Welcome to the March issue of the Investors Choice newsletter; and a very special welcome to all those who’ve recently joined us.

I hope you’ll find the monthly articles interesting and get some great use out of the online Investkit jammed packed with investor resources and spreadsheets.

As some of you may be aware I am currently living through a fairly demanding renovation that I’m happy to say is almost complete. If you would like to see a picture of my latest renovation then check out the March edition of the Money Magazine in which I'm appear in a story about property investing.

In the last few months I have been asked to speak about property finance and my own investing experience at many seminars and conferences, including Victoria, Queensland, New South Wales and South Australia. Time and time again during the post-talk Q&A sessions, the same types of questions come up. Having realised there is lot of confusion out there about borrowing and investing, I will provide some answers to the more common questions in this month’s newsletter. So let us get back to basics this month and cover some of the things every investor should understand.

Jane

InvestKit As a Newsletter Member you also have access to the InvestKit containing easy to use spreadsheets for researching and locating the right property.   The link to the InvestKit has been removed. If you sign up for the newsletter you will have access to the InvestKit

Back to Basics Q: LVR. What is it? A: LVR stands for loan to value ratio; or the percentage you borrow against the value of the property. For example, a $250,000 house with a loan of $200,000 has a LVR of 200000/250000 = 80%. This is the simple bit. The difficulty and confusion is often because different lenders have different policies (….not surprisingly) and will sometimes lend at a different LVR against different types of securities…….Confused yet??? Don’t be.. For instance very few traditional lenders will lend against 4 apartments on the one title and if they do, it may at an LVR as low as 60%. Meaning you would need a 40% deposit. If you think through the reasoning behind this you will see where they are coming from. If the unthinkable were to happen and you defaulted, they’d need to sell the security (those 4 units on the one title). If the units were strata titled they could sell them individually to ‘first home buyer’, investors, or people generally interested in buying a home. However because of the single title (meaning the 4 units have to be sold together) the market shrinks to just investors, which results in limited competition and higher risk to the lender in getting rid of the property at a fair market price. Securities recognised to have a low LVR include large rural properties; retirement villages; student accommodation; builders lease-back display homes; vacant land; company title; and commercial property. However lenders do have different policies regarding what they are prepared to offer and this can vary widely. Just because one lender requires a 40% deposit does not mean the next will. Which is why it’s a good idea to shop around and compare: a task made much easier and quicker with an experienced mortgage broker. Q: What is a 100% home loan? A: Contrary to popular belief, a 100% loan does not mean that someone with no money can turn up to the bank, take out a loan then go off and buy a house. The 100% LVR loan can be managed a number of ways, each with its own set of pros and cons. Here are a few scenarios for consideration: 1) The ‘first home buyer’ Pro: You can borrow 100% of the property price (as confirmed by the lenders valuation), and in many states and territories the State Government assists with additional support to the First Home Buyers Grant of $7000. Con: You cannot however borrow more than the property is worth…. however never say never for a higher interest, higher application fees, high mortgage insurance some niche lender may, however the cost may not be worth it. In addition to the purchase price, you will require funds to cover the Lenders Mortgage Insurance (LMI), the solicitor’s fees and the loan application fees if they exist. In most States you will also have to come up with the stamp duty on your property purchase, this could be as much as $15,000 on a $400,000 home (Vic). In NSW the Stamp Duty is waived on houses under $500,000 so it if you have the $7000 First Home Buyers Grant this may be enough to cover your costs. 2) The non ‘first home buyer’ Pro: You can borrow 100% of the property price (as confirmed by the lenders valuation). Con: You get no government support and you must come up with all the costs mentioned above, as well as the stamp duty. For example in Queensland, the additional cost on a $300,000 purchase with a 100% loan would be $20,000 (approx $9000 of this being mortgage insurance). 3) The person who uses their existing home as additional security (surprisingly, many people do not even know they have done this). Pro: (As you’re sure to hear from a colleague in the lunchroom sometime soon) “It’s easy to get a 110% loan from XYZ bank. They covered all the costs of my new property”. Note: There is no mortgage insurance with this strategy. Con: In this case the lender has used the borrower’s home (or other properties) to secure the loan. When the bank holds the security of your family home to support your investment property it can create a house of cards, reducing flexibility and in the least making it difficult for you to switch to another lender in future should you so desire. Most commonly though the lender has taken ‘control’ over the equity in the home in return for the 110% loan. In reality they may need only take a loan of 5% or 10% or (if you don’t want to pay LMI then) 20% loan from the home and the investment property is set up as a standalone loan for 95%, 90% or 80%. Why give up all or even a limited amount of control over your home when it is not needed? Q: How does Lenders Mortgage Insurance (LMI) work? A: Strictly speaking LMI should make up an entire article on its own, but basically if you are borrowing money with a less than 20% deposit (ie a property with a higher LVR than 80%) the lender will buy insurance to protect them in case you default, then cover their costs by charging you. There are two major mortgage insurers in Australia; Genworth and PMI and 90% of lenders insure through one or both of these. Based on the lender’s volume, relationship, default rate etc they can negotiate their own premium with these mortgage insurers. For example, a 90% LVR loan with one lender may cost you $9000 as we saw in the scenario mentioned earlier, however another lender could charge you only $7000. To explain LMI more fully, let’s go back to 100% loans for a moment. The way the lender calculates the premium is a little fuzzy but essentially it is based on your loan amount and the LVR. If you were borrowing 100% of $300,000 then the LMI premium for the lender in this example is $9000 however if you borrowed 97% the LMI premium is $6000 and you save $3000! Now the good news is that some lenders (more than the number who will lend 100%) will lend you 97% but capitalise the LMI premium (meaning they add this cost to your loan). So in effect you can have a 100% loan with 3% being your deposit (or your equity in the house). OK so you might only own the toilet but you will own some of the property and you will have paid a lower premium to do so, regardless both scenarios cost you $9000, however with one you end up owning some of the property. In my opinion, the major benefit of LMI, is that it buys you time in the market. If you are against paying LMI - some people are - and if you only have a 3% deposit plus enough to cover costs, your alternatives are: your family lends you the money; the family uses their home to guarantee your loan; (a sort of cross-collateralisation as mentioned above, where the bank takes control over the equity in one property to secure the new property); or you save, save, save for years to get to the 20% deposit. FYI: to save a 20% deposit (on the $300,000 example above) you would need $60,000 of your own, plus approx $12,000 for costs (stamp duty etc) so $70,000-ish. So it may take you five years (or more) to save for that $300,000 property. But while you are saving, time is marching on and so is the market. The area where you spotted that $300,000 house has had a mini-boom and ‘your’ house is now worth $400,000. The person who did not want to pay mortgage insurance now has to find an additional $20,000 for a deposit and another $4000 in fees and stamp duty. Hence more years of saving and they still have not bought a house. Many consider the smarter course of action is to pay the LMI premium and buy the house now. In five years time it could be worth $400,000 and you have to ask yourself is this worth the $6000 premium? The added bonus is that the LMI is a borrowing cost - check with your accountant but you may be surprised to find it is deductible over 5 years when it is charged for an investment property. Don’t forget: If you have any property investment questions or challenges you would like me to tackle in future newsletters, please do not hesitate to let me know via email at jane@investorschoice.com.au

Just a quick one Recently I discovered QuickMaps on the Australian Bureau of Statistics website. QuickMaps are designed to provide users with quick and easy access to thematically mapped Census statistics. The maps will be available for larger geographies and will depict selected population, ethnicity, education, family, income, labour force and dwelling characteristics. All you need is a postcode and then you choose a topic for instance, home ownership and house price and a map will show you the information. Be warned the information is from the 2001 Census, however it may be an interesting site to watch when the latest Census is updates. When looking to buy a property remember information is power so look outside the normal areas for research - you may be surprised what you find. For those not reading this email on html copy this link into your explorer address line. http://www.abs.gov.au/ausstats/abs@.nsf/mf/2063.0?OpenDocument Link to QuickMaps

Till Next Month

A final word about investing. Just do it.

I have met so many people over the last few months who have told me how long they have been thinking about buying an investment property - some have been thinking about if for over 10 years! Research is important but beware of paralysis by analysis. At some stage you need to take the plunge and with the markets seeming to be on the rise and the share market reporting a little instability now may be the time.

As always, if you find the information in this newsletter useful or at the very least, thought provoking please forward it to others who may benefit. My business is based on referrals and I appreciate your support.


Until next month, I wish you prosperous investing.
Jane

PS: at Investors Choice we believe in sharing our systems, information and resources. Our website is continually updated to reflect any new information we think you might find of benefit. Check out the website at www.investorschoice.com.au

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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