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fMost investors when acquiring an investment property or share portfolio will take a standard investment loan which includes an interest only component. When applying for their investment loan they do not look much beyond the interest only factor. Most accountants and financial planners will recommend an investment loan be taken on an interest only basis because by doing so an investor can claim the same amount of interest each year (the principal amount of the investment loan is not reducing) and save his personal income for a further investment in the future.

Recent tax rulings in Australia (both Private and Public) have confirmed that the ATO will allow for capitalised interest to be deducted when it is accruing on an investment loan or line of credit and being utilised to meet the shortfall in interest on an investment loan or the costs of maintenance and the like on an investment property.

The ATO had an issue in the past where some borrowers structured their investment loan as a package with their home loan debt and under the terms of the investment loan were able to capitalise the interest repayments on the investment loan provided they made an equivalent payment to the reduction of their home loan debt. This enable borrowers to repay their non-deductible home loan very quickly while at the same time enjoy additional tax benefits because of the increased interest accruing on their investment loan. The High Court of Australia eventually decided against this product and held that it was caught by Part IVA of the Income Tax and Assessment Act.

Subsequently other loan products have been developed on which Private Tax Rulings have issued which allow the taxpayer to claim the capitalised interest where he or she has either:

1. claimed the shortfall between the rental income received on an investment property and the costs associated with an income-producing investment including the interest paid on an investment loan. The ATO does not expect a taxpayer to use personal income to subsidise the costs of an investment loan.

OR

1. claimed the capitalised interest on an investment loan or investment line of credit where the terms of the investment loan or line of credit allow interest to capitalise because the investment loan secured against a different property in which the investor has sufficient equity to allow for the capitalisation.

Any investor who is considering an investment loan should ensure that the structure of the investment loan and any other personal debt is such that it will allow him to

1. Save his personal income for personal use (be it a holiday or perhaps the wiser move of making greater loan repayments to his non-deductible home loan debt so this is paid off much quicker.
2. By creating greater equity in his home property he is able to access this equity to arrange an investment loan for further investment and capital gains opportunities.
3. Increase his tax deductible interest which in turn will reduce the actual tax payable on his personal income.

Structure your investment loan properly and you will build your wealth much faster.

fIf you are in the market for a home loan or an investment mortgage it is worth talking to a mortgage broker. By utilising the services of a mortgage broker you are much more likely to access the best mortgage deals in the market at any given time. Most mortgage brokers are accredited with a wide range of lenders and are updated on a daily basis as to what products are on offer. Utilising the mortgage broker doesn’t just save you time it will save you money and ensure that you will be in the picture on the best mortgage deals available.

Surveys show that borrowers who use the services of a good mortgage broker are much more likely to get the best mortgage deals going. Many borrowers only approach their own bank for a loan when they are looking to purchase property but more often than not these lenders promote those loans that will provide the bigger profit to the bank as opposed to giving you a choice from a range of their best mortgage deals – giving you cost savings rather than higher margins to the bank.

A mortgage broker will also know which lenders have special offers on, and this in itself will help you identify the best mortgage deals going and from those decide upon the best mortgage deal for you! Quite often individual lenders will promote a particular loan and if they are after increased market share then they will often waive establishment fees or offer a discount in the first year of the loan. In researching the best mortgage deals these cost savings can have a significant impact on cash flow especially in the first year of the loan when many buyers (particularly first home buyers) are budgeting carefully. Just make sure that the best mortgage deals you choose from are not just the best mortgage deals in the short term but also suit your long term requirements.

Often a standard variable rate mortgage may suit – you don’t need too many bells and whistles but just make sure when selecting from what you or your broker has determined as the best mortgage deals that do give you flexibility in the long term.

These days though it is fair to say that most lenders are happy to accommodate you if you wish to vary your mortgage in some way. There will be a cost generally if you want to add a line of credit or fix your loan or perhaps include an offset account – but at elast you are able to change the terms to ensure that the best mortgage deal for you stays that way over the life of a loan.

Exit costs have reduced over the past few years. This means that even if your lender is not accommodating and at some stage you feel that your loan is no longer the best of the mortgage deals out there, well, you can still refinance at relatively low costs.

At any given time there are many good mortgage deals in the market – to hone in on the best mortgage deals is the key, and using a mortgage broker will definitely help in this exercise.

If you are feeling a little disgruntled about your mortgage rates or if your lender is simply not providing you with the service you desire it may be that you are thinking about a mortgage refinance. The reality today is that while mortgage rates llook attractive for new loans the majority of borrowers who are with the banks are paying the standard variable rate which is currently sitting at around 5.80% p.a. This could be you. It would seem to be a sensible move to weigh up your mortgage refinance options. What do you need to consider in this process?

Most borrowers simply jump into a mortgage refinance and are often well down the track before they realise that the move may not be a viable proposition. Before you spend too much time or any money look at the costs involved in your mortgage refinance. If you are dealing with a mortgage broker in the mortgage refinance process and he or she does not ask you to ascertain your exit costs on the existing home loan you have then quite frankly you should look for someone else to take care of your mortgage refinance. Many mortgage brokers only alert you to the costs of a mortgage refinance in so far as they relate to the cost of the new lender. They do not want to make you too aware of the costs that you will incur if you are exiting your existing loan early. As a general rule if you are paying out your mortgage within 5 years of its inception then the mortgage refinance costs will include early penalties.

Exit costs on a mortgage refinance will vary depending on whether you are in a variable or fixed rate loan. If you are in a fixed rate loan then you will incur “break costs” which as a rule of thumb equate to the difference between your fixed interest rate to maturity of your fixed period and the rate that the lender can currently reinvest its funds for that same duration. Recently many borrowers have commenced a mortgage refinance process not realising that their break costs are significant because of the dramatic rate reductions we have experienced in Australia over the past 12 months. The amount of these break costs may be such that the amount actually required to complete the mortgage refinance is such that the security value will not support the loan or the loan amount represents say 90% of the value and as a result the borrower incurs additional lenders mortgage insurance costs which can also be quite high.

If there are high early repayment penalties on your loan then you need to make sure that the interest rate differential between the existing mortgage and the new loan is such that you will recoup these costs within a 6 month period and thereafter be ahead as a result of your mortgage refinance.

Too often borrowers are ill-advised or embark on a mortgage refinance before doing the sums – as a result the interest saving they think the mortgage refinance will deliver is wiped out by the costs of the exercise.

Check all your costs first – for both the outgoing and in-coming lender before you proceed down the path of a mortgage refinance. It must be a viable proposition to make the mortgage refinance option a worthwhile exercise.

The reality is that the best mortgage is the one that meets all your requirements in a mortgage loan. These obviously differ from one borrower to the next. For a first home buyer the best mortgage is likely to be a basic variable rate loan with redraw and the option to fix your interest rate. No matter what mortgage you are looking for these are the 2 features which are critical to have as part of your “best mortgage” package. Generally basic variable rate mortgages are priced very competitively – you are not paying a higher interest rate for features that you may have no need for.

Some mortgage consultants have pushed the line of credit as being the best mortgage available in the market for those purchasing their own home. The benefit attributed to a line of credit is that it can be an all-in-one style of loan account. You use your line of credit for all your financial transactions. Under this so-called best mortgage deal your salary is credited to the line of credit each month. You use a 55 day interest free credit card to purchase your monthly groceries etc. On the due date for payment on the credit card you draw down against the line of credit to pay off the full outstanding balance on the credit card. In this way your salary is working for you to reduce the interest on your home loan while it remains undrawn. This is because interest is calculated on the daily balance of your loan.

But is a line of credit really the best mortgage for a home buyer? It can certainly reduce the interest but claims by some banks that you can repay your loan faster without making extra repayments is misleading. You may not physically make an extra repayment but the surplus from your salary is exactly the same thing. So be careful if a line of credit is touted to you as the best mortgage for you – it can be a trap in that borrowers fail to make any dent in their mortgage over a long period of time because often there is no minimum monthly principal and interest repayment required. Not the best mortgage after all!

If you are an investor with a home loan, then a line of credit may well make for the best mortgage package for you. By having a line of credit in place you are able to draw on this to meet any shortfall on interest or maintenance costs in relation to your investment property. Instead of using your personal income to subsidise or meet these costs you should apply as much as possible of your salary to repay the home loan faster and use the line of credit for all your investment costs. Including a line of credit in any investment loan arrangement is a sound idea and you can be confident that by doing so you will have the best mortgage structure for your needs.

The best mortgage is not always the one with the lowest interest rates. You must be careful to check out a product carefully particularly if the interest rate is well below the market. You might initially think the low interest rate makes it the best mortgage for you but if you are not able to fix the rate down the track or there are other limitations that could prove costly in the future then this is not the best mortgage for you.

By reducing the cost of investing and increasing the chance that such investing will perform much better than any traditional investing by deducting loan interest.

So, the loan aspect is absolutely critical to generating continuous business for the investor. Property investment can turn into a huge profit generating business.

There are also an increased amount of lenders available for various investment loans. All lenders wish to establish that the property has a sound profit prospect. It will give assurance to the lender of a safe and timely return for the investor as well as limiting the lender’s risk over the investment loan term. All lenders would like to escape the very costly repossession scenarios and prefer instead the safe payback of the loan.

A Mortgage Calculator is an invaluable tool when you are in the market looking for a home loan or an investment mortgage. There are many different types of mortgage calculators but probably the most accessed by home loan borrowers is the mortgage calculator that works out how much you can borrower.

You do not need to feel daunted by a mortgage calculator – they are simple to use and will automatically estimate how much you can borrow. If you have a property in mind that you would like to purchase then these are the steps you need to take to ensure that the mortgage calculator gives you assistance in your property purchase decision.

Step One: Think of a purchase price that you believe is within your reach.

Step Two: Add approximately 5% to the price to cover off expected costs of the purchase.

Step Three: Calculate your expected savings. To keep your costs to a minimum it is best to try and put at least 20% towards the purchase price. This way you avoid the costly exercise of Lenders Mortgage Insurance (lenders will ensure against loss if you borrow more that 80% of the value of the property.)

Step Four: Subtract the 20% cash (or whatever equity you do have) from the purchase price.

This gives you your loan amount.

By making use of a mortgage calculator you now get an idea of whether you can afford the loan amount you require to purchase that dream home.

The mortgage calculator only needs minimal data.

Obviously the first thing you will be asked to input into the mortgage calculator is your income and the income of anyone else purchasing and borrowing with you.

The mortgage calculator will also ask for other income you might be earning such as overtime, second job, share dividends etc.

Once you have inputted all your income details into the mortgage calculator you will then be asked to input the monthly repayments you are making on any other loan as well as the credit card limit on all credit cards you hold. If you hold a number of credit cards you might find that when the mortgage calculator assesses your income, you are not able to borrow as much as you might have expected. In this case simply remove one or two of the credit cards you rarely use and work on the basis  that you will cancel these credit cards before you apply for a loan. The mortgage calculator will show you how much difference fewer credit cards will make to your borrowing capacity.

This is all the data that is required by the mortgage calculator to work out how much you can borrow. If you an investor then when you use the mortgage calculator you will also include the gross rental income you expect to receive from the property you re buying. The mortgage calculator will automatically calculate between 70% and 80% of the gross rental figure and use this as additional income when working out how much you can borrow.

The mortgage calculator is a very useful tool especially when used in the early stages of the potential purchase process. The mortgage calculator immediately provides you with your purchase price range and you can go out and start looking for a property knowing that from a financial perspective you will qualify for a loan. You must remember though that other factors beyond the mortgage calculator figures are also involved in the loan approval process so it is best to speak with a mortgage broker to get his input and expertise.

Prior to the early 1980s a borrower applying for a mortgage would have no option but to apply to their local bank branch manager for that mortgage. At this time in the mortgage industry the banking branch network was wide and serviced many communities throughout Australia.

A mortgage in the 70s was pretty simple in its structure. As a general rule a mortgage was always a standard variable rate principal and interest mortgage. If you were an investor there were private clients who would give you a mortgage on a 3 or 5 year interest only basis. The banks were not in the investor mortgage segment as aggressively as they were in the home mortgage market. Borrowers looked elsewhere for their investment mortgage because the banks charged higher interest rates on a mortgage that was for investment purposes. Even today it is incredulous that banks can charge much higher rates to small business even though they have a mortgage over the business person’s home or other property. The risk on the “business’ mortgage is no greater than for a mortgage where the purpose is to purchase property. At the end of the day the mortgage is secured by property and as such there should be little if any difference between the interest rate on a home mortgage as opposed to the interest on an investment or business mortgage.

In the early 1980s the government had imposed a cap or ceiling on the interest rate a lender could charge a borrower on its mortgage. Many mortgage rates were capped at 13.5% p.a. This seems an incredibly high interest rate when compared to what is on offer with mortgage rates today but during the 1980s interest rates on a first mortgage escalated to over 17.5% p.a. It is amazing that today mortgage rates for first home buyers have dropped to below 5% p.a. There have even been some mortgage rate specials as low as 2.99% p.a. variable.

In the USA the official rates are down to 0.25%. In Australia our Official Cash Rate is at 3.25% p.a. the lowest it has been since 1964! Governments are hoping that these low rates governments will translate into lower mortgage rates and rates for business as well. The lower mortgage rates will hopefully free up the cash flow of many mortgage borrowers with the result that they will spend more on consumable items. This spending is needed in the current dire economic climate because without the demand for goods, factories and manufacturers close down and unemployment rates increase.

Mortgage rates have an important role to play in the economy. When mortgage rates are high, people tighten their belts and do not spend – inflation is kept in check. When mortgage rates are low, people spend more and the economy is stimulated, people are kept in work.

In Australia we have seen fixed mortgage rates increase recently (June 2009) and this is because the banks are endeavouring to capture higher margin (read greater profits) through their fixed rate lending. Nevertheless it makes sense for borrowers to fix their mortgage rates in that fixed mortgage rates are still low by comparison to where they have been over the past few years. The lenders are happy and for the short term at least so are borrowers.