So what type of loan structure is right for you – right now?

 The answer to this will largely depend on where you are in the home loan cycle and how flexible you wish to be in the years ahead in relation to managing your mortgage and finances  

 And the important lesson is before you jump in the deep end to understand the various loan structures available and what they can offer you before you decide which one is your perfect match.

 Standard Variable Rates

 These rates are the most popular among borrowers as they largely mirror what’s happening to official interest rates and also provide the most flexibility in relation to the range of features attached to the loan.

 Average standard variable rates at the moment are sitting around 2.5 percent above the Reserve Bank official cash rate benchmark but can commonly vary by half a percent between many major lenders.

 When shopping around for a standard variable rate, you should note the comparison rate on the loan, which by law must be advertised alongside the standard variable rate. The comparison rate shows the annual percentage rate of the loan when compulsory fees are included and gives a true cost of the loan.

 However the comparison rate doesn’t include any costs that may be incurred during the period of the loan such as redraw, early termination fees and dishonour fees etc so you need to be aware of this when you make your final choice.

Fixed Rates

Rates on fixed loans are generally set for a period of one, two, three or five years, with some lenders offering fixed loan rates beyond that period.

And this appeals to people who want certainty on their loan repayments, particularly in a time of rising rates.

But the timing of when you fix your rate is often critical and will determine where your fixed rate compares to standard variable rates on the market at any time during the loan period.

With fixed rates, lenders predict ahead where rates will be over the term of the loan period and as a result fixed rates can vary substantially between loan providers. They also usually have high break fees associated with them in order to deter borrowers from switching out of the fixed loan if they find they have locked into a rate too early, and want to change over to another loan.

For this reason many borrowers choose to hedge their bets and fix only part of their loan (known as a split loan), leaving the rest of their loan on a standard variable rate to give them the best of both worlds.

With fixed rates, someone always loses – either the lender or the borrower –  and it’s wise to remember that the lender has many tools at their disposal to make a more accurate call of where rates are headed.

Introductory or honeymoon Rates

Unlike fixed rates for one or two years, these rates are normally variable and are considerably lower than the average standard variable rates on the market i.e. half to one percent for a defined period of time.  This particularly appeals to many first home buyers and others looking for a good head start.

Introductory rates are routinely offered to borrowers for 24 month periods but can also be offered for 12 or up to 36 months.  It’s important to remember with introductory rates, that they will move up and down with interest rate movements, but will always remain lower than their revert rate.

After the introductory or honeymoon period the rate then reverts to a variable rate set by the lender, so anyone considering choosing an introductory home loan should ask the lender what the ‘revert rate’ on the loan is and how it stacks up against their other variable rates in the marketplace.  

The revert rate is important in determining how much you will pay in interest over the life of the loan.  Because if the revert rate is uncompetitive i.e. higher than most variable rates available, the value of the whole package can be more expensive over time.

Currently there are some very good introductory deals on the market for 12-24 months with low revert rates and low to no fees, so you should check both of these key features and also check the lenders comparison rates on the loan.

Capped Rates

This loan style was quite popular in the 1990s and was well-liked in times of rising rates.  Currently there are only a few products of this kind available – so the resurgence in popularity is slow.

The capped rate is usually associated with a variable loan structure but there is a ‘cap’ to how high that rate can go during a certain time period during the course of the loan.   With this loan, the rate can’t go higher than the capped rate for a set period, however it may move up and down below it.

The term that the capped rate may be in place for may vary between loan providers, but usually ranges from around 24-36 months from settlement.  The attraction exists because the capped rate provides security and peace of mind in rising rate environments, and also offers the flexibility that a standard variable rate loan has in relation to loan features.

If you are considering choosing a capped rate product you need to vigorously compare fee structures and the current competitive nature of the rates with other products on the market – as sometimes the appeal of the peace of mind can end up costing you money.

Tracking Rates

A loan type which has emerged recently on the market to appeal to first home buyers and the refinance market, these rates are ‘tracked’ against the average standard variable rates of the big four banks and are promoted as being lower than those rates by a certain amount of (usually) between one half to one percent for certain time periods, usually up to three years. 

If you are considering these loans, you need to be aware of the two main differentiators between the tracking rates of various loan providers which are the fees associated with the loan and the revert rate when it comes off the tracking rate period.

So stop now and ask yourself, have you taken the time to do some homework and find out more about who’s actually going to lend you that money? Because if you haven’t yet considered this, there’s no better time than now to find out why its so important.

By conducting some initial research, you can find out quite a bit about the way a lender does business and avoid any unnecessary concerns that might otherwise arise during the course of the relationship.

Because it’s important for you to understand when you sign up with a lender – you’re not just buying the product, but the service as well.  

Where a loan may look good on paper, you also need to be able to rely on the right lending representative to guide you through all the mechanics of the loan to ensure you continue to get the most out of your lender, your loan and the relationship.

And although education is a powerful tool – not every lender is willing to make the time and effort to help empower you over time to take more ownership of your financial decisions.

So before taking out a home loan, there’s some simple checks you can make. These include:

Visiting the lender’s website

By doing this you can establish how long they’ve been in business, products they offer, interest rates, industry memberships and the people behind the business and its history.

Asking around

A good way to measure the quality of a company’s products and services are through word of mouth. Ask a broad range of friends, family and business associates if they’ve had dealings with the company you’re considering, and if so, how they found the experience.

Obtain a copy of the credit contract for your loan

By doing this you can look at the terms of the loan and your obligations to determine if you will be able to meet them. The credit contract will also outline any fees associated with changing loans – and if you do have any concerns, seek some independent legal and financial advice.

Organise a face-to-face meeting with a company representative

After conducting some preliminary research, set up a meeting with a lender from your organisation of choice. Come armed with any questions and queries your earlier research may have unearthed.

Check that the lender is a member of the Credit Ombudsman Service Limited (COSL)

This service protects the rights of any borrowers who deal with a COSL member and allows them to take a complaint they may have against that lender to an independent dispute resolution body. 

And finally – if you don’t feel comfortable with the direction your lender is taking you, don’t sign on the dotted line. There are many good lenders out there and the buck really does stop with you.

Depreciation is one of the most important (yet often overlooked) tax saving benefits available to investment property owners. Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.

There are two types of depreciation allowances: plant and equipment such as carpets, blinds and whitegoods, and, capital works items such as windows, brickwork and doors. Plant and Equipment items have varying rates of depreciation while capital works items are claimed at 2.5% per annum.

According to Tyron Hyde, tax depreciation expert with quantity surveying firm Washington Brown (washingtonbrown.com.au), many property investors unwittingly miss out on huge tax savings simply because they do not claim their full entitlements.

“One of the biggest myths circulating is that only new property can be depreciated,” said Hyde. “This is simply not true. Both new and old properties will attract some depreciation allowances. It is definitely worth it for all property investors to get a estimate for depreciation, they could be surprised at the large tip they’ve been giving the ATO each year.”

Hyde is quick to point out that if investors haven’t been claiming or maximising their full entitlements they can backdate previous tax returns.

“Property investors also need to be aware of the recent surge in do-it-yourself depreciation options available via the internet,” Hyde added. “Only accredited quantity surveyors are trained in estimating building costs. It’s important to understand that a small incorrect measurement could end up costing you thousands in deductions.”

For example, DIY depreciation requires that you to do your own measurements. If you measure one bedroom from one wall to the other and you do this around the house you actually reduce the property by 10% in gross area. At $1500 a square metre to build, you’ve just missed out on approximately $15,000 in deductions.  

“Not only are you running the risk of missing out on valuable deductions if you measure incorrectly, but submit an incomplete or poor quality depreciation report and you could attract an audit by the ATO,” said Hyde.

Other important facts about depreciation:

• Depreciation is the only deduction that can be subjective. All other expenses – such as interest, strata fees etc. must equal the amount you have precisely paid out.
• You can claim deductions on renovations but get a professional assessment from a quantity surveyor before you renovate so you can claim full entitlements.
• Depreciating your investment property can dramatically improve your bottom line.
• Use an online tax depreciation calculator to estimate which properties will give you the best return before you buy (washingtonbrown.com.au/calculators)
• Property tax depreciation reports are 100% tax deductible

“Depreciation isn’t about dodging taxes, it’s about getting every last cent of depreciation allowance that you are legally entitled to,” said Hyde.

What’s not to appreciate about that?

Mr Graham believes the coming year will see upgraders stepping up to fill the demand gap created by the decline in first home buyer activity since the federal government’s boosted first home buyer stimulus was withdrawn. 

In the case of those in the market to upgrade, many have equity from selling their previous property in the first-home buyer frenzy or turning their current home into an investment property to fund the upgrade purchase. 

This along with the decreased encouragement of low rates and government grants have contributed to knocking first home buyers out of the market because of a lack of property affordability. On top of this, recent rate rises and the expectation to get a loan with less than 10% deposit are also contributing to market entry discouragement and lack of affordability for first home buyers.

According to JP Morgan and Fujitsu, Current first home buyers are committing 34 per cent of their after-tax incomes to servicing interest payments on mortgages, compared to 24 per cent for typical borrowers. They are borrowing about the same as other borrowers (around $280,000) but their loan to valuation ratio is higher.

So if interest rates increased, which is the case in some interest forecasts, first home buyers will be committing 39 per cent of after-tax income to loan servicing.

Nonetheless, it is predicted that the first home buyer sector will remain strong throughout 2011 despite of the withdrawal of the first home owner grant boost and recent rate rises.

According to QBE LMI’s mortgage update report, compiled in partnership with BIS Shrapnel, more than 110,000 loans will be written for first home buyers in 2010 – a healthy 27 per cent above the low point of loans to first home buyers in 2003/04.

“The research by BIS Shrapnel shows strong population growth in the first home buyer cohort (25 to 39 year olds) totalling 3.2 per cent over the three years to June 2012. The solid growth in this age group will result in a bigger pool of first home buyers in the market which will support demand in the future,” Mr Graham said.

Have a read through and cast your vote on the blog poll or comment your thoughts below – we want to know:  Would you rent as a lifestyle choice or would you prefer to live in a home that you own?

A general understanding of your borrowing power is an important factor in ensuring not only that you have the ability to pay off a loan but in determining your maximum spending opportunity.  Tools such as ‘Borrowing Power’ calculator available on the Resi website and comparison websites such Infochoice can provide a useful indication of how much you could borrow based on your salary and some basic financial commitments.

Having a basic insight into your borrowing power is a great initial step to take in deciding whether now is the right time for you to purchase.

If you decide that it is a good time for you to purchase, pre-approving your loan becomes a great benchmark on which to build your purchasing budget upon.  Simply put, pre-approval is where you submit a loan application before you purchase a property to gain an understanding of your borrowing power and the conditions that apply to your home loan application.

It also indicates how much deposit you will require and depending on your deposit, what purchase price of a property you can comfortably start looking for. Real estate agents are also more confident in accepting offers from home buyers with pre-approved loans since it decreases the chance of the buyer falling out from meeting their offer.

There are different levels of pre-approved loans.  A more in depth pre-approval gives you time, security and confidence to find the best suited property for your financial situation instead of rushing into something that you may in fact not be able to afford.  As an example, Resi Home Loans pre-approval period lasts 3 months, giving you ample time to explore what is available in the market all while being prepared. Furthermore, when you find the right property, you don’t have to go through that long and administrative approval process again which can more often than not, increase the risk of loosing your offer to another bidder who is able to finance their offer faster than you.

On the other hand, there are many lenders who offer a quick online or two minute turn around pre-approvals.  This type is less secure since it does not consider your complete financial records when providing you with an estimate of your borrowing power.  

Nonetheless, circumstances can change from the borrower’s side in terms of financial position and employment; as well as the funder’s side with their lending requirements.  So it is important to think of pre-approval not as a guarantee but rather a guide since there are many conditions that will need to be met before a home loan provider will formally approve your loan.

Housing shortages are also an influencing factor, increasing the popularity of borrowers taking advantage of large equity nests.  For more on PRDnationwide’s results, and for the full article, head to The Advisor website.

Just like shopping centres give you a centralised place to compare prices sales and deals for clothes, most people would like a one-stop loan shop to provide opportunity for you to compare and contrast the loan products that best suit your situation. 

There are a lot of websites out there that provide an abundance of information to guide you through the home loan maze but they also report on competition in the home loan industry. Websites such as Info Choice, Rate City, Your Mortgage and Your Investment Property are good places to start.

Other websites which have only been available in the past year or two and also worth a visit are Mozo, Money Buddy and Home Loan Hints. Also check out Resi’s informative videos on My Home.

Also, don’t forget to flick through the financial and property sections of your weekly paper.  This is usually a good starting point for your research into the right home loan for you.  Your national paper will also have an abundance of budgeting tips and market news and can give you an idea of how much houses are selling for in your area of interest.

The current conditions for investing have not only peaked the interest of established borrowers but also first home buyers and ‘upgraders’ who have re-directed their attention to the merits of investing instead, because of recent rate rises.

Existing owner occupiers who have built up enough equity in their own home to purchase an investment property are now feeling confident about investing in an asset class they feel they understand, so the reasons for those borrowers to invest will be quite different to other borrowers.

However for first home buyers and others looking to ‘upgrade’ their homes but concerned about the impact rising rates may have on their lifestyle and their plans, their reasons for investing in property may be more driven by using the investment to build the financial platform they need to eventually own the dream home they’ve always wanted to live in. 

Whichever category of borrower you fit into, there are still several key questions everyone should work through to determine if you’re really investor property ‘ready’:

Do you have a defined financial plan or retirement structure – and does an investment property fit comfortably within that structure?

With many people still not confident with the level of stability provided by other asset classes in the current market, property can offer reliable long term investment potential – which is why it regularly remains a key component of the retirement plans for many Australians who like the stability that bricks and mortar offer.

For those who may be re-evaluating their retirement and financial strategies in the wake of the last two years, it’s important to stick to the following principles:

• Research all of your options from a range of reliable and independent sources to ensure you’re not taken in by optimistic salesman or marketing spin;
• Be flexible with your strategy so that it can accommodate any changes to your personal circumstances;
• Be realistic in your expectations from your investment as part of your overall strategy;
• Invest your time in finding the right lending partner who can provide you with the genuine level of service you can readily access when you need it, and remember;
• Property is not a set and forget investment – it will require ongoing management and maintenance to maximise its potential.

It’s also important to remember that it’s never too late to revise your retirement plan. In fact – baby boomers are arguably in one of the most appealing positions to take advantage of the current market.

Not only are they cashed up, but they are generally confident than with their level of financial literacy and more attuned than most to identifying their life goals – as well as the commitment and discipline they need to apply to achieve them.

Have you attained significant equity in another property which will allow you to comfortably borrow against that property?

As a result of the rising property market over the ten years prior to the credit crunch there are still many homeowners who before that time had built up substantial equity in their own home and are now feeling comfortable with servicing their current repayment levels.

If you find yourself in this position and provided your employment, income and lifestyle remain stable – now could be an opportune time to apply that discipline, knowledge and experience in the market to purchase another property.

However, ensure you go into the transaction knowing all the additional costs and possible expenses that it may entail, such as Lenders Mortgage Insurance, which may apply if your total loan amount exceeds eighty percent of the total value of your property.

Are you currently in a situation where you are able to funnel any surplus cashflow into your mortgage or a savings account?

Surplus money could allow you to either build up enough funds to pay for the deposit and initial costs to purchase an investment property, or if you already have enough equity in your home and can borrow against that – the extra money can provide a reliable buffer for when rates rise again.

When calculating projected figures for any property purchase, potential buyers should always allow for a rise of two percent in interest rates at any point in time, so that they can continue to meet the financial obligations of that property – as well as any others.

If your comprehensive research has been completed, purchasing an investment property can be readily factored into your long term financial plans as long as you’re realistic about crunching numbers on:

• Current and expected yields: Don’t rely on the latest figures. Carry out a thorough historical audit of what prices in your target areas have commanded and can continue to in the future.
• Effect of rising and falling interest rates: Be familiar with the nature of rate cycles and what can occur and how this will tie in with your projected financial plans.
• Effect of an un-tenanted property for any period: Properties can become untenanted for many reasons and the risk of that occurring should always be deemed a possibility. You also need consider lower than expected rental yield.
• Paying for repairs and other expenses for the property: Only repairs deemed ‘essential’ are tax deductible so ensure you don’t get caught up in the total renovation bug without any due thought of how you will justify them.
• Taxation implications: Consider carefully how property related issues such as depreciation, repairs, tax deductible expenses and the long term value of the property can affect your immediate financial situation and your long term retirement plans.  

Are you in a situation where you may be likely to come into a sum of money?

Whether it’s through an inheritance, a lump sum payment or a work bonus, if you do receive an expected or unexpected lump sum and that money can be spared, consider whether you may be able to put it towards securing an investment property.

As long your current financial commitments can continue to be comfortably met, this allows you to put that extra money to more effective long term use – rather than blowing the money on a holiday or item that won’t give you any financial return.

It’s an exciting time to be a potential property investor – as long as you apply a healthy dose of realism and restraint to your research and decision making.

Their award winning product, Switch & Save tops competition within the non-bank category not only because of its current low variable introductory rate of 5.70%* but also thanks to its competitive revert rate that kicks in after 24 months and no start-up or ongoing fees.

These attributes as well as its other winning features including extra repayments, free redraw, and an interest only option has made it rise above other non-bank lenders.

The initial introductory rate for Switch & Save is discounted at 5.70%*, which is a variable introductory rate over two years – well below much of the bank and other non-bank competition. It’s the latter cost with a default rate of 6%* as well as its low start up and nil ongoing fees that helped Resi rise above the other non-bank lenders.

This results in potential savings of $4,839* over three years, $5,698* after five years and an enormous $14,330* over ten years compared to the average cost of the average loan according to Your Mortgage rankings.

 For more information on Resi’s Switch & Save home loan visit, http://www.resi.com.au/Landing/Switch—Save.aspx?t=home_banner_large

Or if you have an existing loan and want to put it up against the Switch & Save test then try Resi’s Switch & Save calculator http://www.resi.com.au/Calculators/Switch-and-Save.aspx?t=HP_banner_right.

* Conditions Apply.