InvestKit As a Newsletter Member you also have access to the InvestKit containing easy to use spreadsheets for researching and locating the right property. If you haven’t yet looked inside the Invest Kit to see what’s on offer, don’t delay because you could be missing out on something that will make a difference to your investment strategy. This month we have added the following:- - A comical pictorial on how the Credit Crunch came about (please be warned about the language) - An article explaining cross collaterisation - An article from Your Property Investment Magazine exploring why Investors use Interest Only loans - PMI Property Report March 2008 This link is not active for those who are not members of the newsletter. Click here to access the Invest Kit

What's your end game? At some point most investors draw up a financial plan - a road map of where they want to be and how they plan to get there. When was the last time you looked at your plan? And more importantly, when was the last time you reviewed what your end game is? Do you still want to retire at 45? Or are you now more specific in your goals, say wanting a passive annual income of $50,000 by the time you’re 50? Unless you keep your ‘big picture’ in mind it’s easy to fall victim to the “hysteria” of today’s media headlines – prices are rising, interest rates are rising etc – without thinking how the purchase fits into your financial plans into the long term. Many first time investors succumb to this “should we, shouldn’t we” mindset, listening to family, friends or taxi drivers, who say now is not the time to buy. Now is never the right time for the naysayers, but now is always the right time for seasoned and experienced investors who are able to make the most of any market conditions to add to their financial plan by building their proprerty portfolio. History has shown that those who try to pick the market often miss the market. Experienced investors always keep their end game front of mind. Before making a decision to buy or sell they consider how the transaction will contribute to their long term goals. They ensure they retain ‘flexibility’ to jump on an opportune purchase. And finally they make sure they can afford the purchase. Rarely do they get caught up in only considering the short term or immediate outlook. The current landscape can be good for the savvy investor as others are scared away. However don’t rule out further investments too quickly. Many areas are experiencing strong rent growths and analysts are predicting house prices have not yet reached their peaks. As reported in BRW on 17 April, many seasoned investors are taking advantage of current market conditions to access recent growth of equity in their properties. If history repeats itself we may see an exodus of funds from shares to bricks and mortar.

Interest Rates – rate and see? Many lenders have added insult to injury recently by increasing their rates above and beyond the official RBA rate rises. So it’s not surprising many investors are reassessing their loans. However if you do, make sure you understand why you are doing so and how it supports you achieving your financial goals. Most importantly limit your borrowings by what you can afford – not what the bank will lend you. The current environment is unusual when domestic and international factors are taken into account. Some of the commentary is not easy to understand. So how do these factors impact and explain what is happening with local interest rates? Put simply – securitisation. Securitisation Securitisation is the process where lenders package their resources (eg a portfolio of loans), convert them into securities and trade them to capital investors. The securities traded have a range of risk profiles and therefore a range of associated returns on investment. It is an important technique, particularly for non-bank lenders as it allows them to raise funds, that banks commonly source from customer deposits. Securitisation has increased competition in the Australian mortgage market, benefiting consumers by allowing many non-bank lenders to offer cheaper products. Securitisation does have a downside. Due to the re-pricing of the risk profiles of tradeable securities as a result of the US sub-prime crisis, domestic interest rates have been rising. Surprisingly it is the big banks who seem quickest to move their rates above the RBA increase. I’ve come across a presentation that explains the US Sub-prime crisis very easily. However – please be warned - despite the innocent and humorous looking stick figures, it does contain some offensive language. If you’d like to really understand what happened in the US and how it has affected the Australian mortgage market This link is only available to newsletter members. Securitisation explained

Otherwise…. The level of securitisation in the US is greater than it is in Australia. However the level of transparency and eligibility criteria is stricter here compared to the US. The weakness of these features in the US, in part, explains the sub-prime market. Not surprisingly the US Treasury Secretary announced last month the introduction of greater regulation and prudential measures. Funds were lent to US customers who eventually defaulted on their loans. Sub prime lending means essentially the people taking out the mortgages had already had defaults previously and to compound issues they started on affordable repayments based on honeymoon discount rates of 1.5% which quickly rose up to 9%. As part of normal banking these lenders, parceled up their loan portfolio (including all the default loans) and sold them to raise funds through securitisation. Australian lenders were among those who purchased these tradeable securities. The risk profiles of these securities were re-priced reflecting the greater risk, or lower return on investment. Before long a domino effect was in play. With a shortage of money on the market, it costs more for lenders to borrow funds to in turn loan to clients. Credit Crunch - impacting everyone Many commentators have claimed this will have even greater long term effect on the domestic market. It may be too early to know if this is true or not but one thing is for sure. Banks are reassessing the profitability of lending money. This has been demonstrated most dramatically in recent weeks by Macquarie Bank and First Permanent, to name but a few, exiting the domestic mortgage market and other lenders reviewing the types of products they will offer with some withdrawing from 100% loans and significant changes to LVR requirements. Another fall out of the credit crunch relates to mortgage brokers. You may have heard that some banks are cutting their commissions to mortgage brokers. Unfortunately this will not translate into a fall in interest rates for clients. The rationale for the drop in commission is one of sharing the pain around. The lenders are passing the increase cost of funds on to their clients through increasing rates however the opportunity to reduce costs through a reduction of payments to mortgage brokers was an opportunity to good to pass up. One bank has reduced broker commissions by 30%. I share this information to demonstrate that the banks seem to have signalled a major change to their routine business operations on all fronts. I doubt when the situation improves and interest rates drop, that brokers will also share the benefit in having their incomes restored. I believe this change alone will see a great reduction in the number of mortgage brokers in Australia. As you can imagine facing a 30% pay cut combined with the changing lending polices making it more difficult to find lending solutions may be too much for some in the next few years. Many experienced investors routinely opt for lo doc or no doc loans when they approach the end of their serviceability, allowing them to make further investments. To really throw the cat amongst the pigeons - Australia's largest providers of insurance which these types of loans require - Genworth and PMI - announced recently significant changes to their policies. This will have major impacts on this routine investment strategy for investors.

Developing a robust loan structure Over the past ten years home values throughout Australia have increased, and in some instances more than doubled. This increased equity provides homeowners with a source of funds they can use. It is up to you on how you use these funds, or if indeed you do. Importantly it is your choice and you should not relinquish your ability to stay in control of your own financial future. Spending time initially to develop an appropriate loan structure specific for you can literally mean the difference between achieving your long term financial goals or not. As many of my clients will attest to, developing the right structure for each client is one of Investors Choice strengths and something of a passion for me personally. Many are now accessing this equity with a realistic fear that they will not be able to in the next year due to a reduction in funds available on the money market. Many believe that you should borrow when you do not need it. However be alert as many lenders are reducing their risks in the current credit crunch by cross-collaterising borrower's homes with their investment property. With this in mind I'd strongly encourage you to review a detailed article I've written on cross collaterisation as a loan structure and how it may effect your growing portfolio. Click on the link to access more detailed information contained within the ICM InvestKit. This link is only available to newsletter members. Cross Collateratisation

No time like the present - tapping your equity As mentioned previously many investors are currently using the current lending policies to access equity they has built up in their portfolio. The main reason this is occurring now is that the lenders and the mortgage insurers have indicated that this may not be possible in the near future. There are a number of reasons why an investor may consider this strategy:- 1. As a defensive strategy, allowing you to hold in the medium term rather than selling. Some use a strategy that uses equity to pay the difference between rent and costs ie interest repayments. This advanced investment stratgey has to be discussed with your accountant and has many implications. However simply in could be an option where future growth prospects are good for a particulat property and transactions cost of buying and selling (stamp duty, agent's commission etc) are high. 2. Offensive strategy. Some are current cashing up so that they can leverage off one of the 3 D's which force people to sell and subsequently allow them to pirckup a bargain. The 3 D's, death divorce, debt. Once again a strategy that some are not comfortable with and should be discussed with your accountant. 3. Because you can. The rapidly changing market may mean that you will not have access to that equity for the next few years. So it creates flexibility in inflexible times.

A final comment

The property market - due to interest rate rises, market uncertainty and a volitile share market - is in a very unusual position. This doesn’t mean to avoid the property market and put your funds under the bed. But it does mean you need to be savvier than usual. Many experienced investors are finding that the strategies we have all routinely adopted are not necessarily the best at the moment. Now more than ever it is critical to ensure you have a robust loan structure and that you have made plans for the next two years especially if you are planning on buying or accessing equity. Please call Investors Choice for an obligation free review of your portfolio.

On a personal note, thank you to the many good wishes following the arrival of my son Max in late November. There has been more good news. Many of my clients will have spoken to Debbie in the office at some stage. We hope you join us in congratulating Debbie on the birth of little Hannah, arriving safe and sound in early April.

Till next time, I wish you prosperous investing and happy house hunting.

Jane


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Disclaimer: You should always speak to a financial planner or accountant about your particular circumstances, the hints mentioned here are for general discussion only and do not relate to your particular circumstances