How do construction loans work?
On the surface, buying and building a house seem pretty similar, but they’re different when it comes to the finance side.
To buy an existing property, a conventional mortgage is used, but when building from scratch, a different type of lending product is needed. It’s called a construction loan.
Specifically designed for people building, construction loans are funded in progress payments that cover the cost of each stage of a build. Payments are sent to the builder as each section is completed.
With low interest rates and a several government incentives on offer, there’s been a surge in the number of construction loans being taken out across Australia of late.
Australian Bureau of Statistics (ABS) data shows the value of new owner/occupier home loans rose 0.8% to $17.4 billion in October, a jump of more than 30% year-on-year.
“The value of construction loan commitments has risen by 65.6% since July, which coincides with the June implementation of HomeBuilder in response to Covid-19,” according to ABS’s Head of Finance and Wealth Amanda Seneviratne.
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What’s a construction loan?
A construction loan is a loan designed specifically for those who build a home, rather than buy something that’s already built. They’re generally for new properties, but can also be used for renovations.
Construction loans offer progressive drawdown, meaning the lender pays your loan in small chunks – as and when your builder completes a stage – rather than in a lump sum.
Most construction loans are interest-only for the duration of the build too, so while your home is being built, your costs are kept to a minimum. After this time, the loan reverts to principal and interest. Most lenders, such as the big four banks, offer construction loans.
What are the advantages and disadvantages of construction loans?
As with any finance option, there are advantages and disadvantages of construction loans.
Pros
- Financial protection: By making progress payments, rather than paying a lump-sum up-front, you cover yourself against financial loss. You also ensure the work is completed to a satisfactory standard.
- Reduced interest: If you’re only making partial payments, you’ll only incur interest on the amount you’ve drawn down.
- Additional payments: Most lenders allow you to make additional payments into your construction loan. This reduces your balance and means you may pay less interest.
Cons
- Bigger deposit: Construction loans typically have a higher loan-to-value-ratio (LVR). So, you’ll need to ensure you have an adequate deposit to cover additional costs.
- Progress payments: Typically, your lender will need to assess work carried out before they’ll release a progress payment. This process can be time-consuming and frustrating.
- Higher rates: Construction loans often attract higher interest rates, so it’s important to do your homework before signing a contract, so you don’t end up paying more than you should.
- Paperwork: As a construction loan is more complex than a regular loan, the paperwork can be arduous and involve a lot of back and forward between you, the lender and your builder.
How to create a design checklist for your build
Building a home is exciting, but before you start, it makes sense to sit down and think carefully about each step. A design checklist is a great way to do this. The Commonwealth Bank offers some great advice about how.
1. Do your research
Whether building on land you own or looking to buy land to build on, research is vital. Look at what’s available, the suitability for what you want to build, the nearby infrastructure and the applicable rules and regulations.
2. Choose a builder and/or architect
It’s important to spend time finding the right builder and architect, if you want to use one. Get recommendations from friends or family, contact the local Master Builders’ Association and get several licensed builders to quote.
3. Draw up plans and get a fixed price building contract
Your builder should provide detailed plans and accurate costings for every aspect of the build. Ensure the contract covers everything and agree to a timeline for completion.
4. Understand “out of contract” items
Look into “out of contract” items. These are extra improvements which might not form part of the fixed price building contract. They’re restricted to “non-structural” works, like floor and window coverings. Additional improvements like pergolas, landscaping and swimming pools can also be classed as “out of contract”. All these extras need to formally quoted for.
5. Have your plans approved
The builder or architect generally handles getting plans approved. Ensure this is done early, as it can take time to get through council and sometimes amendments might be needed.
6. Apply for a construction loan
Next is the application process. Applying for conditional pre-approval is important, as it’ll help give you a good understanding of what you can afford when choosing the design and builder.
How are payments deducted with a construction loan?
One of the key differences between a traditional mortgage and a construction loan is how it’s paid. They’re funded in progress payments that cover the costs for each stage of your build. Payments are sent to the builder as each section is done and signed off.
Construction loan payment stages
- Slab or base down – The first drawdown covers the foundation. This generally includes levelling the ground and installing plumbing and waterproofing. It represents approximately 15-20% of funds.
- Frame up – The next drawdown is for the framing. This generally includes the construction of trusses and windows, roofing and partial brickwork. It represents approximately 20%.
- Lockup – Lockup is when the building is lockable to the outside world. This drawdown generally includes brickwork and external doors, putting up external walls and insulation and installing windows and doors. It represents approximately 20 per cent.
- Fixing or fit out – This stage covers the installation of internal fittings and fixtures and items such as internal cladding, tiles and partial installation of shelves, cupboards and cabinets. It also covers plumbing and electrical. It represents approximately 30 per cent.
- Completion – This payment covers the finishing of walls and ceilings, as well as painting, electrical appliance fitting and the final clean and presentation. It represents approximately 10 per cent.
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Does the construction loan cover contract changes?
Any other costs you incur, which were not in the original contract, will need to be covered by you. For example, if 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 end.
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.
How do you qualify for a home construction loan?
Qualifying for and securing a construction loan is more complex than getting a regular home loan.
Using the plans, a property appraiser will work out the expected value of the property when it’s completed, and from this figure, determine how much money you’ll need to borrow to pay the builder.
If you’re paying a registered builder to build your home, you’ll likely need to provide:
- A copy of signed industry-standard fixed-price contract and an acceptable progress payment schedule
- A copy of plans (including measurements), specifications (materials and inclusions etc.) and permits
- A receipt for any deposit paid to the builder or suppliers
- A copy of the builder’s licence
- The builder’s bank account details for direct credit of progress payments
- Copies of insurance policies.
Next up is having the deposit, which can be anywhere from 5 to 25%, depending on the lender. Lenders’ mortgage insurance might also be payable.
You might also like: Understanding Lenders Mortgage Insurance (LMI)
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How much can you borrow on a home construction loan?
As with any loan, the amount you can borrow for a construction loan depends on a range of factors such as your salary, living expenses, existing equity, whether you’re applying for a joint loan, interest rates and many other factors.
In general, construction loans have a variable rate, with a maximum LVR of 95%. This varies depending on lenders.
You might also like: Buying a home? Here’s what you need to know about loan-to-value-ratio (LVR)
Words by Erin Delahunty
Originally published November 2018. Updated January 2021.
Sources:
If you’re thinking of building a 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.
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Which suburbs are selling like hotcakes, despite the cooling property market? We uncover the Australian suburbs of 2018 that have seen the greatest demand in the last 12 months.
Despite an overall decline in the property market, Sydney and Melbourne are still widely-regarded as property investment meccas, for some, these cities represent hares – fast, flighty but resilient. Regarding investment though, buying in either city now may mean you’ll have to sustain a loss on your purchase price until the market regains momentum.
Hobart and Adelaide, on the other hand, are cities many perceive as tortoises – slow, steady and gradual. While these markets don’t break records regarding gains, they also don’t lose value, making Hobart and Adelaide hot on the hit list for prospective investors.
So, which popular Australian suburbs in Sydney, Melbourne, Hobart and Adelaide have made it onto 2018’s
The 10 most popular Australian suburbs of 2018
- South Hobart (Hobart, Tasmania) – Ranked as the fourth best suburb in Greater Hobart, South Hobart received 9 out of 10 in reviews with great home resale and rental value. This suburb is populated by professionals, singles, families with children and retirees.
- Battery Point (Hobart, Tasmania) – As the 18th most popular suburb in Greater Hobart, Battery Point ranks highly for shopping, gym and fitness, eating out and public transport, scoring a 7 out of 10 in reviews. Singles, professionals, retirees and also tourists live in this suburb.
- Crafers West (Adelaide, South Australia) – With a 7.7 out of 10 review score, Crafers West is relatively quiet with minimal traffic, and it’s considered clean and green with a multitude of parks and recreational areas. Families, professionals, singles, retirees and tourists live in this popular location.
- Red Hill (Melbourne, Victoria) – Scoring 8.8 out of 10 in reviews, this locality attracts families, professionals, retirees and tourists, as well as country lovers. Considered neighbourly and peaceful, Red Hill also has great resale and rental value.
- Aldgate (Adelaide, South Australia) – With a 9.6 out of 10 in reviews and ranking as the fourth best suburb in Greater Adelaide, Aldgate is peaceful and quiet and considered clean and green with neighbourly spirit. This location is home to retirees, country lovers, singles, professionals and families.
- Collaroy Plateau (Sydney, New South Wales) – Scoring 8.5 out of 10 with excellent internet access and public transport, Collaroy Plateau has great home resale and rental value. Retirees, families, professionals and singles predominately live in this area.
- Park Orchards (Melbourne, Victoria) – Park Orchards ranks 8.7 out of 10 with great parks and recreation options, being clean, green and quiet with minimal traffic. Ideal for country lovers, singles professionals, retirees and families, this suburb is popular with most demographics.
- Middle Park (Melbourne, Victoria) – Scoring 8.9 out 10, Middle Park is classified as a great suburb for eating out and also has excellent parks and recreational areas. Singles, professionals, families, retirees and the LGBTQI community reside in this location.
- West Hobart (Hobart, Tasmania) – A 9.3 out of 10 review rating and ranking as the second-best suburb in the city indicates the popularity of this Greater Hobart area. Considered as neighbourly, safe, and quiet with great schools and parks, the gay and lesbian community, retirees, singles and families populate this suburb.
- Birchgrove (Sydney, New South Wales) – With a 9.0 out of 10 review rating, Birchgrove is clean and green, has great gyms and fitness facilities, as well as parking and recreational facilities. This suburb is popular with professionals, singles, families, retirees and tourists.
What makes these the most popular suburbs of the year?
These properties received the greatest number of searches on real estate websites but had the least number of properties for sale, so their demand is higher than other suburbs.
All but one of the suburbs on this list are within an hour of the CBD, so they are a relatively short commute to the city, making them favourable as investments.
There are several tell-tale signs that a suburb is ripe for plucking, including distance to the CBD, median property value and the current ownership demographics.
| Most Popular Australian Suburbs, 2018 | |||||
| Suburb | Distance to CBD (Car) | Avg Age | Demographics | Property ownership | Median Values |
| South Hobart | 6 mins | 20 to 39 | 35% singles, 35% families | 31% fully owned, 31% purchasing, 38% renting | $650,000 |
| Battery Point | 7 mins | 20 to 39 | 41% families, 59% singles | 32% fully owned, 19% purchasing, 50% renting | $1,275,000 |
| Crafers West | 22 mins | 40 to 59 | 57% families, 43% singles | 34% fully owned, 53% purchasing, 13% renting | $640,500 |
| Red Hill | 65 mins | 40 to 59 | 58% families, 42% singles | 45% fully owned, 40% purchasing, 15% renting | $1,417,000 |
| Aldgate | 23 mins | 40 to 59 | 61% families, 39% singles | 43% fully owned, 47% purchasing, 10% renting | $727,500 |
| Collaroy Plateau | 42 mins | 40 to 59 | 59% families, 41% singles | 40% fully owned, 45% purchasing, 15% renting | $1,710,000 |
| Park Orchards | 36 mins | 40 to 59 | 63% families, 37% singles | 49% fully owned, 46% purchasing, 5% renting | $1,515,000 |
| Middle Park | 18 mins | 40 to 59 | 48% families, 52% singles | 37% fully owned, 25% purchasing, 38% renting | $2,740,000 |
| West Hobart | 4 mins | 20 to 39 | 39% families, 61% singles | 31% fully owned, 31% purchasing, 38% renting | $686,000 |
| Birchgrove | 14 mins | 40 to 59 | 47% families, 53% singles | 33% fully owned, 33% purchasing, 34% renting | $1,800,000 |
Source: Domain and Realestate.com.au
Saving for any item can be tough. But, when it comes to banking the thousands needed to secure a home loan, it’s even more of a challenge. Taking out a no deposit home loan could be the way to negotiate your way around this financial roadblock, so you can buy a home sooner.
What is a no deposit home loan?
Usually, a lender will ask for a 20% deposit when you seek to buy a home, as this reduces their risk, but if you don’t have a deposit, you can apply for a guarantor no deposit home loan. This type of home loan is typically secured on your behalf by a third party – such as your mum, dad, aunt, or uncle – using an asset. The asset is usually a residential property that has a loan-to-value ratio of less than 80%.
For example, Neena and her partner want to buy a home for $350,000. Sure, it’s a renovator’s delight, but Neena is an interior designer and her partner is a licensed builder. The couple can afford the home loan repayments; however, they’ve only saved $20,000 towards the deposit. With lenders asking for a 20% deposit, Neena and her partner know they’ll need to find another $50,000 to secure the mortgage. Knowing the home represents excellent value for the asking price, Neena turns to her family for support. Her aunt, who owns her home, agrees to act as a guarantor as she has more than enough equity in her property to secure the loan.
How much can I borrow using a no deposit home loan?
The amount you can borrow under a guarantor loan depends on what type of buyer you are – a first home buyer, investor, home builder, refinancer, or debt consolidator. In most of these situations, you can borrow up to 105% of the property’s value. The extra 5% will cover stamp duty and other added fees that buying a property incurs.
Of course, these amounts vary from lender-to-lender, so you’ll need to do your research before taking out a guarantor loan. You also need to be aware that not all lenders offer guarantor loans, so shop around to find the right lender for you. If you’re unsure, contact a mortgage broker, who can explain your options and help you with your loan application.
What are the benefits of a no deposit home loan?
Guarantor no deposit home loans enable you to:
- Borrow the full property purchase price without needing a deposit or incurring Lenders Mortgage Insurance (LMI).
- In some cases, you’ll be able to borrow enough to also cover the fees so that you won’t have added expenses.
- You can remove the guarantee after you’ve paid off more than 20% of the home’s value.
- Secure a lower interest rate.
Do I need genuine savings to secure a no deposit home loan?
While guarantor loans enable you to borrow the full property purchase price, in most cases you will still need to have some genuine savings to qualify for the loan. Usually, 5% or more of the property value counts as authentic savings. Some lenders may also consider at least three months of regular savings, banking a weekly amount, as enough to meet the criteria for a no deposit home loan. Additionally, many lenders also classify the payment of rent as genuine savings because it’s a regular payment made by you that proves you’re able to manage your finances.
Can I buy an investment property with a no deposit home loan?
Most lenders will consider owner-occupied guarantor loans. However, only a handful are interested in investment guarantor loans as they typically represent a more significant risk. While several of these lenders will consider a single investment property, most are not interested in multiple properties. So if you’re looking to build a portfolio, you may need to consider other options.
When the guarantor secures multiple properties, they are assuming the risk. Yet, the borrower makes all the profit by collecting the rent generated from the properties. As a result, a lender views a guarantor loan on multiple properties as being over-exposed to the financial threat for the investment to be practical.
What types of no deposit home loan guarantees are available?
There are four main types of guarantees available for a guarantor home loan:
- Security guarantee – Also known as an ‘equity guarantee’, this assurance uses real estate as security. The property offered as security is either owned wholly or under a mortgage. If already mortgaged, then a second mortgage covers the portion required as security.
- Security and income guarantee – Friends, acquaintances or family members can secure the loan using a property and their income. While the asset secures the loan, the income proves the loan is affordable.
- Family or parent guarantee – A family member or parent guarantees the loan using their real estate assets as security. Assessment of this guarantee is often done on a case-by-case basis.
- Limited guarantee – This guarantee covers part of the loan, rather than the full amount. As such, the guarantor only provides enough security to cover a part of the loan to reduce their liability.
Is a first home buyer eligible to get a grant with a guarantor no deposit home loan?
In some states, yes, it is possible to have a guarantor no deposit home loan, and still be eligible for both the stamp duty reduction and First Home Buyer Grant. However, you’ll need to check your eligibility before applying for the loan.
A sharp shift from the deeply creative, mystical, night sky-inspired hue of 2018’s Pantone Colour of the Year, this year’s pick – Living Coral – has been dubbed “an animating and life-affirming hue that energises and enlivens with a softer edge.”
Providing a visual and timely reminder to get back to what matters and put less investment into the digital technology and social media that have wormed their way firmly into our daily lives, the colour standards company’s colour of the year, PANTONE 16-1546 Living Coral, is briefed with encouraging us to “seek authentic and immersive experiences that enable connection and intimacy.”
Think that’s a big call for a colour to achieve? In a press release, Pantone says – drawing from nature – PANTONE 16-1546 Living Coral emits the desired, familiar and energising aspects of colour found in nature, with its peachy shade of orange and golden undertones.
“In its glorious, yet unfortunately more elusive, display beneath the sea, this vivifying and effervescent colour mesmerises the eye and mind. Lying at the centre of our naturally vivid and chromatic ecosystem, Living Coral is evocative of how coral reefs provide shelter to a diverse kaleidoscope of colour,” says Pantone spokesperson, Leatrice Eiseman.
The release goes on to spruik the merits of the lively hue, calling it vibrant, yet mellow, embracing us with warmth and nourishment to provide comfort and buoyancy in our continually shifting environment.
“Representing the fusion of modern life, Living Coral is a nurturing colour that appears in our natural surroundings and at the same time, displays a lively presence within social media,” Eiseman says.
It’s also charged with being sociable and spirited, engaging, welcoming and encouraging light-hearted activity – not to mention symbolising our innate need for optimism and joyful pursuits, embodying our desire for playful expression.
A quick flick through various web design and colour psychology pages from around the web lends consensus to the claims that the colour coral evokes feelings of softness, playfulness, nurturing, and good health.
Image source: Pantone
How was the Pantone Colour of 2019 chosen?
Far from a random selection, the colour boffins at the Pantone Color Institute have spent the last 20 years seeking out their annual colour du jour through a selection process involving trend analysis and consideration to a wide range of fields and factors.
These influences include the entertainment industry and films in production, travelling art collections and new artists, fashion, all areas of design, popular travel destinations, to new lifestyles, playstyles, and socio-economic conditions. They’ll often also look to new technologies, materials, textures, and effects that impact colour for inspo, and the relevant social media platforms and upcoming sporting events that capture worldwide attention.
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The Pantone Color Institute Color of the Year has developed into a powerful force over its 20 years – partnering with global brands to leverage the power, psychology, and emotion of colour in design strategies. The annual ‘chosen one’ influences product development and purchasing decisions in multiple industries – from fashion, home furnishings, and industrial design, to product, packaging, and graphics.
In short, expect to see plenty of coral in gift shops, upcoming clothing collections, makeup boxes, magazine and web pages – not to mention paint and furniture fabric swatches!
Words by Melanie Hearse
Whether you’re selling or buying a home, a property valuation is essential. Not only does it let you set a fair price relative to the market when selling, but as a buyer, it also gives you an indication of competitive pricing.
But when you’re buying, your lender may also wish to have the property valued, which is when differences between valuations occur. But how does a bank valuation differ from a market valuation and why are they required?
What’s a bank valuation?
When you take out a loan to buy a property, your lender needs to determine their level of risk. To assess this, they conduct a bank valuation and an independent valuer will be employed to assess your home value. The valuer doesn’t base home value on a fair market price and instead values the property based on what the lender could recoup if they had to repossess, and then sell, your property in a distressed market.
Bank valuations are usually lower than you’d reasonably expect to receive if you put your home on the market yourself because lenders want to protect themselves from a financial loss should you default on your loan. By valuing your home at a lower price, they’re able to calculate debt recovery, including any additional expenses, such as legal fees and real estate commissions, with a quick sale in mind. Then, if they value your property at less than market value and it still covers the costs should you default, then typically this will get you a step closer to loan approval.
How does a valuer work out a bank valuation?
A formal valuation is carried out by a qualified valuer who is trained to focus on the features of a property such as:
- Location and the aspect of the property.
- The condition and structure of the building.
- Any building faults.
- Home features and improvements.
- Property caveats or encumbrances.
- Local government zoning.
While your lender may order the formal valuation, often it’s you who will pay the fee associated. Formal appraisals cost between $100 to $500 per property and your lender usually keeps any information collected about your property.
When do I need a bank valuation?
Bank valuations are carried out to ensure you don’t borrow more than your property is worth. This lending strategy safeguards that your home, which is your loan security, is adequate to cover the lender’s risk.
How is the valuation carried out?
A valuer will first arrange a time to visit your property. Once there, they’ll measure your home and make notes on the building structure, condition and any faults. They’ll also note the property layout, number of rooms and bathrooms, as well as the fit out and any changes made to the property that add value.
Home improvements tend to include extensions, landscaping, solar systems, water tanks, shedding and swimming pools. Often the valuer will take photos of your property and take note of its relative location. Then, the valuer will research planning restrictions and council zoning, before looking at comparable sales in your area. After the valuer has conducted this research, they’ll produce the magic figure.
How does a market valuation compare to a bank valuation?
In comparison to a bank valuation, a market valuation is the value of your property based on the current market value. Also known as the ‘highest estimated buyer price’, this valuation is an appraisal and has no legal standing.
Market valuations are typically carried out by a real estate agent when a homeowner wants to sell a property. These valuations are based on sales in the area, as well as local knowledge, and are usually free of charge.
What are the major differences between a market and bank valuation?
Market valuation |
Bank valuation |
| Used by property buyers and sellers: Usually, a market valuation is used to determine the value of a property for sale. It may also help a buyer identify whether or not a property has a competitive market price. Overall, the market value of a property gives both buyers and sellers an indication of the perceived value of real estate. | Used by banks: Bank valuations determine a lender’s level of risk and also ensure that a property value is high enough to secure a loan. Then, if the borrower defaults on loan repayments, the lender is assured they can recoup their financial contribution to the purchase. |
| Market-based: Using recent sales data of similar properties, the market valuation takes a snapshot of the market at a specific time and then uses this as a basis to value a property. The buyer and seller can then use this information to negotiate a purchase price. | Resale based: A lender looks purely at the resale value of a property, in case they need to sell it quickly. So, the bank valuation isn’t for the buyer, it’s merely for the lender. Thus, most lenders won’t even share the information that they’ve collected about the property. |
| Higher than a bank valuation: With a seller often having longer to achieve a property’s perceived value, market valuation is typically higher than a bank valuation. Plus, the market valuation is seller-motivated, with the seller often waiting to achieve the amount they desire. | Lower than a market valuation: A lender valuation typically factors in selling costs such as legal fees and real estate commissions, based on a ‘quick sale’. |
Source: Finder.com.au
Do you want more information about bank valuations and market valuations for your property? eChoice’s expert brokers can help you understand the market and then simplify the process of applying for a mortgage. We have access to hundreds of products, so we’ll find you a competitive rate.
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.Unlock your suburb's demographic profile
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Calculating depreciation on an investment property can mean claiming more at tax time. But, to claim all that you’re entitled to, you’ll need to keep the right records. Here’s how you could reduce your tax using property depreciation.
One of the greatest benefits of owning an investment property is the ability to reduce the amount of tax you pay at the end of the financial year. But if you don’t know what you can claim, you may be missing out on financial bonuses.
To help you avoid this situation, we’ve put together this handy property depreciation guide for you to use anywhere, any time, ensuring you’re claiming absolutely everything you can in relation to your property.
What is property depreciation?
Investment property depreciation is claiming the reduction in the value of items in your asset over their expected life. The life expectancy of items varies from product-to-product. For instance, carpets may have a shorter life expectancy (usually five to 10-years) than tiles, which may last up to 40-years. Therefore, their depreciation differs.
For new property investors, depreciation of items in an asset is like claiming the wear and tear of a vehicle used for income-producing purposes. Due to your investment property generating an income for you, you can also claim wear and tear on items within the property.
Anyone who owns an investment property can claim depreciation: it’s not just for seasoned investors. Financial experts recommend claiming depreciation from the time of purchasing your investment property and, in fact, some seasoned investors will buy an investment property purely for depreciation.
Some investors don’t understand depreciation fully or know what items they can claim. As a result, they may miss claiming thousands of dollars annually, which could have reduced the amount of tax they’ve paid.
How can you claim maximum property depreciation?
To avoid making a costly mistake and claiming all depreciation on an investment property you’re eligible for, financial advisors and accountants recommend getting a professional report prepared by a quantity surveyor.
The report prepared typically includes:
- Plant and Equipment: These are the items within the property that you own, such as the air-conditioner, oven, carpets, blinds and any other equipment you have purchased. If you’ve renovated the property, then keeping your receipts is a good idea, as new items can have a much higher depreciation value than ones that are a few years old.
- Building Allowance: Bricks, concrete, paving and outdoor structures such as pergolas fall under this category. A building allowance is only claimable on properties built after a certain date (Refer to the table in the section below).
You might be wondering why you need a depreciation schedule. The answer is it allows your accountant to find all the tax-deductible items easily. So, they won’t overlook any and, consequently, you will be able to claim the maximum amount that you’re entitled to at tax time. Without this schedule, your accountant may miss items.
How is property depreciation calculated?
Depreciation on plant and equipment is calculated using two methods – straight line and diminishing value – and both are Australian Taxation Office approved. These methods are as follows:
- Straight line depreciation – the worth of the depreciating asset declines consistently over its effectual life.
- Diminishing value – the depreciating asset’s value declines more in the early years of its effectual life.
Building depreciation, however, is calculated using a scale depending on the type of property that you own. If you own a residential, commercial or industrial property, then these buildings have various cut-off dates. These dates and the claimable depreciation rates are as follows:
| Accommodation Type | Building Allowance Dates | Depreciation Rate |
|---|---|---|
| Short-Stay / Holiday | 21 August 1979 – 21 August 1984 | 2.5% |
| 22 August 1984 – 17 July 1985 | 4% | |
| 18 July 1985 – 15 Sept 1987 | 4% | |
| 16th Sept 1987 – 26th Feb 1992 | 2.5% | |
| 27th Feb 1992 + | 4% | |
| Non-Residential | 20 July 1982 – 21 August 1984 | 2.5% |
| 22 August 1984 – 15 Sept 1987 | 4% | |
| 16 Sept 1987 + | 2.5% | |
| Residential | 18 July 1985 – 15 Sept 1987 | 4% |
| 16 Sept 1987 + | 2.5% | |
| Manufacturing | 20 July 1982 – 21 Aug 1984 | 2.5% |
| 22 Aug 1984 – 15 Sept 1987 | 4% | |
| 16 Sept 1987 – 26 Feb 1992 | 2.5% | |
| 27th Feb 1992 + | 4% |
Source: RealEstate.com.au
Property Depreciation Fast Facts
There are many questions that investment property owners ask about property depreciation. Some of these are:
- Can a depreciation claim affect capital gains tax? You’ll only be affected by capital gains tax when you go to sell your investment property. But, just remember that you can only claim expenses once annually on your property. Thus, if you’ve already claimed these in the financial year of sale, then you won’t be able to claim them again. Consequently, this may affect your capital gains claim.
- Should my accountant prepare my depreciation report? If your property build date was after 1985, then legally your accountant is not able to prepare your depreciation report. Under Tax Ruling 97/25, only quantity surveyors are authorised to prepare depreciation reports.
- Will my property need to be inspected? Typically to have a depreciation report prepared you’ll need to have a quantity surveyor visit your property. Most surveyors will arrange an appointment around your schedule.
- If I have a renovated property can I still claim depreciation? Yes, but you need to keep renovation receipts as proof of your claim. Also, if you didn’t carry out the renovations, but a previous owner did, you can still claim these using a quantity surveyor.
- How much does a depreciation schedule cost? The price of a schedule varies depending on the property type, dwelling size and property location. However, these reports generally range from $700 or more.
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The latest mortgage data released suggests that while investor and owner-occupier home loan commitments are dwindling, first home buyer mortgage demand is on the rise: here’s why.
The demand for housing is continuing to slow across Australia. According to data recently released by the Australian Bureau of Statistics (ABS), this slowdown is linked to a decline in investors seeking finance. Now, while investors are moving away from the market, it appears that first home buyers are moving towards it, with mortgage demand for this sector of the market increasing.
Investor and first home buyer mortgage demand
Data released by the ABS and CoreLogic reveals that the total value of housing finance commitments sat at $31.2 billion in June 2018 – a drop of 1.6% over the year – which is the lowest value since January 2016. Of this value, owner-occupier mortgage demand was worth $20.8 billion (a 1% decline), while the investor share was $10.4 billion (a 2.7% drop). In comparison, first home buyer mortgage demand increased to 18.1% – the highest level since late 2012.
Source: CoreLogic RPData
Investors now account for 41% of the mortgage market, the lowest in seven years. Overall, data estimates that investor lending declined by 16% for the year, which is great news for first home buyers wanting to break into the market.
Why?
Well, less demand means lower prices, enabling first home buyers to buy property while prices are lower so that the deposit they’ve saved stretches further.
The average mortgage for first home buyers sits at around $349,800, whereas average owner-occupier loans are higher, at around $396,600.
Investors accounted for 41% of new mortgage lending in June, its lowest share in 7 years. Meanwhile, first home buyers accounted for 13% of new lending and we haven’t seen that since November 2012 #ausproperty pic.twitter.com/sGWpkV6afp
— Callam Pickering (@CallamPickering) August 8, 2018
Looking at this graph, it becomes clear that when investor activity increases, first home buyer activity decreases, and vice-versa. Thus, the association between investor demand and timing when to buy property as a first home buyer is significant, especially if you’re looking to save more.
Mortgage demand indicates first home buyers are savvy to buying timing
Nationally, home prices have dropped over the last year, with Sydney losing 4.5% in market value – its largest fall since the GFC – and Melbourne home values fell by 1.8% over the last quarter. However, the lower end of the market is attracting far more interest.
This activity suggests to economists that many first home buyers who have been waiting for the right time to buy are taking advantage of this opportunity. Economists indicate that the softening market is ripe for those first home buyers who have their finances sorted. Those who don’t need to consider ways to improve their financial situation, as economists suggest that the market is only going to get better for first home buyers looking to buy property with current incentives.
First home buyer incentives fuel mortgage demand
There are many first home buying incentives available in Australia – the first home owners grant, stamp duty exemptions and reductions and other discounts – are all adding fuel to the already smouldering mortgage demand fire.
In VIC, first home buyers buying a home for less than $600,000 won’t pay any stamp duty. NSW has a similar scheme, with first home buyers receiving an exemption for a property costing up to $650,000.
You can combine stamp duty exemptions with first home buyer grants, which in most states and territories Australia-wide range from $10,000 to $20,000, depending on whether the property is based in the city or regionally. The only catch, apart from it needing to be the first property you’ve purchased, is that you must buy a new home.
Then, there are low-interest rates, which make home buying even more affordable.
Low-interest rates key to mortgage demand
With record low-interest rates tipped to stick around for the next 12 to 18-months, financial experts indicate that making a move to buy now means lower loan costs. While most people assume this price reduction is due to lower property values, the other reason is that interest rates are lower, meaning some home buyers can afford to stretch their budgets and buy a home worth more.
Source: CoreLogic RPData
While first home buyer mortgage demand is increasing, so too is the average amount that first home buyers are borrowing. According to CoreLogic and the ABS, the average first loan, as of June 2018, was $349,800. This figure is a historic high, 10.1% higher when compared to last year’s data.
On a state-by-state level, first home buyer loan sizes have increased across the board:
- NSW up 5.6%
- VIC up 12.1%
- QLD up 3.5%
- SA up 12.2%
- WA up 4.5%
- NT up 1.5%
- ACT up 15.1%
Financial experts suggest that, even with rates as low as they are, some homeowners will find it difficult to repay their mortgages when rates rise. This situation occurs as some home buyers stretch their budgets far too tightly to buy property. So, when lenders make rate rises, they can no longer afford to make mortgage repayments.
It’s really important to consider not just today’s interest rates when looking to buy, but also to calculate what your mortgage repayment could be in five, 10 and 15-years before you commit to buying a property.
Alternatively, you may want to take advantage of the low fixed rate mortgages available and lock your loan rate for two, three or five years, so you’ll know exactly how much you’re paying monthly and potentially reduce your financial stress.
Are you looking to buy your very first home, but you’re not sure where to start? eChoice’s expert brokers can help you understand the market and simplify the process of applying for a mortgage. We have access to hundreds of products, so we’ll find you a competitive mortgage.
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If you’re on the hunt for a new home, investment property or just enjoy window shopping for real estate, here are the five best property apps to help simplify the process.
From disjointed conversations with multiple parties to information scattered across several platforms, searching for a property has historically been an administrative nightmare, as potential buyers scramble to piece together the complicated real estate puzzle and find their forever homes.
New digital platforms aim to do away with these frustrations, making light work of the property buying experience. Today’s property apps merge traditional property listings with social media, allowing users to message their property-buying partners, real estate agents and buyers’ agents through one unified system.
Kohab
Kohab provides a platform for you to communicate and collaborate on property in one destination – either in a browser or with the app – by setting up personalised ‘Dream Boards’, which house your dream properties and integrate messaging, alerts, inspection times and property statuses.
Real estate agents, property agents, buyers’ agents and brands can also feature their properties in their own publicly listed boards, so whether your 20% deposit is burning a hole in your pocket or you’re just looking for some home inspiration, Kohab makes the journey that little bit easier.
Kohab Dream Boards are live! See what makes them such a different way to hunt for property in this video https://t.co/86W7yTueBf
— Kohab (@kohabtogether) October 11, 2018
UrHome
Created by Australian digital bank UBank, the UrHome property app lets you browse almost any property listing in Australia or find a property based on the suburb you’re looking in.
Along with property stats and agents’ contact details, the app allows users to rate properties based on their individual requirements, so if a big backyard or garage is one of your non-negotiables, you can easily filter out the places that don’t measure up.
Onthehouse
If you’re on a strict budget, this clever property app from Onthehouse makes it easy to find the suburbs you’re most likely to be able to afford, helping to narrow down your property search within your parameters.
Once you’ve tracked down a place you love, do some research within the app to find out how much similar properties in the area have been sold for, before making an offer.
realestateVIEW
Packed full of historical property data, current value estimates and detailed information on a suburb’s current residents, realestateVIEW’s property app will help make searching for a property as easy and quick as possible.
If you just missed out on purchasing the place of your dreams, the app has a function to search for similar properties in the same area for sale or rent (in case you want to try before you buy!).
Realestate.com.au
You’ve probably relied on the website a lot to help make your property dreams come true over the years, and Realestate.com.au’s app provides a handy extension to the listings website.
Research the average property price within certain suburbs, look up the estimated value of a property and get notified if a house you’re following is sold or an inspection time changes, keeping you up-to-speed with all the important updates relating to your property hunt.
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