In the year 2017, with almost zero knowledge on how to invest in the stock market, I was able to learn, navigate and invest in Australia Stock Market (ASX). Not bad for self learner.
This year, I decided to learn how the Australian Property Market. This repo will served as my notes, where in I can dump information, links, articles, jargons, that I learn along the way. Maybe in the future, If ever that I decided to buy my own property or join the real estate game, then this wiki will serve as my guidance. 😁
For those who are also based in AU, feel free to contribute.
- Equity - Currently defined as the difference between the current market value of a property less the outstanding mortgage balance.
Purchase Price: $650,000
Loan Amount: $450,000
Total Equity: $200,000 (This is the equity)-
Mortage - Loan from the Bank.
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Loan Amortization - The process of making loan repayments and can be depicted in loan amortization schedule, which is basically a table that depicting all loan repayments over pre-determined time frame.
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Investment Property - Any property secured or purchased by a person, that generates capital growth or appreciation over time. They are either leased out to tenants.
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Negatively Geared Growth Properties - Properties that are closed to CBD areas of Autralia. These are town houses, apartments, detached houses. They have a consistent capital growth of 10% and rental return of 4.5%. Historically, these type of investments doubled every 7 to 10 years since 1901.
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Cash Flow Positive Properties - These are located away from the CBD of Australia. They usually found in regional centres or mining towns such as Gladstone in QLD or Portland in Western Australia. These properties are also consists of detached town houses, apartments, etc.
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Primary Place of Residence - Property that is main purpose of the buyer is to occupy the property. Having said that, some investors will often buy these properties and eventually turning them away into investments into the future.
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Loan to Value Ratio (LVR) - one of the key ris considerations of the underlying security that is undetaken by lenders when looking at a mortage application.
Formula:
Value of the Property: $ 600,000
Buyer's Deposit: $100,000
Loan: $500,000
($500,000 % 600,0000) x 100 = 83.33
Loan to Value Ratio = 83.3 (LVR)The higher the LVR, the higher the risk associated with the loan. Every property has an acceptable LVR assessed by the banks.
- Principle and Interest (P & I) Loans - The most common way to repay a mortgage.
- Interest Only (IO) Loans - Are popular with property investors, where only the interest component of the loan remains unchanged during the life of the loan. You can build significant wealth faster and to a large extent more safely by utilizing IO than widely accepted P&I.
In the introduction of the 'National Credit Consumer Protection Legislation (NCCP)', most interest only loans are set for 5 to 10 years then revert back to Principle and Interest (P & I) loan.
It is worth noting that Australian Property market is 3x bigger than the Australian Stock market.
Whenever investors borrows ABOVE 80% LVR in order to buy a property, he will need to pay Lenders Mortgage Insurance. This insurance simple refers to premium that is payable by the borrower, protecting the mortgagee agaisnt an event whereby the borrower defaults on their mortgage.
Only applicable on:
- Above 80% LVR
- 60% LVR for no doc loans.
The LMI value depends on the LVR percentage, let say you are borrowing 81% LVR, on a property purchase, the LMI premium might be 0.3 of the total loan amount compared to 95% LVR where the LMI premium may be as high as 3.5% of the total loan amount. To put that into perspective.
@ 81%
($600,000 @ 81%) = $486,000 x 0.3 = $1,458
@ 95%
(600,000 @ 95%) = 570,000 x 3.5% = $19,950To avoid LMI, the investor needs to deposit 20% of the total property value.
Start with the lenders that have the hardest and most stringent credit scoring policies and serviceability criteria. The logic behind this approach is that you want the hardest ones and move down the list every time you step down a level, the banking lender's criteria become easier to meet.
Order of Lenders:
- Banks - ANZ, NAB, Westpac, CBA, Bank of Western Australia, ING Bank, Suncorp, CityGroup, Macquarie bank, HSBC bank, AMP
- Credit Unions - Credit Union Australia, Australian Central Credit Union, Savings and Loadn Credit Union
The most important aspect of loan to a property investory is flexibility and loan features, more specifically, ability to unlock equity with ease and have access to funds at hand in the event that the property becomes available to the market while the least important aspect of a loan is the interest rate given that we are currently in a low interest rate environment.
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Basic Variable Loans - Design by the banks as a bait punter, due to its very competitive low pricing. Banks just want to get traffic through the door. It's interest rate moves in line with Reverse Bank of Australia. No offset facilities, no redraw.
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Standard Variable Loans - The most popular loan in Australia. Interest rate is priced slightly higher than basic variable loan. Available redraw facilities and loan splitting, interest rates moves with RBA, allowance for making additional payments.
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Fixed Rate Loans - Allows the borrowers to fixed the interest rate loan for up to 15 years. Once the fixed period is expired, it reverts back to lenders standard variable interest rate, however nothing stops investors from refinancing the loan with another lender for another fixed term.
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Introductory / Honeymoon Rate Loans - Clever marketing ploy to capture first time buyers and new borrowers. Borrowers pay a discounted interest rate that is significantly lower than the standard variable rate. Once the promo is over, it will revert back to standard and variable loan.
Rather taking out the honeymoon rate loan, First time home buyers or new investors would be better off with a professional package with a 100% offset facility in most circumstances.
....to be continue