Property Newsletter – July 2018

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.


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.


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.


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