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Questions and answers2018-11-30T12:32:28+00:00

Questions and answers are outlined below to some of the most common items mortgage broker What If We Finance encounters. Contact us for more information or if you have a question we have not answered.

Tax Depreciation for Property Investors2018-06-10T22:14:37+00:00
Property investors have access to a wealth of potential tax credits, yet often fail to take full advantage of their property’s tax depreciation potential, according to quantity surveyors BMT.

BMT’s Director Bradley Beer says that it is common for owners to miss out on obtaining tax credits, simply because they do not know what they can claim.

“Property tax depreciation is available to any property owner who obtains assessable income by way of rent or operates a business from a property”, Beer says.

Beer offers the following tips for discovering the value of your property’s depreciation deductions:

Does it matter if I didn’t claim last year?

You can adjust previous year’s tax returns; when a property owner has not been claiming or maximising tax depreciation deductions, the previous two financial year’s tax returns can generally be adjusted and amended.

If my property was built before 1985, is it too old?

No. Your investment property does not have to be new; both new and old properties will attract some depreciation deductions. It is a common myth that older properties will attract no claim.

Why is plant and equipment itemised? 

The ATO specifies an individual effective life for each plant and equipment item, so you need to know the estimated cost for each item and its contribution to the depreciation total per financial year. The original building structure and capital improvements, or Division 43, are all written off at the same rate (unless building works have been completed over different legislation periods).

Therefore, individual costs for these items aren’t expressed in the report. If required by the ATO, the estimates for Division 43 can be justified.

How long does the depreciation and capital allowance schedule last?

The ATO has determined that any building eligible to claim the building write-off allowance has a maximum effective life of 40 years from the date of construction completion. Therefore, investors can generally claim up to 40 years’ depreciation on a brand new building, whereas the balance of the 40-year period from construction completion is claimable on an older property.

Can I claim renovations completed by the previous owner?

Yes. Anything in the property that is part of a previous renovation will be estimated by the assessing quantity surveyors and deductions calculated accordingly. This includes items that are not obvious e.g. new plumbing, water-proofing, electrical wiring etc. For capital improvements to qualify for the Division 43 building write-off allowance, they must have commenced construction within the appropriate Division 43 time periods.

What information do I need to provide?

Information required to produce a Tax Depreciation and Capital Allowance report includes the following:

  • Date of settlement
  • Purchase price
  • Access details for inspection (e.g. property manager or tenant details)
  • Any information pertaining to improvements or additions made to the property including dates and actual costs (where available)
  • The date the property became available for income producing purposes.

What is the difference between plant and equipment and the building write-off allowance? 

Plant and equipment items are items that can be `easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items also include items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include (but are not limited to):

  • Hot Water Systems
  • Carpets
  • Blinds 
  • Ovens 
  • Cooktops 
  • Rangehoods 
  • Garage Door Motors 
  • Door Closers 
  • Freestanding Furniture 
  • Air Conditioning Systems

The building write-off allowance (otherwise known as Division 43) is based on historical building costs and includes things such as the bricks, mortar, walls, flooring and wiring.

Who can estimate construction costs for depreciation purposes?

According to Beer, Quantity Surveyors are one of the few professionals recognised by the ATO to have the appropriate construction costing skills to calculate the construction cost for the purposes of building depreciation.

How do you work out how old the building is?

The age of the building can be determined by obtaining council documents with dates pertaining to the original application approval date or the Occupancy Certificate date and final inspection date. Similar methods are used Australia wide, however some properties are privately certified.

What is pooling?

A low value pool exists providing investors the benefit of pooling items that meet either of the following classifications:

Low Cost Pool – A low cost asset is a depreciable asset that has a cost of less than $1000 in the year of acquisition.

Low Value Pool – A low value asset is a depreciable asset that has an undeducted value of less than $1000. That is, the cost of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less deductions in year 1 less deductions in year 2 etc) is now less than $1000. Assets meeting both these classifications can be placed in an itemised pool. Pooling is used in conjunction with the diminishing value method to maximise deductions in the initial years of the depreciation schedule.

 

No LMI for Doctors and Lawyers2018-06-10T22:05:31+00:00

Australian banks offer favourable terms for doctors and lawyers relative to other professions as they are seen by the banks to be low risk borrowers, have high incomes and often approach the bank later for a business or investment loan.

What discounts to banks offer?

Doctors. Lawyers  or medical practitioners are eligible for no Lenders Mortgage Insurance and often goos interest rate discounts.

If you are borrowing over 80% of the property value then it is best to apply with a lender that can waive LMI.

If you are borrowing less than 80% of the property value then you will not pay LMI anyway, so it is better to look for the best interest rate discount.

LMI Waiver

If you intend to borrow more than 80% of the value of a residential property the bank will require you to pay Lenders Mortgage Insurance.This is a once off fee which pays for the bank to be insured in case you do not repay your loan.

As a Lawyer, Doctor or Medical Professional the bank will let you borrow up to 90% of the property value with no LMI and home loans may be in excess of $3 million depending on the lender.

If you are borrowing less than 80% of the property value then banks do not normally require you to pay LMI anyway so you should look for the most competitive interest rates

Self Employed Home Loans2018-06-10T22:02:37+00:00

A common misconception is that being self employed makes it hard to get a home loan or finance. This is not true. Being self employed means the bank looks at your application differently when it comes to providing home loans or business finance. Common misconceptions with self employed finance are banks will ask a lot of questions and not lend to you or banks need 2 years of tax returns and do not account for the tax benefits of being self employed.

While this may be true using a mortgage broker such as What If We Finance can help you ensure you have the best possible chance of getting finance. Banks of want to lend to you but they need to understand how you make your money.

So while banks will ask for 2 years of tax returns they are add backs such as depreciation, interest and directors salaries and wages that the bank looks at before they extend finance.Your mortgage broker can package your returns in the best possible way to ensure you have the best possible chance of getting home loan finance.

Also banks do not necessarily need 2 years of financials or tax returns. This can be a blessing because if you have a bad finance year and a good financial year the bank will average your earnings and this will reduce your borrowing capacity. For example if you earned $100 in 2012 and $200 in 2013 some banks may use $100 as your income and others may use the average income over 2 years of $150. They key in this instance is to find a lender who will use the $200 as your income and this where your mortgage broker can help.

Similarly if you have a large deposit for example 35% of the property price banks may not be as strict and you can get away with one years of tax returns or relatively less information.

Finally you can still get home loans being self employed with lenders Mortgage Insurance this typically means you have a small deposit (less than 20%) but again you need the guidance of your mortgage broker to ensure you get the possible deal and have the best possible chance of approval.

The key message here is being self employed is not an insurmountable barrier and with the right guidance you can refinance your home, buy your first home or investment property sooner than you think.

Cross Collateralisation2018-06-10T22:01:10+00:00

The biggest property investing “no no” seen by mortgage broker What If We Finance is the cross collateratisation of securities by the banks. Simply put if you own two or more properties the bank may group the properties as security against one loan. Banks tend like these arrangements because the get more security than they need and often argue it is easier to approve a loan with such an arrangement. Simply put that is not true!

While cross collateralisation may sound appealing because you one have one loan and one fee in the long run this type of arrangement could be limiting. When you decide to sell a property or refinance the bank needs to agree to the release the security. The bank can ask for the full amount of the loan to release the security and you are really have no choice but to pay what they ask. Consider the following example:

a. you have a loan secured by property 1 worth $820,000 and property 2 worth $300,000 so the total security value is $1,320,000
b. the loan balance is $600,000
c. you sell property 2 for $300,000

In such a scenario the bank still has adequate security cover and one would expect the bank to release property 2 and not ask for a balance reduction.BUT depending on the banks credit policy and their assessment of you financial situation they may take all or part of the proceeds of the sale and reduce the loan. While that in itself is not a bad thing if it aligns to your financial objectives as a property investor you want to have control. You do not want to be put in a position where the bank dictates terms.

If you did not cross collateralise your securities and had as an example the following scenario

a. property 1 secured a separate loan facility for say $480,000
b. property 2 secured a loan facility for say $120,000

In that scenario you would only have to pay $180,000 and are free to use the balance of funds as you wish.

Investors often argue why should I pay 2 fees for the facility but as an investor you want flexibility and the choice to make decisions consistent with your objectives and not be limited by bank policy. In addition there is no reason for banks to force you to cross collateralise and as a rule you should not pool your securities together especially if you plan to grow your portfolio.

Speak to your mortgage broker What If We Finance for more information or if you have any questions.

Construction Home Loans2018-06-10T21:58:20+00:00

So you are building a new home and you need a Construction Home Loan. Where do you start?

Construction home loans are assessed on the same basis as any other home loan. The bank will look at your capacity to repay the loan and also asset and liability position. The principal difference when building a home is the wave the home loan behaves.

When building home the entire home loan is not drawn at once but the bank will pay the builder over 6 stages and these typically are:

  • Buying the land
  • Slab or foundation
  • Frame
  • Lock up
  • Fixing
  • Final

This means the bank pays each phase progressively as each pass is completed. Typically with construction home loans you only pay interest on the amount that is physically drawn down during construction until the completion of your building project. You can then nominate the type of loan the construction reverts to.

On the completion of each phase, the bank or a valuer will normally inspect the project to ensure work is complete according to the requirements set out in the fixedprice building contract.  The bank will then make the progress payment.

For construction home loans the lender will require the following information:

  • Contract to buy the land
  • A fixed price building contract
  • Council approved plans
  • Builders insurance and warranty information

The bank will value the property being built and typically this may be land value plus construction costs. For example if the land is purchase for $200,000 and construction costs are $200,000 the bank may value the project at $400,000. Banks will lend between 90% to 95% of the bank assessed value of the project for owner occupied construction.

Your mortgage broker What If We Finance has considerable experience in helping borrowers with construction finance. We will work with you to ensure all bank requirements  are met and take the stress out of finance so you can enjoy your new home.

Lenders Mortgage Insurance explained2018-06-10T21:54:48+00:00

Lenders Mortgage Insurance (LMI) is insurance designed to protect the lender in the event the borrower defaults on their loan. With rising property prices and the need for bigger and bigger deposits more and more loans are covered by LMI.

Typically LMI applies when you borrow more than 80% of the home value. LMI is one off fee and be can be paid upfront or added to the loan. LMI typically ranges between 0.5% and 3.5% of the loan. The greater then percentage of the property value you borrow against the higher the LMI percentage.

LMI can avoided in certain circumstances:

a. certain borrowers can avoid LMI

b. certain lenders may let you borrow up to 85% of the property value. You will need a smaller deposit but the lending criteria can be much harder.

As a borrower you need to be careful as some lenders will claim they do not charge LMI. The truth is they may not charge a fee called LMI but the fee is may be called something else. For example a Loan Administration Fee or some other variation.

While LMI is a cost with rising property prices LMI may be a necessary evil to allow you to enter the property market and avoid price rises.

 

What is interest offset account?2018-06-10T21:47:36+00:00

An interest offset account is a savings or transactions account linked to your mortgage account. The interest offset account works by “offsetting” the balance in your account against your mortgage. For example if you have $10,000 in savings in your offset account and a mortgage of $400,000 the balance of $10,000 is offset against your mortgage so interest is only charged on $390,000.

The are many different types of offset accounts on the market and the example above assumes 100% or full offset. If the offset account is partial offset for example 40% then only 40% of the $10,000 or $4,000 reduces your interest.

Most offset accounts also come with an annual fee of $200-$400 per annum and make sense if you have savings or a property investor. A savings balance of approx $8,000 would be required to cover the annual fee.

As a property investor if you do not have interest offset and if you redraw the Australian Taxation Office (ATO) treats the redraw as a seperate loan and this may not be tax deductible. Interest offset accounts avoid this and are a must for investors.

Your mortgage broker What If We Finance can advise you further regarding offset accounts.

 

 

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