Why has my Investment Loan interest rate increased?

I’ve had many discussions with clients over the past few months about the increases to investment loan or interest only loan rates, in many cases where the increases have been substantial.

In short this has occurred because APRA, the banking regulator has placed limits on the amount of investor lender and interest only lending that the Banks can provide.

The Banks have implemented this in a few ways:

  • Tighter Lending Criteria
    Stricter assessment of applications to make it more difficult for customers to obtain finance.
  • Higher Interest Rates
    The old Demand & Supply lever – raise your rates and demand will soften. Interestingly, this has been applied to the Banks existing loans as well as new lending whereas the APRA controls relate to new lending.

The result has been marked differences between the interest rates charged for Owner Occupied lending and rates charged for Investment Loans – in some cases more than 1% difference.

So why isn’t the Government or the Reserve Bank doing something about it?

Quite simply, it’s what they want to happen. The Banks are doing some of the dirty work that the Reserve Bank (who control monetary policy) and the Federal Government (who control fiscal policy) don’t want to do.

The Reserve Bank doesn’t want to lift rates across the board because many parts of Australia are not seeing the prosperity and growth that households are enjoying in Sydney and Melbourne. Unfortunately they can’t have one policy for regional Australia and another one for the major cities.

The Government wants to be able to say that investors are paying their fair share, and that there is no need to wind back Capital Gains concessions or Negative Gearing. For them it’s political as much as economical. Perversely, the higher interest rates will only result in higher deductions against rental income and bigger tax returns for investors.

So what should I do about it?

1) Check to make sure that your Owner-Occupied Home Loan is classified as such and not classified as an investment loan. You’ll save a lot by making that change. There are other tips and techniques you can use to pay down that loan faster.

2) Check to see that any increases, top ups or variations to your loan have been priced and classified correctly. If you are unsure best to check with a Broker

3) If you are paying interest only and can afford to change it to Principal & Interest, it may be worth doing so, particularly if the loan is in relation to your main home. If the interest is not providing you with a tax deduction you should strongly consider switching to Principal repayments as well.

Finally, let a Broker have a look and see whether you have the optimal set up and rate structure across your Owner Occupied and Investment Lending. Savings are likely available. There are options available to have your investment loan priced as if it were a owner occupied loan. You just need to know where to find it.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

Tax Time Tips for Property Investors

If you are one of the 2 million people in Australia* that have investment property, whether negatively or positively geared, tax time means getting your things in order to maximise your deductions, including your loan interest expenses.

Here’s 5 Top Tips this tax time:

1) Understand all of the deductions categories.

Expenses include; mortgage interest, bank charges, council rates, water rates, cleaning, pest control, gardening, repair and maintenance cost, insurance, body corporate fees, advertising for tenants and agent management fees, capital works, depreciation, insurance, land tax and travel to inspect or maintain the property. Whilst you may have a good accountant, it is important for you to have an understanding of what can be claimed in order to provide them with the best possible information for deductions.

2) Don’t forget depreciation and capital works.

You can claim depreciation for the decline in value of the assets in your investment property such as hot water systems, carpets and heating and cooling systems. You may also be able to claim capital works expenses from the construction of the property, usually over 25 to 40 years. These deductions can be significant, particularly in new properties. The easiest way to understand and calculate depreciation and capital works, is to invest in a tax depreciation report from specialists such as BMT.

3) Ensure you keep records.

If you rent your investment property through an agent, they may handle the vast majority of your property expenses and provide you with an annual statement with these classified according to the taxation requirements. It is likely though you also incur expenses; such as interest on your investment property loan, bank charges, insurance, travel expenses and possibly land tax. The ATO is known to audit investment property owners and adequate receipts and records including those provided by your agent need to be kept for a minimum of 7 years.

4) Don’t forget the impact of capital gains when it comes time to sell.

There can be substantial tax advantages of investing in property, however keep in mind when it comes time to sell there may be tax payable on any capital gains. For property owned over 12 months, the 50% discount applies. It may also be possible to time capital gains with other capital losses. It’s best to speak to your accountant before making plans to sell your investment property to plan for the capital gains impact.

5) Have a great accountant!

Last but not least, make sure you have a good accountant that is across all aspects of investment property to keep you on the right track and maximise your investment deductions.

For more information you can refer to the ATO’s guidelines on expenses and depreciable assets or talk to your accountant.

 

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

* Source: ATO https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/Taxation-statistics-2014-15/?page=5

Case Study: Investing in property

Craig works as a Brand Manager at Lion Dairy and Drinks and I recently worked with him to gain pre approval for the purchase of his second investment property.

I asked him if he could share his experiences with investing in property.

 

Tell us a bit about your first investment property?

I purchased my first investment property in June 2014 in Frankston for $361k. Since then the property has been rented out to a reliable tenant and giving me regular cash flow.

The property is negatively geared but the shortfall is only around $100 per week (less after tax!) and I’m hoping 5 years down the track it’ll be paying for itself.

Since I bought the property I’d estimate it’s gone up in value by $30-40k, Frankston had a great growth spurt in the first quarter of this year.

 

Tell us about why you are looking at a second investment property?

I see property as a great vehicle for wealth creation.  It has potentially great returns for (relatively) low risk.  You just need to choose well and do your research!

This time the circumstances are a bit different as I’m looking to find a property that is in need of renovation and I’m planning to do the renovation myself.

I’m looking at older houses that I can modernise and add value to which I’ll either sell or rent.

 

How did you choose the type of investment property and the suburb it’s in?

I’d read a lot about Frankston being a potential future hotspot and the median value is still quite low, so it’s affordable to buy into.  There is a bit of a stigma around the suburb but it’s slowly gentrifying, the local council is pouring money into infrastructure and of course it’s beachside!

I’m looking at buying my second property in Reservoir as it’s an area that’s growing in value and one where older style houses that are renovated are in demand and fetching a premium to those that aren’t renovated.

My preference is to buy houses with a land component which in the long run will appreciate in value and can give you options down the track to subdivide / develop.

 

Do you have any advice for other property investors?

Be careful about fixed rates! I fixed my rates in for 3 years at 5.14% with Bankwest. At the time it was a great deal and it gave me certainty over repayments, but it has reduced my flexibility to change and of course rates have gone down.

In all seriousness though, investing in property has has worked really well for me so far and I’m looking to build my portfolio slowly over time.  But how bigger portfolio only time will tell!

I guess though it depends on your particular circumstances, but of course you need to take action to start building wealth and not get in the trap of suffering from analysis paralysis!

 

A big thanks to Craig for sharing his experiences.

 

Interested in Property Investing and want to discuss finance?

telephone Call Douglas today on 0408 671 524

 

Liked this post? Others that may be of interest

Is Negative Gearing for me? 

Tax Time Tips for Investment Property Owners

It’s tax time and those of you with Investment Property, whether negatively or positively geared, will no doubt be looking to maximise your deductions.

Here are 5 Tips on Taxation and Investment Property

  1. Have a good accountant.
    It goes without saying a good accountant that is across all aspects of investment property will keep you on the right track and maximise your investment deductions.
  2. Understand all of the deductions categories.
    Expenses include; mortgage interest, bank charges, council rates, water rates, cleaning, pest control, gardening, repair and maintenance cost, insurance, body corporate fees, advertising for tenants and agent management fees, capital works, depreciation, insurance, land tax and travel to inspect or maintain the property. Whilst you may have a good accountant, it is important for you to have an understanding of what can be claimed in order to provide them with the best possible information for deductions.
  3. Don’t forget depreciation and capital works.
    You can claim depreciation for the decline in value of the assets in your investment property such as hot water systems, carpets and heating and cooling systems. You may also be able to claim capital works expenses from the construction of the property, usually over 25 to 40 years. These deductions can be significant, particularly in new properties. The easiest way to understand and calculate depreciation and capital works, is to invest in a tax depreciation report from specialists such as BMT.
  4. Ensure you keep records.
    If you rent your investment property through an agent, they may handle the vast majority of your property expenses and provide you with an annual statement with these classified according to the taxation requirements. It is likely though you also incur expenses; such as interest on your investment property loan, bank charges, insurance, travel expenses and possibly land tax. The ATO is known to audit investment property owners and adequate receipts and records including those provided by your agent need to be kept for a minimum of 7 years.
  5. Don’t forget the impact of capital gains when it comes time to sell.
    There can be substantial tax advantages of investing in property, however keep in mind when it comes time to sell there may be tax payable on any capital gains. For property owned over 12 months, the 50% discount applies. It may also be possible to time capital gains with other capital losses. It’s best to speak to your accountant before making plans to sell your investment property to plan for the capital gains impact.

For more information refer to the ATO’s guidelines on expenses and depreciable assets or talk to your accountant.

 

Thinking of reviewing your investment property loan? Or purchasing an investment property?

telephone Call Douglas today on 0408 671 524

 

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Is Negative Gearing for me?

Negative Gearing can be described as an approach to investment whereby losses recognised against one investment can be offset against other income, with the effect of reducing one’s overall tax. In Australia, it generally refers to residential property investors who can offset losses on an investment property (or properties) against their regular PAYG income.

Negative gearing is most valuable to taxpayers in the highest tax bracket, as their allowable tax deductions are worth more cents in every dollar.  Take the following examples:

Example – Anthony

Anthony is an Engineer, earning a gross annual salary of $75,000. He decides to purchase an investment property with the following estimated financial results:

Rent Received                                 $20,000

Interest Payable                              $18,000

Repairs & Maintenance                 $2,000

Management Fees                          $1,000

Depreciation                                    $2,000

Total                                                  ($3,000)

Anthony can offset the $3,000 loss on his investment property against his $75,000 income, meaning his Taxable income for this purposes would be $72,000 (leaving aside Medicare and any other allowable deductions). With his marginal tax rate of 32.5c in the dollar, Anthony can reduce his tax bill by $975. Thus he is out of pocket $2,025 in that year.

 

A person on the highest marginal tax rate will benefit more from the same scenario as the following example shows.

Example – Darrell

Anthony’s boss Darrell earns $200,000 per year and has also decided to purchase an identical investment property to Anthony, with the financial results exactly the same:

Rent Received                                 $20,000

Interest Payable                              $18,000

Repairs & Maintenance                 $2,000

Management Fees                          $1,000

Depreciation                                    $2,000

Total                                                  ($3,000)

Darrell can offset the $3,000 loss against his taxable income (again leaving aside Medicare, levies and other allowable deductions). With his marginal tax rate (highest tax rate) of 0.45c in the dollar he reduces his tax payable by $1,350. Darrell is therefore out of pocket $1,650 on the same investment.

Opponents of Negative Gearing will argue that the additional tax benefits available to investors (versus owner occupiers) such as the ones outlined above mean they cannot afford to compete in the marketplace for the same properties.

Supporters of Negative Gearing argue that the tax deductibility of losses means they as landlords can charge lower amounts of rent, therefore making that housing more affordable to tenants. Developers contend that without investors they would lose demand for their properties and consequently supply would slow down supply, perversely resulting in higher prices anyway!

Whatever your position Negative Gearing is currently an effective and legal way to invest in property, however incurring a loss on property should not be your primary reason to invest. The tax effect of investing in property should be a consideration, but not the only one.

Speak to your Accountant to determine whether negative gearing can work for you. If it is, get in touch to arrange the necessary finance, I can help with determining your borrowing capacity and pre-approvals before you start looking for an investment property.