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Renovating your home or investment property is a fantastic way to add value. But what’s the right way to finance the renovation project you have in mind?

There are several ways to finance a renovation – the option that will work best for you depends on the size of your project, your budget, financial circumstances and your goals. Your mortgage broker is an expert when it comes to helping you choose the right loan option for any renovation – here’s an outline of some of the finance options we recommend to get your renovation dreams off the ground!

Line of credit

The benefit of a line of credit is that you only pay interest on the money you use. The way it works is that you apply for a line of credit against your home with an approved limit, then simply use the funds as needed.

You can pay off the balance as you go, then use the funds again later for the next stage of your renovation – much like a credit card. If you want the freedom to pay tradespeople or buy materials whenever you need to, a line of credit may be ideal, particularly if your renovations are ongoing.

Personal Loan

A personal loan is a good option if your renovation costs are relatively small, or you plan to pay the loan off quickly. With a personal loan, you can secure the finance against an asset, such as property or term deposits, or opt for unsecured finance without collateral (this option usually has a higher interest rate). The application process is usually quicker than for a home loan and the money is deposited into your account for you to use as required.

Interest rates on personal loans are usually much higher than home loans, however we have access to competitive rates, so we can potentially help you save. Depending on how and when you plan to pay back the loan, you can choose a variable or fixed rate option. Many personal loans allow extra repayments so you can pay it off sooner and reduce the interest you’ll have to pay, so talk to us about the right one for your needs.

Construction Loan

Construction loans are a great option for larger renovation projects that require a builder. This could include anything from a small extension to a complete knock-down and rebuild. With a construction loan, the lender will use the final value of the property post-renovation to calculate how much you can borrow. Once approved, you can draw down periodic progress payments at different stages of construction.

A construction loan offers significant benefits for larger renovation or building projects:

  • You only pay interest on the money you draw down.
  • The payments are interest-only during construction.
  • Each stage must be inspected and completed before you can draw down the funds for the next stage. This helps to keep your builder on track.
  • The loan converts to a home loan of your choice after construction is completed.

Refinance to access equity

When you refinance your home loan to access your equity, you end up with a sum of cash to use as needed or to finance your renovation project. Refinancing your home loan could be a good idea if you’re ahead on your loan repayments, your property’s value has increased, or you’ve paid down your home loan considerably since you took it out. (It may not be a good idea if your property has fallen in value, or your financial circumstances have changed for the worse since you purchased it.)

Refinancing may also allow you to access other useful features such as a line of credit, or a redraw facility – which could be useful if your renovations are ongoing. It’s important to remember you may not be able to access all your equity – so talk with us and we’ll help you work out your borrowing power.

What’s right for you?

Whether you’re planning to make a few cosmetic improvements or give your property a complete overhaul, chat with us about the finance side of things. The right loan choice will depend on where you’re at financially and what you’re hoping to achieve. For example, the finance we recommend for those renovating their own home may be different from what we’d suggest for those renovating an investment property, or those flipping for profit.

If you’d like to find out more, just give us a call today.

According to a recent news report, more than 900,000 interest only (IO) home loans will come up for refinance during the first quarter of 2019. This kind of loan is very popular with property investors, however, the recent tightening of lending conditions in this area of the market may make it difficult for some people to refinance to another interest only period on their loan.

So, what are IO home loans, what are they used for and how can your broker help you if the IO period on your home loan is about to come to an end?

What is an IO home loan?

An IO mortgage is where your repayments only cover the interest on the amount you have borrowed during the interest only period. That means the principal (the amount you have borrowed) does not reduce. This IO period can be from 1 – 10 years and after it has ended, the loan reverts to a principal and interest loan unless you refinance it.

What are IO home loans used for?

IO home loans are not recommended if you plan to live in the home you purchase, as they only provide short-term benefits and could cost you more in interest over the long run. This kind of home loan offers benefits for property investors because the interest is usually tax deductible. (Always consult an accountant to be sure this applies to you.) It also helps to lower the amount of the repayments in the short-term, which may help property investors to maximise the income from the property.

It should be noted that the principal (amount borrowed) will need to be repaid at some point. There is a risk that the property’s value could fall during the IO period, which could potentially cause a you to make a loss if you were to sell it. It could also make it difficult to refinance the loan at the end of the IO period without topping up the equity in the loan.

Why could it be difficult to refinance for some?

In 2016, the Australian Prudential Regulation Authority (APRA) – which is the regulator for the home loan industry – imposed a cap restricting IO home loans to 30 per cent of bank’s new mortgages and at the same time, imposed a 10 per cent annual growth cap on lending to property investors. These restrictions mostly applied to the big banks, as APRA felt they were over-exposed to risk if the property market should suffer a down-turn. This has caused a general tightening of lending criteria for property investors across the board.

In December last year, APRA lifted their restrictions. However, the tighter lending criteria for property investors and IO loans are still in place with the big banks, which could make it difficult for some to refinance or extend their IO period on their loan.

What if your IO period is about to end?

As your mortgage broker, I can help you access a wider variety of lenders, which could give you more options if you are looking to refinance your IO loan this year. We have access to Australia’s leading lenders, including the usual big banks and credit unions, as well as smaller, private lenders you can only access through a broker. Not all mortgage brokers can offer you such a comprehensive variety of loan options, so you can be sure that we will be able to access loan products that suit your needs and give you value for money.

Refinancing could potentially be of benefit to you in a variety of different ways in your personal situation, so please talk with us about your needs and goals. Your consultation is complimentary, so please just give us a call at Element Finance if you’d like to talk about your options.

It’s been nearly eight years since the Reserve Bank of Australia (RBA) last raised the country’s official cash rate. Interest rates have been at historical lows for quite some time and as a homeowner, you may never have experienced an “official” rise in interest rates.

At present, interest rates remain low and we expect them to stay that way for a while. However, forecasters predict Australia’s economy will continue to strengthen over the next 12 months and as it does, an RBA cash rate rise becomes more likely.

So, how does the cash rate affect interest rates and ultimately, your home loan repayments?

Understanding the RBA cash rate

The RBA cash rate sets the prime interest rate on overnight loans in the money market. In simple terms, it’s the interest rate that every bank must pay on the money it borrows. The official cash rate is currently at 1.5%.

The RBA may decide to change the official cash rate for a variety of reasons. These include:

  • stimulating the economy,
  • managing inflation,
  • controlling fluctuations in the Australian dollar,
  • to encourage or discourage consumer borrowing and spending. (For example, a rate rise often stimulates the Australian dollar, which can negatively affect export businesses and our tourism industry).

How would a rate change affect your home loan?

When the RBA makes a change to the cash rate, lender’s interest rates will usually move in line with the change. In recent times, lenders have also been making minor ‘out-of-cycle’ interest rate changes (outside the RBA’s rate movements) but historically, major home loan interest rate changes have been determined by RBA decisions.

A change in the official cash rate will affect the interest rate you pay on your home loan and can drastically affect your mortgage repayments if you’re on a variable rate home loan.

Rate changes usually occur in fractions of a percentage point, but this can still have a big impact on the size of your monthly home loan repayments.

So, how do you prepare for a home loan interest rate rise? Here’s a few suggestions that could help to make sure you’re not caught on a financial back foot.

Consider switching to a fixed interest rate

With a fixed rate home loan, your interest rate will be locked in for a pre-determined period. You won’t have to worry about fluctuations in the cash rate or interest rates. Plus, you’ll know exactly how much your repayments will be during the fixed period.

Another option is to hedge your bets and fix part of your mortgage, while leaving the rest variable. This is called a split loan. These options could help to protect you from interest rate rises in the near future, however you will still need to plan and budget for a rise in repayments once the fixed period has ended.

Build a buffer into your home loan

A good idea is to make extra repayments while interest rates are still low, so you can build in a buffer by getting ahead on your repayments. You could also channel any spare money into a redraw facility or offset account. These loan features reduce the interest you’ll have to pay over the life of the loan.

Shop around for lower interest rates now

If your current home loan isn’t competitive, you’ll be left even more out of pocket if rates rise. It may pay to shop around now for a more competitive home loan that better suits your financial circumstances and goals.

Pay down your debts and consider consolidating

It’s a good idea to pay down any variable debt, particularly credit cards, while interest rates are low. Concentrate on paying off debts with the highest interest rates first, then knock over the others.

If you have multiple debts of different types, you may like to consider consolidating everything into your home loan or a personal loan. Consolidating is not necessarily right for everyone, so it’s very important to speak to your broker before proceeding.

As a homeowner, it’s important to be prepared when interest rates head north. If you’d like to know more, please get in touch with Element Finance today. We are always ready and willing to answer any questions you may have, help you save money on interest and find ways to prepare for any future rate rises.

Last year, important changes to tax deductions for property investors were announced. For some investors, the changes may have a significant impact on the annual deductions you can claim on your rental properties. As your mortgage broker, we like to keep you up to date. Here’s what you need to know about the changes when doing your tax this year.

Travel expense deduction scrapped

As of July 1, 2017, property investors can no longer claim a tax deduction for travel to maintain, inspect or collect rent for their rental property. Likewise, you can no longer claim travel expenses for preparing the property for new tenants, or for visiting a real estate agent to discuss your property.

Investors who own property interstate will probably be the most affected by this change. If these changes do affect you, perhaps consider employing a property manager to perform some of these tasks for you, as their costs are usually still tax deductible. Talk to your accountant to find out more.

Depreciation deductions tightened

Depreciation is the decline in value of an asset with a limited life expectancy. Depreciating assets include carpets, furniture and appliances like water heaters and cookers (also known as plant and equipment).

Residential property investors can now only claim depreciation deductions for plant and equipment expenses if they purchased them. Previously, investors could claim plant and equipment depreciation on assets that were installed by a previous owner.

This “integrity measure”, introduced in last year’s Budget, was intended to prevent multiple property owners from depreciating the same assets, exceeding their actual value. The changes apply to second-hand plant and equipment acquired after last year’s Budget night (May 9, 2017). You also can’t claim a deduction for plant and equipment installed on or after July 1, 2017 if you have ever used it for private purposes.

If you owned or entered into a contract to buy your investment property before May 9, 2017, you will not be affected by these changes. You can still claim deductions for depreciating plant and equipment assets that were in the rental property before that date.

Further reading

You can find more information about the expenses you can claim for residential rental properties on the ATO website, available here. You’ll find details about expenses that are deductible immediately, such as management, maintenance and interest; and expenses that are deductible over several years, such as capital works and borrowing costs.

Your tax time checklist

Here are some tips to prepare for tax time:

  • Update your Depreciation Schedule. You can find a Guide to depreciating assets 2018 here. If you’re confused, seek advice from your accountant. If it’s a new property investment, you may need to have a quantity surveyor prepare a Depreciation Schedule report.
  • Understand what you can claim (refer to the ATO website for clarification).
  • Get your documents together and organise your receipts.
  • Tally up your deductions. It’s a good idea to create a spreadsheet with all your income and expenses listed. That way, you can save on accounting fees (rather than giving them a shoe box of receipts to go through).
  • Book in with your accountant (they are flat out at tax time, so the sooner the better).

As your mortgage and finance broker, we’re happy to work with your accountant or financial planner on your investment property finance. And if you need a recommendation for a good accountant, we can help with that too. Good luck with your tax, and if we can assist in any way, please don’t hesitate to get in touch with us at Element Finance!

Loan refinancing is a strategy used by property investors to access funds – usually to grow or improve the value of their property portfolio. The right time to do it largely depends on your strategy, plans and equity. In this article, we highlight some of the key considerations for this strategy and how savvy investors often use the funds. If you’re considering investing in property or taking the next step in your investment journey, remember your mortgage broker is a great source of information and support, so please don’t hesitate to give Element Finance a call.

Why refinance?

Refinancing your loan allows you to access the equity in your property. Equity is the proportion of the property you own – for example, if the property is worth $500,000 and you owe $200,000 to the bank, then you have $300,000 in equity.

Savvy property investors use their equity for a variety of different purposes:

  • To renovate and add value to an investment property
  • As a deposit for their next investment property
  • To fund their lifestyle and living expenses.

Another popular reason to refinance is to secure a more competitive interest rate or a loan that better suits your needs. There may be loan features that can improve your interest savings or cash-flow, like offset accounts and redraw facilities. It pays to talk with your mortgage broker and reassess your property investment loans regularly, to ensure you’ve got the right loan to maximise your financial benefits and tax advantages.

Key considerations

1) Market value and equity
Generally, the right time to refinance your investment property is when the equity has grown sufficiently to take the next step in your investment strategy, or to fund your renovation plans. To get an idea of the value of your property, and how much your equity has grown, you’ll need to compare public sales data for similar properties in the area. Ask Element Finance for a free suburb and property profile report with the latest on-the-market information.

You could also ask real estate agents for an estimate (make sure you hit up at least three different agents) or pay for a professional property valuation. Keep in mind that a lender’s valuation will be on the conservative side of any estimates, and a formal valuation will be required by the lender before they will allow you to refinance.

2) Consider the costs
Switching lenders and refinancing your investment loan can help you achieve your goals, but there are costs involved. These may include break fees or discharge fees, establishment fees for your new investment loan, and valuation fees. Speak to Element Finance and we’ll run you through the costs and help you decide whether refinancing is worthwhile right now, or if it may be better to wait until your equity has grown further.

3) Investigate how the market is performing
Part of the decision about whether to refinance will depend on how the property market is performing for your investments. National dwelling values have been falling in many capital cities in recent months, while regional dwelling values have been edging higher. That may mean the location of your investment property will be a key consideration when deciding to refinance.

It’s important to be aware that if do you refinance after your property’s value has decreased, you may be facing negative equity territory. This is when the value of your investment falls below the outstanding balance on the mortgage. In this situation, it may be better to wait until the market recovers before you refinance.

4) Other considerations
The investment lending landscape has seen many changes in recent times. In April, the Australian Prudential Regulation Authority (APRA) announced the 10 per cent limit on bank lending to property investors (in place since 2014) would be removed for lenders that could demonstrate prudent lending. As a result, we’re seeing interest-only investment loans becoming easier to obtain, and interest rates being reduced by some lenders. That means now may be a good time to reassess your investment strategies and refinance requirements.

Talk with your mortgage broker first
If you’d like to access equity to grow your investment portfolio or renovate, or you just want to know you’re getting the best deal, it’s worth having a chat with your mortgage broker. You’ll find we are a wealth of information – and it’s always best to make a fully informed decision. If the time is right for you to take the next step in your investment journey, we’ll help you find the right refinance option to help you achieve your goals. Call Element Finance today!


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