Wednesday, August 22, 2018

investment

It sometimes feels like the banks are making it more and more difficult to secure lending, particularly for investors. The fact is, the banks have certainly tightened up their lending criteria - not because they like to make things difficult for everyone, but to help us as a nation, weather the storm of predicted financial crisis by taking action to reduce the national level of household debt. 

Negative gearing

Last year Bankwest took the dramatic step of removing negative gearing tax gains from its loan applications. Having already pulled the plug on new lending to investors, the bank - part of the Commonwealth Bank - no longer allows predicted tax refunds from losses attributed to an investment property to be included in loan calculations. Of course, you will still benefit from the practise of negative gearing, but it just won't be factored into your mortgage application - essentially meaning you can borrow less. 

This was a brave move from Bankwest, as other lenders didn't follow suit as anticipated, but it was a responsible move. Any investor requiring negative gearing to get their loan over the line is a more risky proposition and you would be smart to omit this from your own calculations whichever lender you decide to go with to make sure you can service your loan comfortably.

Why the crackdown on investor lending?

The banks have certainly tightened up their lending criteria as a whole - but they are actually taking positive, preventative steps to avoid a potentially significant over-lending crisis and putting the brakes on investor lending is an inevitable target area. 

So what does this mean for investors?

Over the past couple of years, banks have faced tougher regulations aimed at investor lending, including lower LVRs (Loan to Value Ratios) - the proportion of money they will lend for a home loan compared to the property's value - meaning you will need to put down a larger deposit. Lending limits to property investors are capped at a growth rate of 10%. Once a bank hits or nears that limit, it is obliged to put a temporary hold on all investor lending until that percentage drops. This means you will have to shop around more to find the right loan for you - using a broker will be helpful as they keep abreast of the whole market and often have access to niche lenders. 

The tightening of restrictions, including higher interest rates and increased LVRs on interest only mortgages has also had its impact on investors and owner-occupiers alike (as many owner-occupiers have overstretched themselves purchasing their family home on interest-only mortgages). Lenders are also now looking for evidence that investors, as well as owner-occupiers, have plans to reduce their overall debt. So you may well need to consider a principal & interest repayment mortgage for your investment loan as opposed to interest-only. 

While property prices are still buoyant in Melbourne and Sydney, in other parts of the country, especially in WA, prices have cooled and the banks need to safeguard against riskier lending. Putting the impact on your personal situation aside for a moment, think of the bigger picture - this tightening of the banks' lending restrictions in general is a good thing and will ensure our economy and property markets remain vibrant and strong. 

Well-informed investors with secure finances should not be deterred, as the property landscape will likely remain more fertile with these practice’s in place. 

education

As parents, you want the best for your children - and, with the growing reluctance of grown children to fly the nest, you might want to start planning to avoid the prospect of having your 35-year-old offspring cramping your retirement by still living at home. The time to start planning is now, by creating a savings plan to pay for your child's future education. 

According to government figures, by 2025 the average cost of a three-year degree course will have reached an eye-watering $50,000 - before you even consider living expenses. 

That means that most children starting out on their career paths will face the daunting prospect of having to pay off huge student loans before they can even think about starting to save for a home of their own. Putting saving strategies in place now to cover - or part cover their tertiary education will mean that once they start to earn, they can put their hard-earned cash towards the deposit of a property. Learning to save as opposed to earning to pay a debt is a much more uplifting experience and will get them off to a much more positive start in their career - and get them out of the family home sooner. 

Here is a little inspiration on the ways you can save...

Start Early: set up a bank account as soon as your child is born and set up a direct debit from your current account - however small an amount - to ensure a steady drip-feed of funds. Shop around for an account offering the best interest, and once a nest egg grows make use of long-term deposit accounts for higher interest rates. If you didn't do this and your children are older, don't be disheartened, start now. It is never too late to start saving!

Cash Not Trash: from the moment your child is born, it is showered with teddies, toys and other gifts from well-meaning friends and relatives. Most of these gifts end up in the trash or are given away as your child grows. Instead, encourage your family to give token gifts and to put money into your child's savings account. 

Piggy Bank: even though we live in an increasingly cashless society, we still all end up getting weighted down with loose change. You may not have a piggy bank, but find a sturdy receptacle and encourage the whole family to throw in their loose change. Cash it in at the bank every so often (you'll actually be amazed how much you amass in a short time) and put it straight into the savings account. 

Earn Their Keep: as your children get older, encourage them to start earning and saving their own money. Start by paying them pocket money to do small jobs around the home and then, once they are old enough, get them out earning at a weekend job. Teach them to save a fixed proportion of their income towards their education. Aside from contributing to the education fund, this practice will set them up for life with a savings ethic that will ensure that they continue to support themselves into a comfortable retirement of their work. 

Incentivise Saving: agree to match their savings dollar for dollar and see how quickly the funds mount up.

Help Them Get Entrepreneurial: set up an eBay account with your children and help them to sell some of their unwanted items online, then deposit the revenue straight into their bank account. 

 

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Contact Details

Zippy Finance 

PO Box 3078
North Turramurra
NSW 2074

T 1300 855 022 

Louisa Sanghera is a credit representative (437236) of BLSSA Pty Ltd ACN 117 651 760.  Australian Credit Licence 391237. ABN 85 168 278 975.

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