who are building a home. This loan only applies to new properties, so anyone buying an established property is unable to get the same type of funding.
Construction loans are designed to work in conjunction with the building process and require regular payments as completed stages of construction occur. These payments are called ‘progress payments’, which is when the borrower releases some of the funds approved by a lender to the builder.
Most lenders offer construction loans, but not all, so check that your lender provides this type of finance before applying for a loan.
Progress payments when building typically take place in five stages, though some builders may have different schedules, which you should find out before you sign any contract. It’s also important to ask about fees, as most lenders charge you when they make a progress payment – also known as a progressive drawdown.
The main stages of building when progress payments occur are:
When you first apply for a construction loan, your lender will need to see a copy of the building contract. Lenders also request an independent evaluation of the estimated value of the property at the time of completion. This valuation ensures that they are making a sound investment. If satisfied with the figures presented, then your lender will then agree to lend you a specified amount. If this amount does not cover the full loan cost, then you’ll need to pay the shortfall or balance owed using your own funds.
Under new legislation, the short-fall is payable at the time of land settlement. Therefore, you’ll need to make sure you have these funds available or you may jeopardise land settlement.
You must also be aware that any other costs you incur, which were not in the original contract, will need to be covered by you. For example, if at the time of selecting your fittings for the new home, you choose designer items instead of the standard included in the contract, which cost an additional $2,500, you’ll need to pay this expense at the time of completion.
However, there are exceptions to this rule. Some lenders will allow you to increase your loan to cover more substantial expenses, but you’ll typically need to apply at least a month in advance to cover the shortfall.
Before you jump into a construction loan, it’s essential that you find the right product for you and your circumstances and consider interest rates, fees and features, as well as construction terms. By comparing these, and then negotiating with lenders, you’ll get the best possible deal.
Are you thinking of building your own home, but aren’t sure where to start? eChoice’s expert brokers can help you understand the market and simplify the process of applying for a construction loan. We have access to hundreds of products, so we’ll find you a competitive rate.
When buying your investment property, it’s vital to keep costs and returns in mind. This perspective keeps property investment real and stops you from getting caught up in the savings hype. Let’s look at investment property tax from both sides of the coin, so that you can work out the costs and how much you could save.
There are many taxes that you’ll attract as a property investor as well as deductions that you’ll be able to make at the end of the fiscal year. Consequently, you need to weigh-up both to find out whether or not buying an investment property is justifiable.
There are several taxes associated with your property investment. Some are tax deductible, while others are not. The following are the most prominent:
How is capital gains tax calculated?
Let’s look at an example.
You buy an investment property for $190,000 in 1998. In 2018, you sell this property for $490,000, and your current taxable income is $50,000. The cost to buy the property including stamp duty, tax advice and capital improvements was $47,000. Ownership costs were $126,468 and the costs of selling $23,000. Based on this, the capital gain made was $103,432. Subsequently, the tax payable under the new Capital Gains Regime of a marginal tax rate x half the capital gain is $24,582.
A vast range of expenses that relate to your investment property are tax deductible, so keep sound records and all receipts. However, remember that you can only claim these if the property is an investment that you don’t live in, which is either currently tenanted or available as a rental.
Properties built or renovated to a tenant are exempt from the payment of GST. However, if you’re building to sell for a profit or looking to ‘flip’ the renovated property for profit, then you’re liable to pay GST on the sale; you will also have to pay capital gains tax.
In most cases, the general tax allowances for your property investment are straightforward. These are as follows:
What can I deduct?
While this is an extensive list of tax-deductible items, there may be more. Therefore, always consult your accountant before lodging your tax return.
This information is a guide only and is an estimate only based on the past 12 months of aggregated online mortgage enquiries from eChoice and partner programs. Submitting your enquiry An eChoice home loan expert will be in touch soon.
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Negative gearing refers to the situation where the costs of owning an investment property are more than the rental income, resulting in a loss. In this case, the Government allows investors to claim their investment property expenses off their income before paying tax, thus paying less tax.
So, how does it work? Well, when an investor buys a property they incur expenses – loan interest, council fees, etc. – and they collect rent. As soon as the cost of owning the property becomes higher than the rental income collected, the property becomes negatively geared.
For example, let’s say you collect rent of $15,200 a year on your property, but your property expenses are $17,500 yearly. Consequently, this means that your property expenses become tax deductible. So, if you earn $52,000 in this financial year, then your taxable income becomes $34,500. So, you’ll incur tax on this amount.
How does negative gearing benefit me?
What are the risks for me?
Not all investment properties are negatively geared. Some rental properties collect more rent than ownership costs making them positively geared. Once this occurs, the profit made on the property annually becomes a part of your taxable income.
So, if you’re purchasing your own investment property and need a property investment loan, contact eChoice and achieve your investment goals faster by speaking to a qualified mortgage broker who can help by gearing your property portfolio with the right investment loans. Our brokers have access to 100’s of products, so we can help you find a competitive mortgage to meet your individual needs.
Property investment builds wealth providing you make sound decisions that create excellent financial returns. However, there’s an art to investing right. So, before you rush out and start buying property, you need to do your research and consider the upfront costs involved in property investment. Then, you can determine if property investment is affordable for you. Let’s look at the costs you may encounter and just how expensive these may be so you can adequately budget when looking to buy an investment property.
Knowing whether you’re eligible for the First Home Owners grant could save you a considerable amount of money. Most Australian grants are more than $7,000, and this can cover some expenses such as stamp duty or associated fees when buying.
Generally, the grant varies in size depending on where in Australia you are seeking to buy. Additionally, the grant’s size changes depending on which government is in power, and on state and federal government budgets.
Also, there are a few rules that you’ll need to meet before you can receive the grant. While these are straightforward, it’s important that you read the full documentation, and then apply. This strategy ensures that you’ll have the best chance of approval.
So, who is eligible for the grant?
To be eligible for the grant, you’ll need to be:
Stamp duty is a government cost that differs from state-to-state. Though, in most cases, it is dependent on the purchase price of the property. Some states also offer first home buyers stamp duty exemptions. So, it pays to review your eligibility.
How does stamp duty affect me?
Stamp duty can:
If you don’t have home equity, then you’ll need to save a deposit before buying an investment property. Sure, you can borrow more than 80% of a property’s value, but you’ll have to pay Lenders Mortgage Insurance (LMI). This insurance can add tens of thousands to the cost of property and is an additional cost that you should look to avoid, if possible.
Who does LMI protect?
Your primary place of residence is exempt from land tax. Nonetheless, an investment property may attract a fee. Once again, this tax varies from state-to-state.
What are the terms of land tax?
The amount of land tax payable depends on the state the property is in, and the value of the property. Other considerations are:
Local council taxes apply to property you purchase. These fees vary depending on the council that governs your property and the estimated value of the home.
What does this cost cover?
This property investment cost typically covers:
Should you purchase a townhouse, unit or apartment, this will attract a corporate body fee. This fee covers the costs of maintenance and insurance for the grounds and buildings. All complexes have varying fees depending on the property type purchased and the size of the actual property.
How much are corporate body fees?
When you first buy property, you’ll need to ensure the installation of all utilities. These include water, electricity, and gas, if available. While your tenant handles the connection and usage cost to all utilities, except water, you’ll need to manage the initial utility set-up.
What utility costs apply?
The costs you can expect to pay include:
Any property attracts an emergency services levy. This fee pays for the metropolitan and country fire service, state emergency services and marine rescue.
How is the fee calculated?
The services levy is governed by:
Creating a home budget is an excellent way to take control of your finances. Plus, it enables you to save for a home quicker, and then to manage the mortgage once you are committed. So, while it seems daunting, working out where you spend money, and how you can save, is sound monetary management. In addition, after you’ve done it once, it’s straightforward and efficient to use repeatedly. Let’s look at how you can ‘crunch those numbers’ and become a financial guru.
A home budget shows how much you are earning, spending, and saving. So, while it’s tempting to avoid doing a budget, the outcome is well worth the effort. Why? Well, creating a realistic budget helps you to achieve your savings goal faster.
A straightforward way to create a home budget is to review what you earn, what you are spending where, and then calculate your savings. Here’s the deal:
Write down your current income – Grab your pay slip and jot down your take-home pay after tax and super. Now: if you’re self-employed, then use your business bank statements to calculate your average weekly wage. But, if you find that your salary fluctuates depending on work, then look at your last tax return. Also, include any other sources of income – child support, government benefits, etc.
Calculate your spending – Think about what you buy every day – coffee, lunch, and treats. Let’s call these luxury items. Next, write down every daily and weekly expense, and be honest. Taking shortcuts here won’t reveal how much you’re spending otherwise. Don’t forget to include the cost of running your car – registration, petrol, insurance – and make sure you include your bills. If you’re not sure what you’re spending, then look at your bank statements and create a monthly diary of your spending. Make sure you write down all living expenses – food, nights out, entertainment, school fees, etc. Let’s call these necessities.
Work out your savings – Add up the ‘luxury items’ and ‘necessities.’ Then, take the necessities from your income, and see how much is left. This amount is how much you could save if you forgo those luxuries.
No one likes them, but there are times when occasional costs arise. These costs include those expenses that come around annually or once every few years. These include school fees, new tyres for the car and servicing, as well as life insurance and other costs. Therefore, when making a budget, it is essential to add these to your spending as well.
You might be wondering: if you are finding it hard to account for everything you spend, then a handy method to overcome this is to use categories. Want to know the best part? Grouping items together takes the guesswork out of budget creation, and makes it easier to cover all your expenses. Some categories you could use include:
When creating a home budget, always make sure you set aside some money to cover anything unexpected. For example, rises in rent, higher than expected bills and appliance breakdowns. If you own a car, then set aside some money for repairs, because sometimes a vehicle needs extra work to keep it running.
If you’re saving for a home loan deposit, then it is a smart idea to calculate your stamp duty and other costs such as moving fees and conveyancing charges. This strategy will enable you to save more so you cover all costs, and so you avoid any financial difficulties once you’ve committed to buying a property.
Saying that you are going to forgo all luxuries until you’ve saved for a home is not realistic. Therefore, it’s vital that you include entertainment, the odd night out and gifts within your budget. By making your budget realistic, you will find it easier to maintain. Moreover, you’ll also discover that it’s not too restrictive on your lifestyle.
There are many ways that you can save for a home loan faster. Here are two of the best: