property investment

Investing – my thoughts on comparison rates

So I recently completed a refinance. It took me over 3 months from contacting the broker to the day the account is created. I just want to share some thoughts on the difference between interest rate and comparison rate. And when one is more beneficial than the other.

Tl; dr;

  • Interest rate is the pure rate charged on outstanding loan balance.
  • Comparison rate is interest rate plus certain fees, defined by the banks.
  • If your goal is to smash the loan as fast as possible, high comparison rate is not really an issue.
  • If your goal is to keep the loan for as long as possible, give some thoughts to the comparison rate.

Interest rate vs comparison rate

This is an example of loan package that outline the interest rate and comparison rate, along with the fees associated.

westpac home loan
Westpac investment loan

One thing to note is that when calculating comparison rate, banks like to use these figures: $150,000 loan size, 25 years loan, Principle & Interest payment.

As we can see, the interest rate is 3.84% per annum, which means for a loan of $150,000, you need to pay $779 per month in mortgage.

However, looking at the comparison rate, it is 4.24% per annum, essentially means you need to pay roughly $812 per month in mortgage.

The difference for a year is roughly $395, which equals to the annual fee that they note down in the image above. The fee could be higher if the banks also calculate the account opening fee into the comparison rate.

tables showing the difference between interest rate and comparison rate

When do we need the lowest comparison rate?

This is a bit weird for people like me who just got into property investment. But for investment properties, I want to drag the loan out as long as I can, so I can utilize the borrowed money to keep purchasing. I am willing to pay interest only for as long as I can, because it makes the cash flow better and more predictable.

With that in mind, obviously the higher rate is, the worse the cashflow will be for an investment property. So when I try to find a loan, it is in my interest to find something that has a low comparison rate, only if I intend to hold the loan for a long time.

So when do we want a high comparison rate?

Home loans often have the best interest rate, but sometimes go with a terrible comparison rate because of all the fees associated with it.

However, if my intention is to pay it out in the next, say 10 to 12 years (surprisingly, it is not that impossible to do). I can take the package with low interest rate, but a bit high comparison rate. The reason is that comparison rate is calculated based on a gradual payments for a long time. So by paying extra and/or change the payment period, we can reduce the real rate down to a ridiculous amount.

Example: given the same rates above, let’s say that we want to pay $300 per week into the repayment. With the assistance of moneysmart website, we can calculate the total repayments and how long does it take, as well as guessing the actual comparison rate.

calculations showing early repayments

As we can see, by paying extra into the home loan with the intention to finish it off, the actual rate is even less than the interest rate, since we finish the loan much earlier than expected of 25 years.

Summary

Loans are complicated, and there are a lot more that I cannot cover. It is best to go to a broker and discuss with them your goal. Trust in their expertise to find a perfect loan for you. And if things don’t work out the way you want, a refinance is always an option.

By Tuan Nguyen

property investment

Investing – the trash talk with Landfill levy

On February, the State of Victoria rolled out a new program, Recycling Victoria. Among many information about what we will tackle the rubbish and recyclable materials, there is an item that could affect us as real estate investors.

Tl; dr;

  • Landfill levy is increasing from $65.90 to $125.90 per tonne in 2023.
  • Eventually it will be passed down to council rates, i.e. the rates will be higher.

What is landfill levy?

Landfill levy, or waste levy, is a tax applied to waste types by weight. The government designed it to incentivise waste generators to reduce general waste, and increase diversion through recycling. Governments also use landfill levies to fund environmental and sustainability programs to improve waste management.

In a simpler term, it is the tax that home owners pay to get rid of their trash, for the trucks to roll in every week and take the rubbish away and process it. As a result, this levy often mixes into the council rates that we pay every quarter.

How much is it increasing?

According to Victorian Landfill guidance, the rates are increasing year by year, and stop at 2023. In details, they are increasing from $65.90 to $125.90 per trash tonne.

landfill levy 2021 to 2023

The levy for FY 2019-2020 stays the same at around $65.90 per tonne.

This increment will put into Sustainability Fund, which funds sustainable projects and improve the waste management system.

The government hopes to reduce landfill amount by increasing the levy. People will be more inclined to use recyclable products. This implies that the increased amount will pass down to rates payers, i.e. home owners and investors. Expecting your rates to increase by a small amount in the next 3 years is not unreasonable.

Summary

It is good to know the government cares about the environment and has some initiative to promote sustainability environment. However with the increment of rates in mind, we need to be a bit more careful on how we as property investors calculate our numbers.

By Tuan Nguyen

property investment

Discussion – what exactly do you own in real estate?

Recently I ran across some interesting matters regarding what do we own in terms of owning the title of a piece of real estate. I think it is useful to note down and share with people.

Tl; dr;

By owning the title of the land, one has the right to the air above and the earth below.

If you find something valuable, e.g. gold nuggets, in your backyard; it belongs to the Crown.

Air rights

dollar signs on the sky

In Australia, if someone owns the title of the land, he or she has the rights to use the air space above the land.

In Latin, this is defined as follows “cujus est solum ejus est usque ad coelum et ad inferos”Property Rights, 2016. This means “to whom belongs the soil, his is also that which is above it to heaven and below it to hell”.

So we own the airspace, but how far up do we own? Surely it is not as far as the airplane altitude, which is somewhere around 35,000 feet, or about 10.6km. According to the Property Rights, it is as high as to “be necessary for the ordinary use and enjoyment of his land and the structures upon it”. It highly opens for debate of how high can an airspace be. One can argue that if a helicopter flies too close to the house and that stops him from enjoying the land, then it is an invasive of the air rights.

Subsurface rights

Well it is not called “Subsurface rights” in Australia, nor defined separately from the air rights. However, this is related to the land and the mining rights of the soil below the land.

Similar to Air Rights, there is no hard limit on how far the owner of the land can dig. However, you need to obtain a permit from The Crown to be able to dig down for minerals and natural resources.

Which brings us to the most interesting facts…

Valuable items found in your backyard

gold nuggets
Gold nuggets

So what happens if you found something precious in your backyard? Gold, precious gems, or even a natural oil vein.

According to the mineral rights, The Crown is the first in line to say about all coal, oil, silver, gas and gold found on public or private property. Therefore even if you found something valuable, it will be the Queen’s property, and should be returned to her.

Summary

Those are interesting facts about owning the land in Australia. Now we know better about what we actually own, and realize that we actually own more than we know.

By Tuan Nguyen

property investment

Investing – Some thoughts on the Real Estate market

Recently I have been listening to quite a few podcasts and videos about real estate investing. And today I listened to a few pieces of thoughts that I find interesting. Which I decide to note them down for future references.

Tl; dr;

  • Land is a commodity, house is a consumer good.
  • Income growth is a major force to sustain real estate appreciation.
  • Real estate is a strong force to push inflation.
  • Real estate does not produce capital goods unless redeveloping.

House is a consumer good.

“A commodity is a basic good that is most often used as inputs in the production of other goods or services.”Investopedia.

“Consumer goods are the end result of production and manufacturing, which is what consumer sees on the store shelf.”Investopedia.

With the above definitions, we can clearly see that land fits the definition of a commodity, which is a basic input good that is used to produce; or in this case, develop; real estate. At the same time, the house is the final result of the real estate production chain, available for the consumer to purchase.

From this, we can see that if we treat real estate as an investment, the land is what we look at in the form of growth, as it is the only thing that appreciates in value. While the house degrades and goes out of fashion as other consumer goods, or as we call it “depreciate”. I have known about this for a while, but the explanation above so far is the simplest way to describe the fact.

Income growth sustains real estate appreciation

Australian income growth by year

As explained by Ray Dalio, production growth increases income, and as a result, increase affordability and push real estate price. If the income growth has not been too much, but the housing price is still going up, we need to figure out what caused it. At a macro-economics level, there are 2 other things that push housing price up, debt and foreign imports.

With debt, people in Australia rarely buy a property in cash. They almost always borrow most of the purchase amount from a financial institutions. The more we leverage, the more buying power we can afford to purchase one, two or multiple properties. This in turn will push the price up, especially in an auction environment, since everyone has the leverage to pull and they do not hesitate to get the dream house they want. However, without a good income, the buyers soon realize that it is challenging to keep up with the mortgage payments.

Foreign imports are pretty straightforward. People from other countries see Australia as a developed country with a stable government. They start to pour money into the Australian real estate market as an investment, or just a form of wealth preservation. For these people, it is difficult for them to borrow from Australian banks. Therefore they mostly purchase with cash. And because of the vast number of purchasers available with a limited amount of land, they push the real estate price up immensely. The cause of real estate growth is external and we all know external causes are not stable comparing to internal 

Real estate is a strong force to push inflation

Imagine a property worth $100,000 that is rented out for $200 a week. The market is growing for 10% a year in that area. In the next year, the house worths $110,000. Now the landlord has 2 options, either to keep the rent as is, or increasing it to fit the new “value” of the property.

This normally is not a problem for existing landlords, however it can be a big issue for the new investors who just bought into the area. They need to have the rent up to keep up with the mortgage repayment. Therefore the median rental price will be increased, without the change in supply and demand. This is what is known as the cost push inflation, and is generally considered as a bad form of inflation.

Real estate does not produce capital goods.

Probably the most controversial topic, however I think it has a good point.

Unless you are developing/redevelop the land, whether by sub-division, building granny flats or straight out building a new construction, exchanging blocks of dirt back and forth and drive the value up does not help improving the country’s economy since it does not produce capital goods, i.e. goods that are used to produce consumer goods and generate profits.

So would it be better if people do not dump so much money into the housing market, and pour it into other industries that could have improved our economy. In turn, it increases our income, and then increasing the housing market steadily?

I guess people are not patient enough for that to happen. Investing in economy takes time and we will not see a rapid growth in the housing market if that is the path we take.

Some final thoughts.

Is real estate investing good for an individual? Yes definitely. It increases our income by renting out the property. And there are more millionaires who get rich from real estate than any other form of investment in the world.

Is a rapidly rising real estate market good for the economy in general? Probably not, since if it is rapidly rising without a strong base to support; in this case, income growth; we could be over leveraging ourselves into the properties that do not produce enough income for us to keep it.

Summary

There are good and bad aspects of investing in real estate. We normally see it as a good form of investment for ourselves and the family. However whether it is good for the country, that is left to debate about.

Some ideas are inspired by The Economics of Real Estate.

By Tuan Nguyen

property investment

Book review – 20 questions for property investors

Margaret Lomas, the author of 20 Must Ask Questions For Every Property Investor, is a financial adviser who has been operating in Australia for quite some time. And in her book, she discusses about a system to determine if a property is suitable to add into your portfolio.

Tl; dr;

After a rough filter of all regions that you can scan, an investor can apply 20 questions in a specific order to determine if the property is a great one to buy, or quickly eliminate it from the list.

Margaret Lomas believes that capital growth and cashflow can go together, and not mutually exclusive.

Why both capital growth and cashflow can go side by side?

With a good entry price, any property can have positive cashflow. And if you can pick a property before the growth happens, people will be left questioning how you have a great performing property. You do not need to pick the property just before the boom time, rather buying it when it shows all signals of growth, but the market has not moved to reflect the changes.

Since rental income will always be running after capital growth, most people will see the growth first and ignore the rental income when they are out there doing house hunting. But without a good rental income, it can be difficult to hold on to an investment property, especially when you are holding it negatively geared.

People who buy into an area with a steady growth in the past few years, can be left devastated because the growth time is coming to an end. This does NOT apply if the area still shows all growth signals and they are getting stronger. However, most property investors listen to property gurus, or their friends to determine if a particular area is a good place to buy. As a result, their approach is a buy and pray strategy, hoping that the property value will go up and they will enjoy the capital growth one day.

Some preparation before applying 20 questions.

The end goal for us is to choose a property with the best possible chance of growth, while sustain the highest possible cashflow that we can afford.

  • Determine the scanning area: first thing to do is to determine the top level area that we want to scan for a property. For me, it will be the whole Australia. For others, it can be just a city region, e.g. Melbourne regions; or a state, e.g. Victoria.
  • Workout how much you can afford: obtain a pre-approval from a financial institution. However, keep in mind that if the pre-approval says $500,000; it does not mean the bank will lend you that amount. But it will adjust to your financial situation when you actually apply.
  • Scan real estate websites like realestate.com.au or domain.com.au for possible properties that have their indicate price that suits your pre-approval. For example, I want to look for properties with price between $350,000 and $500,000; where the area’s average price is $500,000. Margaret’s argument is that these properties are in the lower end of the area, therefore it is easier to buy and to sell.
  • Dismiss properties in areas that have less than 15,000 population: these areas are too small to sustain a good population growth, and most likely they do not have a good infrastructure or diversified industries that can support a good population growth.
  • Determine the average yield of investment properties in the remaining areas: we want it to be around 4% to 5%. Anything lower or higher show signs of unsustainability.

What I learned after reading through 20 questions?

They are extremely detailed on what to look for in an area in the first 10 questions, which are only concern about the area’s economy, population growth, external and internal growth drivers. This can eliminate most properties in the above list already.

Then we apply the remaining 10 questions, which focus on the property itself. The good thing is that if we stick to the system, at the end, there may be just 1 or 2 properties left, or we are left with an empty list. This does not mean that the method is invalid, it just means that we need to be more patient and wait for a suitable property to come on market. Or just hire a buyer agent to search for us in those areas we choose.

Summary

Overall, this is the most detailed on a system of how to choose a property to invest in that I have ever read. However, property investment is an industry where many fake gurus reside. Whether or not the system is sound, I will need to implement for the upcoming purchase to have a sound proof.

If you want to read the book and discuss ideas, you can obtain a copy here.

By Tuan Nguyen

property investment

Discussion – Deposit bond

I just learned about something called Deposit bond while reading How to achieve Property Success by Margaret Lomas. It is quite helpful in helping people buying properties more efficiently.

Tl; dr;

Deposit bond is an insurance policy that purchaser gives to the vendor, instead of the deposit amount. This can be done because of various reasons. One of which is the purchaser may not have 10% deposit available after winning the auction, but still financially able to purchase the property.

To utilize deposit bond, one must seek approvals of the vendor. And have the auctioneer/vendor approves it on writing.

What is a deposit bond?

deposit button on keyboard
Source: smartline.com.au

A deposit bond is an insurance policy. It covers the vendor in the event that the buyer defaults on the purchase. The vendor will receive the full amount of the deposit, should the conditions of losing deposit are satisfied.

Instead of giving the vendor 10%, or any amount that represents a deposit, the buyer can just hand over the deposit bond. This means no money has actually been exchanged, and full amount of money will still need to be transferred at settlement date.

Benefits of a deposit bond

There are benefits to both buyers and sellers in the usage of deposit bonds.

For sellers, they enjoy the insurance that the deposit is fully paid, no matter the circumstances of the buyer. Since once the conditions are met, the insurance company will disburse the money. Then they will go after the other party to claim that amount back. It reduces the awkwardness when it comes to financials.

For buyers, the advantages may slightly be better.

  • They keep the deposit in their bank/offset accounts, and it continues to earn them interest/offset their mortgages during the settlement period.
  • In the situation where they are in the process of selling a property before purchasing another one. Buyers may not have the cash in their possession yet, and a deposit bond may be the answer to that circumstance.
  • The premium amount is small, on average it is 1-1.5% of the deposit.

An illustrated example of the deposit bond at work.

Jane purchased a property for $500,000, with a 6-month settlement term. She was required to put $50,000 as a deposit when she won the auction. However she did obtain the deposit bond for $500 and gave it to the vendor.

John also purchased a property for $500,000, with the same settlement term. However he pays the deposit up front.

Given that they both have other mortgages to pay, and assuming that their interest rates are the same at 4% pa. Over 6 months, Jane saved $1,000 ($50,000 * 4% / 2) in interest by parking that deposit amount in her offset account, while John has to pay that amount from his pocket.

JohnJane
Purchase price$500,000$500,000
Settlement term6 months6 months
Deposit$50,000$0
Deposit bond expense$0($500)
Interest over term period($1,000)$1,000
Total cost($1,000)$500
Illustration on John and Jane’s choice of handling deposits

Limitations of Deposit bonds.

Not surprising, nothing is all good. So what is the limitations of Deposit bonds?

First off, vendors have the right to not accept the deposit bond, and requesting the full amount of deposit to be paid up front. Especially in Victoria, where the deposit bond is not at all popular. This is why buyers need to obtain the approval in writing, should the disagreement arise later.

Previously, the deposit used to be transferred directly to the vendor’s bank account. They can use it to put down on another property if they need to, or pay the Real estate agents their commissions. The agents prefer to have the money sooner rather than later, so a deposit bond goes against their interest.

However, with the recent changes, everything has to be in escrow, meaning that a third party will hold all the money until settlement. In Australia, one such company is PEXA. Therefore it does not matter whether the deposit is in cash or in deposit bond anymore, since nobody can touch that money until settlement date.

Secondly, buyers will need to go through another round of financial approvals when they apply for the deposit bond. This can take more time before they can go out and find their next home.

Thirdly, it is hard to know the exact amount of the deposit in an auction situation, therefore normally the insurance company will insure the maximum amount of deposit on the maximum price that you can afford. As a result, sometimes it may not be beneficial to do so due to a higher premium. E.g. you’re insured for $50,000 deposit, but you only purchase a property for $300,000 (in this case, deposit amount is $30,000).

Summary

Deposit bonds are definitely something to look into, or be aware of when buying properties. I will certainly be exercising this options when purchasing my next property.

Should I be successful in utilizing deposit bonds, I will have a recap on the experience.

By Tuan Nguyen

property investment

Discussion – Rental guarantee

Many property advisory companies promotes their properties with rental guarantee benefits. While this sounds reasonable and brings many benefits to the buyer. Let us take a better look at this benefits.

Tl; dr;

As the old saying goes, “If it sounds too good to be true, it probably is.” 

Rental guarantee often indicates that the project, or a particular property, has some negative aspects. These issues are not highlighted by sale agents because of obvious reasons. 

If a project offers rental guarantee benefits, it is highly advised to research a lot more into the project, see if they are viable to your property strategy in the long run.

Benefits of Rental Guarantee

There are multiple benefits that can come out of this scheme, provided that the sellers hold up their end.

Firstly, it is often advertised of having a guaranteed rental income that is the same with the current mortgage interest rate, or higher to represent a good cashflow amount. This amount can cover the interest payments and all buyers have to spend is for principle payments and other operating costs. And since it is guaranteed, investors can have their peace of mind if the property cannot find tenants for an extended amount of time.

Secondly, it is much easier to forecast cashflow if there is a rental guarantee scheme in place. You can always have that much income, and if the property can find tenants, it will be even more income. The sky has never been bluer.

What are the dark sides of Rental Guarantee?

Who pays for the Rental Guarantee?

Just taking an example from Property Update.

The developer wants to sell properties at $600,000. However the market price in that area is around $520,000. And the rental yield is about 4.6% in that area.

If he offers the rental guarantee scheme, say 6% guarantee over 3 years. The amount to spend on that scheme, provided that there are tenants is $600,000 x (6% – 4.6%) x 3 = $8,400 x 3 = $25,200.

So if he can sell the property at $600,000, factor in the rental guarantee, he can still walk away with a nice bonus comparing to the market price of that property.

So the first hidden gem is that most of the time buyers actually pay for their own Rental Guarantee.

What happens after the scheme expires?

Most investors found that after 3 years, the yield drops back to its real value. If the market has not responded to the rental growth, they are stuck with an under-performed property.

Worse case, if investors try to sell, they can only sell it at market value. And if within those 3 years, the capital growth is not as good as it was advertised, they may end up having a property that is over-priced, and unable to find a buyer.

One more thing to note is banks are cautious to lend to this kind of properties. They will NOT consider the rental guarantee amount, but taking in the real market rent amount instead.

Do you actually get paid?

Sometimes, the entity operating Rental Guarantee scheme can go broke. And in that event, all “guarantee” is simply gone.

Let’s say the developer creates another company called Rental Guarantee Pty. Ltd. with $1 equity. This company will provide rental guarantee to the investors in a project. Then when people come around asking for the guarantee payment, the company simply goes bankrupt.

Since there is no regulations related to this scheme, it is totally possible to do so. Developers do not need to register with a government body to assimilate this scheme.

What can we do to protect ourselves?

If you are offered properties with this scheme. You need to do more research into the area.

  • Find out what is the market rent, and how much growth it has over the years.
  • Find out what is the average market price over the area. If the advertised price is a lot higher than the market price, it is certainly something to look further into.
  • Ask if you can have any discount if you just don’t take rental guarantee.
  • Check the entity that provides the scheme, as well as their ability to honour the payments.
  • Note for myself – Best thing to do is just don’t buy into those projects.

Summary

Rental guarantee is advertised mostly by developers and their reseller networks. Although on the surface it may seem beneficial, but personally I think it is a way to rip investors off of their hard earned money.

This is by no mean saying that there is no investor that benefits from this. I just feel that the chance I can land such benefits is minimalistic.

I do not think I will buy into any of those projects in the foreseeable future.

By Tuan Nguyen

2020

Discussion – My goals for 2020

Setting goals is a good way to start the new year. Here are the outline of what I plan for my life in 2020.

Tl; dr;

  • Straighten my finance.
  • Purchase at least 1 more property.
  • Grow emergency fund to 3 months living expense.
  • Write at least 52 blog posts.
  • “Challenge” gather a good deal to present to investors.

First thing’s first….

financial review

Reviewing my current personal financial situation, I think it is in a mess currently, with loans are everywhere and there are no system around them. So for 2020, I want to restructure my finance to have a better interest rate on my loans, better visuals on how the investments are going.

At this moment, my loans are as follow.

Loan Interest Notes
Home loan (now investment) 3.85% fixed 2 years, ending 04/12/2020
Investment loan 4.16% a bit high at the moment, can be lowered to a considerable amount

I’m aiming to have them lowered, considering there may be further rate cut from the RBA going into mid 2020. I would consider fixing the interest if the RBA lowered the cash rate to 0.25.

The good thing from low interest rate is that my cashflow from the properties will be much better and I can save them up to invest in more properties.

Property purchase

property investment

As some of you may know, I want to be a professional investor, concentrated to properties. So in 2020, I will be active to find a suitable property for me to purchase, and looking to renovate it to make some instant equity, as well as structuring it to at least neutral geared after tax.

I have been reading up a lot about the topic. And it is challenging to not fall into “paralysis by analysis” syndrome. Basically it means that researching too much leads you to the state where you see risks everywhere and do not start taking action.

By leveraging the young age that I have, mistakes can be fixed. I will prepare myself to purchase at least another property, fixing it up, putting it up for rent, and reconsider my financial position to see if I can redo it all over again. If I find problems in any steps, there will always be people who are keen to help.

Emergency fund

emergency fund

This is what I learned from various books like The Barefoot Investor, The Total Money Makeover, etc. I have grown my emergency fund to be sufficient for about 1.5 months now. And the goal for 2020 will be growing it to at least 3 months of my monthly expense.

This way I have a good cushion to fall back on, should any unexpected events show up. I will just park it in a high saving account (I use ING, with their high saving account at 1.95% pa).

Blog posts

Fullstack developer illustration

Of course I will continue writing blogs. It is entertaining and providing me a way to memorize what I learned, as well as sharing my knowledge and perspective to the world.

The goal for 2020 will be writing at least 52 blog posts, or 1 each week. This should be achievable, considering I only spend around 3 hours to create an article.

Upcoming blog posts will focus more on property investments, rather than just technology aspects that I have been posting. I feel like I have absorbed so much knowledge regarding property investment that I should go out and implement, then report my findings to you all.

“Challenge” present a good deal to investors

This is what I would like to try out in 2020. Where I can find an outstanding investment opportunity and gather all information needed. By presenting it to the investors, I hope to raise private funds to buy another property. This is a bonus challenge for myself, and I really hope that I can achieve it.

Summary

Well that is a lot of goals that I set for myself in 2020, and we have already finished the first week of 2020. I better be fast before the year ends.

By Tuan Nguyen

property investment

Discussion – National Rental Affordability Scheme

National Rental Affordability Scheme, or NRAS, is a government scheme to help low to moderate income people with an opportunity to rent homes at a lower rate.

Can investors like us take advantage of that? Let’s find out.

Tl; dr;

  • NRAS pays landlords with an incentive that is 20% or above market rent to offset what tenants need to pay.
  • NRAS commenced on 01 July 2008, and has been through 5 calls for applications.
  • There will be NO further call under this scheme in the foreseeable future.
  • NRAS targets low to moderate income tenants, and targets medium to large-scale investment body (usually 100 or more houses).
  • Payments usually comes in a form of refundable tax.

What is National Rental Affordability Scheme?

NRAS

Source: knowledgesource.com.au

In Layman’s terms, the government will pay a portion of rents to the landlords, and approved tenants will pay the remaining.

E.g. If market rentals is $1,000 per month, Australian government will commit to pay at least $200 per month, and the tenants only need to pay the remaining $800.

NRAS started on 01 July 2008, and was planned to go through 5 calls for applications. However the last call did not commence since the Scheme only supports 38,000 allocations. I.e. Only 38,000 properties can be approved for this scheme.

Who can benefit from this Scheme?

beneficiary

Source: travelinsurancegungei.blogspot.com

Low to moderate income tenants need to be approved to rent  the properties that were approved for this scheme. This means there are 2 separate approval processes that applies to the tenants and the properties. Tenants only need to pay up to 80% of the market rent, and the lowest is 20%.

E.g. If market rent is $1,000; tenants only need to pay between $200 to $800, depending on the approved finance.

The scheme aims to organisations that have about 100 or more houses, provides them with a financial incentive for up to 10 years. This means individual investors will not be able to apply for the scheme directly. However if they buy properties that are already approved, then the scheme will go with the properties.

Financial benefits come in the form of refundable tax credits. The amount of the tax credits is available here.

One thing to note is that the tax credits adjusts for inflation. Which means the amount of credits will be different each year, protects the investors from inflation.

Summary

NRAS is a scheme to help low to moderate income Australian to be able to rent their homes by providing financial incentives to landlord.

It is no longer open to apply in the foreseeable future. However if individual investors buy an approved property, the scheme will follow the dwelling.

By Tuan Nguyen

property investment

Discussion – First Home Loan Deposit Scheme

First Home Loan Deposit Scheme has been in the news since the Coalition won the election. Let us take a deep dive and see what it is and how you can benefit from it.

Disclaimer: information provided in this blog post does not constitute financial advice, please do it at your own risk.

Tl; dr;

  • The scheme is only for individuals who have not bought a property before, or for couple who BOTH have not bought a property before.
  • May work with FHSSS, according to the proposed plan.
  • Up to 10,000 applications per year.
  • No Lender Mortgage Insurance required.
  • Supports low and middle income class.

The scheme

The Coalition government, in the attempt to win the election, rolled out their plan to help low and middle income families to own a house without having 10-20% deposit. According to the plan, eligible applicants only need up to 5% deposit.

The plan allows average Australian to own their house easier, continuing the Australian dream.

The plan commences on 01 January, 2020. You can apply for it here.

What are the benefits

benefits of first home buyer scheme

Source: news.com.au

Multiple benefits are introduced with the scheme, as seen below.

  • Buyer only needs 5% deposit to apply to buy a property as their home.
  • No Lender mortgage insurance applied to properties bought under this scheme.
  • May work with First Home Super Scheme Saver, i.e. if buyer already has 5% of the property value in their super, they may be able to use that to buy the home they want.

An example of a property that can be bought under this scheme.

Property price $600,000
Buyer’s saving $15,000
Super balance $15,000
Saving + super $30,000 (5%)

With the above financial situation, he/she may be able to buy the property. There is no stamp duty since it still eligible for stamp duty exemption.

Disclaimer: there are other fees that can be applied as well, e.g. lodgement fees, PEXA fees, etc.

The catches

the caveat

Source: murfett.com.au

Of course it doesn’t come free, there are multiple caveats that come with the scheme.

  • Only 10,000 successful applications per year. This is quite reasonable and I don’t think there will be a shortage.
  • Australian citizen only, i.e. PR holders will not benefit from this scheme. Indirectly this reduces the potential applicants amount.
  • If a successful applicant refinances, the benefits will be gone. I.e. they will need to pay LMI once they refinance with less than 20% deposit on the house.
  • Applicants will need to have their annual taxable income less than $125,000; and a couple of less than $200,000 combined taxable income. This should not be a big concern, considering the income threshold is quite high.
  • If applying as a couple, both people will need to be first home buyers.
  • Only supports property that have values up to a threshold, this threshold depends on regions. You can find the full table here.
  • Banks want to charge a higher interest rate on properties under this scheme. More information here.
    • This is understandable. If buyers only have 5% saved up and not 20%, there are chances that they are not as responsible with money. Therefore the risk of defaulting is higher.

Summary

There are a lot of benefits for people who can take advantage of the First Home Loan Deposit Scheme. However they will need to be more responsible with their finance so they can keep their home.

Reading the fine print is crucial for families who apply. There can be multiple conditions that you need to know of before signing the contract.

By Tuan Nguyen