With the Reserve Bank of Australia (RBA) keeping the official cash rate on hold again in April, many market observers are keenly awaiting the outcome of next month's interest rate decision. Two key questions are being asked – Will the RBA reduce the official cash rate by another 25 basis points? And, if it does, how much of the rate cut will be passed on by the banks?
But, for now, there arguably remains a very favourable domestic lending environment, with many attractive finance and refinance packages available on the market. A few weeks ago, we published the first story in a two-part series by Century 21 Home Loans' Chief Executive Officer, James Green, about how investors can leverage current lending conditions. We've now decided to share part two, which is currently appearing in the April edition of Century 21 Wentworth's Property Investor. This story should help to highlight some additional finance and refinance tips that are worth considering.
Top finance and refinance tips for investors - part two
Over the past month, we have seen the national housing market continue to improve with capital city dwelling values posting a 1.3 per cent increase in March and auction clearance rates remaining in positive territory. During this period, the Reserve Bank also elected to hold the official cash rate at three per cent, and Century 21 Home Loans received a record number of monthly loan applications, which is no small feat when one considers that March is traditionally a quieter month for mortgages.
Although the national housing market appears to be on a steady growth trajectory, there are still prime investment opportunities available in many areas at affordable prices.
But how does an investor ensure that they are maximising their borrowing power? Particularly at present when there is so much competition between lenders? There are a number of important factors that should be considered.
In last month's article, I outlined several key strategies for utilising mortgage brokers, refinancing investment loans, paying down interest-only loans, and leveraging interest rates to your advantage. In the final instalment of this two part series, I will focus on three equally important, but perhaps less obvious finance and refinance tips. These include: ensuring that your property gearing strategy aligns with your investment goals; harnessing property equity; and considering self managed super funds (SMSF) as a potential vehicle for property investment.
ENSURE THAT YOUR PROPERTY GEARING STRATEGY ALIGNS WITH YOUR INVESTMENT GOALS
A property that is positively geared generates an income that outweighs expenses, and therefore makes a profit for the investor. Negative gearing, on the other hand, occurs when the expenses of an investment property (for example, interest and depreciation) outweigh the property's income.
The benefit of a positively geared investment is obvious - higher returns and better cash-flow. These types of properties may be particularly suited to investors who can't afford to service an expensive loan, because their rental returns will effectively cover mortgage repayments.
When low interest rate environments combine with strong rental market conditions, positively geared properties can generate some very favourable outcomes for investors - provided that their primary investment goal is passive income rather than capital growth. Positively geared investors will, however, face a higher tax liability than those who negatively gear.
Negative gearing will see an investor's property expenses increase; however, they may make more money over the long term through tax deductions and capital growth. With interest rates currently at relative lows and property prices seemingly on the up, negative gearing could be a smart option for purchasers looking to secure long-term investments in high growth areas.
At the end of the day, both negative and positive gearing can produce either great or bad outcomes for an investor; the outcome will depend on a number of factors including the type of property, market conditions, the level of property maintenance and, importantly, the investment goal underpinning the purchase.
If you expect to earn a large income over the next five to ten years, then you might want to look into making a negatively geared property investment. If, however, you're approaching retirement age, you may be better off purchasing a property that will effectively pay for itself - that is, a positively geared investment.
HARNESS YOUR PROPERTY EQUITY
If you're in a position where you've paid off a mortgage or a substantial part of a mortgage, you may want to consider harnessing the equity in your property (or properties) to finance additional property acquisitions or refinance your home loan(s). There are a variety of liquidity, flexibility, taxation and portfolio expansion benefits that can result from this type of financing and, as such, it's certainly an option worth looking at.
Investors commonly look to borrow against the equity in their property (or properties) to pay a deposit for another investment property. This is particularly useful for investors that are looking to diversify their portfolios and maximise their tax deductions.
It is important to realise, however, that property equity can be used to fund more than just the deposit of a property investment. For investors with large amounts of property equity, it is possible to harness such equity to borrow 100 per cent of the purchase price of a property, plus costs. In doing this, an investor can focus on paying down their principal loan while leaving their investment loan (their deductable interest) at its peak level.
Of course, everyone is different, and some investors won't want to negatively gear their property purchases, let alone to the maximum extent. Ultimately, the best course of action will depend on the purchaser's financial, lifestyle and investment goals.
CONSIDER USING A SELF MANAGED SUPER FUND TO INVEST
According to a recent report from the Australian Taxation Office (ATO), self managed super funds (SMSF) were the fastest growing superannuation sector within Australia as of June 2012, making up almost 10 per cent of the industry. This trend looks to be growing within the real estate marketplace, with more and more Australians unlocking the equity in their SMSFs to purchase investment properties.
Why are SMSFs becoming such a popular property investment avenue? Because investors are becoming increasingly aware of the tax advantages associated with this type of financing structure. For instance, the capital gains tax rate is 10 per cent for SMSF funded property investments that are held for more than 12 months, and this rate can potentially reduce to zero per cent if the fund is in the pension phase. Moreover, a SMSF can be used as a vehicle for negative gearing; there is 15 per cent tax paid within the super fund that can be offset against any negative gearing losses.
It is important to note - however, that a SMSF is not going to be a suitable option for all investors. In fact, an investor cannot purchase a residential property through a SMSF unless the property is for commercial or investment purposes, and not for the fund members or their associates to live in. These are just two of many rules relating to SMSF property investments and, as such, it is important to seek professional advice before proceeding with any transaction.
Who should you consult for advice? I would recommend speaking to your mortgage broker, accountant and financial adviser in order to ascertain whether or not SMSF property investing might be a suitable avenue for you.
You may want to speak to both your mortgage broker and accountant at the start of the process because you need to know how much equity you have in your SMSF before you can consider whether or not a SMSF investment strategy is conducive to your financial planning goals. You don't want to spend money speaking to your financial adviser about an investment strategy that may not even be possible.
If - however, you find that SMSF property investing is a feasible prospect, it will be important to consider how this type of investment could impact on your retirement plans. For example, you might be planning to retire in two years and, as such, may not want purchase a property that consumes your entire super. This is again why your mortgage broker, accountant and financial advisor will be invaluable sources of guidance.
A growing number of Australians are taking the time to carefully consider their options and examine factors that may affect their capacity to invest. The most important thing to do when considering finance or refinance options is to stay informed on the market, and seek professional advice. To this end, a Century 21 mortgage broker can be a beneficial resource as they will provide you with a range of options to help you select the best product and associated rate for your personal situation.