While property values took a hit in the wake of the GFC, they certainly didn’t stay down for long. After dipping 5% in 2008, Melbourne house prices grew by a massive 17% in the first 11 months of 2009, according to RP Data, reaching a new record of $580,000. Apartment values soared 19% to reach a median value of $440,000 during the same period.

Fuelling this extraordinary price growth is the high demand caused by strong population growth, coupled with an undersupply of housing. Put simply, there are more people moving to Melbourne than there are houses for them to live in.

At the same time, rental yields are on the increase, with forecasters BIS Shrapnel predicting rental growth to exceed 6% in 2010.

So what does this mean for property investors?

Well, for those that bought real estate in Melbourne’s inner ring suburbs during 2009, give yourselves a pat on the back. During the last year at Super Finance alone we spent much of our time advising and helping clients purchase the properties that have gone on to perform so strongly - so we know there must be plenty of you.

If you haven’t yet purchased but are still considering your options, now is the time to act on well-located, good quality property situated in Melbourne’s ‘inner ring’ - those suburbs within 10 kilometres of the CBD.

Why the inner city? To begin with these phenomenal growth rates are unsustainable - which means that policy makers will be forced to undertake measures to avoid a housing bubble in Melbourne.

“The main worry is that home prices are rising at unsustainable rates is some capital cities, such as Darwin, Hobart and Melbourne,” warns economist Craig James from CommSec. “The last thing anyone wants to see in 2010 is another boom-bust scenario.”

Measures could include interest rate hikes and an increase in supply, such as fast-tracking land releases in outer suburbs and high-density developments in inner Melbourne suburbs.

More housing options will have the effect of slowing price growth as supply floods the market, but it’s important to remember that large multi-dwelling development projects take several years to come to fruition. Projects in the outer suburbs are likely to move into the development stage much more quickly than construction of a 30-storey building in St Kilda or Port Melbourne.

There is no quick fix solution to the current environment, but it’s clear that demand for inner city housing – from both renters and buyers – remains strong. Demand fuels growth, which means inner suburb investors will be best placed to enjoy increasing rental returns and sustained price growth for years to come.

These are complex times and the market is changing at an unprecedented rate, the likes of which we haven’t seen for two decades. As always, Super Finance is happy to provide impartial advice and to answer questions and guide clients through any challenges they face.

Last week the leading industry analyst and economic forecaster BIS Shrapnel announced that they were anticipating rental growth to surge by about 6 to 7 per cent in 2010.

The reason for the anticipated surge in rental property income is mostly due to the fall in construction of new medium and high density housing. It’s demand and supply at work - and supply during 2009 has fallen by around 30%, with construction at it’s lowest since 1991.

If you’re a property investor, you might already see where this is heading.

Put simply, lower housing supply equals higher housing demand - and along with that comes higher rental property returns for investors. And with the figures that BIS Shrapnel are working on, those increased returns will be significant.

Over the next three years the national average rental growth is anticipated to be 5.8 per cent per annum. This means that households will be passing an extra $1.9 billion to their landlords each year.

Here’s an example of what property investors could gain.

Let’s say my investment property is currently rented for $410 per week. Now I would like to think that I have bought in an area that will increase by more than the national average anyway - but if we just apply the above figures as they are - my rental rental returns should look like this:

2010 - $434 per week - or an increase of $1,248 per annum compared to 2009
2011 - $459 per week - or an increase of $2,548 per annum compared to 2009
2012 - $485 per week - or an increase of $3,900 per annum compared to 2009

That’s a great outcome because it means that in 3 years time, my $430,000 property will be providing me with a hefty 5.86% return.

So what’s the good news for home buyers?

High rental rates also provide a real incentive for those looking to enter the property market as home buyers. As rental prices rise, the benefits of becoming a home owner increases as well.

So let’s look a similar situation from a renter’s prespective. If you wanted to purchase the above property instead of renting it, here are the expected repayments on a $400,000 mortgage, including the likely interest rates increases:

2010 – 6.5% average interest rate over that year - $584 per week
2011 – 7.5% average interest rate over that year - $645 per week
2012 – 8% average interest rate over that year - $677 per week

And here’s how you can create wealth by buying your own home.

The real ‘cost’ of home ownership is your mortgage payments, minus the rent you would have paid if you were still a tenant. In this example you would be paying around $7800 extra to own your home in 2010.

Now remember, that money is paying down your mortgage - it’s putting equity into your home. At the same time, the market value of your property is rising - so if your property was to increase in value by just 5%, you will have created equity - or wealth - worth $21,500. That makes a very good return on the ‘cost’ of owning your own home.

You can see that if you’re currently renting a home to live in - and you’re not quite comfortable with buying an investment property and continuing to rent - your next best choice would certainly be to purchase your own home.

This morning I met with a client who had previously had her loan rejected by one of the big banks. After talking a while it came up that the bank had been offering one hour home loans - that’s not just approved, but loans signed sealed and delivered in less than sixty minutes.

My first thought was: I couldn’t choose a new pair of shoes in an hour, let alone find my clients the right home loan in that time.

When you take out a mortgage you’re essentially buying money from the bank. And just like any other purchase you make, there’s a whole range of different products to choose from. Each one has it’s pros and cons, and each one is suited to different people’s needs and circumstances.

Imagine you were buying a new pair of sports shoes, for example, It’s likely you would try on at least several different pairs. The salesperson would find out what you were using the shoes for, whether you had any specific needs, and so on. Put simply, you wouldn’t buy a pair of cross trainers to play football in - and chances are you wouldn’t walk out of the store in much under an hour.

Thinking of it that way, buying a 300,000 mortgage - that you need to live with for years to come - in less than sixty minutes suddenly seems a bit rash.

Even the most straight forward home loans will take around half an hour to formalise on paper. So putting that time aside, your lender has just thirty minutes to understand what your finance needs are, what your plans for the future could be, and how both of these things fit with your lifestyle and determine what finance that will work best for you.

It doesn’t happen.

Instead what you get (or what you don’t get) is an off the shelf home loan that’s just the same as the next person’s - regardless of your particular circumstances. You could get lucky and land a loan that happens to be right, but the odds are against it. It’s like walking into a store, grabbing the first pair of shoes, and crossing your fingers that they even fit, let alone that they’ll be designed for what you need them to do. It’s a lucky dip - and it’s not worth a couple of hundred dollars, it’s worth years and years of hard work.

If only the lender Susan* called on had taken a little more time to understand where she was at, they might have found how they could organise a loan that would work for her. But when you only have thirty minutes, it simply becomes impossible.

Susan could well be lucky her loan was rejected the first time around. Now she has the opportunity to not only get the home loan she wants - but to get the home loan that’s right for her.

*Not my client’s real name.

The question of whether to go for a fixed or variable interest rate inevitably confronts both home buyers and property investors. Coming to a decision can often feel like trying to predict the future. Will rates rise? By how much? Will they fall even further? Of course no one can say with certainty what will occur in the market, so that basing your decision on predictions alone is not a great idea.

FIXED RATES COME AT A PREMIUM, AND CARRY A COST

What we can say with certainty is that in the short term you will pay more for a fixed interest rate.
A fixed rate is like insurance. At the moment a fixed rate will cost you around 1.5% more than a variable rate - that’s the premium you pay your lender against further rate rises. If the variable rate happens to climb significantly while you’re loan is fixed, you could come out even. Should rates stay the same, or rise only slightly, you’ve lost money that you could have used to pay of your mortgage faster.

HOW FIXED RATES CAN MAKE IT HARDER TO GET AHEAD

Here’s an example…

Imagine that you take out a home loan today for $300,000, and decide on a fixed rate for three years. At 1.5% above the variable rate, you’ll end up making about $4500 extra in repayments each year. If interest rates stay pretty much the same for the next twelve to eighteen months, you could end up making nearly $7000 in extra loan repayments than if you had chosen the variable rate.

That’s $7000 which you could have used to pay down your mortage. Let’s be clear, in this scenario, rates would need to increase by about 3% in the second half of your fixed term before you broke even.

History does tells us that interest rates are likely to rise, but unless we know just how significant those increases will be, fixing your loan becomes a gamble you’re paying to take against your lender.

VARIABLE RATES ARE YOUR INSURANCE, WITHOUT THE EXTRA COST

On the other hand, opting for variable while interest rates are low allows you to pay more of your mortgage sooner. What’s more, the gains you can make paying today’s variable rate will also provide a buffer against possible rate rises in the future.

There are some very specific circumstances where fixed rates are appropriate. But most often our answer is to opt for variable. With the right advice and a disciplined approach to budgeting and mortgage reduction, we see our clients achieving better results with a variable interest rate mortgage.

Are you on a fixed or variable home loan? We’d love to hear what’s worked for you.

Cheers,

Yannick

Pleasant Surprises That Make Us Smile

I can never help but share the trials and tribulations my clients experience as they move closer to getting into their new home. There are inevitably ups and downs, but recently we’ve found some people who go out of their way to help make the process as smooth as it can be.

Arranging great finance is an obvious - and critical - part of buying a new home or property. But the reality is that you’re relying on other people to do their jobs well too. Real estate agents, building and pest inspectors and removalists all influence how smoothly your property purchase (or sale) goes.

Then there’s your conveyancer, or lawyer - the people ultimately responsible for taking care of all the legal aspects of the sale, including the crucial exchange of contracts that allows you to take final ownership of your new property.

Without a reliable, proactive conveyancer or lawyer, there’s a lot that can go wrong - including your purchase falling through altogether. Unfortunately, really good professionals can be hard to find, and we’ve shared the frustration caused by a lack of professional service.

Recently, however, we’ve had some good news stories. Many of my clients have been using Aldgate Lawyers in Richmond, Victoria, and on more than one occasion these lawyers have gladly gone above and beyond expectations when my clients have need that extra attention.

Here are just a few things that make Aldgate stand out from the rest:

• They’ve not yet charged clients over the initial quote (unlike many others).

• They have even completed work for free for some clients who needed help…

In one instance our client needed to get out of a contract. Since there was no sale there was no conveyancing - so effectively there was nothing in it for them. Yet Aldgate helped the client out of the contract without ANY charge.

• Their lawyers are always in house when needed

Of course this seems like a basic thing, but I’m sure you’ve already experienced how hard it can be to get professional service providers on the phone you need them.

• Aldgate have shown an above average level of professionalism and flexibility - particularly on several of the more complex files they’ve worked on for our clients.

However much we’d like buying property to always be easy, the reality is that it’s a complex process. At Aldgate, the lawyers specialising in property conveyancing have always been able to succesfully finalise transactions - even in the most difficult cases.

Finally, Aldgate even offer a money back service guarantee - an unheard of level of commitment in this industry.

Okay, I might sound like I’m writing a blog for the lawyers at Aldgate. But as well as letting you know how much a good conveyancer or lawyer can make your life easier, I must declare some self-interest - when you have a great lawyer it makes our life at Super Finance that much easier too!

Cheers,

Yannick

I’ve been working with clients helping them to buy property ‘off the plan’ for some time now. In the right circumstances, it’s a fantastic way to get into the property market - either as a first time buyer or an investor. So I thought I’d share what we’ve been doing to make it happen.

Financing property off the plan lets you buy at (and lock in) today’s market price - and simply work on a 10% deposit while the project is being built. This saves you a lot in stamp duty, and often offers big tax depreciation benefits on the finished property.

I’ve put together a couple of case studies to show how it might work for you. The first scenario is for a single, first time buyer. The second scenario shows a married couple investing in a second property.

David’s Scenario

David’s living with his parents. He’s on full-time wage of around $52k and has about $10,000 in savings. We’ve helped him find an off plan apartment (to be completed in 24 months) for $410,000.

A 10% deposit is required to secure the property, so we organised a personal loan for $31,000 to supplement David’s existing savings.

David then had a couple of years to simply focus on repaying his personal loan. When the apartment was complete we settled by organising finance on the balance owing. So here’s where he’s at now:

• David’s saved about $16,000 in Stamp Duty.
• With his property valued at $433,000 on completion - David’s made about in $23,000 in equity just by holding the property during construction.
• The property was leased within three weeks of settlement - for rent exceeding 5.2% of the purchase price.
• David now only needs contribute about $80 / week to his property.

Susan and Michael’s Scenario

Susan and Michael are married and living in their own home with their two children. Together their income is around $97,000pa. Their home is worth 560,000 and they have a mortgage of $300,000.

We’ve helped Susan and Michael find an off plan apartment for $510,000. It’s expected to be completed in two years. To pay the 10% deposit we organised an interest only loan against their home. Then, for 24 months they only needed to meet the very low repayments to hold the new property.

When the property was complete, we increased the initial $51,000 loan to $105,000. This let us raise Susan and Michael’s deposit to 20% and eliminated the need for mortgage insurance - which saved them thousands.
To finalise the purchase we organised an 80% loan against the new property. This is their position now:

• They’re new property was valued at $525,000 on completion - so they’ve already made $15,000 in equity just by sitting on the property while it was being built.
• They immediately leased the new property - with a rental return just above 5%.
• Susan and Micheal’s ongoing contributions to the property total just on $100 / week.

What you need to look out for.

Buying and financing property off the plan has really great financial benefits when it’s done well. Still, remember you’re buying on plans only, so there are some things you need to look out for.

Do your homework on the project’s architect and builder. Have they finished other projects you can check out? What indications are there of they’re capacity to finish the project as described. The time-frame for completion is also important - it could seriously impact your portfolio development.

Lastly, keep in touch regularly with your finance consultant during the development process. It pays to make sure you’re staying on track to secure the property once it’s complete.

Already bought property off the plan? How did your experience add up? Can you see this approach working for you? I’d love to hear your comments!

Yannick

This morning I had an idea.
There’s generally one of two reasons people wake at 6.00am with mortgages on their mind. They’re either working out how they’ll finally get one - or they’re working out how they can pay off the loan they do have easier or sooner. I’m no different - except that when I wake bright-eyed at six am thinking about home loans its probably because I’ve just found another way to make them work better.
It’s what I do.
Too often us finance consultants live behind computer screens in quiet offices. But anyone who knows me knows I love to talk. Preferably to people. So I’ll be using this blog to share the insights I have on everything to do with getting and using finance. You’ll get an ‘insiders’ point of view. The fact is there are lots of ways to get a better deal on finance - once you understand what lenders want and what is and isn’t possible.
That’s what this blog is about. Real world information that comes from talking to people about their circumstances and what they want to achieve.
Hopefully you’ll find information useful to you. If you do - fantastic. If there’s any questions you have along the way then leave a comment and I’ll do my best to answer. Or just get in touch via the website.

Cheers,
Yannick