If you invest in property, it could be positively or negatively geared. And it has nothing to do with mechanics or engineering. 

It refers to whether the income you receive for the property is higher or lower than the overall amount you pay to own it. These can have implications for the investor, not only for how much you have in your pocket week-to-week, but also when it comes to tax. 

Here we’ll break down the difference between the two, how to know which your property is, and what it means for you as an investor.

What is negative and positive gearing?

At a basic level, the term ‘gearing’ means money you borrow to invest. Whether you’re positively, negatively, or neutrally geared depends on the rental income and your outgoings, including interest and other associated expenses.

This part is pretty straightforward – you’re either actively making money from your investment property, or paying out of your pocket to have the property. However there are other implications such as tax that you should consider.

You may be able to claim a tax deduction for things like body corporate fees, advertising for tenants, insurance, land tax, gardening and cleaning fees, and council and water rates. Check the ATO’s rental property guide for a list of things you may be able to claim, and always consult with your tax advisor for more information.

How to calculate whether a property is positively or negatively geared

Whether you already own the property or are looking to purchase one, there are a number of costs to consider when calculating whether it is positively or negatively geared. The amount you have coming in for rent is your income, from which you deduct all your outgoings which can include:

Beyond this, you can also take into account some potential tax deductions, depending on your circumstances. For example investors may be able to claim some depreciation such as the decline in value over time of the building structure – speak to your accountant for information relevant to your circumstances.

If your income exceeds your outgoings, your property is positively geared. If your outgoings are higher than your income, your property is negatively geared.

Choosing negative gearing as an investor

At first glance, finding a positively geared property sounds like the most logical strategy, however, negative gearing can have its place for some tax-savvy investors. If your property is negatively geared, you’ll need to cover the shortfall out of pocket, but it could in turn reduce your taxable income.

Under Australia’s tax law, you might be able to claim the interest and some outgoings as expenses. For example, you may be able to claim the interest part of your loan repayments, along with repairs and maintenance costs on the property as expenses. Your net loss on the property could also be offset against your personal income, which means your taxable income would be reduced. So for example, if your salary is $90k per annum and your property leaves you out of pocket by $5k per year, you may be able to deduct this amount from your taxable income, bringing it down to $85k. By the same token, investors with a positively geared property may need to pay tax on their rental income profit. For more information, the ATO provides a guide to rental income and expenses. It is important to speak to your accountant or financial advisor for personalised advice based on your unique circumstances.

Negative vs positive gearing

While negative gearing offers financial benefits, it’s important to keep in mind tax savings only play a role in the bigger picture of a viable investment property. So while negative gearing could in some circumstances help you save on tax, this shouldn’t be the only reason you’re investing in a particular property or the sole driver of your strategy. For example, you may not be looking for regular income from the property but be more focussed on finding a property with high capital growth potential, meaning the value of the property is likely to increase above average over time.

Bottom line: which strategy is best?

Both negative and positive gearing have their place, and the right option will depend on your circumstances. It is a good idea to develop a thorough understanding of how each works, including what, if any, deductions you will be able to claim. Additionally, as an investment, it is a good idea to look for a property with good capital growth prospects. 

Property investment isn’t without its risks, so make sure you have the financial foundation to cushion a fall in the value of your property, a rise in interest rates, and/or long vacancy periods.

Your Loan Market broker can work with you to understand what your loan repayments could be if you are looking to invest, or compare loans from over 60 lenders to see if you could get a better deal if you refinance.

When you work for yourself, you may pay yourself a consistent income, but, more likely, your earnings fluctuate month to month. You may have experience managing your personal cash flow to accommodate this, however lenders tend to look for stability and a track record of making ends meet. So, if you are self-employed and want to take out a home loan, how do lenders calculate your income when assessing your application?

What will the lender look at when calculating income?

The way your income will be calculated will vary depending on the lender. For example, most lenders will require at least two years’ tax returns from which they will calculate your average income. Some lenders may only use the lowest figure from the last two years, some may accept one years’ tax return and it may be possible for some loan types to only require six months’ payslips along with a letter from your accountant. 

What might the lender “add back” when calculating income?

The income on your tax returns isn’t necessarily the final figure lenders will consider. They could also look at the expenses that you’ve incurred that reduced your taxable income, but aren’t recurring, and add these back. This can actually boost your overall income. The expenses that may be added back, depending on the lender, include:

There are additional expenses that could potentially be added back, which your broker can speak with you about.

What if I have less than two years’ tax returns

If you have been running your business for more than one year, but less than two, there may be some lenders who will still consider your application. If your business has been operating for less than one year, it could be trickier as lenders like to see consistency with your income. It is still worth speaking with your broker to find out what options may be available to you.

Having a broker on side

If you’re self-employed and applying for a loan, you will likely need to provide more documents than someone who is an employee to demonstrate your dependability in repaying the loan. We know the ins and outs of the different lenders’ requirements and can help you understand what options may be right for your unique circumstances and put your best foot forward.

The Reserve Bank of Australia (RBA) today announced the cash rate increased from a record-low 0.1% to 0.35%.

This is the first time the RBA made a change to the cash rate since November 2020 saying now was the right time to begin withdrawing some of the “extraordinary support that was put in place to help the Australian economy during the pandemic”.

It said it was committed to doing what was necessary to ensure inflation in Australia returns to target, which will require a further lift in interest rates over the period ahead.

But what does a jump in the cash rate mean for you, and how much could future cash rate increases impact your pocket? We’ll start by breaking down what the cash rate is and how this comes into play with banks and lenders.

What is a cash rate?

The cash rate is a number set by the RBA which is the interest rate that banks and lenders pay on the money they borrow. The RBA announces the official cash rate on the first Tuesday of every month (except January).

The RBA considers a number of factors when deciding whether to change the cash rate. For example, if inflation is too high, increasing the cash rate could help cool it down. If unemployment is too high, decreasing the cash rate could encourage more investment and spending to create more jobs.

How does the cash rate affect me?

While the cash rate itself doesn’t directly impact you, banks and lenders tend to look to the cash rate as a component of their calculation for interest rates. And that is where you could feel the impact.

When the cash rate is low, banks and lenders will tend to offer lower interest rates across loans as well as savings accounts. When the cash rate rises, the interest rates offered by banks and lenders will also likely rise.

What is predicted for the cash rate?

Economists from the big four banks had previously predicted the cash rate would rise today to .25% (an increase of 15 percentage points). There is speculation the cash rate will continue to rise incrementally by 25 percentage points with Westpac predicting it will hit 2% by May 2023. NAB predicted it would reach 2.5% by August 2024, while ANZ predicted it could peak above 3% at some point in 2023.

How much will interest rate rises impact home loan repayments?

We can see lenders already increasing fixed-rate home loan rates in what many anticipate to be a trend we will continue to see. Part of the reason for this is the increase in the cash rate. We will also likely see variable rates increasing as the cash rate grows. Your repayments will depend on a number of factors including whether your loan is fixed, variable or a split and the size of your loan. If your loan is fixed, your repayments will not change until the end of your fixed term, when it is a good idea to speak to your broker about finding a competitive deal. If you have a variable rate loan, or a split loan, you are likely to see increases in repayments over the next number of months.

To calculate the average repayment increases, we looked at the average loan size. According to the Australian Bureau of Statistics, the average home loan in Australia for an existing property in February was $611,524. Say your variable rate is currently 3% p.a. for a 25-year term paying principal and interest with monthly repayments, your monthly repayment would be $2,900. We’ll have a look at how much more your monthly repayments may be if your interest rate increases in line with the predicted cash rate increases (today’s initial increase of 25 percentage points followed by a jump of 15 percentage points to round out the cash rate at .5% and then future rises of 25 percentage points). The following table was calculated using our home loan repayment calculator.

What if I don’t own property yet?

If you are still saving for your first home, the increase in cash rate could be in your favour. Banks often move savings interest rates in line with the cash rate, meaning as the cash rate increases we could see increased interest rates paid on your deposit. This could give your savings a boost. 

On top of this, we are seeing house price growth slow around the country. According to Ray White Chief Economist Nerida Conisbee, house prices increased by 30% since the start of the pandemic, but this last quarter saw prices slow and even drop in some cities including Sydney and Melbourne.

“For the rest of the year we can expect to see much slower market conditions – prices won’t fall everywhere but we will not see the same market conditions in 2022 as we saw in 2021,” she said.

However, while price growth is slowing and interest rates could become more favourable for savers, the challenge could be in finding property to purchase.

“Compared to last year, there are 11,000 fewer homes for sale (March quarter 2022 compared to March quarter 2021),” Ms Conisbee said.

“Our own data has shown a 33% reduction in listing authorities in April (homes listed but not yet advertised) which points to a lean May.”

If you’re planning on purchasing property, speak with a broker to understand how much you may be able to borrow and to get a plan in place to hit your goals. 

Investors are continuing to show confidence in the future of property with the latest data showing a 6.1% rise in the value of housing loans made to investors in January, according to the Australian Bureau of Statistics (ABS).

A total of $11 billion was loaned to investors  – that’s a new record and the 15th consecutive month of growth in investor loans with investors now accounting for a third of all housing loans across Australia.

The hotspots where investment loans grew significantly were: 

Queensland (-1.7%) went backwards, but its annual investor loan levels remain at historic highs, while investor loans in South Australia fell -2.5% and Tasmania -3.0%.

Lenders issued a total of $33.7 billion in loans in January. That’s up 2.6% month-on-month and represents another record high, according to the ABS.

Homeowners climbing the property ladder borrowed $22.69 billion – up 1% on the previous month.

Another record has been set for the average loan size for owner-occupiers. It now stands at nearly $619,000 – up $17,000. Every state and territory hit record-highs for owner-occupier loans in January except Tasmania.

The data also shows however that there are fewer first-time buyers in the market, dropping 6.9% across the country. 

If you’ve been considering investing in property, we can help you look at your financing options.

You’ve found the property. Your broker has helped you find the right loan with a competitive interest rate and all the features you want. You’ve completed the application and now you’re waiting for settlement. As the day comes you look through the paperwork but that competitive fixed interest rate you applied for has just jumped without notice. Your monthly repayments are suddenly set to be higher than you anticipated and you’re locked into the loan for your fixed period.

It isn’t a scenario anyone would want and many people may not be aware that this can actually happen. Interest rates regularly change in response to market conditions, and the fineprint in your loan application likely specifies that the interest rate can change between application and settlement date. But there is a way to safeguard against this, and it is called a rate lock.

What is a rate lock?

A rate lock is an optional feature that may be available to applicants of fixed-rate home loans. It enables you to secure a rate, meaning even if interest rates rise, yours won’t. The lender usually charges a fee for this feature, but speak to your broker as this fee varies and some lenders may offer it for free.  

The amount of time the rate lock lasts will also vary between lenders, for example 60 or 90 days, so if you have a longer settlement, your broker can discuss which lenders may be right for you.

How much are rate lock fees

The rate lock fee will vary depending on the lender but tends to range between free to around 0.2% of the loan amount. So for a $400,000 loan this amount could be around $800. The average is lower than this and tends to be around $750 for a $500,000 loan.

When should I consider a rate lock?

Rate locks tend to be most appealing when fixed interest rates are predicted to increase, for example if some banks have started increasing their interest rates and others are predicted to follow suit. It also is usually more beneficial for a longer fixed term as there is more the borrower stands to save over the life of the loan. Your broker can run the calculations for you to determine how much the interest rate would need to change to warrant the upfront rate lock fee.

It is important to keep in mind that if a lender lowers its interest rate and you have opted in for a rate lock, you are not necessarily guaranteed the lower rate. Each lender has a different policy around this and you may need to negotiate to see if you can cancel the rate lock to access the lower interest rate, which your broker can do on your behalf.

Also, this fee may be non-refundable even if your application is unsuccessful. Speak with your broker to put your best foot forward with your application and understand where you stand with lenders.

It is a good idea to read the terms and conditions of the home loan you are considering, including the Target Market Determination (TMD) and Key Facts Sheet (KFS). Your broker can also help to highlight key points for consideration and how they may impact you.

If you are considering whether to opt in for a rate lock, speak to your broker to understand the pros and cons and calculate your potential savings.

A guarantor could enable you to purchase a property sooner and potentially save thousands of dollars

By using the equity they’ve built up in an existing property, a guarantor may provide security that enables you to buy a home or invest in residential property (known as a security guarantee). They may also offer a security and income guarantee whereby their income can help to satisfy the serviceability of the loan.

How does a guarantor loan work?

A guarantor loan works when someone with security, such as equity in their own home, agrees for a purchaser to use it as security against a new loan for their property purchase. One of the most common reasons property buyers use guarantors is to avoid paying Lenders Mortgage Insurance (LMI). This is a form of insurance that protects lenders from borrowers defaulting on loan repayments and is payable if you only have a small deposit, usually below 20% of the total property sale price. 

If you don’t have at least a 20% deposit, you will often have to pay LMI, which can be as much as $10,000. However, if you have a guarantor who agrees for their own security (such as their property) to be used for your purchase, you may be able to borrow a larger percentage of the property’s value and not pay LMI.

A security and income guarantee not only uses the guarantor’s equity as security, but also their income to be calculated toward determining the serviceability of the home loan, meaning whether they could assist you to meet repayments should you experience troubles.

Guarantor loans could help you to get a foothold in the property market sooner, rather than saving a larger deposit.

It is important to keep in mind that the guarantor’s equity is used as collateral should there be any issues with the repayment of your loan. This means that if anything goes wrong, the lender could take possession of it. There may be an option for a guarantor to only guarantee some of the loan, which means once a certain amount is repaid, they may be removed from the risk should you later default.

Who can use a guarantor?

The most common need for a guarantor is if you are a first home buyer who has a steady income and can service a home loan without assistance, but you do not have the necessary deposit.

Depending on the lender, you may still be required to have at least 5% of the property’s value in genuine savings (held in an account for at least three months) to demonstrate your ability to save. But the amount required for your deposit can, in some cases, be less than this.

Who can be a guarantor?

Guarantors are typically parents wanting to help their children get a foothold in the property market. As well as a parent, a guarantor can also be a parent-in-law or a step parent and grandparents, siblings, close friends, spouses and de facto partners will also be considered by many lenders.

And while lenders have different eligibility criteria, the following usually apply to all potential guarantors:

What are the potential benefits of using a guarantor?

One of the key potential benefits of using a guarantor is that it could help you avoid paying LMI. And because it could enable you to take out a loan without saving a 20% deposit it means you could potentially get your foot on the property ladder sooner, which could be particularly useful in times where house prices are rising quickly. 

What are the drawbacks of using a guarantor?

The main drawback of using a guarantor is that they become liable should you not be able to make repayments on the loan. Because of this, it is recommended for potential guarantors to seek legal advice before agreeing to the loan as their security could be at risk of repossession or they may need to pay on your behalf if anything should happen and you fail to make repayments.

It is also important to note that guarantors will need to tell lenders about any loans they are guaranteeing, and this could impact their future borrowing potential. If you do not meet your repayments, both your and your guarantor’s credit score will be impacted.

Hypothetical case study of a security guarantee

Anna wants to purchase a property. She doesn’t have enough savings to pay a 20% deposit but can afford the loan amount she needs so her mum, Donna, has offered to provide a guarantee over her unencumbered property. After three years Anna is made redundant, can’t afford her repayments and defaults on her loan. Anna ultimately sells her property at a lower price than she purchased it so it doesn’t cover the full amount she owes the lender.

She’s unable to pay the amount owing so Donna is responsible for paying the remaining balance. If she can’t make the repayment, the lender may seek to sell her property as this was guaranteeing the loan.

When can I remove the guarantee?

There may be an option for the guaranteed amount to be a small percentage of the entire amount of the loan, which means the guarantee could end once that portion of the loan has been paid off.

The borrower and guarantor may apply to the lender to remove the guarantee when the loan amount has been reduced to 80% or less of the property value. This may be achievable in two to five years, particularly if the property has increased in value during that period.

Other ways family could help

If guaranteeing a loan represents too high a risk, there are alternative ways family or close friends may be able to help. For example, they may offer money as a gift or loan to go toward the deposit. Keep in mind that lenders will likely ask whether the money is intended to be paid back and this could impact whether the loan is approved.

You may consider whether moving home for a period of time is an option to save more money for a deposit. There could also be an option for a co-signed loan where both signees are responsible for the loan without needing to put equity towards the security.

A mortgage broker will be able to give you the proper guidance on how guarantor loans work. If you’re considering a guarantor loan, a mortgage broker can let you know which lenders are willing to work with guarantors and will be able to negotiate between several lenders to help you find the most competitive product.

The Federal Government last night announced the 2022 Federal Budget with a big focus on counteracting the impacts of escalating costs of living and house prices.

The schemes announced are targeted at helping Australians with the challenges of building up a house deposit through the expanded Home Guarantee Scheme and assisting with costs to households.

The move comes after a Property Council of Australia survey found one-in-five people who wanted to enter the property market believed it was beyond their financial capacity. Some 90% of 1,110 respondents said high prices were the biggest barrier to buying their first home.

First Home Guarantee

A total of 35,000 First Home Buyers will benefit from the Government’s decision to extend the First Home Guarantee (previously the First Home Loan Deposit Scheme). The Treasurer, Josh Frydenberg, said the Government had helped 160,000 people purchase their first home since last year.

The scheme enables eligible first-home buyers to avoid Lenders Mortgage Insurance (LMI), which is often compulsory for buyers with less than a 20% deposit.

Eligible buyers only have to commit 5% of a 20% deposit, and the Federal Government will guarantee the gap.

LMI protects a lender from a customer defaulting but can cost buyers tens of thousands of dollars. 

The new scheme has the following price caps for each state and territory:

To qualify, individual applicants must earn less than $125,000 annually, while joint incomes for couples must total less than $200,000.

Family Home Guarantee

The Family Home Guarantee was also extended to now offer 5,000 places each year. This scheme is targeted at single parents and will help them purchase with as little as a 2% deposit. The Government will guarantee the gap between their down payment and the full 20% deposit to help them avoid paying for LMI.

While this isn’t a large number of places, it may provide more stability for some families, particularly as rents across Australia rose 15.3% since the pandemic.

It is important to note that lenders will still heavily scrutinise a potential borrower’s capacity to service a loan before approving, especially if they have multiple dependants. 

Regional Home Guarantee

The Regional Home Guarantee will offer a similar mortgage guarantee for applicants who build or buy brand new homes in country regions.

It is aimed at helping 10,000 first-home buyers and those who have spent five years on the rental cycle to build or buy a newly built home outside the metropolitan markets.

This is expected to help attract new migrants to regional areas, boosting economic activity beyond the capital cities, and assist long-term locals to compete for properties amidst an increase in sea and tree-changers moving from metropolitan areas.

The scheme is expected to commence in October.

Reduced household costs

Additional measures were announced to reduce costs to households including cuts to fuel prices and increased childcare subsidies.

The Government said it would halve the fuel excise for six months, from 44 cents to 22 cents per litre, saving approximately $15 on the average price of a tank of petrol. 

Increased childcare subsidies were also brought forward, which the Government said would leave the average family $2,200 a year better off.

Cash payments

Low- and middle-income earners will receive a boost with a one-off $420 payment available from July. The low- and middle-income tax offset has also been extended for another year, potentially adding $1,500 back in Australians’ pockets when they complete their tax return.

Around six million pensioners, carers, veterans, job-seekers and eligible self-funded retirees will be eligible for a $250 cash payment.

What’s next?

If you want to know where you fit with the Home Guarantee Scheme or to understand your options when it comes to purchasing or refinancing property, get in touch with us today.

Things you should consider when selecting a home loan

Choosing an interest rate type – variable or fixed?

A home loan’s interest rate will either be a variable rate that moves up or down or a fixed rate that stays the same during the loan term. You can also split your loan into fixed or variable portions. Here’s everything you need to know about choosing an interest rate.

Variable interest rates

The most popular loan type in Australia because of it’s financial versatility. Variable interest rates will shift many times during the lifetime of a loan; which will lower and increase your repayments. Many variable rate products offer flexible options to maximise your savings and minimise how much interest you pay.

Variable interest rates will move up and down as lenders respond to the cash rate set by the Reserve Bank of Australia (RBA). As lenders do not adjust their rates in-line with the RBA or each other, it’s important to thoroughly compare both a wide range of lenders and different products.

Variable rate home loans can come in either basic or standard packages and it’s important to know the differences and benefits of both.

Basic vs Standard

Basic home loans are generally used by borrowers with smaller loan amounts or who do not need any additional product features. Basic home loans will have lower interest rates and no annual fees.

A Standard home loan is attractive for borrowers who want:

Additional features in variable rate home loans

Here’s an overview of the main features you’ll find in most standard variable rate home loans:

Lisa has a $300,000 home loan with a 25 year term and 5% interest rate. Her repayments are $1,753 a month. Lisa decided she wanted to switch her repayments to interest only and her repayments dropped to $1,250 a month – $503 less than she was paying before.

Josh has a home loan worth $400,000. Over the course of the 25 year loan he will pay $319,000 in interest. If he kept $50,000 in an offset account he would have saved $40,000 in interest repayments (25 year loan at 5.25%)

Fixed interest rates

Fixed interest rate loans let you lock in an interest rate so you know exactly what your monthly repayments will be. A fixed rate home loan is great for anyone who wants certainty about what their monthly repayments will be.

A fixed rate home loan gives you the confidence to budget for your lifestyle and plan your finances for a set period of time but it’s important to know and understand the benefits and disadvantages of a fixed interest rate.

Benefits of a fixed interest rate

Certainty of repayments – as the market is difficult to predict, a fixed rate home loan can offer a solution to an unpredictable future. A fixed home loan gives you certainty that your repayments will not only be the same every month, but safeguards you against future interest rate rises.

Further key influences include how much your repayment amounts will be as well as other fees and charges. See also variable rate home loans and split loans.

Disadvantages of a fixed interest rate
What is a variable rate home loan?

Variable home loan rates give you flexibility and extra features to save you money. Your variable interest rate will move up and down over time, loosely in line with the official interest rates set by the Reserve Bank of Australia (RBA).

What is a fixed home loan?

You can lock in your home loan rate so you have a set repayment each month for a certain amount of time. A fixed interest rate is good for a borrower who wants certainty about their repayments and likes being able to budget around a set amount.

Everything you need to know about buying your first home, or moving into a new home.

Going from buyer to homeowner might seem like a daunting journey, but as long as you’re prepared, buying your first home can be a smooth process.

Before you start your house hunt, there are a few things to consider. First and foremost, making sure that buying is the right decision for you can set you up for a smooth buyer journey. One of the key factors in making this decision is looking at your budget and determining what you can comfortably afford.

Knowing your limits financially helps inform your decision in choosing the right home loan and when you’ve found a product that suits your budget and lifestyle, the next step is being pre-approved for that loan.

Having done all the background, you’ll feel confident starting your property search.  Where are you looking to buy? Are you looking for a house or unit? Again, your budget will play a role in the answers to these questions.

We know it doesn’t end there. House hunting can take time, and once you’ve found and successfully bought your new home, then there’s the matter of moving in- another big task in its own right.

We hope you find these snippets of information useful as you begin your property journey.

You can get a leg-up on other buyers and shop for your new home with confidence if you’ve been pre-approved for a home loan.

A formal pre-approval is a critical step in purchasing property – it’s when a lender gives you an approved amount to borrow based on a full assessment of your financial situation.

What this means is that you can attend auctions and know what your price limit is and how much your repayments would be at a certain price range. Even if you’re borrowing a small amount, a formal pre-approval is a good idea. You’ll know exactly how much you have to play with, putting you in a stronger position to negotiate with a vendor or bid at auction.

Advantages of home loan pre-approval:
A formal pre-approval is important

There are different kinds of pre-approval – it’s important you get a formal, written pre-approval. Once you have it, you can negotiate or bid under almost the same conditions as a cash contract.

Be wary of any website that offers you a pre-approved home loan without taking the time to assess your financial situation. A Loan Market mortgage broker will organise your home loan pre-approval for a loan that matches your personal situation and financial goals.