Credit scoring
It’s possible that your loan could be declined without a human even looking at it. Most lenders use some form of credit scoring and in a number of cases will let a computer decide whether your loan is approved or declined. So if the “Computer says no” then that could be the end of it.

Of course what affects your credit score is a closely guarded secret but over time lenders have let a little bit slip here and there.

Pre-approvals are worthless
Lenders hand out pre-approvals like lollipops but what most won’t tell you is 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.

As we discussed in our last newsletter what your income is and what a lender is prepared to use are two different things.

I think the approach most lenders adopt 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. And the lender gets first shot at it. If the loan is declined or then modified from what they first advised it’s no skin off the lenders nose they just move on to the next deal.  

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 hat in 99% cases this break cost will stop you from leaving.

Most fix rate loans also stop you paying off the loan too quickly.

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 stayed on variable.

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

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.

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 other establishment fees, valuations fees, legals, ongoing fees etc suddenly that low rate is no so low anymore.

And then there is the cost of mortgage insurance – this can vary by several thousand dollars between lenders.

You’re too old
Changes to legislation have meant it is more difficult for older applicants to obtain a home loan. Once you are over 50 lenders will ask a lot more questions and make place more restrictive conditions on your loan. 

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. We are even seeing two valuers be $50000 apart on their figures.

Many lenders acknowledge privately that valuers underscoring properties and being inconsistent in their valuation methods has become an issue and are killing good quality property transactions but no one seems to be prepared to do anything about it

The important this in all this is to get appropriate advice. We work with an extensive range of lenders and are familiar with all their different rules, policies and approaches.

This means when we work with clients we give them a realistic appraisal of their options 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

Demonstrating your ability to meet loan repayments and repay the loan is essential to successfully qualifying for a loan. Therefore a key factor will be your income. However what you actually earn and what a lender will allow in terms of assessable income can vary significantly and have a dramatic effect on your borrowing capacity.

Below I’ve covered some of the general criteria lenders use to assess income.

Employment

Full time and permanent part time
Lenders are looking for stability in employment. Generally at least 6 months in one job, and at least two years or more in the same industry. No probation. If you don’t have 2 years in the same industry then they will be looking for at least 12 months in your current position.  

If you have a history of changing jobs or profession on a regular basis then this could go against you.

Casual
Generally at least 12 months employment or 2 years in the same industry. Lenders may want to see 12 months worth of income to establish an average earning

Self-employed or contract worker
In almost all cases lenders will require you to be trading for a minimum of 2 years. For most businesses lenders will also require a registered ABN for 2 years. If an ABN can not be produced some lenders will accept a letter from your accountant confirming the business has been trading for 2 years.

Working in a family business
Most lenders will treat this the same as being self-employed and therefore will want to see a 2 years trading history for the business.

Income

In terms of income lenders are trying to establish regular and reliable sources of income. So if you are an employee, have been in your job for some time, and are paid the same amount week in week out then 100% of your base gross income will be considered.  

The areas where it becomes greyer are as follows:

Overtime
If overtime is standard for your industry (such as nursing) then most lenders will allow 100% to be included for servicing. It may however be necessary to provide additional documentation such as group certificates or a letter from your employer to confirm that overtime is a standard requirement of your job.

If it is not industry standard then two years tax returns or group certificates plus a letter from your employer may be required.

Commission/Bonuses
Most lenders will generally want to see 2 years history of earnings if bonuses and commissions are part of your remuneration. If you have been employed for 12 months and commission is a condition of your employment then some lender may consider 100% if this can be documented.

If you have been in your position for less than 12 months this it is likely only your base salary will be considered.

Car allowances
This varies quite considerably amongst lenders ranging from not at all to 100%. If the allowance can be cashed in then several lenders will allow 100% to be used. If not several lenders will at least allow it to be offset against any lease payments. So for example if your allowance was $10,000 and your vehicle lease payments were $8,000 per annum. Then the lease payments would not be included as part of your assessment. The remaining $2,000 however would not be added to your income. 

Some will lenders will only allow 50% to be used or will simply have a dollar cap that is applied.

Self-employed and contract
To establish your income, business and personal tax returns and financial statements will be required. Income/profit will generally be averaged over two years. Most lenders will allow add-backs for non-cash items like depreciation and non-recurring expenses.

Rental income from investment property
Lenders will generally use between 70-80% of the gross rental amount. Income must generally be confirmed from either a current lease agreement or rental statements. For newly acquired properties a letter from a real estate agent confirming the expected rental can often be used.

Rent received from boarders
Generally this type of income will not be accepted. Some lenders may consider it tax returns can demonstrate that it has been earned consistently over a 2 year period.

Dividends from investments or share trading
Needs to be evidenced from 2 years tax returns

Child maintenance
Generally not accepted but will be considered by some lenders where there is a court order in place, the children are less than 10 years, and consistent payment over 12 months can be demonstrated.

Centrelink payments
100% of the Family Tax Benefit will be considered in most cases where the children are less than 11 years of age. 100% of government pensions will be considered if they are ongoing and are evidence by relevant documentation. Unemployment benefits and New Start are generally not considered.

You can see from above what you actually earn and what can be included for assessment can end up being quite different. And this can vary significantly from lender to lender which is why it is important to talk to a specialist like us who has access to an extensive range of lenders and understands where you position will be more favourably assessed.

Greg Carroll is an expert on the area of finance with over 27 years’ experience in finance and business strategy. He is an active investor in property and shares. Holds qualifications in Economics, and Finance and Investment. And has written a number of books in this area including Home Loan Secrets and 17 Sins of Cashflow Management. 

Before you take on any type of borrowing it is really important for you to determine what you can comfortably afford in terms of loan repayments, irrespective of how much a lender will allow you to borrow. Just because you can qualify for a certain loan amount doesn't necessarily mean that is what you should take on.

Lenders assess your capacity to repay as at today. Other than factoring in a small interest rate buffer they do not factor in other future events such as having children, school fees, medical bills, increased petrol prices etc. Most will make an allowance for living expenses based on the number of people in your household, but these expenses are based on averages. They do not factor in costs like private health insurance or cable television.  

Budget planning gives you greater control over your finances. It can put you in a position where you have money available to meet your all your expenses so you are not “chasing your tail each month.”  Also once you have your finances under better control you will then be in a position to start building your wealth.

How much money you earn has little bearing on how wealthy you will be. I regularly come into contact with people who have six-figure incomes but have ten of thousands of dollars in debt racked up on credit cards, and almost no equity in their house. If their income was cut off tomorrow, they would end up with virtually nothing.

On the flip side I often meet people who are on modest incomes but have good equity in their house, clear their credit card each month (or often have no credit card at all), and are steadily building an investment portfolio. And do you know what? These people aren’t frugal with their money…they’re just smart with it.

The only difference between these two groups is one has a disciplined approached to their finances. So the first step for you is to decide which one you want to be. If you chose the later then read on. If not I wish you well.

So how do I set up a budget?

What you ideally need to do is review your current income and expenditure and put it into a spread sheet over a 12 month period. To get an accurate picture you should get around 3 to 4 months of your bank and credit card statements and record every item of expenditure – alcohol, fuel, groceries, haircuts the lot. Try to get it down to the last cent.

Importantly make sure you record the actual timing of when income comes in and when expenses are actually paid. For example if you pay your electricity quarterly then record the expense in the month it is due, don’t just spread the cost over 12 months. The reason you are doing this is so that you can see the peaks and troughs in your expenditure. You will probably find that you have a lot of expenses in some months and not as many in others.

People often find themselves short of cash because they spend up in the months when they don’t have many bills coming in, but then don’t have anything in reserve when the bills do arrive. 

Once you have done this, review it and make sure you haven’t missed anything. Also make sure you put in an allowance for holidays, birthdays, Christmas presents, and other occasions. It’s amazing how these can add up.

I guarantee if you haven’t done this before you’re in for a big shock. You will probably find you are spending far more in certain areas than you thought. You will probably also be surprised to see how much expenses such as insurance can add up.

Once you are sure you have recorded everything, you should then sit down and review your budget. What you are now looking for are areas you can cut back on or improve. This is going to be different for everyone but I guarantee in most cases there will be areas where you can make savings. Do you really need cable television? Could you cut back on takeaway? Is it worth shopping around for some competitive quotes on insurance?

Hopefully once you go through this process you should find that there is something left over from your income. If not you may need to go back and review your budget. If you already have a home loan or lending this may also be a case where it is worth reviewing your finances as a restructure may assist in reducing your expenses further.

Once you have completed this process you should have a clearer picture of the level of repayments you can comfortably afford.

Once you have your budget mapped out you can then adjust it along the way as your circumstances change. If another expense comes up you add it to your budget. In this way you can see where you are going and identify any potential trouble spots before they occur. If you could see that things were going to be a bit tight in two months time because of a number of bills coming up then you might curb your expenditure a little bit now to compensate.

Seeing what is coming in advance means you can make small adjustments along the way rather than being forced into drastic action.

Contact us to arrange a review of your home loan. You might be missing out on significant savings.

Greg Carroll is an expert on the area of finance with over 27 years experience in finance and business strategy. He is an active investor. Holds qualifications in Economics, and Finance and Investment. And has written a number of books in this area including The Property Investment Bootcamp, Home Loan Secrets and 17 Sins of Cashflow Management. 

This information is provided in good faith but is not intended to be comprehensive and does not constitute specific advice. The above information does not take into account individuals specific circumstances. MTA Finance Australia Pty Ltd accepts no responsibility or liability for anyone relying on this information. You should always seek independent advice in relation to your specific circumstances.

Housing affordability is declining in Brisbane. In 2012 85 out of 173 suburbs had a median price below $550,000. This has now fallen to 73 suburbs, or 42.2 per cent. And only 40 suburbs priced at $500,000 and below.

(SOURCE: Property Observer)

A CLSA analyst says interest rates in Australia will be less than 1% within two years and could even go to zero.

Christopher Wood, the managing director and chief strategist of the Asian-based equity broking and investment firm, made the forecast in an interview with The Australian Financial Review.

"I think less than 1% within the next two years. They are going to end up a lot lower than people still imagine," said Wood.

The AFR notes the most recent Bloomberg survey of economists indicates an average interest rate forecast of 2% for the end of the year and the first quarter of 2016.

Wood told investors to sell US mortgage securities before the subprime disaster.

"It's not whether interest rates go up, it's whether Australian interest rates go to zero," Wood said.

"When I was in Australia 15 months ago everyone thought that interest rates had bottomed and were going up. But now there is greater awareness among fund managers that it is going to stay lower for longer."

Wood said the drop in gross domestic product means the Reserve Bank of Australia needs to keep cutting interest rates, but it is caught in a difficult position.

"The issue from Australia's central bank standpoint is that it doesn't want to cut interest rates because of the housing market which, from a value point of view, is overextended," he said.

"You do have asset price rises driven by Chinese buying. But the bank is under pressure to cut rates, so I think it will have to come down to macroprudential controls and they are very political."

Two recent reports have flagged the strongest areas for price growth in Queensland. The results will no doubt be a surprise to many as they bust some myths about the best areas for growth.

The latest data from Real Estate Institute of Queensland (REIQ) reveals that Ipswich ranks as the strongest Queensland price growth region. Ipswich's median house price increased by 6.7% over the quarter, the largest gain recorded by any area across Queensland.

Brisbane’s while improving only moved by 3.4% over the same period.

Meanwhile Hotspotting’s latest price predictor report has Logan City as the number one predicted growth region in Australia. The Price Predictor Index is a tool based on trends in sales volumes which provide an indicator of future price movements.

Logan City has more growth suburbs than any other Local Government Area in Australia with 4 of the nation’s top 30 rising suburbs. Hotspotting puts Logan’s performance down to its affordability, good road and rail links, proximity to jobs nodes, and abundance of schools and shopping options.

These reports again bust the myth that the closer you are to the CBD the better the growth. Unfortunately many would be investors turn their nose up at areas like Ipswich or Logan City because of preconceived ideas about the market or potential tenants without any actual data to back up their beliefs.

I’m not certain of the origins of this myth but often when we ask people what their investment plans are – many say they want to buy close to the city because they believe that’s where you obtain the best growth.

Our own research tells us that good growth opportunities exist in many places and if you limit your focus to inner city only then you are cutting yourself off from significant upside gains.

For property investment advice find out about our Property Investment Service

What are the things you need to know before you invest in property? Click here

Many people are reluctant to actively invest for their retirment because they are concerned about risk. Therefore they choose to do nothing believing this is a "safe bet". Unfortunately inaction carries with it as much risk as taking action. In fact I would argue greater risk.

Warren Buffet, one of the worlds wealthiest indivuals, highlighted this in his recent letter to his clients. The simple message - if you try to play it safe by holding cash you will go backwards.

By way of example he compared the performance of holding the S&P500 with holding cash over a 50 year period. The S&P 500 achieved a 11,196 per cent return as opposed to cash which depreciated by 87 per cent over the same period.

At certain points in time cash may be a safe haven but it is only effective in the short term. Over the long term (with the correct approach and advice) assets like property and shares will grow in value while the real value of cash will go backwards. Sure you can reinvest interest in your cash holdings but what are you actually doing? Your rate of return is only matching the inflation rate so at best you are treading water but after tax you are steadily going backward. 

Assuming an average rate of inflation of 3% the real value of $100,000 would reduce by more than $25,000 over 10 years. If that was $1 million dollars then that would be more $250,000.

The reality is there's no such thing as playing it safe. But if you choose to do nothing your outcome is guranteed.

BIS Shrapnel says pent up demand, a push by investors into the market and an undersupply of new housing stock will drive a 14% surge in Brisbane house price over the next 2 years to June 2017. Pushing the market further out of reach of first-home buyers and driving up rents.

Beyond 2017, house prices will continue to rise in markets like Sydney and Brisbane, but at a more moderate pace, as higher interest rates impact on demand.

Last week I wrote about my concerns with what appears to be a emerging over supply of units in Brisbane. What's the big risk for the Brisbane market.

BIS Shrapnel has made similar observations this week suggesting we are building the wrong thing. Too many units and not enough detached housing. With the potential for a 10% fall in prices.

Melbourne, Brisbane each face glut of 15,000 apartments within two years, BIS Shrapnel predicts
Australia will run into a glut of apartments in just two years led by Melbourne and Brisbane - but other cities including Adelaide are also building more than they need, research house BIS Shrapnel predicts.

The Brisbane market has been on a steady albeit modest recovery since 2012 but their are significant risks emerging which could see substantial losses for some. 

I saw the below article last week and it has me pretty concerned about over-supply in the Brisbane unit market. Many of these units are being built in inner city suburbs like the Valley, South Bank, and West End. Sure these areas are artractive from a lifestyle perspective but these areas are already heavily saturated with units that have achieved limited price growth over an extended period and in many cases have seen declining prices.

They are also markets that have demonstrated fairly sluggish rental growth. 

Given that many of these projects are being realsed at the same time it is likely they will completed and settle around the same time. The potential impact of thousands of units coming onto the market at once is a sharp decline in values and increased vacancy levels.

This means for people purchasing off the plan they may find that the unit they purchased values for less than the contract price. And for those looking for it to be an investment there could be extended periods of vacancy or reduced rents achieved.

Since this article was released I have seen the announcement of several more projects and off the plan sales.

How it plays out only time will tell but I would be exercising a fair degree of caution and if I did proceed would have in place a substantial buffer to fund any devaluations on the property.

Remember once you sign an off the plan contract it is unconditional which means you have to settle of lose your deposit.

Brisbane’s off the plan apartment market is smashing all previous records within a three month period with a staggering 1621 unconditional sales taking place.

Apartments sold during this quarter revealed a weighted sale price increasing to $551,558 from a recorded $545, 478 during the three month period to September 2014, a figure which remains relatively unchanged.

An apartment “boom” was evident with a total of 12 new projects released during the December 2014 quarter, spanning a colossal 2760 new apartments – more apartments in a single quarter than during the entire 2013 calendar year.

The report identified that the most unconditional sales of the December 2014 quarter arose from the inner-northern Brisbane off the plan apartment market, which included 620 unconditional transactions with a weighted average price of $481,774, representing 38 per cent of all sales during the period.

(Source: AFG Mortgage Index)

Mortgages processed last month by AFG, Australia’s largest mortgage broker, surged 58% higher than in January, and 16% higher than in February 2014, according to the latest AFG Mortgage Index.

The $4.3 billion of mortgages processed in February included a record $280 million processed on the last Wednesday, 25th February, the largest single day’s volume AFG has recorded in its 21 year history.

Mortgage volumes varied significantly from state to state, with South Australia showing the greatest increase of 31% on February 2014, with NSW up by 25%, VIC by 21%, QLD by 15% and WA going backwards, processing 4% less in volume than in February 2014.

Mark Hewitt, General Manager of Sales and Operations (pictured) said the figures were encouraging.

‘February is the real start to the mortgage year and overall we’re off to a flying start this year. No doubt the February rate cut has made borrowers more confident, but it’s important to recognize the significant variations from one state to another,” Mr Hewitt said.

“We’re also keeping a close eye on the proportion of investors, but this hasn’t changed on the levels we’ve been seeing for the past twelve months.”

Loans to investors comprised 39.6% of all home loans processed last month, a similar figure to those reported each month for the past year.

Fixed rate mortgages declined as a percentage of all home loans to 13.6%, its lowest since August 2011 when only 9.4% of borrowers chose fixed rate loans. The rise of Introductory loans continued to a fresh high of 7.9% last month, indicating the proportion of borrowers.

(Source: The Urban Developer)

Australia’s population is likely to greatly exceed the Intergenerational Report’s (IGR4) forecast of 39.7 million people by 2055, according to advisory group MacroPlan Dimasi.

The baseline assumption in the IGR4 is that net overseas migration will average 215,000 people per annum.

However, MacroPlan Dimasi Chairman Brian Haratsis believes the annual increase is likely to be closer to 300,000 persons per annum, even if the national permanent migrant intake is not substantially raised.

“Australia’s economy has become more dependent on long-term temporary residents, including overseas university students, skilled workers and family visitors,” Mr Haratsis said.

“Recent history has shown that sectors leading economic growth are dependent on our temporary residents. Our healthcare, professional services and tertiary education sectors provide leading edges to jobs growth.”

The 16 million new Australian’s will drive demand for around 12 million homes, 32 million sqm of retail floorspace and 160 million sqm of office floorspace. By 2055 both Melbourne and Sydney are likely to be the same size as Chicago is today at 9 million people.

MacroPlan Dimasi argues that it is now time for a refresh of macroeconomic policy, with a focus on industry perspectives (rather than industry policy).

“It is clear that both monetary and fiscal policy, as sources for momentum, are close to exhausted. Moving forward, Governments will need to offer more detailed and considered analysis of how the economy is evolving” Mr Haratsis said.

One area policy makers should be focussing on is the tourism sector, which is complex as a source of demand for transport infrastructure, retail services and property investment. Our services for overseas tourists are thriving, but this sector remains undervalued and misunderstood.

“Framing actions for the next 40 years will require thoughtful assessment of the global services boom, as it collides with the digital revolution and growth in Asian middle class wealth,” he said

Cash neutral investment properties are those that pay for themselves without any additional contributions from the investor.  If the property is one that delivers reasonable price growth over time it really becomes a no brainer. A property that pays for itself and builds your wealth and your retirement fund. But do they exist and where do you find them?

Do they exist? Yes, but you won’t find them with a sign out the front. And you probably won’t have much success if your are using realestate.com.au  either. In fact if all you do is look at properties you will probably never find one.

That’s because the property is only one part of the story and there are a range of other factors that will influence a property’s cash position and whether it will be neutral for you, including.

• Your specific financial position
• Your taxable income
• Tax structuring
• The financial structure set up to fund the property
• How the property is managed

Unfortunately most people get focused on the “property” and pay little attention to the structure around it. In many cases the structure and strategy become an after- thought.

This is unfortunate because in many cased they are doing themselves out of thousands of dollars a year. Which in turn could undermine goals like paying off their home loan and building further wealth.

Our approach with clients is to start with the strategy first in the context of the client’s financial position. We map out the financial goals and then put in place the correct property and structure to support it.

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.