Did you know credit reporting is changing?

Did you know credit reporting in Australia is changing? If not, you’re not alone. Despite new credit reporting rules coming into force in July 2018, the vast majority of Australians remain unaware of these changes and how they will impact their potential borrowing capacity.

The new move towards comprehensive credit reporting, now compulsory amongst major lenders, will see more data being included on credit reports, and will likely have a significant impact on investors’ credit scores. But what do these changes mean? And is comprehensive credit reporting a good or bad thing for investors?

What’s changing?

Comprehensive credit reporting, also known as ‘positive credit reporting’, has been in play in Australia since 2014, but has (up until now) remained voluntary. Whilst remaining an opt-in process for some lenders, as of 1^st July 2018, comprehensive reporting became mandatory for the Big Four banks. The major lenders were given 90 days to supply 50% of comprehensive credit data to credit bureaus, with the further 50% to be supplied by 1^st July 2019. But what exactly is comprehensive credit reporting?

The move towards comprehensive credit reporting will see lenders provide more consumer credit information to credit reporting bodies. Under the previous negative reporting system, consumer credit reports would only include information such as previous enquiries for credit products and defaults on payments 60 days or more overdue. However, under the new system, credit reports will now include up to 24 months of additional repayment information, including repayments (made or missed) on credit cards, personal loans and mortgages. Other information included in the comprehensive reports includes:

• When a credit account was opened or closed
• The type of account held
• The credit limits of the accounts
• Up to 24 months of repayment history

How will these changes impact investors?

The inclusion of this additional data isn’t necessarily a bad thing for borrowers. In fact, for those who make repayments on time, comprehensive credit reporting is likely to be a good thing, as it provides a means for borrowers to build a strong credit score and show their positive repayment history. This could ultimately provide borrowers with better credit opportunities and could be especially beneficial for first-home buyers who were previously unable to show their creditworthiness.

Having said this, borrowers also need to be aware of how these changes could negatively impact them. Whilst previous reports would only include information regarding serious infringements such as defaults or bankruptcies, the new inclusion of an individual’s comprehensive repayment history could see those who miss repayments suffer from lower credit scores. Some of the factors that may decrease your credit score include:

• Not making minimum credit card payments on your credit card
• Late payments on credit cards, personal loans and mortgage of 14 days or more (note: this doesn’t apply for utility bills)
• Defaults overdue by 60 days or more
• Submitting multiple loan applications/enquiries

What can you do to protect your credit score?

Whilst the full effects of comprehensive credit reporting are yet to be realised in Australia, the changes have raised increased speculation as to the potential for a move towards risk-based pricing from lenders. Although this is yet to be seen, borrowers looking to benefit from changes to the credit reporting environment will need to take steps towards improving and protecting their credit position sooner rather than later. Now more than ever, it’s important for aspiring investors and borrowers to make their repayments on time and remain up-to-date with the factors that could influence their credit score. Those who do this could be in a significantly better credit position when it comes to applying for a loan in future.

In light of recent changes to credit reporting, our finance specialists will be offering an obligation-free consultation for investors looking to learn more about  their credit position. As part of this advice-driven service, our mortgage brokers will run your comprehensive credit report and help you analyse your results, offering key advice on how to maximize your borrowing capacity prior to applying for a loan.

Case study: the risks of cross-collateralisation

When it comes to growing their property investment portfolio, the majority of investors will look to leverage the equity from their current properties to fund the next step in their investment journey. What many investors don’t realise, however, is that the structure of their existing loans can have critical implications on their ability to do this.

Unfortunately, lenders will often look to structure loans in a way that is favourable to them as opposed to the borrower. In many cases, this often leads to a problem known as cross-collateralisation, whereby one or more existing properties are used as security for a loan. Whilst favourable for banks looking to minimise their own risk, this structure can lead to a number of issues for investors and their long-term goals.

In our latest case study, we highlight some of the key risks and restrictions associated with cross-collateralisation.

The problem

Prior to enlisting Momentum Wealth, the client had approached his bank directly to arrange loans for three properties – his home and two investment properties. When structuring the client’s portfolio, the bank had used the investor’s home as security for both investment properties under an overarching loan amount of $600,000. Unbeknownst to the client, this was about to pose a significant issue for his future plans.

Despite the fact the investor was able to pay off the mortgage on his own residence, this structure meant his home title remain tied up with his other investments. With his home used as security for his investment properties, the investor was running the unnecessary risk of forced sale or repossession of his main residence should he fall into debt and be unable to make his loan repayments.

Further to this, when the investor attempted to withdraw equity to purchase another property, he discovered he was unable to do so. Although he had the required capital to fund a further purchase, his equity was trapped in the complex loan structure, leaving him unable to borrow from the bank for his next investment.

The solution

Faced with this dilemma, the investor approach Momentum Wealth in search for a solution that would offer the security and flexibility he needed to progress in his investment journey.

By refinancing the loan, we were able to uncross and re-structure the client’s portfolio. Instead of using the investor’s home as collateral, our finance brokers set up two separate $300,000 loans against each specific investment property. This freed up the client’s home title and enabled the investor to access the equity he needed for his next investment property. Through doing this, we were also able to identify a more competitive interest rate for the client, saving him over 1% in interest.

The importance of loan structure

As an investor, it’s important to be aware of how the structure of your loan can impact your long-term investment plans and risk exposure. Having the right structure in place can be critical in giving you the flexibility and security you need to achieve your long-term investment goals, but it also holds fundamental implications for the protection of your existing assets. In today’s complex lending environment, especially, this is why it’s more important than ever to find a finance specialist with an understanding of your property investment goals and the structures that support this.

If you’re experiencing problems with your current lending solution or would like advice on financing your next property, our finance specialists would be happy to discuss your needs in an obligation-free consultation.

Is refinancing the right strategy for you?

As an investor or home buyer, choosing the right loan product can be crucial to your financial security and long-term investment plans. However, the lending environment and your own financial situation can also change over time, which means your original loan may not always support your ongoing needs. In these situations, many investors will consider refinancing their loan to achieve a better rate or gain access to products that better suit their circumstances. However, this strategy can also carry significant risk for those who don’t understand the costs and implications involved. So, when should you think about refinancing? And what are the factors you need to consider before doing so?

Why refinance?

Better rates elsewhere – The lending environment is highly competitive and will often fluctuate with changes in market conditions and lender’s policies. This means that what might seem like a good rate today won’t necessarily be the best interest rate for you in future. Many investors will choose to refinance when there are lower interest rates available with another lender. In addition to reducing monthly repayments, this could ultimately help you pay off your home or investment loan sooner. In addition, refinancing may enable you to access a greater range of features and add-ons, such as redraw facilities and flexible repayment plans. Reviewing your loans every twelve months, or when there are considerable changes in the lending environment, can help you ensure you are still receiving the best rates and products for your circumstances.

To leverage equity – Another reason investors might choose to refinance is to access the equity they need to progress in their investment journey. If you are planning to renovate or want to expand your portfolio by investing in another property, you will no doubt need to borrow more money to do so. If you’ve paid off some of your existing loan and your property has increased in value, refinancing may enable you to access the equity you need (and therefore borrow the money you need) to take the next step towards your long-term investment goals.

Your circumstances have changed – As an investor or home buyer, it’s important to ensure you choose the right lending solution to suit your situation. However, your situation can also change over time. If you are expecting a change that will have a significant impact on your cash flow, such as a drop in income at work or a reduction in household earnings due to pregnancy, you may need to re-address your financial situation to ensure you can continue to make repayments. If cash flow is a concern, refinancing may enable you to access a rate or lending product that is more suited to your current circumstances. For instance, if you require stability of repayments due to temporary life changes, switching to a fixed-rate loan could give you access to a more predictable repayment plan.

To consolidate debt – Some investors will choose to refinance their loan as a means of consolidating other debts such as personal loans and credit cards into one facility. This can benefit investors who are struggling with large interest repayments by potentially enabling them to bring together their debts and access lower interest rates to reduce their overall monthly repayments. However, since home or property investment loans typically have longer terms, you will also need to ensure the benefits of this outweigh your long-term costs by making additional repayments as quickly as possible.

To extend interest-only periods – With recent changes in the lending environment triggered by APRA regulations and the scrutiny of the Banking Royal Commission, some investors are finding it difficult to re-extend interest-only periods on their loan. If you’ve been unable to do this with your current lender after re-assessment of your situation (now standard practice amongst most lenders), you may be able to refinance to another lender. However, it’s important to remember that each lender will have their own unique policies, meaning your eligibility for certain products can differ vastly between different banks. To avoid submitting multiple enquiries, which could have a negative impact on your credit score, speak to a broker with an in-depth knowledge of different lender’s products and policies to help you identify the right product for your situation.

Consider the risks

Before making the decision to refinance your loan, there are also some key factors you need to take into consideration. Most importantly – will the savings you make outweigh the costs involved? Although refinancing may help you access a better interest rate, you will also need to consider upfront costs such as exit fees loan, loan establishment fees, break costs (for fixed rate loans) and, should you need to borrow more than 80% of the property’s value, Lender’s Mortgage Insurance. If your projected profit doesn’t exceed your potential losses, you will need to reconsider your strategy.

In addition, you also need to remember that property appraisals are an inevitable part of refinancing. Afterall, lenders will need to know your property’s worth before issuing a new loan. This is where it’s really important to get your property professionally appraised prior to submitting a new loan application, or to work with a broker who has access to these valuations. If your property has reduced in value, this will have a significant impact on your ability to access better terms on your new mortgage, and your broker may recommend against refinancing.

If you’re thinking about refinancing but don’t know whether this strategy is right for you, our specialist mortgage brokers would be happy to conduct a complimentary review of your existing loans in an obligation-free consultation.

MPF Diversified Fund No.2 open for investment

Mair Property Funds has opened our latest fund for new investment.

MPF Diversified Fund No. 2, which currently comprises three well-leased commercial assets, is structured to acquire a diverse range of commercial properties across multiple states, including industrial facilities, large format retail, offices and medical centres.

The fund follows the success of our raising for MPS Diversified Property Trust No.1, which closed in September 2017 after unprecedented levels of investor demand.

Mair Property Fund’s Managing Director, David Ellwood, says the success of the fund provides a strong reflection of the growing demand for commercial property trusts amongst investors.

“We are seeing increased enquiries from savvy investors looking to diversify their property investment portfolio into different asset types and locations”

“The lower capital required to invest in commercial property trusts, as well as the higher yields typically associated with commercial assets, are providing a  strong incentive for investors looking to reduce their risk whilst benefiting from a passive income stream,” he said.

MPF Diversified Fund No.2 is projecting initial income distributions of 7.5% for the first year, with average projected distributions forecasted at 8% per annum or more over a five-year period.

To commence the portfolio, we have purchased three assets, including a large format retail asset tenanted by a national liquor franchise, a new industrial facility based in Queensland, and a Brisbane-based medical laboratory tenanted to specialised medical equipment manufacturer, Aim Lab Automation Technologies.

The assets are 100% leased and offer a WALE of seven years, with minimum investment for the fund starting at $50,000.

Mr Ellwood says he is confident the assets offer strong criteria for long-term success.

“Our asset selection process has been heavily focused around targeting stable, high-quality assets with long-term potential for income growth”

“With strong tenancies in place across the first three properties, as well as the diversity of the tenancy mix and asset types, we are confident these properties are well-positioned to perform and deliver strong investment returns,” he said.

We are now actively seeking further assets to incorporate into the fund, with the aim to build a portfolio up to a total value of circa $60M.

Case study: The dangers of poor mortgage advice

Seeking the advice of a finance specialist with a strong understanding of investment finance can be critical for property investors looking to progress in their investment journey. For active investors who have capital spread across multiple assets, in particular, ensuring the right loan structures and features are in place is essential to the expansion and success of their investment portfolio. Poorly structured loans can not only be detrimental to an investor’s long-term investment plan, but could also have critical implications on the management of their finances come tax time.

In our latest case study, we look at how the specialist mortgage brokers at Momentum Wealth helped an active investor who had received poor lending advice from a finance broker with a lack of experience in property investment.

The problem

Prior to enlisting the services of Momentum Wealth, the client had approached another finance broker to set up a loan that would be utilised for multiple investments. The client was an active investor in property, syndicates and other asset classes, and was looking for a lending solution that would allow for ease of management as well as flexibility should he wish to invest in further assets.

After briefing the finance broker on his needs, the broker set up a $500,000 loan against the investor’s home, with the loan amount to be used for multiple different investment assets. In doing so, however, the broker created a complex loan structure that would pose a number of difficulties for the investor and his accountant further down the line. Since the loan was not split into separate loans, this made it extremely difficult for the investor’s accountant to determine the proportion of interest and deductible debt associated with each investment, creating an unnecessarily lengthy process come tax time. This structure would also create additional complications should the investor wish to sell or add another investment to his portfolio, as this would require a further re-proportioning of interest and deductible debt.

The solution

Due to the difficulties encountered with the loan provided by his previous broker, the client approached Momentum Wealth’s finance team seeking an alternative lending solution. After speaking to the client about his financial situation and long-term investment plans, our mortgage broker advised that the client opt for an alternative loan structure that would allow him to create separate loan splits for each of his investments under one overarching limit.

As well as enabling the investor’s accountant to easily identify the interest purpose for each split, this structure granted the investor considerably more flexibility when it came to expanding his investment portfolio. Rather than reapplying to add a new investment to the loan each time he purchased an asset, the revised structure enabled the client to create a new split for additional investments, which he could do either online or by contacting our mortgage brokers. If the client now decides to sell an asset further down the line, he will also be able to amalgamate the remaining splits automatically rather than re-calculating the new proportions through a lengthy administrative process.

The importance of specialist mortgage advice

As an investor seeking to build your property portfolio, it’s important to find a mortgage broker that understands the right solutions to support your long-term investment goals. Unfortunately, not all lenders and brokers have the understanding and experience of the property market to do this, which can result in investor’s missing out on lending solutions that are better suited to their needs. In today’s volatile lending market, seeking the advice of a mortgage broker with an expert understanding in investment finance can be critical to maximising your success and wealth creation.

If you are seeking lending advice for a new investment venture or would like to organise a review of your current lending solutions, Momentum Wealth’s finance team would be happy to discuss your needs in an obligation-free consultation.

Investing interstate: 6 essential tips for interstate investors

Whilst diversification has long been considered a strong strategy for property investors looking to mitigate the financial risk of investing in a single market, expanding your property portfolio into different locations can be a great way to take advantage of wider capital growth opportunities, especially when your home market isn’t performing strongly.

With the Melbourne and Sydney markets cooling down, a rising number of east coast investors are beginning to look towards alternative property markets in Australia for investment opportunities. If you are considering investing interstate yourself, here are a few simple ways to limit your risk and maximise the success of your investment.

Do your research

Before you invest interstate, you will need to compare different locations to identify a property market that fits your buying strategy. Property markets in Australia differ vastly in terms of price range, housing stock, and stage in the property cycle, so it’s important to ensure your market of choice matches your expectations in terms of rental yield and capital growth. Researching local property statistics as well as wider economic factors that influence the performance of the property market such as population growth, job opportunities, and public & private investment will be key to informing your understanding of where the market is in the property cycle, which is an important factor in determining the market’s long-term potential for growth.

Identify any warning signs

Whilst understanding the general state of the market is a vital element of investing interstate, it’s equally important not to stop your research at this broader market level. In a single city, the performance of the property market can differ considerably between different suburbs and locations – something we’ve seen recently in Perth with the emergence of the two-speed market. However, this can also be the case with individual streets and properties, which can pose a particular problem for interstate investors who aren’t familiar with the local area.

Whilst a suburb might look great on the surface in terms of location and nearby infrastructure, there are a number of additional factors that can influence a property’s value, many of which are difficult to identify without an in-depth knowledge of the area.  For example, are there high crime levels in the suburb? Is the property situated under a flight path? Is there a busy road nearby? If you don’t have a chance to visit the property yourself to gain this level of insight, you may need to consider engaging someone who is familiar with the local market to ensure you’re making an informed purchase decision.

Get to grips with planning policies

Australian states, and even suburbs within those states, each have their own local planning policies and processes in place when it comes to property. As an interstate investor, and particularly if you are seeking a property for development, it’s really important that you familiarise yourself with the zoning of your prospective property, as well as any additional Council policies that apply to the asset. This can have a huge impact on the long-term potential of your property as well as your immediate development plans, so you may want to speak to a local buyer’s agent or property developer prior to purchasing a site to ensure your plans are feasible.

Understand local legal requirements

As well as individual zoning policies, it’s important to be aware of any local variances in the legal requirements and processes involved in the property investment process. Documents such as sales contracts and strata reports often differ between states, so it’s really important that you understand these differences before you sign the dotted line. In addition, costs such as stamp duty costs, land taxes and transfer fees will vary in different locations, so make sure you research these costs and factor them into your budget when planning your investment.

Enlist a good property manager

A good property manager is a valuable asset for any investor, but even more so for interstate investors who don’t have the time and ability to self-manage their property. As an interstate investor, it’s important to find a property manager you can trust to carry out regular inspections and maintain your investment property whilst you’re away. Ideally, however, you also want a property management team who will be proactive in helping you identify opportunities to add value to your property and further the success of your overall investment strategy.

Consider using a buyer’s agent

Expanding your search to different property markets can significantly broaden your investment opportunities, but one of the biggest downfalls of investing interstate is not having the local knowledge to make informed investment decisions. If you don’t have the time to research the market and compare different properties yourself, consider enlisting a local buyer’s agent to identify and secure a property on your behalf. In addition to ‘insider’ knowledge of the local property market, a good buyer’s agent will have an in-depth understanding of investment policies and an established network of real estate professionals within the local area, which can be invaluable when it comes to negotiating a great deal on a property with high potential for growth.

If you are looking to invest in Perth property and would like to speak to our buyer’s agents about potential investment opportunities, our team would be happy to discuss your investment needs in an obligation-free consultation.

Alternatively, if you would like to find out more about the Perth property market, download our latest research report, Residential Property Spotlight: Perth.

Five key factors to consider before subdividing

Subdividing an existing block to develop or sell can be an incredibly lucrative strategy for investors seeking to extract more value from their investment property, but property subdivision isn’t always as simple as dividing a site in two and selling each lot for a profit. Whilst it can hold significant benefits for investors looking to add value to their property or create an additional income stream, the reality of subdivision is far more complex, and there are a number of requirements and risks that need to be taken into consideration before you commit to a project.

Does the site meet zoning requirements?

The first step towards subdividing a property is to understand the zoning requirements that apply to your site. In addition to the Residential Design Codes of Western Australia, lots of land in Australia are subject to the individual policies of local councils. These set out standards such as minimum lot sizes, and are therefore critical in determining the scope and subdivision potential of your property. As an investor, it’s important to bear in mind that these individual policies can vary considerably between different councils.  In some cases, as little as one clause can dramatically impact your site’s development potential, so familiarising yourself with the specific requirements that apply to your site is crucial.

As well as setting out zoning restrictions, local council policies can also contain clauses that could significantly increase your site’s development potential, many of which can be easily missed by investors who don’t have a full understanding of these documents. Depending on the location and proposed lot configuration, for example, councils are willing to apply a 5% variation to lot sizes subject to the approval of the Western Australian Planning Commission (WAPC). It may not sound significant, but this additional 5% could mean the difference between building two blocks and not being able to subdivide at all.

Is there enough demand for the subdivision?

Many investors assume that subdividing a property will always lead to profit. However, just because you can divide a site into multiple blocks, doesn’t mean you should. Before you get started on your subdivision, it’s important to research the local market to assess whether there is enough demand for the project you have in mind. If, for instance, there is already an oversupply of duplex properties in the area, or there is a premium on larger properties within that particular suburb, you may want to re-consider your subdivision plans. When you’re carrying out your research, consider what’s selling well in the area, and compare similar properties to find out what profit margin you can expect. This will be critical in determining the budget you are working with, and ultimately in assessing whether the project is feasible in the first place. If you are looking for a site with the specific intention of subdividing, you may want to consider enlisting a property buyer’s agent to help you identify a site with strong growth drivers in place.

Are there any additional restrictions that could hinder the subdivision?

As part of the planning process, you or your development team will need to carry out detailed due diligence to check for any issues that could impact your subdivision. In some cases, these feasibility checks can uncover issues that could have serious implications on future development plans, such as nearby sewerage systems that prevent you from building in a specific area.

As part of this feasibility check, you will also need to identify whether any site-specific restrictions apply that could prevent the site from being subdivided or dictate the manner of the subdivision itself. For instance, if the site is located in a bushfire prone area, this may change the specifications required when redeveloping the site (if you choose to do so). Similarly, many councils also have their own requirements relating to aspects such as restricting additional driveways or upgrading an existing dwelling, which could impact the required specifications of the subdivision and increase the construction costs involved in the project.

Are there any easements that affect your subdivision plans?

An easement is a property right that that allows someone to cross or use your land for a specific purpose. For example, if you have a gas or electricity line running under your land, it’s likely that the relevant utility company will have an easement in place to guarantee access to these lines. If you’re planning a subdivision, this is something you need to be aware of, as it will be your responsibility as landowner to ensure this access isn’t hampered by the development works. Whilst an easy way to do this would be to alter the setbacks of the property, this isn’t always possible with properties on smaller lots, which means you could be facing significantly higher expenses to build over the top of the easement in a way that still allows access. This is something you will need to factor into your overall costs when assessing your projected profit margin to determine whether the project is worth your while.

Have you factored in head works and council contributions?

In addition to standard expenses such as construction costs, building permits and planning application fees, there are a number of additional costs many investors fail to factor into their subdivision plans. When you subdivide a lot into multiple dwellings, Western Power and Water Corporation will often need to upgrade their existing infrastructure to support the increased demand for their services, the cost of which lies with you as the developer. Depending on the number of new lots being created, the local council may also ask for a development contribution to support the increased demand for amenity and community infrastructure created by the additional dwellings. These costs can vary from $50,000 to $400,000 per additional lot depending on the individual council, and can therefore have critical implications on your profit margin if you have failed to factor them into your budget beforehand.

Property subdivision can be a considerably profitable investment strategy with the right research and planning in place, but it also carries a significant amount of risk for investors who don’t have the time and expertise to commit to the project. In these circumstances, having the expert advice and support of a professional property development team can be crucial to avoiding key mistakes and ensuring you don’t miss out on opportunities to further the value of your property.

How much cash buffer do you need for your investment property?

A successful property investment strategy requires careful planning and preparation, and this sometimes means planning for the unexpected.  Whilst the long-term benefits of property investment should far outweigh short-term costs, property investors are sometimes faced with unplanned situations that impact their immediate cash flow, which is why smart investors will always set aside a cash buffer to cover unexpected expenses.

If you own multiple investment properties, in particular, saving up an emergency buffer is a vital step in ensuring your investment portfolio remains protected through changes in cash flow or income, and could ultimately mean the difference between leading a comfortable investment journey and being stretched beyond your financial limits.

Why do you need a cash buffer?

Cash buffers are crucial to investors for a number of reasons. Even if your investment property is positively geared, there’s always the possibility your cash flow situation could change should your tenants decide to vacate or unexpected costs arise. In these cases, a property investment buffer will ensure you can continue to make your mortgage repayments and cover additional advertising costs until a replacement tenant is found. This emergency buffer will also serve as a contingency plan should you be faced with repairs that aren’t factored into your ongoing maintenance expenses such as broken hot water systems or water leaks.

In addition to a property investment buffer, you should also aim to set aside a personal income buffer to cover you through changes of income or loss of salary. This will ensure you can continue to make repayments in cases such as loss of employment or loss of income due to extended illness. Failure to plan ahead for these unexpected expenses can put investors under substantial financial pressure, and in some cases lead to serious consequences such as forced sales.

How much cash buffer do you need?

As a guide, you should look to have two to four months of rental income on hand as a property investment buffer, as well as two to four months of personal income set aside as a personal income buffer.

However, this will also depend on individual factors such as your job security, your risk profile, and the age of your investment property. Older properties, for example, will often require more maintenance, and may therefore justify a higher cash buffer. This is ideally something you should be factoring into your initial investment decision, which is why it’s important to speak to an experienced property buyer’s agent to ensure you’re not purchasing a property outside of your means and financial capacity.

If possible, your cash buffer should be held in an offset account against your mortgage, as this will help you reduce the amount of principal on your loan (and hence the interest charged) whilst the buffer isn’t in use. If you have multiple investments but still have debt in your own home, it’s better to set this account up against your owner-occupier property as the interest repayments on this are non-tax-deductible.

Making smart investment decisions

Whilst the risk of unexpected expenses can never be fully mitigated, property investors can deal with this risk by planning ahead and making smarter investment decisions. As well as setting aside an emergency buffer, this means having the right professionals on hand to manage your property and take care of situations that put your rental income at risk. Most importantly, however, it means making the right decision when selecting a suitable property in the first place.

If you are purchasing an investment property or looking to expand your current portfolio and would like to speak to a professional property advisor about your investment needs, book an obligation-free consultation with one of our Perth buyer’s agents today.

The power of compound growth

Taking the step towards starting a property investment portfolio can be a daunting prospect for aspiring investors. With other financial priorities such as starting a family, organising that much-needed holiday and paying off existing home repayments, many end up delaying the start of their investment venture, with the majority never making it to their second purchase.

With issues of immediate affordability at the forefront of their minds and retirement a far cry away, many people overlook the long-term benefits of investing in property, and their goal of achieving financial freedom suffers as a result. In reality, however, there are huge potential benefits to investing early and giving your investment portfolio time to grow, and the secret lies in a concept called compound growth.

What is compound growth?

Compound growth is when an asset generates earnings which are then reinvested to generate their own earnings. Whilst compounding is commonly associated with interest, it’s also an incredibly powerful concept when applied to the capital growth of a property. For example, if an investor purchases a property valued at $500,000, and this property grows 5% per year, the property will increase in value to $525,000 over the first year. After a second year of growth, it will then increase further to a value of $551,250, and this trend will continue, with the value of the property (and the equity in the asset) increasing exponentially over time.

The snowball effect

Whilst many investors are familiar with the concept, a lot of people don’t understand the actual power of compounding when put into practice. Whilst it may not take a huge effect immediately, compound growth increases by larger and larger amounts each year, and this snowball effect can have huge implications for property investors who hold onto an asset long enough to reap the rewards.

Let’s look at that same property – with an annual growth rate of 5%, the property would be worth over $814,000 after ten years, marking an increase of over $300,000 compared to its value upon purchase. Whilst a non-compounding asset would have only increased in value by $250,000 over the same period of time, in this case the $250,000 in growth has created its own $64,000 in equity due to the compounding nature of property. The equity created from this growth could then be leveraged to purchase a second investment property, which will in turn start to accumulate its own equity through compound growth, and so on.

Time is key

The key to profiting from compound growth, and property investment generally, is time. The earlier an investor starts building their property portfolio, the longer they can hold onto a property, and the faster they can accumulate wealth. Going back to our earlier example – if the investor holds onto that property for a further ten years, it would be worth over $1.3 million after a period of twenty years. Now imagine the potential implications of this if you had multiple properties in your portfolio. Pair this with the fact you would  be paying less and less towards your properties as rental growth and loan repayments take their toll over time, and it’s easy to see how compound growth can become an incredibly lucrative strategy for investors.

Choosing the right property

When it comes to compounding value, choosing a property with high growth potential is integral to success. As an investor, it’s really important you consider the potential growth drivers of a property before completing a purchase. With the right research, strategy and support in place, there are huge potential gains to be made from compounding growth. And the earlier you start to build that portfolio, the greater the potential returns.

Momentum Wealth is a fully-integrated, research driven investment consultancy dedicated to helping investors build wealth through property. Backed by our in-house research team, our buyer’s agents are committed to helping investors identify investment properties with high potential for growth. If you would like to discuss your property needs with one of our Perth buyer’s agents, book a consultation with the Momentum Wealth team today.

Seeking approval: what do lenders look at?

In the past few years, we’ve seen a number of shifts within the lending environment due to changing APRA regulations and the recently appointed banking royal commission, with banks reassessing and adapting their lending criteria to mitigate risk and meet new lending guidelines. As a result of this increased scrutiny, investors (both aspiring and existing) are having to be more diligent when it comes to preparing their finances and approaching banks for loan approval.

Whilst lending criteria and policies vary considerably from bank to bank, here are some of the key factors lenders will look at when assessing your eligibility for a home or investment loan.

Credit Score

One of the key pillars lenders will consider when assessing your eligibility for a loan is your credit score. Are there any red flags that suggest you may not make your repayments on time? From the lender’s perspective, your credit history will provide a key indicator of the level of risk they are taking in borrowing to you. If you’ve failed to make repayments on time in the past or filed for bankruptcy, the lender may consider you a high risk borrower, and this can strongly impact the rates or products they are willing to offer you (or, in the latter case, your immediate eligibility for a loan).

Income and serviceability

Before issuing a loan, banks will also look at your ability to make repayments on time and in full. For lenders, one of the biggest indicators of this will be your monthly income. As well as aggregating your income sources and assessing the stability of this income, lenders will look at your outgoing expenses such as existing debt repayments, your new mortgage repayments, child support and all other outgoings to assess your serviceability. A key thing you also need to be wary of, and something that proves an obstacle to many investors and first-home buyers, is the way that banks assess your credit card debt. Even if you have a proven history of paying off your credit card on time, lenders will still calculate debt based on your credit card limit. If you have a credit card limit of $50,000, they will therefore consider that amount as ‘debt’ and take a 3% monthly liability to mitigate their risk, thereby impacting their assessment of your monthly income. If you have any credit cards that you don’t use, you may want to consider cancelling them to improve your serviceability.

With recent changes in the lending environment, many banks are tightening their serviceability metrics by enforcing stricter housing expenditure models and changing debt-to income ratios. Whilst an investor or home buyer may have once been deemed eligible to service a loan under a given income, this may no longer be the case under the new criteria. In addition, you also need to be aware that lenders will assess different types of income in different ways depending on their individual policies. For example, whilst some lenders may take overtime work into full consideration when assessing your income, others may only consider a percentage of the money earned through overtime when calculating your serviceability. In these fluctuating conditions, this is where a mortgage broker can really help you compare different loan products and lenders in the market to open up your options and find a solution that suits your situation.

Equity

Whilst it hasn’t always been the case, banks in the modern lending environment require borrowers to make a down payment before they issue a loan. As a prospective buyer, you will need to start making provisions for this in advance by building the necessary savings required for a deposit, whether it be in the form of cash savings or equity from an existing property. The amount required for a deposit will vary depending on your lender’s individual policies and the nature of your investment, but many banks are willing to lend up to 95% of a property’s value with Lender’s Mortgage Insurance in place. However, lenders may require higher equity if you are deemed a high risk borrower. To find out more about how your investment strategy can impact your required deposit, read our latest blog on the upfront costs of property.

Property analysis

One of the biggest things that lenders will take into account when determining the loan-to-value ratio they are willing to offer a prospective buyer is the physical state and location of the property being mortgaged. In other words, the lender wants to know that the property would be easy to sell should you default on your loan. If the property is in good condition and located in an inner-city suburb with high demand, the banks will likely be willing to offer a higher loan-to-value ratio, especially if you have Lender’s Mortgage Insurance in place.

We have, however, seen examples where lenders demand a higher deposit due the property type and location. This can be the case with apartments in high density CBD locations. With the high stream of apartment stock coming to market in Perth’s CBD, lenders often see these dwelling types as less secure due to the higher level of supply, and will therefore ask for the full 20% deposit to mitigate their risk. This will ensure they are covered against greater losses should you default on the loan and the property sell for less than its purchase price. This can also be the case in locations that are heavily dependent on one particular industry, as these areas can be more susceptible to price drops should that industry undergo a downturn. A key example of this would be Karratha, where the property market is heavily dependent on the mining industry. These wider market trends are something you will need to take into account when identifying potential properties, particularly if you are purchasing an asset for investment purposes.

Navigating a changing market

Applying for a home or investment loan can be a daunting prospect, especially in a fluctuating lending market with more potential changes on the horizon. With loan criteria tightening and banks now adopting stricter lending policies, it’s more important than ever to seek the advice of a specialist mortgage broker who has the investment knowledge and expertise to guide you through changes in the lending landscape.

If you are looking to secure finance for a property or would like to discuss how to navigate recent changes in the lending environment, our investment finance specialists will be happy to discuss your financial needs in an obligation-free consultation.

Bank vs broker: which is best?

When searching for a home or investment property loan, buyers will generally weigh up between two options: applying for the loan directly with the bank, or enlisting the help of a mortgage broker to compare products from different lenders. Whilst the end game is essentially the same, how and who you choose to apply for your loan can have a significant impact on the final rates and benefits you receive. So what are the key differences between brokers and banks? And how could a specialist mortgage broker better serve your long-term investment goals?

Product choice

One of the biggest differences between banks and mortgage brokers lies in the range of products each service provider offers. Since they are aligned to their own lending solutions, banks will only have access to their products and will adhere to their own unique lending policies. Essentially, this means you’re only being shown a fraction of the hundreds of lending products on the market, and you could be missing out on better rates or benefits from alternative lenders. Mortgage brokers, on the other hand, have access to a broad range of products from different lenders. Since they aren’t aligned to one particular bank, brokers will be able to compare the products and policies of each lender to help you find the loan solution that best suits your individual needs and goals. These options can be particularly important in the modern lending environment especially, as APRA changes and the banking royal commission are creating tighter lending conditions that are limiting many customers’ eligibility for certain products. Whilst this could leave you in a tough position if you don’t meet your chosen bank’s lending criteria, mortgage brokers will be able to search the market for alternative loan solutions that better complement your circumstances.

Brokers work on behalf of the client

One of the reasons that many Australians enlist the help of a mortgage broker over a bank is that brokers generally don’t hold preferences towards one particular product or institution. Whilst bank staff work in the primarily interests of their own company and products, brokers effectively serve as an agent for the client, and will assess both the positive and negative features of a loan before recommending a given solution. This enables the broker to find a solution that really fits the client’s investment strategy, as opposed to selecting the best solution out of a limited range of products.

This difference can also have critical implications on the way each institution structures a loan. A good mortgage broker with a thorough understanding of their client’s investment needs will always look to structure a loan in a manner that supports their long-term goals and enables them to move forwards in their investment journey. Banks, on the other hand, will often look to structure a loan in a way that mitigates risk for them. In some cases, this can lead to issues such as cross-collateralisation, whereby more than one property is used as security against a loan. Whilst less risky for the banks, this can lead to big issues down the line should an investor wish to sell one of the properties under the mortgage contract, and it could also hinder their eligibility for future property investment loans from other lenders.

Ongoing support

Whilst both banks and brokers can help you secure a great home loan deal, brokers offer an additional service that simply isn’t available with lenders – guidance throughout the entire lending process. As well as saving you the time and hassle involved in comparing different lending products, brokers will navigate the entire loan process for you and follow up with lending institutions on your behalf. This guidance can be particularly useful for first-home buyers with less experience and understanding of the steps involved in securing finance. If you are purchasing a property for investment purposes or buying a home with the intention of later turning it into an investment property, this is where selecting a mortgage broker who specialises in investment finance can really make or break your success. A good mortgage broker will take your long-term goals into account, and will have a thorough understanding of the structures and loan features that support your wider investment strategy as well as your short-term situation.

Expert finance solutions

At Momentum Wealth, we understand the importance the right loan solution plays in supporting your wider investment strategy. Whether you’re expanding your property portfolio or kick-starting your investment journey with your first home, our mortgage brokers can help you identify tailored loan strategies that complement your long-term goals, as well as your current circumstances. For more information about our mortgage broking services, or to speak to one of our specialist mortgage brokers about your finance needs, book a consultation with a Momentum Wealth finance specialist today.

Case study: Scarborough development sets client up for retirement

The fundamental aim for most property investors, and the reason many enter property investment in the first place, is to build enough wealth to secure financial independence and generate income for retirement. Depending on an investor’s individual aims, there are a number of different strategies they can use to do this. In our recent case study, we explore how a Momentum Wealth client used a develop and hold strategy to create the cash flow required to retire on property.

Brief

The client approached Momentum Wealth in 2009 seeking a property with high rental growth prospects and medium-term potential for development. Their long-term aim was to develop and hold the property to create an ongoing source of cash flow which would later provide a passive income to fund their retirement. Not yet ready for development, the client was seeking a property that they could land bank until they had built the equity to develop in the right market conditions.

Strategy & Acquisition

With the client’s brief in mind, Momentum Wealth identified Scarborough as an up-and-coming suburb with extremely promising long-term prospects. Whilst well-located in a beachside area between City Beach and Trigg, we also saw future government spending as a catalyst for impending change within the suburb, marking it as an ideal location for future development and rental growth.

Looking further into the local market, our buyer’s agent was able to identify a key property of interest – a 1158sqm property comprising two dwellings. This was extremely well suited to the investor’s land banking strategy, as the second dwelling would allow for an additional source of income to help minimise holding costs until the investor was ready to develop. Whilst we first identified the property in question during a bidding auction, our acquisitions specialist strategically waited until post-auction before placing an offer, and was thereby able to negotiate a better deal for the client, securing the property for $985,000. With the offer accepted and due diligence completed, the property was passed to the Momentum Wealth property management team, who were able to ensure the asset remained tenanted and well maintained until development works began.

Timing the market for development

With the government recognising Scarborough as a suburb primed for redevelopment, they established the Metropolitan Redevelopment Authority to implement and gazette a rezoning of the area in 2014, significantly boosting the development potential of the client’s site in turn. Following these changes, Momentum Wealth’s development team secured development approval for ten multiple dwellings over two storeys in January 2016. After the client secured finance, our development team carefully managed the builder tendering process and the detailed design of the apartments before securing a building permit in April 2017. After the appointment of Daly and Shaw as the builder, construction of the new development began, with the project coming to completion in May 2018.

Result: success in Scarborough

During the time that the client has held this site, Scarborough has undergone a massive period of redevelopment. The suburb has transformed into one of Perth’s most vibrant hubs, with projects such as the ongoing Scarborough Beach revitalisation establishing the area as a key centre of activity for tourists and locals alike. This ongoing redevelopment has brought new amenity to the suburb and boosted the rental appeal of surrounding areas, placing this development project in great stead for success.

Under the management of the Momentum Wealth property management team, five out of the ten apartments in the client’s redevelopment have already been leased for between $425 and $440 per week. With a total projected rental income of $4,380 per week, the client is set to benefit from approximately 6-7% rental yield from this development. This marks a considerable $227,760 per year in rental returns. In addition, the client has also witnessed a significant increase in capital growth, with the estimated total value of the apartments increasing to $5 million. This leaves $1 million of equity when development and purchase costs are taken into account, putting the client in a great position to benefit from short-term cash flow and, in the long run, a comfortable retirement.