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Hank Hong Answers Your Home Loan Questions

How does a trust structure work?

Is buy a commercial property better than buying residential?

What do first home buyers and foreign investors need to know about the Australian property market right now?

For the second time this year, Home Loan Experts senior mortgage broker Hank Hong has held a Reddit ‘Ask Me Anything’ (AMA) session to help home buyers once again make sense of home loans and the Australian real estate market.

Last time, he answered questions about non-resident mortgages, unusual employment situations and refinancing.

Here he is, back again, and he has plenty more mortgage secrets to tell you!

Is a trust structure a good way to buy assets?

Trust structures are excellent tools if you need protection or you want to reduce your taxable income. They’re also a great way to keep property within the family group.

Trusts are set up mainly for the following reasons:

  • Tax benefits: By using the trust to distribute your income to your family members with lower taxable income, you can effectively reduce your tax bill.
  • Asset protection: Trusts allow you to control and receive income from assets without actually having them in your name. In the event that you’re sued or you have to go through a divorce, this may provide protection for these assets.
  • Estate planning: Some trusts may let you effectively pass the assets on to future generations without the need to pay excessive taxes or going through estate disputes.

Please note that the trust structure may be an expensive option for a single income family.

This is because the account will charge more and more each year and would require you to pay around $1,500 in setup fees.

Should I buy one property in Sydney or a few outside of Sydney?

Property prices in Sydney have been quite expensive for a long time and most industry reports suggest either continued growth or a slight correction.

Sydney has always outdone the rest of Australia and it’s running out of space. In spite of this, some of the property prices in Sydney can’t be fully justified.

There have been people who’ve bought 3 units in Brisbane and Melbourne for the same price as one unit in Sydney!

Building up your portfolio with cheaper properties outside of Sydney isn’t a bad way to go. House prices in Australia have been increasing steadily each year and a couple of properties to your name outside of Sydney may not be a bad investment.

Ultimately, it depends on how you want to move ahead. If you’re planning on living in Sydney, then buy in Sydney. If you want to diversify and build your portfolio, buy outside of Sydney.

Either way, get your foot in the door!

How are banks viewing property investors currently?

Right now, many banks and lenders have moved on to a maximum 80% lend (allowing investors to borrow up to 80% of the property value) on investment loans. However, this isn’t the case for all banks as a select few will still let you borrow up to 90% of the property value or Loan to Value Ratio (LVR).

Even if you’re eligible to take out a 90% investment loan or even up borrow up to 95%, your LVR could still be restricted because some banks aren’t taking negative gearing into account. The rates on investment loans are also being set higher than standard home loans.

Current rates for investment loans are sitting at about 4.40% to 4.65% and most banks aren’t offering any further discounts irrespective of the loan amount.

In essence, it’s a testing time for property investors.

Is a commercial property a better investment than a residential property?

A residential property, in my opinion, is a better investment than a commercial property.

Although the rental return on a commercial property is usually higher than the growth on a residential property, the risk of vacancy is also higher. In contrast, residential units can be rented fairly quickly.

You’ll also need a higher deposit for a commercial property, ranging from 20% up to 40% depending on the type of security it is. It’s an excellent investment if there’s a long term tenant though.

Of course you’ll need to look into location, future infrastructure and possible new buildings before you invest in either one.

Should I invest in property or in shares?

Investing in property is a simple investment vehicle. It has always performed well in the past, and now, research and education tools for it are readily available.

In most cases, putting $50,000 into a property which has rental return and tax breaks will have a higher return than investing the same amount in shares or managed funds.

It’s a lot less work than playing the share market, which has more ups and downs.

However, diversifying into both is a good option: purchase an investment property first then buy shares, or use shares to leverage into a property.

To actively make money from shares, you’ll need to follow trends and possibly trade a few times a week.

For those who don’t know much about the share market, this could be throwing money into the wind!

First home buying

Should I buy property now or wait for prices to slow down and then buy?

Personally, I suggest you try to get into the property market as fast as possible with whatever deposit you have. If you try to save 20% plus costs, it may take another year and prices may go up $10,000 or even $20,000!

If you buy now then you’ll have recouped your money as long as the market goes up. Although I do believe a slowdown is coming in the Australian property market, it should not be too significant.

If you want to buy now but you don’t have a 5% deposit in genuine savings, you can go for a no deposit home loan or a no genuine savings home loan.

One of the most popular options is a guarantor loan. It helps if you’ve been nice to your mum and dad!

Is it always better to buy land instead of apartment units?

If you’re buying to live in the property then it depends on your personal choice: whatever makes you happy.

If you’re investing, then land tends to be a better investment because it’s more scarce than apartment units.

However, a unit closer to the city or a high density area can work the same way as a piece of land far away.

Bear in mind that many banks are quite conservative when it comes to these types of security so it pays to speak to a mortgage broker that specialises in unusual property types.

Why is a 20% deposit the ideal deposit?

Although saving a 20% deposit can be quite a struggle, it’s actually the ideal amount as it removes you from having to pay Lenders Mortgage Insurance (LMI), a one off fee usually charged by the lender when borrowing over 80% of the property value.

Your current income and expenses, along with the property value and your deposit, dictate your borrowing power, the amount you can borrow on a home loan.

It’s always best to get into the property market as soon as you can so you may try for a 15% deposit, 10% deposit or even just a 5% deposit.

Use our borrowing power calculator to work out how much you can borrow.

Foreign investors

How does foreign investment work here in Australia?

Foreign investors are allowed to buy property in Australia as long as it’s a new property, that is, a property that’s never been lived in before. In order to make the purchase, they’ll need the approval of the Australian Foreign Investment Review Board (FIRB).

As long as the FIRB approves the purchase, there should be no issues for you in investing. In the past few years, this process has been quite easy and foreign investors have been able to buy houses or units with no issues.

As a result though, many of the locals have been outbid by foreign investors from other countries, who deem Australia as a better investment location than back home.

What foreign investors should be aware of is new legislation targeted at curbing the number of non-residents investing in Australian real estate. Nothing official yet but watch this space.

Should I go for a fixed, variable or a hybrid interest rate?

If you’re not planning on making additional repayments, go for a fixed rate.

In this current market where you have 5 years fixed rates at 4.50%, you can go hybrid depending on how much you plan to pay off.

In the current market, I’d personally go for an 80% home loan fixed for 5 years and then have the remaining 20% as variable. Please note that the percentage may vary according to the situation.

This allows stable repayments and lets you use your offset account effectively.

You can find more information on whether to fix or stay variable on this page.

Need a home loan but not sure what’s right for you?

Call us on 1300 889 743 to speak with Hank or any of our other specialist mortgage brokers and see how we can help find a home loan, investment loan or commercial loan solution.

It may sound strange but many customers call us thinking they’re pretty sure what they need but after speaking with us they can put their situation and needs in perspective to make an informed home loan decision.

Alternatively, you can complete our free assessment form and we’ll get back to you within 24 hours!

Disclaimer: The above must not be taken as financial advice. These are views and opinions expressed by the specific mortgage broker and don’t necessarily reflect the company’s views. Please speak to a financial professional before making any decision relating to finance or investment.