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From our Mortgage Broker | October 2020
20-Oct-2020
We are very fortunate here at Newton Real Estate to have Lionel from Smartmove as our mortgage broker, working towards reaching our clients' financial goals. Chatting to him recently, we asked him for an update on trends he is seeing with his clients and strategies to put in place. Some great information, particularly for investors below, thanks Lionel for your update...
In this current environment of record low interest rates, we are starting to see a lot of clients moving to principle and interest (P+I)- repayments on their investment loans. Currently, I am seeing 70% of investor clients taking out P+I loans. The reason for this is that banks are offering differential pricing between P+I loans and Interest only loans (IO), where on average IO loans attract a higher rate of approximately 0.30% - 0.50%.
Another trend that I am starting to see is that clients are looking to either fix a large portion of their investment loans or partially fix their investment loans. The reason for this trend is because fixed rates are on average another 0.30% - 0.5% lower than a variable rate loan. Let’s look at an example of the effect of lower interest rates on negative gearing:
-$500,000 – Investment property purchase
-$400,000 – Loan at 80% lend
-3.5% - A mid-range Investment IO, variable interest rate
-$14,000 – Interest charged per year or approximately $270 per week
The rent that an investor may attract on a property worth $500,000 may be anywhere between $350 - $500 per week (depending on a number of variables). As you can see from this example the property is positively geared (subject to other expenses on the property).
Some of the strategies we are seeing our clients employ to try and maximise their tax benefits on their investment properties include:
-Working closely with their accountant to get the best advice
-Investing in a depreciation schedule
-If they have an existing property, borrowing 105% of the cost of the property with 25% borrowed against the existing property (if equity is available) and borrowing 80% against the new investment purchase. Keep in mind the extra 5% accounts for stamp duty and other miscellaneous fees. In the example above, it changes the tax deductible debt from $400,000 to $525,000.
SOURCE - Lionel Singh - Smartmove Professional Mortgage Advisors
In this current environment of record low interest rates, we are starting to see a lot of clients moving to principle and interest (P+I)- repayments on their investment loans. Currently, I am seeing 70% of investor clients taking out P+I loans. The reason for this is that banks are offering differential pricing between P+I loans and Interest only loans (IO), where on average IO loans attract a higher rate of approximately 0.30% - 0.50%.
Another trend that I am starting to see is that clients are looking to either fix a large portion of their investment loans or partially fix their investment loans. The reason for this trend is because fixed rates are on average another 0.30% - 0.5% lower than a variable rate loan. Let’s look at an example of the effect of lower interest rates on negative gearing:
-$500,000 – Investment property purchase
-$400,000 – Loan at 80% lend
-3.5% - A mid-range Investment IO, variable interest rate
-$14,000 – Interest charged per year or approximately $270 per week
The rent that an investor may attract on a property worth $500,000 may be anywhere between $350 - $500 per week (depending on a number of variables). As you can see from this example the property is positively geared (subject to other expenses on the property).
Some of the strategies we are seeing our clients employ to try and maximise their tax benefits on their investment properties include:
-Working closely with their accountant to get the best advice
-Investing in a depreciation schedule
-If they have an existing property, borrowing 105% of the cost of the property with 25% borrowed against the existing property (if equity is available) and borrowing 80% against the new investment purchase. Keep in mind the extra 5% accounts for stamp duty and other miscellaneous fees. In the example above, it changes the tax deductible debt from $400,000 to $525,000.
SOURCE - Lionel Singh - Smartmove Professional Mortgage Advisors