Myths & Misconceptions: A guide for borrowers

 First home borrowers continue to make the same mistakes when buying property, according to Wizard Home Loans which surveyed managers at 200 branches around Australia.

 Chairman Mark Bouris outlined some of the myths and misconceptions about home buying and borrowing that can cost borrowers money:

 Myth: A bad credit history doesn’t matter if you eventually pay off the debt

 “Regardless of whether you pay the debt off or not, it all counts,” says Bouris. “A patchy credit history can haunt you – even if it is very old or just a one-off, small amount. There are two major credit reporting agencies that record all of these debts (including any missed or defaulted payments on credit cards, interest-free contracts and mobile phone plans).

 “Lenders consult these agencies before they complete your loan application.”

 Myth: Assets are the same as income

 “People often believe that a strong asset position can be a substitute for income when it comes to servicing a loan. But no matter the strength of your assets, what really makes the difference is your capacity to repay the loan through a regular income.

 “The amount of income-earning capacity you have will ultimately determine how much you are able to borrow.”

 Myth: It’s the credit card balance, not the limit, that counts

 “Every type of credit you have in your name, regardless of balance, is used to calculate your ability to service your loan,” warns Bouris. “The less credit (credit cards and other loans) you have on your home loan application the better.”

 Myth: You need a 20% deposit to get started

 “Not true! These days you can borrow up to 100% of the property value. This is proving to be an attractive option for many cashed-up first home buyers, who often wonder whether they’ll ever get their feet on to the property ladder.

 “A lower deposit may mean a higher interest rate and fees,” Bouris says.

 Myth: Personal debts can be rolled into a new home loan

 “One of the most common misconceptions among first home buyers is that debts such as a car loan and credit cards can be consolidated in their new home loan. In many cases you can’t immediately put all your eggs in one basket when it comes to your first home.

 “Once you have built up enough equity, you can refinance and roll all your additional debts into the mortgage.”

 Myth: Mortgage insurance protects the borrower

“This form of insurance protects the lender, not the borrower,” Bouris clarifies. “The less deposit you are able to pay when you apply for a loan, the higher the mortgage insurance premium.

 “Generally, if you have more than a 20% deposit you are not required to pay Lender’s Mortgage Insurance.”

 Myth: Making your repayments minimum and monthly is the best strategy

 “Not true! The interest on a home loan is calculated daily and is charged monthly. The more regularly you make repayments, the less interest you pay over the life of your loan.

 For example, a customer who is making half of their monthly repayment on a fortnightly basis on a loan of $250,000 can reduce the 30-year loan term by more than seven years and save over $112,000 in interest over the life of their loan.”

 Myth: 100% loans = no money upfront

 A 100% loan covers the property purchase price but does not extend to the additional upfront fees involved in buying a home such as legal fees, Lender’s Mortgage Insurance and stamp duty.

 SOURCE: Hotspotting.com.au

Investing in positive cash flow property

 By Margaret Lomas

 Founder of Destiny Financial Solutions
Author of five books on property investment,
including The truth about positive cash flow property.

 These days, as shares and managed funds ride the rocky road of volatility, it seems that investors are turning to property to provide an investment portfolio to not only keep pace with inflation, but also provide cash flows into retirement.

Property is the choice of many investors due to its tangibility and its performance over time.

 Today there are spruikers, advisers, gurus and experts in abundance - all keen to impart sometimes dubious schemes to investors who are hoping to make some impact on their financial futures. In the main, these people spout methods which line their own pockets with ridiculous tutoring fees - and the student is left with little to work with.

 For many years people have believed that a property investment is likely to entail a weekly cost. We often see advertisements offering property which will cost the investor, say, $50 or $60 a week. And it’s true that in many cases, in the early days of a property investment, unwary investors often find themselves with expenses which exceed income - and the resulting tax break provides only partial relief. The investor has to supplement the income received in order to meet expenses, until they have paid off some of the debt and increased the rents.

 Investing in property does not have to mean losing money or even making a commitment each week (as is required with a negatively-geared property). Buying negatively-geared property places enormous importance on capital gain – you must achieve a large capital gain to make up for the losses over time. During periods of high inflation chances are that you will recover your losses - but what if inflation remains low, as it has for the past 10 years?

 The answer is to be sure that the property you buy is “Positive Cash Flow”. To satisfy this criteria, the property has to return cash in your pocket, every week, from day one. This concept may be foreign to investors who are used to contributing money to their properties - but it is highly possible with property of every type, providing you do the research before you buy.

 There are two ways that you can achieve positive cash flow from property. The first way is through positive gearing – this is where you find property whose rent returns are high in proportion to the purchase price and cover all the expenses on the property. The resulting gain (the cash left over after all expenses are met) is then taxed. Typically, property like this is found in regional areas based on one industry where renters are abundant. In addition, buyers with substantial cash deposits can also see a positive gearing situation, as their expenses are minimized due to a lower loan expense.

 Positive cash flow property is another way to see a weekly cash flow, and this exists where you find property with a high amount of on-paper deductions. This type of property can be found anywhere and is ‘property based’ rather than ‘area based’. Often you can find positive cash flow property in the midst of negative cash flow, where the property in question has been renovated or otherwise has a lot of depreciable items. Positive cash flow property will have income which - when added to the tax breaks you get from claiming expenses and depreciation - outweigh the outgoings (loan interest, rates, body corporate fees, etc).

 To put this into perspective, imagine this: If a property costs you $40 a week (after tax), then you are limited in the number of properties you can buy to the amount of your surplus income. But, if a property gives you $40 a week, then you are only limited by your existing equity (or cash available).

 In addition, cash in your pocket equals more available funds to pay down any debt, while cash out of your pocket potentially slows up debt repayment. You are then more quickly in a position where you have increased your equity in a property and made room for further investing.

Finding positive cash flow properties is not easy, but not impossible either. New or near-new property of any type, where depreciation benefits are available in the early years, are the most likely to provide a positive cash flow for you. Older properties in areas where capital growth has been suppressed but the rental market is still active can fit – however, this type of property will usually result in a net gain and tax will be payable.

 Either way, cash in your pocket equals increased investing potential and a greater chance at a financially independent retirement.

 Through a national branch network, Destiny Financial Solutions has been assisting people for many years to put together strategies which help them to find, finance and acquire the right kind of property. We do not sell property: we help people to buy it by offering guidance and support.

 Positive cash flow property can provide the means to accrue a secure retirement income, but it is by no means a magic formula, nor is it necessarily easy. An abundance of good research, asking the 20 “must ask” questions which are outlined in my books, and being prepared to take time and put in effort, can result in a sound and safe financial future.

 Margaret Lomas has a Diploma in Financial Advising and is an affiliate member of the Securities Institute of Australia . Her books are published by Wrightbooks and available from all good bookshops. Refer to the “Resources” section of this web site for details of Margaret Lomas’ books on property investment.

 SOURCE:  

 

Gen Y - still living at home and loving it!

 By Bob Wilson, 7th August 2008

 More than half the people we old people call "Gen Y" (those born between 1976 and 1991), are continuing to live at home. Predictably, the Housing Industry Association, which proclaimed it so last month, blamed the "still living with the olds" syndrome on Australia's unaffordable housing market.

 The HIA used data from a 2006 ABS Survey of Income and Housing and the 2007 NATSEM-AMP study to put some meat on the bare bones of anecdotal stories. For illustrative purposes only, let's consider the lifestyle of 29-year-old Ben (and girlfriend Stacey), comfortably ensconced in the self-contained granny flat below Ben's Mum and Dad's McMansion in the suburbs. Ben and Stacey are both pulling in $80,000 to $100,000 a year and work long hours (so they eat out almost every night). They are yet to break away from the family nest to put a deposit on their own place.

 Perhaps it's their need to each have a car, a mobile phone, a laptop and gym membership which eats into their disposable income? And why on earth would they save up for some besser-block starter home in the outer suburbs when they can have the wide screen TV and whitegoods heaven that is Mum and Dad's downstairs pad. After all, Ben will own it all one day anyway - right?

 Sorry - we digressed from the serious work of research in a feeble attempt to portray the typical Gen Y'er. The HIA's popular press release (written up in virtually all daily newspapers recently) covered every media angle with a state by state breakdown which showed that more Victorian Gen Ys are living at home than anywhere else in the country.

Around 23% of Victoria's Gen Ys in the 25-29 age bracket are still living at home. In other states and territories, the 25-29-year-olds are showing signs of moving out. Only 14% in Queensland, 10% in South Australia and 15% in WA still live in the parental home.

HIA chief economist Harley Dale says the proportion of older Gen Ys now living at home, Australia-wide, is well above 1989 levels. In that year, only 12% of people in their late 20s were still living at home, compared to 18% in 2006 (the latest figures available). The proportion of all Gen Ys still living at home ranges from 54% in Victoria to 39% in the Northern Territory. The proportions were also high in NSW (53%), and South Australia (53.5%). It's probably relevant, though, that Melbourne, Sydney and Adelaide all have higher proportions of Asian and European migrants, who tend to have a culture of young adult children living at home.

 According to Dale though, in 2008 Gen Ys are still living with Mum and Dad "because they could be trying to save for a deposit, or because they can't afford the soaring cost of rent". He says: "If you're in your twenties on a low-to-middle income and looking to buy a home, it's becoming virtually impossible."

 And according to Australian Property Monitors, demand is intensifying as a result of strong immigration patterns and a weak building sector. APM general manager Michael McNamara says rising rents are being driven by higher mortgage costs, at a time when high interest rates are deterring renters from making the shift into home ownership. With rents rising 17% in Melbourne and 15% in Sydney, it's not difficult to identify this as one of the reasons those cities have the highest proportions of Gen Ys still living at home.

 The HIA continues to champion the need for more new dwellings. Dale says fewer than 20% of first-home buyers bought a new house and suggests this is because of the drastic shortfall of new housing.
"HIA research confirms that in FY2009 we will require 190,000 new dwellings nationally to care for the increasing population - and we're going to fall about 40,000 dwellings short," he says.

 The HIA's survey (based on FY2006 data) describes a trend which can only get worse. Increased fuel and food costs will exacerbate the problem for Gen Ys who don't earn big salaries and who are already struggling to find somewhere affordable to live. According to the Natsem-AMP report of July 2007, 35% of their income was being spent on housing and transport.

 That figure will be higher now, with both rents and fuel costs soaring in the past 12 months. According to the latest Australian Property Monitors' report on Australia's capital city rental markets, weekly housing rents rose between 13% and 17% in all cities except Canberra (+5%), Adelaide (+5%) and Hobart (+6%) over the 12 months to June 2008. Unit rents rose between 3% (Brisbane) and 25% (Perth), with other cities recording rent rises between 7% and 13%.

 And although Gen Ys had a net worth of $80,880 (and spend less on food and alcohol than the slightly older Gen Xs), debt is an issue - 23% have a HECS debt, 55% have credit card debt and collectively, Gen Y owes about $60 billion! They will eventually catch up, but for now the average superannuation balance is just under $10,000.

 In 1989, safe to say, more households were making do with smaller, older-style homes, often described as three-bedroom when in fact they were two bedrooms with an enclosed veranda. So these days, when Mum and Dad are rattling around in a five-bedroom two-level house with room in the garage for three cars and a set of golf clubs, why wouldn't their Gen Y children commandeer the renovated basement flat and tuck $150 a week or so into the household kitty?

 SOURCE: hotspotting.com.au        

 
 ABS data puts some balance in debate over prices

 Property prices are higher now than a year ago in all state and territory capital cities, except Perth.

 The latest data from the Australian Bureau of Statistics shows that the House Price Index for Adelaide is 16% above the same time last year, while Melbourne and Brisbane remain 14% higher than a year ago. Across the eight capital cities, prices have risen an average of 8%.

 This follows the results for the June Quarter, which show prices rose (a little) in four of the state and territory capitals, and declined in four. Across the eight capitals the weighted average was a decline in the House Price Index of 0.3%.

 The only cities with a significant downward trend in prices are Perth, still adjusting after its spectacular price boom, and Hobart.

 The ABS House Price Indexes are the most reliable of the research sources on house prices and put some balance in the mix, following claims by one analyst that prices are trending seriously south and are likely to fall 10% across the board.

 There's been an overwhelmingly emphasis in print media on analysts claiming a major downturn in residential property, including one research company which predicted a 1-in-100-year market slump.

 Less column space has been given to the larger number of credible analysts who have forecast another rise in property prices in the near future. The various predictions have ranged up to suggestions of "the mother of all price booms" from ANZ Bank.

 Most analysts have been more moderate in their predictions than ANZ, but basically agree that high population growth levels (boosted by big overseas migration numbers) at a time of a growing under-supply of dwellings is likely to continue to push up home prices. Analysts holding that view include BIS Shrapnel, Access Economics and CommSec.

 In addition to the basic supply-demand equation (high demand through population growth versus low supply through under-building of new homes), positive factors pointing to a resilient property market include recent tax cuts, solid wages growth, the downward trend in petrol prices and strong indications from the Reserve Bank that the next interest rate movement will be a cut, possibly as early as next month.

 The latest measure on consumer sentiment, the Westpac-Melbourne Institute index, showed a 9.1% rise in consumer sentiment, the third biggest increase in the past five years. This balances earlier surveys showing public confidence was waning.

 Overall, the residential market is struggling with high levels of listings of properties for sale but few buyers. This is reflected in the general slowdown in price growth.

 However, we are likely to see investors coming back into the market, given low vacancies, improving yields through rent rises and the general climate of a buyers market.

 I don't expect anything more than moderate price growth in the next year or so, but nor do I expect a serious slump in the property market.

 SOURCE: Terry Ryder from hotspotting.com.au