If you are considering upgrading your property you may be looking at your existing home and feeling it could make a good investment property. Whether it is the right move for you will depend on a number of factors.

Tax deductible debt
Interest which is directly linked to income producing investment assets is tax deductible.

Many people assume they can simply redraw or set up a new loan on their old home (which will become an investment property) and claim that debt as a tax deduction. This is not correct. And if you are audited by the ATO could result in substantial penalties.

Example
When Bill purchased his original home he borrowed $350000. Over time Bill has paid the debt down to $100,000. Bill decides to upgrade to a $500000 property. The purchase costs are $25000. Using the equity in his existing home Bill redraws the original loan back to $350000 ($250000 increase) and then borrows the remaining $275000 against the new property.

Because Bill has a loan of $350000 against his investment property he assumes that this loan is tax deductible. Bill is dead wrong.

The property the loan is secured against is irrelevant – it is the purpose of the loan that the ATO will consider. In this case the purpose of the $250000 increase was to assist with the purchase of a new owner-occupied property therefore the purpose is not for investment purposes and therefore is not tax-deductible. 

Only $100,000 of the loan is tax-deductible. The remaining $525000 offers no tax benefit whatsoever.

Age
If the property is older than 5 years then it will offer little in the way of depreciation for plant and equipment which would offer significant tax write downs. It will also have lower capital depreciation deductions.

Tax Refund
The impact of both the lower interest and the age of the property could mean that Bill will miss out on a tax refund of around $7000 if he had instead sold his own home and borrowed for a new investment

Capital gains tax
As his existing home is his principle place of residence Bill can sell it today capital gains tax free. If he purchases a new principle place of residence his existing home will attract capital gains tax if it is sold at a gain. So for example Bill holds onto the old home for a further 10 years and it increases in value by $200000. Bill sells the property and is taxed on 50% of the gain - $100000 at the applicable marginal rate.

So he has not only missed out on a substantial tax refund for the last 10 years he now gets hit with a huge capital gains tax bill as well.

Repairs
If it is a significantly older property then it may also present significant maintenance and repair issues which will impact the overall cashflow of the property.

Performance
Just because you have an emotional attachment to the home doesn’t make it a great investment property. The rental yields and capital growth rates may be substantially less than what can be achieved elsewhere.

 
What opportunities are you missing?
Are there ways to improve your current cashflow that you are not currently doing? Are your finances correctly structured to build a property portfolio or are they holding you back? Do you have a plan of attack of how to build a portfolio? Are your finances set up to ensure you can acquire property without negatively impacting your lifestyle? Are there things you are missing that you should or could be doing that could have a significant impact on your wealth creation plans?

Contact us for an initial discussion.

Sydney and Melbourne have definately been the growth stories of the last 2 years. Whereas Brisbane has been sluggish in comparison. There's probably many factors that have contributed to this but the softening in the mining sector and the public service cuts by the Newman government have put a dampner on confidence. 

While Sydney has been going strong the rate of growth is above the long term trend which suggests at some point there will be a market correction. With a median of $850,000 and average yields of only 3.7% that's a fairly substantial shortfall for investors to fund.
Melbourne is sitting at $613000 with yields of 3.3%.

With Brisbane sitting at $485,000 average yields of 4.6% and interest rates now sitting at 4.5% and lower we feel its only a matter of time before some catch up occurs.

The key factors will be a return of confidence and improvement in the jobs figures. But don't think the market isn't moving up. It still grew 5.1% for the last 12 months. 

So as always it will be the ones that move early while others sit on the fence that will maximise their upside.

We have recently identified a unique investment option in the Redland Bay area. 

The property is located in a small infill site in an established area. The location is excellent – only minutes to the main shopping/business district and area is well serviced for schools including the highly regarded Sheldon College. The area has experienced a consistently low vacany rate remaining below 2% for the last 24 months. Expected rental yield is 5.17%

Clients wishing to obtain further details on this property will first need to complete our Financial Health Check form. Click here to request a form.

1. Lenders want you to fix your loan

Lenders offer fixed rates for one reason only – to stop you from leaving. They are purely a retention strategy.  To break a fixed loan can be incredibly expensive and lenders know that in 99% cases this break cost will stop you from leaving.

Most fixed rate loans also stop you paying off the loan too quickly. So even if you secure a good rate you can only pay a minimal amount extra which could in fact see you paying more interest than if you had simply stayed on a variable rate.

Lenders pay big money to interest rate strategists to work out where rates are heading and where the cycles are. Fixed rates are designed to make you pay a higher cost of funds than if you actually stayed on variable.

Your chances of winning the bet are very low. If you don’t believe me have a look the Big 4’s combined net profit.

2. It’s not all about the rate
Lenders know most borrowers focus on the interest rates and pay little attention to all the other costs of the loan. However when you add up establishment fees, valuations fees, legals, ongoing fees, mortgage insurance, renegotiation fees etc suddenly that low rate is no so low anymore.

The biggest growth in lender income is via fees.

3. Lenders look after new customers better than their loyal clients
To attract new business lenders often offer significantly discounted rates (0.25 – 0.5% less) for the exact same loan that their existing clients have.  You might have banked with them for 10 or 20 years never missed a payment but they won’t offer you that rate.

Which is why it is always worth reviewing your lending on a regular basis.

4. Pre-approvals are worthless
Lenders hand out pre-approvals like lollipops but they aren’t worth the piece of paper they are written on. Most pre-approvals do not involve a detailed analysis of your financial information and full verification of your documentation. In many cases they are done over the phone or via email based purely on a few questions.

And don’t even get me started on online loan calculators.

What your income is and what a lender is prepared to use to assess your capacity are two different things.

I think the approach most lenders take is when someone makes an initial enquiry they just say “yes”. That way there is a strong likelihood that person will come back to them for their loan if they sign a contract. If the loan is declined or then approved on ales favourable terms than what they first advised it’s no skin off their nose as you are just another number and they move on to the next deal.  

5. Lenders want you to cross-securitise
As with fixed rates lenders know if they tie up all your property it’s going to make it very hard to ever leave. This is particularly an issue for property investors with a portfolio. Each time you add a property it gets added to the mix. It’s very hard to unscramble an egg.

Unfortunately most people are apathetic and continue to pay thousands of dollars each year more than they need to.

6. Valuers dictate the market
It doesn’t matter what you think your property is worth, or the bank. The only person that matters is the valuer. It is now fairly common to see properties come in below contract price or well below owners expectations if they are refinancing. And even if you can provide supporting sales evidence it is unlikely that will change their minds.

Many lenders acknowledge privately that valuers can underscore properties and be inconsistent in their valuation methods but no one seems to be prepared to do anything about it.

7. They know most people are apathetic
Lenders know most of their clients will do nothing about their loan and continue on in the wrong loan product at a higher cost for years. They know most won’t obtain advice from a finance expert who can assess their position and provide some alternative options to their current situation and most likely save them thousands of not tens of thousands of dollars. 

At MTA Finance we provide clients with a realistic appraisal of their options based on their specific circumstances, and ensure that the structure that is put in place is designed to benefit them and not the banks.

Contact us for an initial chat to discuss your home loan requirements