We had a representative from CBA in our office the other day who mentioned an interesting statistic; only 10% or so of the approvals they’re currently doing are for people purchasing property outright, including first home buyers, upgraders and investors.

So what’s the other 90% of their home loan business consist of? Refinancing of course. Yes, there’s a swag of borrowers out there who are fed up with their current lender and are ready to jump ship for a better deal.

While we’re not complaining about the refinancing frenzy going on right now – it certainly keeps us busy! – we can’t help but admire some of the purchases that are coming across our desk of late. Quite simply, the deals are getting better by the day.

Now we’d be the first to concede that selling in today’s market probably isn’t the easiest thing to do, but if you have equity and are considering an additional property, now is a great time to make your move. We hope that this little snippet of where our clients are buying will inspire you to seek out one of the amazing opportunities that exist in this ideal buyer’s market.

Although we specialise in investor finance, we will also assist owner occupier’s too, so this month we thought we’d show you what a smart young couple have done in buying their first home. I think you’d agree they both have their heads screwed on the right way!

Settlement Date – 26th August 2011

Client – Local – Canberra

Purchase type – Initially Investment

Purchase price – $875,000

Transaction type – On Market

Suburb – Campbell ACT

Property Type – Four Bedroom, Double Garage, 2 bath + granny flat

Attributes – Campbell is a tightly held suburb in the parliamentary triangle and as such, this property will command an excellent rental in the short term of $760 per week for the house and $360 for the granny flat, representing a yield of 6.66%. The purchasers intend to renovate the property and tenant it for a year or so in order to claim back the land transfer duty, after which time they will move in themselves. After being passed in at auction, the house had been on the market for 6 months with the desperate vendors dropping their asking price by $50,000. Interestingly, the final purchase price was below the vendors’ reserve. Maybe the old saying – ‘Your first offer is usually the best offer’ is true after all?

Want to know more about claiming stamp duty on ACT investment properties? Call David Thomas on 1300 657 132.

Settlement Date – 16th September 2011

Client – Blackburn North – VIC

Purchase Type – Initially Investment

Purchase Price – $770,000

Transaction Type – Auction

Suburb – Mitcham, VIC

Property Type – This older brick home on a substantial 910 m2 block was purchased primarily for its land value, as large blocks in this area are becoming increasingly rare – especially ones that boast great views over the Dandenong Ranges. It will initially be rented out to support the client’s debt while plans for a new dwelling are drafted and down the track, the old residence will be demolished to make way for their dream home.

Settlement Date – 2nd August 2011

Client – Hinchinbrook Sydney – NSW

Purchase Type – Investment

Purchase Price – $377,500 (asking $399,000)

Transaction Type – On Market

Suburb – Orange, NSW

Property Type – This newly built, brick veneer home with colourbond roof boasts 4 bedrooms, 2 bathrooms and a double garage under the roof line. It sits on a 622m2 block in the large rural town of Orange, which has a population exceeding 30,000. With a university built in the community during the 1970′s and the Cadia goldmine opening in the 1980′s, the local rental market has traditionally been fairly tight. Now, with the current resources boom in full swing, interstate mines have started poaching skilled workers from the region and running a fly-in-fly-out operation. This has put further pressure on the city, which is one of the reasons it has been enjoying some strong growth recently. This particular property was purchased with an exiting tenancy that currently returns $480 per week – a gross yield of 6.61%.

Settlement Date – 5th July 2011

Client – Interstate – Belmont North

Purchase type – Investment

Purchase price – $359,000

Transaction type – On Market

Suburb – Kotara, NSW

Property Type – This 3 bed house on the central coast of NSW was purchased from a deceased estate. The property was initially passed in at auction, however the clients managed to negotiate a good deal afterwards. Due to its state of disrepair, the purchasers spent $15,000 and 4 weeks making minor cosmetic improvements to the property, including replacing the carpets, patching holes, giving the walls a fresh coat of paint and updating the landscaping. Upon completion, the house was revalued at around $440,000 by a local agent and is currently fetching $420 per week in rent.

Settlement Date – 20th July 2011

Client – Local – Canberra

Purchase type – Investment

Purchase price – $599,000

Transaction type – On Market – Granny Flat Potential

Suburb – Kambah, ACT

Property Type – This four bedroom home with a 1 bedroom granny flat gives the owners an impressive total rental income of $800 per week, making it just on cash flow neutral before tax from day one. Although the house is in need of some cosmetic renovations, these will be scheduled for a later date as the property was snapped up by a Canberra based national company that required accommodation for some of their interstate staff. They were also nice enough to pay 6 months rent in advance to secure it.

Settlement Date – 14th July 2011

Client – Local – first home buyers

Purchase type – Owner Occupied

Purchase price – $252,000

Transaction type – On Market

Suburb – Coree, ACT

Property Type – Coree is 25 minutes out of Canberra’s CBD heading due west and unfortunately lost a number of homes in the 2003 bushfires. Today, many of them have been rebuilt and are now bigger and better, however a few older properties are still scattered throughout the suburb. This property is one of the bushfire survivors. It is an entry level, 3 bedroom home perched on an 800m2 block and although it requires a bit of TLC to the tune of around $15,000 (including new carpets, fresh paint and an updated septic) it’s structurally sound and represents a great stepping stone for these first home buyers who understand you need to walk before you run. Excellent buying given the median for Canberra is over $500,000 these days.

Most property investors have all heard that buying in your own backyard has its advantages. For one, you know the area intimately and have a much better opportunity to learn the ins and outs when it comes to generating income from a residential dwelling – who is your target market when it comes to finding a tenant? What type of resale value can you expect from the area? What type of capital growth has the suburb delivered over the long term?

Yes, buying close to home certainly has its advantages and makes the all important research that goes into a successful property investment a lot easier.

Trilogy Funding client Tim Munk, has taken the idea of buying in your own backyard quite literally, recently acquiring an ex-government property directly behind his family home in the Canberra suburb of Spence. It is Tim and his wife’s third addition to their growing portfolio, including their principal place of residence and an investment in Queensland’s Deception Bay.

“Our strategy has been to buy, renovate and hold,” says Tim. “But we might start looking at simple buy and holds because we now have a 2 year old, so it was a bit of a struggle finding time to renovate this property.”

The couple prefer negatively geared investments and agree with the “general consensus” in property circles, “that when you buy a negatively geared property the capital’s going to go up a lot quicker than a positively geared property,” according to Tim. “So that’s what we aim for.”

Tim says they saw the property go up for government auction in May this year and were confident that it would sell at a bargain basement price due to the state of disrepair it was most likely left in by the former tenants.

“I went to the auction on a Tuesday – obviously being a government auction they have to hold them during the day so there are people in the offices if they need to make a call or anything. There was only one other bidder who I ended up getting to know later because she lives two doors down from the property. She was renting at the time and wanted to buy her own home, but didn’t have her finances in place so she wasn’t aggressively bidding.”

At the fall of the hammer, Tim managed to snaffle the 3 bedroom house for $355,000; a good $50,000 below market value in his estimates.

They quickly proceeded to replace the old kitchen, bathroom, toilet and laundry with a new combined toilet and bathroom, moving the laundry wall and taking part of this space to make the bathroom facilities less claustrophobic and more family friendly.

“The kitchen and living area were also divided by a wall which we knocked down to create one large open space for a combined kitchen, living and dining area,” says Tim. “With all of that plus new carpets, paint and drapery, as well as landscaping, a bit of electrical work and new plumbing, the total cost came to somewhere between $25,000 and $30,000.”

Upon completion, the couple had the property re-valued and found they had generated an extra $80,000 within three months, when the house was determined to be worth $435,000.

“We’re expecting about $50,000 worth of net equity from the banks when we refinance after all the costs and fees are accounted for. Not bad for three months,” says Tim.

When it comes to future investment plans, Tim says his brother’s philosophy plays an influencing role in how many properties the couple hope to acquire for their portfolio.

“He’s an avid property investor as well and his theory is; no property is bad, some property is good, but lots of property’s great and I feel the same way. We’re aiming to get as many properties as we can, as quickly as we can without negatively gearing so much that we can only afford to eat baked beans each week!” laughs Tim.

“This particular property fits in to that idea nicely, as it’s quickly boosted the opportunity to continue purchasing more houses by manufacturing a good chunk of equity from the renovations we did.”

According to Tim, the refurbished home will be tenanted for $430 per week – a marked improvement on the $350 per week it was achieving as a government rental.

This is the type of strategy that can truly pay dividends in a quieter market such as the one we are currently experiencing. When things head south and capital growth all but dries up, generating your own through cosmetic refurbishments is an excellent option, as Tim and his wife have clearly demonstrated. Just another example of how you can always make sure the cup is half full when it comes to bricks and mortar!

Combine the continuing strength of our dollar against America’s Greenback with a flailing US housing market where historically low values are fostering bargain buys and you have the perfect ingredients for adventurous Aussie property investor’s looking to cash in on opportunities in “the promised land”.

According to data from the National Association of Realtors based in Washington, Australians invested around $600 million in U.S residential properties in 2010 alone.

I mean, how could you possibly pass up homes going for half their pre-GFC value at fire sale prices, particularly with local spruikers making lots of noise about growing rental demand and an economy in recovery mode?

It all sounds too good to be true!

Well, here’s where I burst your bubble and let you in on a little secret…it IS too good to be true for a number of reasons, not least of which is the inherently high risk, speculative gamble of parking your money in a property market you have very little knowledge of.

So let’s take a look at the numerous reasons you should stick to the local real estate market for pure investment to make money…isn’t that what it’s all about?

It’s cheap…for a reason!

I’ve had a number of clients discuss the prospect of investing in the US housing market with me over the past six or so months. After all, it is the latest craze and everyone wants in on the action.

One of the main things I hear is that American property is cheap as chips at the moment and the opportunities presenting themselves are too good to pass up.

But if you stop for a moment and ask yourself; why are people virtually giving homes away in some areas, suddenly “cheap” doesn’t have as much appeal.

Most of the trouble started for US housing when the sub-prime crisis hit. Banks had been throwing money at borrowers with little regard for their capacity to repay the debt prior to the GFC. When times got tough, millions of home owners simply walked away and left lenders to bare the burden of their unpaid mortgages.

We all witnessed the fallout from this, with some of the biggest banks in the country closing their doors and the US financial system collapsing almost overnight.

Opportunistic vultures have pounced on ridiculously under-priced property as thousands of homes sit vacant and started what’s known as “flipping” in investment circles.

A popular practice in America, this involves buying a “bargain” and then on-selling at inflated prices to unsuspecting buyers. Who better to target than overseas investors with no idea of what their getting into? In fact, a number of profiteering scammers have even set up agencies specifically targeting Australian purchasers looking to cash in on the downfall of America’s property market.

Too many houses for too few people

With lenders scrambling to recoup their funds as home owners literally fled (and continue to flee) in the cover of night, thousands of vacant properties have flooded the market at fire sale prices.

It’s been reported that some real estate has fallen in value by as much as 50 to 80 per cent in states where the economic downturn has had the direst effects. But it seems the worst is yet to come.

The saturation of stock is set to increase over the next few years, with experts predicting another 4 to 5 million foreclosures and as a result, a further fall in house prices.

In towns where unemployment has gone through the roof, people are leaving en-masse and “ghost towns” are becoming common place in areas that relied on one or two industries, which have since been forced to shut up shop, for their economic prosperity.

It is in these locations that most Aussie investors are finding so-called ‘bargain buys’. But with no knowledge of the local markets, they are often buying into bad neighbourhoods with rocketing vacancy rates, where the prospects for securing a halfway decent tenant are actually slim to none.

Some states can’t even give property away as crime rates soar and people make every effort to get the heck out of Dodge!

An ailing economy

Let’s face it, the one time world leader in economic prosperity has caught a very bad financial cold and the prognosis for future recovery is pretty bleak.

Ratings agency Standard & Poor (I didn’t make that up), grimly did an about face on the economic outlook of America in April, pronouncing it had changed from stable to negative.

In response the share market took a nose dive, while the flailing US dollar just keeps getting weaker. Then there’s the bane of Barak Obama’s life right now – an increasingly high unemployment rate and a national deficit of $A13.421 trillion.

Can we fix it? “Yes we can!”…or can we? It seems the government is yet to agree on just how to do that.

Essentially, the recovery that many Australian investors are banking on is not likely to happen any time soon. In fact I’d lay odds on that we are yet to see the bottoming out of the US economy, with too many fundamentals working against the possibility right now.

Get a haircut and get a real job…if you can

As mentioned, Obama is having a terrible time of it since gaining power, particularly with unemployment at record levels in some of the hardest hit US states.

The US Bureau of Labor Statistics reported unemployment at 9 per cent in April this year, however double digit figures are more likely in areas that have all but lost their primary industries.

Experts forecast that unemployment will remain high well into 2012 and while this might seem like a boon for landlords with more people forced to rent than buy a home; stop and think for a second. What type of tenant will you be getting? The most likely answer is one who has no job and no ability to maintain rental payments.

So how do you intend to chase the likely arrears that will add up as your less than desirable tenants fail to meet their financial commitments?

It can be hard enough to get wayward tenants out in Australia where we have a fairly robust system in place to deal with rent arrears. But in the US, it’s nigh on impossible! Landlords there have less rights than tenants and are at greater risk of litigation.

Then of course you have to find a reliable property manager from thousands of kilometres away who will collect your rent on time. It all sounds like a rather costly headache for what is meant to be an inexpensive investment doesn’t it?

And what about the requirements of the US tax system, which you’ll be required to meet even though you’re an Australian investor? Do you know how it all works?

I’m not telling you that you should never invest in an overseas property market. Nor am I telling you not to go anywhere near US real estate.

What I will say is that what appears cheap in the short term, can end up being very costly down the track and with this type of speculative investment, you should never outlay any money that can’t afford to lose. It’s that simple!

Everybody break out the piggy bank, it’s time to save, save, save! Remember that rainy day we all keep talking about? The one where you might need an umbrella made of money stashed away to avoid getting drenched in another global economic storm similar to that of 2008? Well chances are we will all be ducking for cover fairly soon if America’s mounting debt issues are anything to go by.

Admittedly, by the time you read this things may have done a complete 180 and Obama could be on the White House floor, spinning in circles of delight and whooping hysterically (a Homer Simpson reference). Let’s face it, every time we turn on the news or open one of the daily rags, a different song about the global financial markets is being belted out by the media, who are almost peeing their pants with delight at the fodder they have to feed on right now.

There is one consistency however, journalists have broken out the negative terminology thesaurus and are bombarding us with phrases like “economic Armageddon”, “market meltdown” and “catastrophic crisis” to add some spice to the “same old” stories.

Obviously the tumultuous US financial market has the world teetering on the brink of a global recession (again!), but are things really all that bad here in the “Lucky Country”? We still have some very strong fundamentals underpinning our economy (as discussed in my intro) and the Reserve Bank has thankfully left itself plenty of breathing space when it comes to the option of reducing interest rates to help stimulate Australia’s economy; they can slash rates to 1 per cent if need be, unlike those countries in the worst financial position where interest rates are already close to, if not there already.

Apparently some of the majors expect the Central Bank to pull the interest rate lever very soon in order to ensure our economy continues to grow at a steady pace, despite what might happen with the mounting debt and financial troubles faced by the US, Europe and Japan.

Westpac and the CBA have both slashed their fixed rate products to below 7 per cent, making fixed mortgages more appealing than the standard variable rates on offer at present, which is above 7 per cent. This is a good indication that our repayments could be shrinking over the coming months and illustrates just how dead the home loan market has been for the banks this year.

Another silver lining for Australia’s economy is the emerging trend toward conservatism that many of us seem to be on board with. The eighties mentality of “greed is good” saw us turn into a nation of spendthrifts almost overnight. Unlike our parents and their parents before them, we were enjoying some heady times and an overall sense of abundance. Things were good and just kept getting better – our future looked bright and our wallets were fat. Our overall national debt soared as consumerism took hold and we had a love affair with easy credit.

Many of the Gen X-ers and Y’s growing up during those last few decades of the 1900′s had never experienced true hardship and even the baby boomers had seemingly forgotten about the Great Depression that their parents lived through.

Then fortunes turned. America led the world into a global financial crisis and all of a sudden, Australians knew what it meant to be financially vulnerable. Many boomers lost thousands in superannuation and shares and were left with close to nothing. Why? Because saving money had become an obsolete ideal and we were all busy living beyond our means. Great while it lasted wasn’t it?

It seems though, that we took the lesson on board – most of us anyway! More and more Australians have elected to tighten their purse strings this year, spooked into saving by a shaky global economy and uncertainty surrounding interest rates and the local housing market.

This is good news as far as the RBA is concerned, as it means we have a more stable financial foundation and the potential to prop up our economy should things go pear shaped, as many commentators are suggesting they might.

So where to from here?

Well, it would be remiss of me to tell you that I know what tomorrow may bring. In fact I have about as much chance of making an accurate prediction regarding the fate of the global financial markets as the so-called experts do – slim to none! And they’re fibbing if they tell you otherwise!

What I can tell you, is that market sentiment is a very powerful force and right now, the collective market is tearing its hair out, screaming “OMG, OMG, OMG! Too much debt!” and flapping its arms around wildly in a state of unbridled panic! Maybe not literally, but you get the idea.

While I won’t deny that there is definitely a worst case scenario to avoid if at all possible, the concern many people are voicing about a global recession the likes of which could prove dire for the world could become a self fulfilling prophecy.

What do I mean by this? Quite simply, if the panic continues to take hold, businesses and consumers will lose what little confidence they have left and in turn, stop spending and investing altogether. All it will take is another stock exchange scare like the one we had recently and a further dent in the already battered US economy to have people heading for the hills.

I’m not suggesting that we all stick our heads in the sand and deny the current goings on, nor am I saying we should stop saving and go on a shopping spree borne from fear of the future. But I am going to tell you that despite the certainty with which many are predicting the end of the world as we know it, none of us truly know what tomorrow may bring; there are just too many twists and turns in this story to foresee where it’s heading with any accuracy. All I can say is, watch this space!

There has been a lot of hubbub around the traps of late about borrowers having access to some great deals due to revitalised competition in the finance sector. But while this might have brought a smug smile of self importance to Wayne Swan’s face, many smaller lenders are not quite so jovial.

Yes, there is a battle being waged for your business; that I won’t deny. But the reality is, while the big four boys are stomping around, making lots of noise and flexing their lending muscles, the little guys are struggling to be heard.

According to figures from the Australian Bureau of Statistics, non-bank lenders lost more than half of their market share in the March quarter, dropping from 2.7 per cent of all Australian mortgages to just 1.2 per cent.

Credit unions and building societies were not immune to the banks’ newfound domination either, losing ground from 8.3 per cent to 7.4 per cent.

Meanwhile, the big banks cut of the lucrative $1.2 trillion industry climbed to 91.5 per cent during the same period, up from 89 per cent in December 2010.

This recent demise of smaller operators in the market represents a significant change to the status quo from the late 1990’s, when lenders such as Aussie and Wizard introduced lower rates to borrowers who were fed up with being at the mercy of the CBA, NAB, ANZ and Westpac.

Many jumped ship to take advantage of competitive offers from smaller lenders and in 2003 their market share peaked at 15.2 per cent, while the banks’ stake dropped to just 76.9 per cent.

Industry experts are now concerned that with the recent significant fall in market share, the non-banks are no longer able to keep pace with the big banks and instead of fostering competition, we could see a return to the days when banks could pretty much do as they pleased.

Chief executive of the Mortgage and Finance Association of Australia (MFAA) said, “The non-banks brought a lot of competition to the mortgage market. They found ways to lower their interest rates and create incentives for home buyers to borrow from them.”

He says this turnaround in fortunes is partially due to the GFC, which curtailed the non-banks’ funding model and saw home lending become the domain of institutions that also took deposits.

However the government’s decision to ban deferred establishment fees – which I predicted would be detrimental to industry competition months ago – just happened to coincide with a drop in market share for the non-banks from 3.3 per cent to 1.2 per cent in just five months.

This emerging trend should cause as much concern for consumers as it has for those of us in the industry who realise that if smaller lenders are forced to shut up shop, we could see the big players once again have us begging for a better deal.

Food for thought…

While the Reserve Bank is playing nice before Christmas, with many predicting that they’ll keep official interest rates on hold until next year, it looks like the banks will be struck off Santa’s gift list as they play naughty.

It’s expected that a number of the big banks will flout the RBA’s decision to maintain cash rates at their current level (4.5%) during their August 3rd meeting, in favour of an increase in retail rates intended to offset increased funding costs and declining profit margins.

While the banks’ net profits have been in the billions for the most part – as recently reported by the CBA – lenders are now contending with a rise in funding costs as a direct result of the GFC, which forced them to seek more expensive, largely offshore funds. This, combined with the banks competing for business by offering enticing savings deposit rates (in some instances higher than the home loan interest rate), are both taking a toll on banking profits…and we all know how much banks like a good profit!

As discussed in our feature article this month, now might be a very opportune time for borrowers to consider fixing a portion of their debt, before the banks make their inevitable move.

I’m not really a betting man, but odds are pretty good that the experts’ predictions will be realised sooner rather than later, and hedging some of your debt against not only the banks’ impending interest rate rises, but the RBA’s (we all know they won’t be this low forever), isn’t such a bad idea. 

Here is a small snapshot of some of the more interesting transactions we’ve seen over the past few months.

Settlement Date – 3/05/2010

Client – Local Canberra – 1550

Purchase type – Investment

Purchase price – $642,000

Transaction type – off Market – private treaty – used a buyer’s agent to acquire

Suburb – Coogee, Sydney

Property Type – 2 bed apartment + study

Attributes – big block of land with only 12 apartments on the site and communal BBQ area set high on the hill, single lock up garage. Only 400m from waterfront with views of Coogee beach. The client undertook a $26k renovation that included a new laundry (new flooring and installation of a washing machine/dryer combo), built in linen cupboard, new cooking appliances, fresh paint, new robes with mirrored doors and replaced ceiling. The kitchen and bathroom had already been recently updated. The apartment was tenanted in the middle of winter for $550pw, with a 15 month lease, so the property can be re-let during the peak summer period. This is a well located property purchased for capital growth potential.

Settlement Date – 09/06/2010

Client –Local – 1998

Purchase type – Investment

Purchase price – $500,000

Transaction type – On Market private treaty – used a buyer’s agent to acquire

Suburb – Bondi Junction, Sydney

Property Type – 2 bed Unit

Attributes – Bought with the view of capital growth. It is very difficult to secure a 2 bedroom unit in this area for less than $600k. The property, which is in a complex of only 12 units, also has off street parking and is tenanted for $500pw.

Settlement Date – 23/07/2010

Client – Local – 2141

Purchase type – Investment

Purchase price – $500,000

Transaction type – Ballot land release

Suburb – Gungahlin, ACT

Property Type – Vacant residential land

Attributes – This block was purchased for $450k 12 months ago. There is a shortage of land in the location and these clients have enjoyed a nice gain over the past year.

Settlement Date – 30/07/2010

Client – Local – 2240

Purchase type – Investment

Purchase price – $370,000

Transaction type – Private sale

Suburb – Mt Gravatt, QLD

Property Type – 3 bed townhouse in a complex of 20

Attributes – Good location with off street parking. The recent softer market made for good buying, with the added bonus of a motivated vendor and a great managing agent. The client is returning to the property market after a few years’ hiatus to add to their family.

Settlement Date – 25/08/2010

Client – Interstate – QLD – 2287

Purchase type – Investment

Purchase price – $375,000

Transaction type – On market – private treaty

Suburb – Cannonvale, QLD

Property Type – Vacant block of land

Attributes – Expansive ocean views. This property was purchased in a SMSF structure.

Settlement Date – 27/08/2010

Client –International – USA – 2246

Purchase type – Investment

Purchase price – $582,000

Transaction type – On market, Auction

Suburb – Macquarie, Canberra

Property Type – 5 bedroom house with ensuite & double lock up garage

Attributes – The property is located in close proximity to Belconnen Mall (Westfield) and will rent for $440pw. It was purchased by telephone from OS and the owners intend to reside here once they return to Australia.

Property investors and home owners were given a much needed reprieve this month as the Reserve Bank decided to leave the official cash rate of 4.5% unchanged for the third consecutive month, at its August 3rd meeting.

The RBA’s decision came as the June quarter Consumer Price Index (CPI) rate of inflation was a lower than expected 3.1%, just outside the central bank’s target band of 2 to 3%.

In a statement regarding the decision, RBA governor Glenn Stevens said, "With (economic) growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate."

While there are now signs of a slow recovery for most of the major world economies, uncertainty surrounding jobs growth and a deceleration in the housing market has seen Australia’s economy soften in recent months.

Australia’s seasonally adjusted unemployment rate increased to 5.3% in July, which CommSec economist Craig James said was not surprising given a slump in retail spending and more caution from the manufacturing and services sectors. 

He said, "The good news from today’s figures, in terms of interest rates, is that interest rates are clearly on hold until at least the end of the year, with most economists talking about 2011 as the next move."

Now is not the time for borrowers to become complacent with regard to the status quo of interest rates though. With most economists predicting that the RBA will take a wait and see approach until the beginning of next year, it’s a good time for those with a home or investment loan to consider restructuring their debt and hedging their bets against the next inevitable set of rate rises, by fixing a portion of their borrowings. 

For the first time in a while, 3 year fixed rates are closely aligned with the discounted variable rates on offer by most lenders. This represents great value considering the economy is likely to strengthen in the near future, causing a rise in inflation and the RBA to hike up interest rates accordingly.

Some estimates suggest that the official rate could peak at 5.5% by the end of 2011. But more concerning is the impending move by banks to increase their retail rates, regardless of what the RBA does, due to higher funding costs.

With these factors in mind, many in the brokerage industry are currently advising clients contrary to our general belief that you will always come out on top if you stick with a variable mortgage. On occasion we see a window of opportunity to fix some debt and actually benefit from such a move – and now is one of those times.

Many borrowers can fix with their current lender without having to change banks, therefore saving on refinance fees; particularly if they are willing to do a bit of negotiating by asking their lender to match, or get close to, some of the more attractive fixed rates on offer.

Some of the more appealing fixed rates right now include the Heritage Building Society (6.95%) and ING (7.09%). If you want to stick with one of the four majors, Westpac comes out on top with 7.19% fixed for 3 years, followed by the CBA and NAB at 7.29% and the ANZ at 7.35%.

These are all quite tempting options, given the current discounted variable rates range between 6.70 and 6.81% and in many instances, the difference between variable and fixed within individual lending institutions is only around 0.5%.

For borrowers who appreciate the security a fixed term brings, or fear the uncertainty of what lies ahead for interest rates; this is an alternative well worth considering. 

As mentioned in my intro and the feature article on mortgage managers, the NAB has recently announced it’s acquisition of James Packer’s Challenger (now known as Advantedge) and made a commitment to fund mortgage managers without the need for securitisation, meaning increased competition in the lending industry and more options for borrowers.

Most banks have increased their stress testing for new loan applications and some of the resulting changes we have seen include; an increase in the living allowance, called the Henderson Poverty Index (AKA HPI) and lenders now assessing the loan applied for and other facilities held as if they were all Principal and Interest, even if the new loan requested is Interest Only.

With the RBA’s three consecutive increases to the cash rate over the past 6 months, fixed rate options from lenders have increased dramatically over the last 8 weeks. As a result it’s very hard to justify taking on a fixed rate loan at the moment. Here’s a snapshot of who’s offering what;

As at 10th December 2009

Over the last 3 months we’ve discussed the first three “C’s” that are used by lenders to assess all loan applications, being Character, Collateral and Capacity. In this issue of the Trilogy Report, we consider the fourth and final “C” – Capital.

As the term suggests, “capital” is all about how much you are able to contribute to the transaction. In other words, how much cash are you chipping in as a deposit? Capital is the bank’s barometer that helps them to assess how committed you actually are to the deal and as such, it speaks volumes in your application.

For instance, are you seeking 100% finance or are you only asking for 60%? Now, picture yourself as the credit officer; are you more likely to approve a loan at 60% or 100% of the asset’s total value?

As you are probably already aware, the lower the level of funding sought (what we call the Loan to Value Ratio or LVR for short), the less risk the lender is taking, as a higher degree of risk is transferred to the borrower.

This is essentially due to the fact that if you default on your loan and fail to make the repayments, forcing the bank to sell off the asset, the bank risks losing less of their funds if a larger deposit (or a higher proportion of capital) is offered by you at the outset.

In other words if you pay a 40% deposit and the bank provides you with the balance of 60%, while you will lose your contribution in its entirety, the bank only has to recoup 60% of the original sale price of the asset in order to break even and recover their funds. Hence, a larger deposit and therefore a smaller LVR makes your loan application more appealing, as the banks have greater peace of mind in knowing that should things go pear shaped, their money is more likely to be safe.

What you, as the borrower, need to realise is that Capital is effectively the lynch pin of your deal and depending on the size of your deposit, can make or break your loan application. Basically, a substantial deposit can pretty much get any loan over the line.

I once heard someone say, “You can insure a burning house for the right premium” and essentially, the same applies to getting the nod from your lender; you can virtually get any loan approved with the right amount of deposit or Capital.

So let’s have a look at some examples of how Capital can sway the banks in your favour, even though your application may be lacking when it comes to any of the other three “C’s”…

Assuming your loan application is light on Character (you might have defaults on your credit report, be new to the country, have slow credit accounts, etc). An offer of more upfront Capital can override these glitches and persuade the bank to say yes. This is because you are reassuring them that although you may have made some mistakes with credit in the past, or they may not be certain as to your commitment to the deal, your contribution of a larger deposit is proof that you are indeed a “safe bet”.

What if your application is supported by security (Collateral) that will be difficult for the lender to sell in the event of a foreclosure? It could be a retail shop front in a street that has a high level of vacancies or a block of 6 units in a small country town for instance. From the lender’s perspective, both of these scenarios carry a higher level of risk than normal residential housing in the suburbs. They might look at that collateral unfavourably because if they are forced to sell and recoup their debt, they could have trouble finding a buyer willing to pay the necessary price.

In this situation, the lender will ask you to assume more risk and contribute more cash (AKA “hurt money” or “skin in the deal” for obvious reasons), thereby lowering the LVR and reducing their risk. By failing to provide the extra cash, you are essentially sending a message to the lender that you are not as committed to the whole transaction as you expect them to be.

In recent times, many property investors were unable to provide evidence of Capacity in the conventional way; in other words, they could not necessarily assure the banks that they could meet the required repayments for the amount they were seeking.

This may have been due to the fact that a large portion of their income consisted of cash, or they were behind in their tax returns. In this situation, the lender would ask the borrower to increase the deposit on their application to assume more risk and in turn, they would overlook this Capacity shortfall.

They would offer the applicant a “Low Doc loan” and although these still exist to some degree today, the banks now require extra evidence in order to get them across the line. They have also reduced their exposure to them by forcing the borrower to contribute more cash to the deal; hence lowering the LVR “just in case” the borrower cannot meet the repayments.

Now throughout these last few paragraphs I’ve been using the terms “cash” or “deposit” when discussing the possibility of reducing the LVR to entice the lender into approving your loan application. What I have failed to mention however, is that this money can actually be borrowed from another source or against other security. This means you can still gear at a higher level, say 100% or even 106% to cover all costs; it just might mean you have to approach two different lenders to secure funding.

Let’s look at an example of how you might do this if you decided to purchase a retail shop front for $600,000;

In Diagram 1, we are contributing the deposit and closing costs using our “saved up cash”.

In Diagram 2, we buy the same property but pull the deposit from another property that has a Line of Credit against it and is possibly held with another bank.

As you can see, the lender is happy with a reduced LVR at 70% and the borrower wins too as they essentially managed to secure106% funding.

Of course there are some industry standards applicants must meet when it comes to the amount of deposit required to buy a property. Here’s a bit of a guide as to how much deposit lenders will ask for on individual securities, assuming the applicant’s Character, Collateral and Capacity are favourable.

Keep in mind as you read through the following that your closing costs, such as legal’s, rates adjustments and stamp duties, are payable in addition to the deposit. As a guide, approximately 6% of the property’s purchase price is usually ample to meet all of these and in some states you’ll need a bit less. It goes without saying that you should cross check all associated purchase costs before you buy. Now, back to the required deposit amount for various securities…

• Residential houses in the suburbs – 20% to as low as 5%, depending on whether or not you want to incur a lender’s mortgage insurance fee.
• Block of 6 units on single title – Typically 40% is needed, but some lenders will go as low as 30%.
• Commercial property such as a retail shop – same as per a block of units in the above example.

With the understanding that Capital is effectively the make or break aspect of your loan application, you have the capacity to buy any property you like – as long as you are prepared to save the necessary deposit to get the bank’s nod of approval. In other words, the property you can buy will only be restricted by the amount of deposit you are able to contribute.

As a rule of thumb, a smaller deposit paid to the lender usually equates to a higher interest rate and additional fees. It is very much user pay and remember – there are no free lunches when it comes to the banks!