What is meant by “Cross Collateralised” Loans?
Cross collateralisation denotes the practice of combining multiple properties into one larger source of collateral for mortgages obtained from the same lender. The most common setting for cross collateralisation occurs when a bank requires additional security for an existing or proposed loan.
The following is an example of how a typical cross collateralised loan works:
Suppose you currently have an outstanding $400,000 home loan with your bank. The mortgage is secured by your $800,000 primary residence. You locate an attractive investment property for $500,000. The initial outlay required for acquisition is $530,000. Borrowing against your home equity is an option. This would, however, entail a considerable stamp duty and other costs.
An alternative approach is a cross collateralised loan of $930,000. This would provide sufficient capital to acquire the investment property and retire your current home loan in full. Real estate values totalling $1,300,000 would secure a $930,000 loan. The loan-to-value (“LVR”) ratio of this loan proposal would be 71%. Any lender would find this figure very attractive.
By contrast, obtaining separate mortgages would yield the following results:
Loan 1: $530,000
$400,000 existing home loan and $130,000 required for investment property deposit.
As your $800,000 residence serves as the sole stand-alone collateral, the loan would have an LVR of 66%. From the lender’s perspective, this is even more attractive than the cross collateralized example cited above. It’s only part of the picture, however.
Loan 2: $400,000
This would be a new loan to finance the balance of the investment property’s purchase price.
As the investment real estate would be the sole standalone security for this loan, the LVR would be 80%. From a lender’s perspective, this is not nearly as attractive as the 66% of your separate refinance loan, or the 71% of a cross collateralised loan. Such an approach would likewise involve higher duty stamps and other costs, since two separate loans would be required.
Should I always choose a cross collateralised loan over a stand-alone mortgage?
The best answer to this question is highly-dependent upon several specific borrower-related and loan-related factors. In general, our recommendation is to avoid cross collateralised loans. The two main reasons for this position are the extreme difficulty of subsequent collateral severance and loss of borrower control over loans. Taken together, these two features of cross collateralised loan structuring create high risks for prospective borrowers.
By way of example, assume the following situation. You encumber 5 parcels of land with a cross collateralised loan. Subsequently, the need to sell one or more of the properties arises. As lien-holder of all the real estate, your lender may impose any of the following requirements:
1. Appraisal of the other 4 properties to ensure adequate residual security.
If the value of your remaining collateral portfolio is not enough to fully secure the outstanding loan balance, the lender may demand sale of all 5 properties. Based upon the relative value deficiency level, the mortgagee may even prevent the proposed sale altogether. For obvious reasons, this can be quite problematic for you. If the property you wish to sell is your portfolio’s “anchor” by virtue of having a much higher relative value than the others, you are probably out of luck.
2. Full re-evaluation of your economic status to establish continued loan affordability.
This can be very inconvenient for you. If, by the lender’s standards, your existing loan would be “unaffordable,” it can demand all proceeds from your proposed sale to reduce your total outstanding debt. If you are deemed to be in especially dire financial straits, the lender may demand immediate repayment of the whole outstanding balance – after retaining all proceeds from the prior sale. Such an eventuality would, of course, force liquidation of all properties within your collateral portfolio. In many cases, this includes the borrower’s primary residence. Refinancing via an alternative source may be impossible.
3. New documentation preparation.
Most banks and other mortgage financiers require the issuance and endorsement of two sets of entirely new loan documents. This is to be expected, as the composition of security for your current cross collateralized loan will be changed. This may seem a trivial matter in comparison to other potential consequences. Nevertheless, it is a source of considerable hassle and entails some expense.
With stand-alone mortgages, you may sell a parcel of land whenever you desire. Your only obligation to the bank or other lender is repayment of just one loan. There is no reassessment of borrower financial status, and no formal valuation of any other property you own. The most important advantage to you is full control over the disbursement of any sales proceeds.
Aren’t a lot of small loans much more cumbersome?
This concern is very common and valid. Consolidated debt with one lender certainly has many advantages over having multiple smaller balances outstanding with one or more lenders. A means of circumventing the major disadvantage of stand-alone loans is a revolving line of credit securitized by your most valuable realty holding. You may access it as needed for multiple investment purchase deposits.
Is a cross collateralised loan ever the best option?
There are instances in which cross collateralisation is the only practical loan structuring option. The most common instance is when none of your current realty holdings has enough equity to serve as security for a prospective investment purchase. The combined equities in two or more of your properties may be adequate to affect the purchase of a highly-desirable prospective investment acquisition. In such a case, you should definitely consider a cross collateralised loan, rather than miss out on potentially enormous investment gains.
What is meant by “all monies mortgages?”
“All monies” is used in the mortgage lending industry to denote a borrower’s entire outstanding debt with a particular lender. Many mortgages contain an “all monies” stipulation. Typically, such clauses allow your lender to accelerate all outstanding loans if you experience a material change of economic circumstances. Even your non-realty assets may be subject to forced liquidation. The only means of avoiding the attachment or involuntary sale of assets is to refinance your debt via a new loan or alternative lender.
Divide to minimize risk
For owners of multiple properties with several outstanding loans, we recommend the use of at least two primary lenders. If problems develop during the term of any loan(s), you already have a source of relatively easy refinancing installed. It is especially advisable to obtain a primary-residence home loan via one financing source, and all investment-related loans with another.
Learn more about cross collaterised loans.
For most people, buying a home is the most important investment they will ever make. Choosing the right home loan is one of the key elements in making the right investment in a family home or an investment property.
Among the items to take into account when considering a home loan are the loan type and the amount of money that you should borrow
What Loan Type Is Best For Me?
Choosing the right loan type will depend on your specific situation and budget. Generally you can choose either a fixed or variable interest rate loan. Sometimes it can be difficult to decide on which of these loans is best for your situation. In such cases, you should consider seeking home loan advice from professionals. Making the right loan choice can not only help save you money, but can also help you avoid the possibility of future default and even foreclosure.
Fixed Rate Loans
A fixed rate home loan involves a fixed interest rate and monthly repayment for a set period that usually lasts from one to 10 years. One of the drawbacks of fixed rate mortgages is that if you repay the loan in full before the fixed rate period ends, you will have to pay an early exit penalty known as “break cost” or “economic cost.” To avoid paying this penalty, you should make sure that you follow the repayment schedule.
Variable Rate Loans
Variable rate mortgage loans come in two types, the standard variable loan and the basic variable loan. The standard variable rate loan offers a varying interest rate that can increase or decrease during the repayment period. The professional package is often taken together with the standard variable loan, which is popular with investors who have more than one property.
The basic variable rate mortgage is designed for borrowers who are looking for just a single home without any plans on buying additional property in the future. The interest rate can increase or decrease during the term of the loan, but the basic variable rate comes with a loan discount included.
Equity And Line Of Credit Loans
You can use your equity or line of credit to obtain variable rate loans. Line of credit loans often do not require set repayments up until you reach your credit limit. Sometimes you make be required to make a monthly payment at least equal to the amount of accrued interest from the previous month.
Line of credit and equity loans are good for making renovations to your home and for other types of investments.
Combination Loans And Split Loans
One of the best options for a combination or split loan is to take the loan together with a professional package. The professional package is designed for investors that have multiple loans that can be of various types and it combines the rates together in a single annual package fee.
A split loan refers to a mortgage that is partly of variable interest rate and partly of fixed interest rate. The split loan, thus, offers some of the advantages of both the variable and fixed rate types of loans. You will not have to worry as much about interest rates going up with the fixed interest rate, and you can make extra payments with the variable interest rate.
Can Non-Citizens Obtain Home Loans?
Australia allows permanent residents and temporary residents to obtain mortgages and buy property in the country.
Generally, banks will only cover about 80 percent of the property value for expatriates that are purchasing homes. However, those who have lived in Australia for more than 12 months and that are willing to pay a higher deposit can often find a bank that will cover up to 90 percent of the property value.
Permanent residents and expatriates who are married to Australian citizens or permanent residents can usually obtain mortgage loans for up to 95 percent of the home value.
People on temporary visas that will not be staying in Australia for more than 12 months are required to obtain approval from the Foreign Investment Review Board (FIRB). Spouses of Australian citizens and most others on temporary visas who will be staying for more than 12 months will not need FIRB approval.
In addition, temporary residents are not eligible for first home owners grants or other government benefits. However, if you have a spouse or partner visa and you will be purchasing property with your spouse or partner as joint tenants, then you can qualify for the First Home Owners Grant (FHOG).
How Much Should I Borrow?
Banks will often give you quotes on how much you qualify to borrow for a home loan. Generally though, this maximum amount is more than what you should prudently consider for your mortgage loan.
The maximum amount that you qualify for can be taken as the amount that you will be able to pay while maintaining a generally low standard of living given your income. A good rule is to only consider loans that do not require repayments of more than about 35 percent of your gross income.
However, for borrowers who are frugal and who have lower tax rates, they can prudently consider repayments up to about 40 percent of their gross income.
For example, if a person were to make $80,000 a year with a desire to maintain a generally higher living standard, then the annual repayment should be no more than $28,000 ($80,000 X 35%) or $2333 a month. In order to figure out what repayment rate is right for you, the best option may be to seek advice from a professional mortgage expert who can work through the details of your present and future budget.
Seeking Mortgage Advice For Investments
If you are a real estate investor, it is generally best to seek professional advice to optimize your chances for success.
Generally, it is best to seek standalone loan structuring rather than structures that depend on cross collateralisation.
A cross collateralisation investment involves a secondary loan that is secured with your owner occupied family home. The obvious danger here is that you could lose your family home if you are unable to satisfy the terms of the secondary loan.
In a standalone structure, you first obtain a second loan using your line of credit on the family home. This second loan is used as a deposit for the investment property loan. In this way, the investment property is secured solely by the investment property itself and not by your family home.
Property Ownership For Couples
Husband and wife can benefit by allowing the highest income earner to hold title to the home for tax purposes. However, if you plan on owning the property for a long time, you can lower your future capital gains taxes by jointly owning the home.
Get more information on home loan types.
Most of the lenders in Australia currently offer 90% home loans to at least some of their borrowers. Recently, there has been a return by lenders back toward offering high LVR (loan to value ratio) loans once again. A 90% home loan is still quite a bit more risky to lenders than the more traditional 80% loan, but it is considered a great deal safer than a loan with only a 5% deposit, or no deposit at all.
There are some lenders who will be willing to offer a 90% loan even without any genuine savings. Lenders have been loosening up somewhat as the economy has been improving steadily in recent times. Many financial experts anticipate that this option will start to become more common in the near future, and that they won’t be quite as difficult to get approved for. At the same time, if you have a relatively unreliable credit history, you most likely won’t be able to take advantage of this option. Rather than trying to find these loans on your own, it is often a good idea to take advantage of the services offered by a mortgage broker. They have a better idea of who is most likely to approve your loan, and who will do so without charging you an unfair interest rate.
Another option is to take advantage of something called a “cash out” loan. This is when you refinance your home in such a way that you can gain access to funds that you will be able to use for your own purposes. It is more difficult to get approved for this type of loan than it was in the past. There was once a time when you could cash out a loan with little more justification than to say you will use it as an investment. Today, you will need to provide more evidence to support your case.
Cash out on a 90% loan is not impossible, but you will need to offer a compelling case in order to receive approval. Essentially, the reason for the loan needs to have a rational explanation. The amount of money that you are asking for should be proportional to the reason you are asking for it. If you are asking for more than $30,000, you will usually need to provide some paperwork to support your argument as well.
If you are self-employed or work on commission, it could be significantly more difficult to obtain approval, especially for larger loan amounts.
As is fairly standard for the financial industry, there aren’t any rules written in stone that all banks must abide by. If you argument makes sense, you have a good credit history, and you have the evidence to support it, there is a good chance that you will be approved. It is truly up to the lender to make that decision.
A 90% loan can also be a good solution for an investor. It can be somewhat risky to purchase a property with a 5% deposit, or no deposit at all, but many investors are comfortable with less than a 20% deposit. It gives an investor more flexibility without putting them at too much risk. They have the opportunity to invest in almost twice as many properties. Often times, the cost of lender’s mortgage insurance for a 90% loan is quite a bit lower than at 95%.
There are various factors that will affect your ability to get approved for a 90% loan. One of the most important factors is the purpose of the loan itself. Will you be using it to buy a home for your own purposes, to invest in property, or to refinance? Some banks will consider one type of loan to be more risky than another. Generally, you will have more luck if you are applying for a loan to use for your own purposes. Investors are often more willing to take risks, which can lead to some discomfort on behalf of the bank. Refinancing could also be an indication that the borrower is experiencing some financial trouble, especially if they are self-employed.
Obviously, your credit history will have an impact on whether or not you are approved. Other debts that you owe will also play a big part. The bank will weigh these debts against your income in order to determine whether or not they feel you will be able to make your monthly payments on time, since this is the bank’s ultimate concern. They will usually hope to see that you have been working at the same job for more than six months, and it is often beneficial to see that you have been in the same industry for more than two years. Seeing five percent genuine savings is also very helpful for your case. The savings should be in the bank for between 3 and 6 months in most cases.
Learn more about 90% home loans.
Buying property is thrilling, stressful, and a little frightening. There are so many terms to understand, and an incredible amount of paperwork to sign. Interest rates have to be considered, along with down payments. Buying a standard home is a relatively simple process that most people are familiar with. But what happens when you’re trying to buy an unusual property? You will find that the process for buying these properties is a little different. It can be done, but it’s important to know what to expect.
Mortgage Terms
Loan to Value Ratio (LVR)
This is simply a quick way for lenders to know how the amount loaned compares to the actual value of the property. The amount of the mortgage is divided by the appraised value of the property in question. Most banks like the LVR to be below 80%. If the LVR is higher than 80%, they will require you to get Lenders Mortgage Insurance (LMI) to help protect their investment.
Commercial Mortgage
This mortgage is required to secure real estate that will be used for business purposes. Commercial mortgages are used for buying office space, warehouses, retail stores, and some rental properties.
Residential Mortgage
This mortgage is designed for buying houses and other residential property. Fees and interest rates are typically lower than for commercial mortgages, and lenders will allow higher LVR’s.
Torrens Title
Most people think of their home and understand that they are the ones listed on the title. A single document names the absolute owner. This is known as a Torrens title, it is the most common type, and getting a mortgage for one is a relatively simple process.
Strata Title
This title is for a privately owned property that is connected to another property. Apartments and town homes that are privately owned, for instance, would have Strata titles. The property is defined as the airspace occupied by an individual unit, and a strata corporation is created to take care of common areas used by multiple owners. Mortgages with these titles are also relatively simple.
Community Title
When an entire community has common areas such as parks, playgrounds, or pools; a Community title is necessary. It covers a subdivision or neighbourhood and allows all the individual home owners to also have ownership in, and responsibility for, the community areas. These are also basic titles that do no usually present problems for borrowers.
Company Title
These titles date back to the pre-Strata title era. Before apartments and townhomes were divided up into individual dwellings with each property defined as the occupied air space, ownership was addressed with a company title. The apartment building or town home was owned by a company. People wanting to buy a townhouse would not simply buy that home, but would buy shares in the company. The problem with these mortgages is that the other owners in the company, your neighbours, have to give consent for anyone to sell, lease, or mortgage their individual unit. Banks do not like these titles, and buying a property that uses one can be challenging.
What the Bank Looks For
LVR
This is high on the banks priority list of concerns. A general rule of thumb is that higher risk properties will be limited to lower loan to ratio values. When a property is more desirable and easier for the bank to sell you can borrow more money against the value.
Saleability
The bank wants to know that they can recoup their money if you default. Properties that only appeal to a few people are harder for the bank to sell and will be harder for you to get a mortgage on.
Stable Value
Banks like knowing what a property will be worth over the life of the mortgage. When a property has a history of an unstable value, most lenders will be leery of it. If the value fluctuates too much over the years, the bank will require a lower LVR, so you’ll have to put more money down.
Legal Issues
Banks don’t like legal issues and challenges. They want to know that they can sell your property if you don’t make the payments. Company titles, in particular, are not something banks want to get involved with. You can still get a mortgage, but you might wind up having to lower the LVR by making a larger down payment.
Unusual Properties Types and Their Challenges
Luxury Properties with High Price Tags
Luxury mansions are great to look at and visit, but most lenders hesitate to put up their money for them. When you’re looking at properties valued at over two million dollars, lenders want to limit how much of that value they are actually holding. The reason is simple. If you default on the loan, the bank wants to know that they can sell the property and at least get back the money they have paid out.
Inner City or High Density Buildings
It seems like such a great idea to buy an apartment building and become the ultimate landlord. But then you go for financing and start running into challenges with mortgages. Some lenders simply don’t like financing these buildings. They may have several types of restrictions regarding building size, location, height, and how many apartments it has. Luckily, you can still find mortgages for these structures. The trick is to find a bank that doesn’t have a specific inner city property policy, or high density building policy.
High Rise Apartments
While these buildings may be nicer and more luxurious than an inner city apartment building, it can still be challenging finding a company that will write a loan. These unusual properties often run into the same challenges as inner city properties.
Company Title Properties
As discussed before, these multi-unit properties have a more involved process for buying or selling any units. Because the neighbours have a say in the transaction, most banks are leery to get involved at all. It is possible to find lenders that will go up to 85% LVR, but most try to stay below 60% LVR.
Serviced Apartments
These buildings are designed for short-term stays. They typically do not have permanent residents, but people who need somewhere to stay for a few weeks or a few months. They are usually furnished and serviced by the entity that owns the building. A lovely investment for rental income, finding mortgages for these properties can be problematic.
There are lenders who will still provide mortgages on these unusual properties, provided certain requirements are met. The requirements can be quite stringent, but may allow you to go up 80% LVR, depending on the bank. If the requirements can not be met, you may be limited to 50% LVR.
Multiple Properties on a Single Title
It is possible to have multiple properties placed on a single title. Some investors prefer this for simplicity. The problem is that when too many properties are listed on a title, the bank will define those properties as being commercial units. This works greatly in the banks favour, because you will have to take a commercial mortgage with a lower LVR and higher fees. You will fare much better on terms and lending amounts if you choose a lender that will still allow you to take a residential mortgage on the properties.
Mortgages are available for any of these property types. The key lies in knowing why the banks will avoid making the loan, and how to work around the issues. You can get a home loan on a luxury property; you just have to know what type of lender to search for. There are mortgages available for unusual properties, as long as you know how to work with the bank.
When discussing home loans and mortgages, you may often hear the term “loan to value ratio.” The loan to value ratio, or LVR, refers to the ratio of the loan amount to the value of the property. It is typically expressed as a percentage.
This ratio is extremely important in all aspects of lending. The majority of banks and financial institutions have lending policies for each type of loan that are related to the loan to value ratio. For example, the bank may only allow up to an 80% loan to value ratio on investment loans, but may allow up to 95% LVR on loans used for a primary residence.
In order to calculate the loan to value ratio, one must divide the principal loan amount by the value of the home. A $200,000 loan on a house with a value of $300,000 would have a loan to value ratio of approximately 67%. When a lender calculates the loan to value ratio for the purchase of a piece of property, they will either use the valuation amount or purchase price, depending on which is lower. The worst case scenario occurs when the purchase price is higher than the valuation, resulting in a higher loan to value ratio than was anticipated. High loan to value ratios mean higher mortgage insurance premiums. In addition, if there is a significant enough difference between the value of the home and the purchase price, the loan may be declined.
When a loan to value ratio is calculated for a refinance, the valuation amount is always used. On rare occasions, a lender may use valuations even if they are higher than the purchase price for a home loan, but usually only if the sale contract is several months old.
If possible, one should always obtain a valuation prior to submitting an application for a loan. This can save a lot of unnecessary trouble and inflated hopes in situations where the valuation amount will determine the borrower’s ability to secure the loan. Once the borrower has determined that he or she will meet the lender’s loan to value ratio requirements, the application can be submitted.
Typically, a lender will require mortgage insurance for any loan with an LVR of more than 80%. However, for lo doc loans, this percentage may be as low as 60%. For first time buyers, the loan will usually have a relatively high loan to value ratio. In fact, in many cases the loan to value ratio will be 100% for first time buyers. Fortunately, most first time home buyers are eligible for the First Home Owner Grant, which can be used to pay the majority of the required mortgage insurance. In addition, first home buyers are exempt from stamp tax in some states.
In the event that a loan applicant is not eligible for the First Home Owner Grant and cannot afford a deposit of 20% or more, he or she will have to pay stamp tax and mortgage insurance, which often requires a loan with a loan to value ratio of more than 100%. If the borrower does not wish to pay these extra costs, he or she could ask someone to act as a guarantor.
A guarantor is someone who signs an agreement stating that he or she will take responsibility for the loan repayments if for some reason the borrower can no longer pay. This person is usually a relative, but may also be a friend in some cases. The guarantor’s assets will be used to secure the loan, which can bring the loan to value ratio down to a percentage low enough to avoid mortgage insurance. In some cases, a guarantor may be needed in order to secure the loan at all.
If a guarantor is utilized, he or she can either sign a guarantee for the full amount of the loan or for a limited amount. In a limited guarantee, the guarantor will be responsible for only the percentage of the loan needed to bring the loan to value ratio down to an acceptable level. For example, if the original loan to value ratio for a borrower is 95%, but the bank will only allow ratios of 80% or lower without mortgage insurance, the guarantor would need to sign for 15% of the loan amount so that the borrower can avoid the insurance premium.
Loan to value ratios (LVRs) are very important tools used by lenders to make decisions and determine costs. A lender may only approve certain types of loans if their loan to value ratio falls under a set limit. In addition, lenders typically charge mortgage insurance premiums to the borrower when the loan to value ratio is above a certain percentage. Avoiding these extra costs can be very helpful, so sometimes it may be in a borrower’s best interest to seek out a guarantor.
A mortgage offset account has also been referred to as an offset home loan, an interest offset account, or simply an offset account. All of these terms refer to the same thing: a mortgage that is linked to a bank account. Crucially, the interest that you owe toward the home loan is based on owed balance of the loan minus the balance in the bank account.
How Does an Offset Account Work?
You can use the account just like a standard bank account. You can deposit and withdraw funds, write checks, use an ATM, and access your account online. When the bank calculates your interest, it is as though all of the money in the offset account has already been applied toward the loan.
As an example, if you owe the bank $500,000, and you have $10,000 in your offset account, the interest that you owe will be based not on the full $500,000, but on $490,000.
How Can the Bank Do This?
Why is the bank able to do this? It comes down to the way that banks work. When you make a deposit at the bank, the law says that they have the right to lend out a specific percentage of those funds and earn additional interest on them. Every time that you give money to the bank, whether it is to pay off a loan or simply to make a deposit into your bank account, you are actually giving the bank access to those funds.
For this reason, the bank doesn’t really see the funds any differently. Whether you are paying off a loan or making a deposit, they can use the funds that you give them in order to make additional loans and earn additional interest on them.
Does it Make Sense to Use an Offset Account?
An offset account is not the perfect solution for everybody, but for certain strategies it can be extremely beneficial. The important thing to keep in mind is that it is all relative. If you could earn more interest by putting the money into a savings account than you can save by putting it into an offset account, it doesn’t make a great deal of sense.
In reality, the amount of interest that you can earn from a savings account is usually very small in comparison to the interest that you are charged on a home loan. For this reason, it often makes more sense to use an offset account than a savings account.
Combining a Credit Card and Offset Account
One strategy that some people claim is helpful is to combine the benefits of an offset account with a credit card. If you pay all of your living expenses using a credit card each month, you will maximize the amount of money available in your offset account for the majority of the month. Each month, you can then use the offset account to pay off all of your credit card debt.
By using the credit card for your living expenses, all of your income and savings go toward reducing the interest on your home loan. This means that your regular payment will take a larger chunk out of your principle, meaning that you will be closer to paying off all of your debt on the home loan. Of course, the crucial part of this strategy is that you don’t go overboard with the credit card, and that you use it in such a way that allows you to pay it off each month.
Diverting Income to an Offset Account
By combining all of your accounts into one, an offset account gives you a bigger picture of what is going on with your financial situation. If you have investment properties as well as personal properties that you are lending through, an offset account allows you to divert all of your income through the offset account, reducing the interest that you have to pay on your home loan.
Turning Personal Property into Investment Property
It’s not uncommon for a borrower to buy a home for their own personal use with the expectation that they will eventually buy a better home and use the old one as an investment. Rather than selling the old home, they can rent it out and earn a passive income on the property.
One strategy that has proven very effective for some people would be to purchase the first property with an interest only loan linked to an offset account. Any extra payments they then made toward the loan could go into the offset account.
First of all, this would mean that the borrower would pay no extra interest on the loan. As long as they were able to make a payment equivalent to that of a standard loan, rather than that of an interest only loan, they would actually end up spending less in interest than they would with a standard loan.
Later on, when the property became an investment, they would be able to enjoy some tax benefits. The principle of the loan would remain unchanged, and all of the interest charged would be tax deductible.
Not only that, but all of the funds that had been placed into the offset account could then be used in order to buy the next home.
In summary, the borrower has managed to take out an interest only loan without needing to pay any more interest than they would need to pay with a standard loan. They also manage to get the most out of their future tax deductibility when the property turns into an investment.
How to Determine if an Offset Account Will Save Money
One important thing to realize is that an offset account typically comes with a yearly fee. Before deciding to use an offset account, you need to be sure that it will save you more than the cost of this fee.
The first thing that you will need to determine is the average amount of money that will be in your bank account for the entire year.
In a situation where the interest rates are especially high, the amount of money that will need to be in your bank account if you want to break even will be lower.
To determine how much would need to be in your bank account, you would divide the cost of the annual fee by the interest rate. As an example, suppose that the annual fee was $400, and the interest rate were 10%. You would simply divide $400 by 10%, which gives you $4,000. This means that, on average, there would need to be $4,000 in your account each day.
This might mean that your account balance is near $8,000 for half of the month, and near $0 for the other half. You will need to take a look at your daily account balance over a period of a month to determine this exact value.
Of course, this only tells you if the interest savings are worth more than the annual fee. It doesn’t tell you if you would be better off placing the money elsewhere, such as in a saving’s account, or a different high yield investment. Only you can determine whether it makes more sense to use that $4,000 for something other than to offset your interest.
Learn more about mortgage offset accounts.
Buying a home is an exciting process, but it can be very expensive and intimidating. This is especially true if you have never bought a home before. If you are preparing to buy your first home, there is an excellent government-sponsored opportunity you need to be aware of- The First Home Owner Grant.
The First Home Owner Grant Act was created when the Australian Government realized that the population needed some help in building and purchasing homes. They invented this unique scheme to encourage families to purchase a home of their very own. Increased rates of home buying not only boost morale, but also improve the economy.
The First Home Owner Grant or FHOG was first introduced to the public in July of 2000. This grant was designed to counter the effect of the Goods and Services tax on first home ownership. Though the FHOG is a national scheme, it is funded and administered by individual territories and states. The grant offers $7000 to first time home buyers that satisfy all of the necessary criteria.
In order to qualify to receive the First Home Owner Grant, the applicant must meet all of the following conditions:
1. The applicant must be a first-time home buyer. If either the applicant or the applicant’s spouse owned and occupied a home after July 1, 2000, the applicant will not qualify. In addition, neither the applicant nor the applicant’s spouse is allowed to have owned an interest in any land in the country of Australia that contained a residence prior to July 2000. If the investment property purchase was made after July 1, 2000, the applicant will still be eligible as long as he or she has never resided at the property.
2. The applicant must be a person and not an entity such as a company or a trust. The applicant must be an Australian citizen or a permanent resident that is at least 18 years old.
3. The applicant must be under contract to purchase or home or have entered a contract to construct a new home that commenced on or after July 1, 2000. If the applicant is an owner-builder, the foundations must have been laid no earlier than July 1, 2000.
4. The value of the applicant’s property can’t exceed $750,000. At least one of the occupants must keep the home in question as their primary place of residence for at least 6 continuous months. This period must occur within 12 months of construction of the home or settlement.
5. The applicant must have never received a grant under the First Home Owner Grant Act in any territory or state in Australia. Similarly, the applicant’s spouse may not have received a grant either.
6. Joint applicants are restricted to filling out only one application and receiving on $7000 grant under this program.
7. The home in question must be located in Australia.
The amount awarded under the First Home Owner Grant Act is the same regardless of the value of the house constructed or purchased. In addition, the amount doesn’t change based on the amount financed. Whether the mortgage value is $50,000 or $500,000, the grant will still be worth $7,000. To apply for the grant, the buyer or builder can visit one of many banks or lending institutions that are included in the list of approved agents.
In addition to the First Home Owner Grant Act, different states and territories have other ways of helping first home buyers as well. Some areas offer concessions or exemptions from stamp duty payments, while others offer additional grants.
If the applicants both meet certain criteria, they may even be eligible for additional funds from the government. These extra grants are referred to as a first home bonus and do not require a different application. One is automatically considered for the first home bonus upon completing the application for the First Home Owner’s Grant.
The First Home Owner Grant is an excellent opportunity for all eligible first time home owners in Australia. It was created to stimulate the country’s housing market and economy by helping home buyers with their first purchase. Home loans often provoke anxiety in first time buyers, but this grant offers buyers the incentive they need to go ahead with the process. If an applicant meets set criteria, he or she will qualify for this grant regardless of the value of the home purchased or built. The grant is for the same amount, $7000, no matter what the price of the home was. This opportunity can only be taken advantage of for your first home purchase, so don’t miss out! Visit your nearest bank or other qualified lender and see if you meet the eligibility requirements.
The process of buying a house at auction can be nerve racking. It is important that you understand that when your bid is successful in an auction, you will be signing a contract to pay for the house on the same day. You have no recourse if you want to change your mind after the purchase. Please do your homework and make yourself aware of all of the things that could potentially go wrong when buying a home at an auction. Here are some tips that can help you make the most out of buying a house at an auction or through a private treaty.
Pre-approval
You must get pre-approval for a home loan before an auction. Your loan application must be properly assessed and approved, subject to a valuation of the property. Many lenders will not pre-approve mortgages because many people who apply for them choose not to proceed with the purchase of a home. Some banks see processing mortgage pre-approval as a waste of resources. Check your local banks and lending institutions to see if any will pre-approve a mortgage before you bid on a home at auction.
Making an Offer Before the Auction
If you are absolutely set on buying a specific home, you can try making an offer before the auction commences. Make an offer that is realistic but still under your maximum bidding amount. You should put the offer in writing along with your preferred time frame for settlement of the auction. Vendors often like when buys make bids before the auction, as they are happy to secure a favourable price instead of putting the home up for competitive bidding. If the vendor comes back with a counteroffer, it may be to your advantage to offer slightly more and advise the vendor that that it is your final offer before the auction begins. If you get no response, it may not be in your best interest to contact them again. If the same vendor contacts you immediately before the auction, tell them that you may or may not be bidding. Their reaction can often tell you if they are seriously considering your bid.
Setting Your Limit
You should always set the limit of how much you are prepared and able to spend before the auction starts. Once you have determined your personal limit, never go over it. One idea is to pick a reasonable number as your limit and to make bids that are several thousand dollars or more below your limit. If you are approved to for $300,000, it may make sense to bid $278,500 on a home, as your bid would beat those approved for $275,000 or $278,000. It may seem like a strange strategy, but it can pay off big time if you bid on the right home at the right auction!
Don’t Take Guide Prices Seriously
Intentional under quoting of the expected sale price of a house is illegal in some places and definitely unethical, but it still happens often. It is very common for properties to sell for significantly more than the amount that the property is listed for in the price guide. Many real estate agents either don’t know the actual value of a property or they are trying to get as many potential buyers as possible to become emotionally attached to the property before the sale. This should go far in showing you why informed buyers need gauge on what properties are worth for yourself. If you don’t know what a certain house is worth, do some research about recent selling prices of other comparable homes in the area. You can attend multiple auctions and research past sales. You should also research the property itself to see what it last sold for. Then you can compare that to the information that you’ve found researching the prices of other similar homes in the area. The key is to go to the auction informed so that you can make an informed purchase.
Negotiate Contract Changes Before Auction
The contract for sale will outline what is included in the sale of the property as well as the time frame for settlement of payment due to the seller. This contract can be negotiated but that must be done before the auction commences. The vendor is not obligated to change their contract after a house is sold at auction but some may be willing to do so.
Tips for Private Treaty Sales
The private treaty method of buying a home is often a bit less stressful than buying a home at an auction, particularly if you are purchasing your first home. A private treaty sale will often be handled by a real estate agent, though it can also be arranged directly by the owners of the house. Buying a house by private treaty means that you should not have to exchange contracts until you have a mortgage loan approved by a bank.
Don’t Show Your Hand
It’s fine to express interest in a house to the agent or vendor handling the sale, but you should try not to show too much emotion. If you can, let them know you are interested in some of the other properties at the auction. Disclosing your finance position to an agent or vendor is usually not a wise thing to do. Agents will ask if you have approved financing or if you have are able to put down a deposit. These questions help the agents get information about you as a buyer, though that information can be used against you later. Don’t be rude, but also don’t give them so much information that they’ll have the upper hand in negotiations.
Do Your Homework
Find out as much information as you can about how much other properties in the same area have sold for in recent months. You can go to auctions and learn about local property market trends. If more than 75% of the houses at the auction have sold, this would be indicative of a thriving market. If less than 50% of the houses have sold it would be considered a slow market.
Don’t Believe Anything That They Say
Agents will often say that there’s a higher offer on the table than a bid that you have just made. It’s best not to believe them if they tell you this. Remember to stay within your limit and never negotiate a price over it. You may have to show them that you are willing to walk away. If you do this, you won’t have to worry about bidding against yourself and paying an artificially high price for you home.
Put your offer in writing
Real estate agents are obligated to submit all offers to the seller for review. You should always submit your offer in writing. Remember that your offer is not legally binding until both you and the vendor have signed the contract. Remember that you can negotiate not just the price, but also the settlement time frame and the items included in the sale. Always negotiate changes to the contract before the auction and always make special conditions, such as a longer settlement time frame, known to the vendor upfront as well.
Get expert advice
If you need additional advice then consider asking friends who are experienced property investors as they often bid at auctions. There are useful resources such as property investment forums that you can use to access the experience of others if you don’t have friends who are investors.
In addition to this you should always use an experienced conveyancer for your purchase. They can help you with your due diligence up front, to ensure you don’t run into any traps later on.
