Why choose an interest-only loan?

In the past, one of the best features of an interest-only loan was that it gave first home buyers the ability to start sooner and get a foot on the housing ladder. That’s because it allowed first-time buyers an increased opportunity to purchase without being under the pump to make the full P&I repayments. However, it has become increasingly more difficult for first-time buyers to secure an I-O loan, unless there are extenuating circumstances, e.g. they can prove that the property will be turned into an investment property in the near future. Because an interest-only period lowers the repayments it’s a good way to ease into a first investment.

Interest-only loans offer greater flexibility

Interest-only loans can also assist when homeowners go through job losses or other financial situations where income is reduced. For example, when a partner is on unpaid maternity leave. Changing to I-O helps help ease financial pressure during this period of reduced income.

Which loan will suit YOU best?

Now that we’ve clarified the difference between P&I and I-O loans, your next question is most likely going to be; “What’s best for me?”. Our answer is always; “What are your goals?”

Your goal might be to build-up assets over a period of time with the aim of producing income for you in retirement. Or you may want to pay down your investment property as quickly as you can? For example, a younger person may be in a good situation to invest for growth, whereas someone closer to retirement age might want additional cash flow to supplement their retirement. Our advice will be quite different in each of these circumstances. That’s why we take the time to look at where you’re situated on life’s timeline and work with you to clarify your goals.

We’ll also consider external factors such as:

Historically low interest rates

In our lifetime there may not be another time when the cost of money was so cheap to borrow. That seems like good news, right? On the flipside, the cost of real estate has never been more expensive. So, one might question if it’s a great time to invest, or if there’s never been a better time to reduce debt? The difference is perspective. We’ve discussed a similar concept before here.

Fixed interest rates versus variable

Generally, a fixed loan will offer a more discounted rate than a variable-interest rate loan. But a spilt loan, where you nominate a portion of the loan to have a fixed rate and the remainder to have a variable interest rate, can also be a good option to maintain an offset*. That’s because fixed rate loans don’t come with the ability to set up an offset account.

For example: On a $400,000 loan with a $300,000 fixed portion and a $100,000 variable portion, the variable portion of the loan can be utilised as an offset.

Property investor strategies

Although interest-only loans can seem very attractive, they don’t come without some risk. That’s why at Capital Properties we work with you to develop investment strategies to mitigate these risks and achieve the best-possible outcome from your investment. We’re big on strategies, so to get you started, consider this simple checklist:

Plan

Be a planner. If you’re finding that you can manage the I-O loan easily, then it’s worth starting to build up the offset. *An offset is a savings bank account that’s offset against, or linked to, the loan account. Any funds sitting in the savings account will help to reduce the overall amount owing, thus reducing the interest payable. A redraw works in a similar way but with funds being paid directly to into the loan but can be accessed (“redrawn”) if required.

This offset is what investors call a “buffer”.  This buffer means that you’ll have funds that the loan can draw on so you can rest easy knowing that you’ll always have enough funds to pay the loan repayments.

Pay down

Whilst interest rates are low, an investor should be able to afford to reduce the principal of the loan. After all, you’ll need to reduce the debt eventually and in this case it’s better to do so sooner rather than later.  

Equity

The equity in your property is the difference between the property value or present value of your property and the amount of debt owing on the property. If your loan remains on interest-only and your property doesn’t grow in value, you may end up without any equity in the property, which is far from ideal. This is a very good reason to build an offset or redraw.

Capital Properties covers all of this, and more, in greater detail in our “7 Step property investment process.”

In fact, we offer a thorough support system, helping you to negotiate the entire investment process, with our free Discovery and Strategy sessions. Our First Home Buyer Pack, including a copy of my book Property Investment SOP is essential reading for all first home buyers and property investors.

Let us help you on your way. Get in touch now.

Guest Blogger: Brian Beck | Mortgage and Financial Consultant

brian@quickselect.com.au | www.quickselect.com.au

You’d need to have been living under a rock if you haven’t already heard about the new HomeBuilder Grant introduced on the 18th of June 2020 – was reduced to from $25,000 to $15,000 on the 1st of January 2021.

It’s the Governments’ fundamental response to lessen the impact of COVID-19 on the Australian economy. And they’ve made the package very attractive to Defence Force Members.

On the go? Here’s 30 seconds of take outs:

  • The HomeBuilder Grant provides $15,000 to eligible applicants to help build a new home or complete substantial renovations.
  • You’ll be eligible if you’re an owner-occupier, you meet an income-criteria and are spending more than $150,000. This also assumes the cost of the new home is under $750,000 or the value of the existing home is not exceeding $1.5 million.
  • The grant is available for first-home buyers (even with the first home buyer grant) and existing home owners.
  • Defence members based in NSW and VIC can apply for the HomeBuilder Grant as an investment opportunity.

 

Keep reading >>

What is HomeBuilder?

HomeBuilder is an Australian Government grant package intended to increase activity in the residential construction sector and therefore boost the economy during the COVID-19 economic crisis. It will provide eligible applicants with a $15,000 grant to help build a new home or complete substantial renovations in an existing home.

Eligible applicants can apply for HomeBuilder when the relevant State or Territory Government that you live in, or plan to live in, signs the National Partnership Agreement with the Commonwealth Government.

Stay updated about what this means for the construction industry.

Relevant Government Bodies

All Australian states and territories are currently developing an online portal that will allow you to lodge an application for the HomeBuilder Grant. It will be available shortly, but in the meantime you can access the appropriate HomeBuilder Grant guidelines for your state or territory to check your eligibility and learn what supporting documents you’ll need to prepare for your application:

ACT Revenue Office https://www.revenue.act.gov.au/covid-19-assistance/homebuilder-grant

Revenue NSW https://www.revenue.nsw.gov.au/news-media-releases/covid-19-tax-relief-measures/homebuilder-program

Territory Revenue Office https://treasury.nt.gov.au/dtf/territory-revenue-office/homebuilder-grant

Queensland State Revenue https://www.qld.gov.au/housing/buying-owning-home/financial-help-concessions/homebuilder

Revenue SA https://www.firsthome.gov.au/homebuilder/sa/

State Revenue Office of Tasmania https://www.sro.tas.gov.au/about-us/covid-19

Western Australia Department of Finance https://www.wa.gov.au/government/publications/building-bonus-grant-and-homebuilder-grant-application-form

State Revenue Office Victoria https://www.sro.vic.gov.au/homebuilder-grant-guidelines

What this means for Defence Force Members

According to Revenue NSW and similarly Revenue VIC the Defence Force Residence Exemption was announced and states that “where an applicant was a member of the permanent forces of the Australian Defence Force and the applicant was enrolled on the NSW electoral roll at the date of the eligible HomeBuilder contract, then the applicant is exempt from the residence requirement”. Great news!

It essentially means that a Defence member based in NSW and VIC can apply for the HomeBuilder Grant as an investment opportunity. Even if they’ve used the First Home-Owner Grant (FHOG).

Funding, financing and the HomeBuilder grant

The great thing is that the HomeBuilder grant can be used in conjunction with the current FHOG. So you can effectively double tap your grants! For example, right now in Queensland you can use the $15,000 FHOG plus the $15,000 HomeBuilder grant as well as Stamp Duty exemption! All of this adds up to great addition to your deposit and buffer!

The HomeBuilder Grant cannot be used as funds to complete* the purchase of the property but, at the time this blog was being written, some banks will let you use the FHOG as funds to complete*. It means you’ll need to show the banks genuine savings and proof of funds which can include the FHOG.

*Funds to complete: Means the proof of funds required to complete the purchase, including:

  • A deposit (e.g. 5%, 10% or 20%)
  • Stamp duty, land tax payable on the purchase; and
  • Fees payable to the Land Registry to register the transfer of the property to you, as well as any mortgage; fees and disbursements
  • First Home-Owners Grant (If eligible, this depends upon the bank’s lending policy)

What types of properties are eligible?

All property types are eligible for the scheme. This includes houses, apartments, house and land packages and off-the-plan purchases. All are fair game as long as the owner-occupier is building a new home or significantly renovating an existing home.

  • “a comprehensive home building contract to build a new home as your principal place of residence where the value of the house and land does not exceed $750 000 (inclusive of GST);
  • a contract with a registered builder to substantially renovate your principal place of residence where the renovation contract is between $150 000 and $750 000 (inclusive of GST), and where the value of your existing house and land does not exceed $1.5 million;
  • a contract to buy an off the plan/new home as your principal place of residence where construction had not commenced prior to 4 June 2020, where the value of the house and land does not exceed $750 000 (inclusive of GST).”

 

Do you need to be a first-home buyer?

No. The HomeBuilder Grant is available for both first-home buyers and existing homeowner-occupiers. Although it’s obviously a huge advantage for first-home buyers who can also access the FHOG.

The only criteria are that; you’re Australian, older than 18 years of age and earning at least $125,000 PA as an individual or $200,000 PA per couple. You must use the grant to spend more than $150,000 on purchasing the home, or on renovations. The cost of the new home must be under $750,000 or the value of the existing home cannot be more than $1.5 million.

Executive Manager of Economic Research Cameron Kusher says “The HomeBuilder Scheme is set to primarily benefit first-home buyers wanting to build a new home as it will be offered in addition to the current state and federal first-home buyer grants and exemptions”.

Are you interested in the HomeBuilder Grant but need help to make it happen?

At Capital Properties, our team is dedicated to educating, mentoring and guiding you through successful property investment. We can help you choose the right block of land and provide you with all the information you need to purchase in the best location. We can also help you with a new build consultative service for owner occupiers and investors. This ensures you get the ultimate house design on an ideal block.

We know consistency is vital, so one of our team members will remain your point of contact throughout the build process to make sure everything goes to plan.

Sounds interesting right?

Where to start? We can assist with builds in Wollongong, Western Sydney, Central Coast, Newcastle, Hunter Valley, Port Macquarie, Northern Rivers, Goulburn, The Mid to Far North NSW Coast and many other areas.

We’ll help get you on your way with a free Capital Properties discovery session. And if you’re already onboard, our Pinnacle Support Program will support you in finding out more.

While you’re here, check out our free investor tools: Online property investment toolkit | Book Your Pinnacle Program Review | Property Investor – Self Evaluation Tool

Capital Properties

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