EWM Finance – January 2017 Newsletter

While some argue that property buyers should expect a doubling of their money every 7-10 years, others believe this is simply not the case.

Property analytics provider, CoreLogic RP Data recently tried to find the answer, with a study that compared home values across capital cities. It found that in the ten years to 2006, home values more than doubled across each capital city, but in the ten years to 2016, growth was half that of the previous decade. Melbourne is the only capital city housing market in which home values doubled between 2006-2016, although Sydney and Darwin each recorded an increase of more than 75%.

So, what does this mean for you? As a property investor, it’s a timely reminder of how important it is to buy the right property, at the right price and in the right location. A powerful way to push the odds in your favour is to buy property in an area that has a long history of strong capital growth.

Also, look for properties close to employment and amenities like schools, shops, and transport. Don’t buy the property because it appeals to you; think about what owner occupiers would like and the features that are going to remain popular in the future, such as entertaining areas, open plan living, natural light and an appealing kitchen.

Lenders want to know how your deposit was acquired – did you save it yourself? Was it gifted to you? For lenders, this is an important indication of whether you are capable of the consistent ongoing savings required to repay a home loan.

If you are borrowing more than 80% of the property value, most lenders require proof of ‘genuine savings’. In other words, you will need to show evidence that over time you have been able to save at least 5% of the value of the property (or more if you are purchasing an investment property).

1. Any money your family gives you to help with a home loan deposit must meet lender requirements

Money that is gifted is usually termed as a ‘non-genuine saving’ because you have not saved it up yourself over time. For it to be considered as a genuine saving that counts towards your home deposit, it needs to sit untouched in a saving account for a least three months (or more). Some lenders, but not all, allow gifted money if parents put in writing that their money is a gift and they do not expect it to be repaid. You must be able to provide evidence that you have the funds available to you.

2. Savings in a redraw account may not be considered as genuine savings

Not all lenders accept redraw accounts as proof of genuine savings because lenders prefer to see that you have a savings account connected to your everyday banking from which you can show transactional proof of savings and from which money is not withdrawn.

3. For rent to be considered as genuine savings, your lease should be from a registered real estate agent

Some lenders may consider rental payments as partially meeting genuine savings requirements but they will often add extra conditions, such as a licensed property agent must manage your property, and that you have lived there for a minimum of 12 months.

4. Lump sum deposits over time don’t demonstrate your ability to save

Lump sum deposits such as commission income, bonuses, or money from the sale of a car or other asset are not viewed as genuine savings because they don’t show your ability to repay on a regular basis.

5. A non-genuine savings home loan product is not always the best solution if you don’t have enough genuine savings for a deposit

Non-genuine savings home loans are offered to borrowers who have a non-genuine deposit but don’t want to wait the required three months. These products are convenient but keep in mind they usually come with higher fees and interest rates, which could increase costs over the life of the loan.

Want to know more? We can talk to lenders on your behalf and advise you of the best course of action for your individual situation.

The answer depends on your individual situation. Both options have pros and cons, just as every lender has different lending policies and some are more open to receiving self-employed home loan applications than others. As your mortgage broker, we know who these lenders are and what criteria and documentation you’ll need to achieve a successful application process.

If you take the low doc home loan path…

Know that it is unlikely you will be allowed to borrow more than 80% of the value of the property and you will probably pay Lenders Mortgage Insurance (LMI) if you are borrowing over 60%.

You may also be charged a slightly higher interest rate to account for the extra risk that some lenders associate with self-employed borrowers who are not able to show evidence of a stable income.

The benefit of a low doc loan is that it is quick and simple because it requires significantly less documentation. Every lender’s policies are different, but many require you to supply a Business Activity Statement (BAS), as this will help assess whether you’re able to afford the loan. Other common document requests include previous bank statements and a letter from your accountant.

Since the global financial crisis, the low doc loan paperwork requirements have become more robust but it is still possible to find lenders whose only requirement is for you to sign a certificate that you earn sufficient income to comfortably afford the loan repayments.

After two or three years on a low doc loan, you may be allowed to convert to a full doc loan with minimal financial verification.

If you go for a traditional home loan…

Most lenders will ask you to provide two years lodged tax returns, BAS statements, bank statements, or even a declaration from your accountant. They are looking for signs of regular repayment because they want to see that your business has a history of maintaining a level of income suitable to their minimum servicing requirements.

Some lenders assess self-employed applications by using the average of the last two years’ income, while others use a variance strategy or they take the lower of the last two years taxable income.

By planning ahead and discussing your specific needs with us, we can give you an idea of how much you might be able to borrow before the formal application process even begins.

Know where your money goes

The starting point for saving money and paying off debt is to work out where your money is going. Use a free app like ASIC’s TrackMySpend to record your daily expenses and track spending by categories. Once done, you are now one step closer to setting up a budget.

Use technology to do the work for you

Thanks to technology we can say goodbye to the daunting task of setting up an excel spreadsheet DIY budget. There are now countless online-based budget planners and calculators that have done the hard work for you. Many of these tools will show visualisations of your financial data, allowing you to more easily pinpoint overspending.  Free tools include Pocketbook, Mint, ASIC’s budget planner, Microsoft’s Personal Budget WorkSheet template and Google Doc’s Simple Budget Planner.

Automating your payments is another way technology can help. Automatic transfers will keep you from accruing late fees and discourage you from spending money needed for paying bills.

Work backwards from your goal

There’s no point in telling yourself you want to try and save more money if you don’t have a concrete goal to work towards. Decide on a specific thing you want to save for and work backwards from this goal by finding out how much you need to save every week to get to it.

Find easy ways to reduce spending

Are you tired of hearing about money saving tips like cutting back on convenience food, bringing lunch to work, repairing old clothes?

While these are all great ideas, they are often hard to stick to because they impact the lifestyle we are used to. On the other hand, doing some internet research and choosing a less expensive electricity supplier may bring instant savings and minimal impact. The same goes for reviewing any ongoing bills: gas; water; home loan; internet; credit cards; bank accounts; life insurance; superannuation; and car, home, and health insurance.