Non-Resident Loans

Non-resident and ex pat lending:

Non-resident and ex pat lending is a very interesting and often misunderstood segment of the local lending landscape. This is primarily due to the fact that there has been, and continues to be quite a bit of change with regards to lenders and their appetite for these types of clients and their transactions.

It is important to clarify who lenders classify as non-resident applicants and who are not. Importantly, Australian citizens who live abroad are not classified as non-residents – these clients are typically referred to as “ex pat” clients and the majority of lenders have fairly standard policy for these types of applicants which we will touch on below.

Lenders classify non-resident applicants as applicants who are either:

  1. Not Australian citizens and who live outside of Australia
  2. Not Australian citizens and who live temporarily in Australia – temporary visa holders.

With regards to non-Australian citizens who reside outside of Australia, there are specialist lenders who can assist these clients however they have varying degrees of requirements. A standard requirement for all of these scenarios are that these clients require FIRB (foreign investment review board) approval. Some lenders have quite conservative LVR (loan to value) restrictions whilst others don’t. Some lenders have restrictions on which countries these clients reside in and their income is generated out of, whilst others don’t.

Temporary residents in Australia tend to have a few more options, however it is very specifically based on the type of visa they hold. If the bank accepts their temporary visa, they are almost treated as normal Australian resident applicants, however if they don’t accept their type of visa, they have to fit into the category above. Again, different lenders have differing policy when it comes to which visa they accept and which they don’t, it’s just a case of finding the lender who accepts that specific visa.

Ex pat clients

Where ex pat clients are employed and get paid a regular salary, most lenders are happy to deal with these applicants in a fairly straightforward manner. Most of the lenders will reduce or shade the income that can be used for assessment purposes and different lenders have varying degrees of inclusion when it comes to the currency that the income is being earned in. Self-employed ex pat clients however are far more restricted in terms of their options, however, importantly there are options available for these types of clients.

In summary, whilst there is a great deal of misconception and misunderstanding when it comes to this space, at the moment, importantly, there are solutions for these clients. Some of those solutions might be of a more specialist nature, whilst some clients might fit into lenders’ traditional offerings. We have experience in this area and are able to work with you and these clients in figuring out what their options are, whatever those may be.

Negative Gearing

Negative Gearing – what is it and how could it be of benefit to you.

In our last article before the end of the year we wanted to touch on a topic which in our experience is not always fully understood. Let us explain what negative gearing is and how it works in practice.

Negative gearing is the mechanism whereby currently the ATO gives you a tax concession on the costs that you incur that are related to investment assets, including investment properties. In essence, they allow you to deduct most of the expenses related to that investment from the income that the investment generates, resulting in a net profit or loss on that specific investment – this net gain or loss is then added to or subtracted from the remainder of your taxable income.  This mechanism can have clear tax benefits if your overall loan portfolio is structured and administered in the correct way.

It’s crucial to understand which costs associated with investment properties are allowable deductions. Of course the primary cost tends to be the interest that you pay on the related loan, together with body corporate fees, cleaning, council rates, insurance, land tax, property agent’s fees, and water charges and in some instances depending on your specific property, potentially your share of the depreciation expense of the building. Your accountant or the ATO are best placed to advise you on which deductions are allowable and which are not. It’s also important to understand that when it comes to the loan expenses related to this property, the test that the ATO uses, is a test based on “purpose” – i.e. for what purpose the debt relates to. People often make the mistake of believing that they can increase their investment property loan, extract surplus equity to purchase their owner occupied home and still have this regarded as investment debt – based on the purpose test, this is not investment related debt, but rather mixed purpose debt and hence not normally all tax deductible debt.

A key point to remember though is that whilst negative gearing may leave you with a tax deduction, that scenario may well leave you in the short term with a negative cash flow situation with regards to that specific property – if your costs are exceeding your income, you will need to ensure you are in a position to be able to contribute the short fall on a monthly/yearly basis.

Negative gearing is also often referenced in the expression “good debt vs bad debt”. Essentially the phrase refers to tax deductible debt vs non-tax deductible debt. As I’m sure you would be aware – costs related to your owner occupied property are not tax deductible, therefore the sensible strategy if you are in a positon whereby you own your own home and an investment property, would be to pay down your owner occupied/non-deductible debt as quickly as possible and keep your deductible debt balance as high as possible, maximising your tax position, whilst managing the combined cash flow requirements of the two loans.

In conclusion, negative gearing is a feature of the current tax system that could potentially provide you with tax benefits depending on your specific situation. If you are considering a strategy which involves taking advantage of negative gearing benefits we urge you to consult your accountant to ensure you are entitled to the benefits you believe you may be.

Snap – Crackle – Pop

No we are not referring to an advert for a breakfast cereal. We are referring to all the buzz about the Australia housing bubble.

The big question is will it or won’t it POP. But before we can talk about the pop factor we need to be certain that there really is a bubble.

So what is a housing bubble? Investopedia defines a housing bubble as “a run-up in housing prices fuelled by demand, speculation and the belief that recent history is an infallible forecast of the future”.

If you accept the above definition, and you look at recent behaviour of property buyers in the Australian market then we must be in a bubble.

So what is fuelling this demand and creating the run up in housing prices? We believe some of the main contributors are as follows:

  1. Foreign investors – there is significant appetite for our property by foreign investors.
  2. Self-Managed Super Funds – low interest rates result in SMSF trustees chasing yield and alternative investment opportunities. Coupled with legislation that allows gearing for SMSF property you have a recipe for high demand. This has resulted in the rapid inflation of unit prices in the $600k to $1m price range.
  3. First time home buyers – are still flooding the market desperate to get on the property treadmill and their slice of the Aussie dream.
  4. Euphoria (Lollypop land) – there is a strong perception in the market that property is going to continue on this trajectory and in this case perception has definitely become reality.

So if we accept that we do have a bubble, of course the question on everybody’s mind is – how big and when is it going SNAP, CRACKLE OR POP.?

Our view, to the disappointment of most journalists I’m sure, is that we will have none of the dramatic SNAPPING, CRACKLING OR POPPING, but RATHER a FIZZLE.

The kinda fizzle when air slowly leaks out of a balloon or you take a pot of boiling water off the stove.

Before we begin, it’s important to reiterate again that it is dangerous to generalise. Most articles written by journalists need to appeal to a wide diverse audience and therefore the property market tends to become one big homogenised group. As you have been told countless times before, the Australian market is diverse, property prices in the eastern suburbs of Sydney are driven by very different factors to property on the Central coast. Be conscious of this when assessing your own specific property objectives.

So, back to the FIZZLE. We believe this fizzle will be created by a gradual but steady increase in interest rates, and will result in a plateauing of property prices until generally speaking incomes catch up with property prices. The reason why we don’t believe a pop will occur is ultimately because of high level demand and supply forces. Whilst changes to legislation (SMSF lending) and changes to bank’s lending policies will have it’s effects, we don’t see everything imploding overnight.

No matter what the market conditions and the various opinions being offered, we believe the following principles should be applied when it comes to your specific property decisions:

  • If you are buying a family home – does it suit your living needs, do you want to be in a specific area for schooling/transport, and of course what impact is the loan affordability going to have on the lives of you and your family.
  • If you are buying for investment purpose – do the numbers and make sure they work. For most part it is a mathematical calculation – what is your net/after all costs rental yield and how does that compare to other income investment returns, what is your loan cost and can you subsidise if required to. Don’t get emotional about the property and picture your sofa in the living room – that is then a lifestyle asset and not an investment asset.

In closing:

*          Don’t get caught in the hype

*          Do your homework on the market and the property you are considering

*          Let us help you – we can send you RP Data Valuation Reports helping you with your negotiations and in making an informed decision about the property you are considering


Sudden Investment Impact

So the world of residential property investment suddenly changed last week. Let’s take a look at these changes, specifically the borrowing side of things and if they should alter your decision making process when it comes to buying residential investment property.

 After considerable pressure over recent months from the regulator, the major banks have tightened their residential investment property credit policy. Interestingly, as they all have slightly different dynamics and aspects that they regulators want them to address, they have used different and overlapping levers.

– The most obvious is to increase interest rates for investment purpose. Until now borrowers would get the same discounts for investment purpose as they would for owner occupied loans. If you think of it, investment purpose loans should always have been more expensive because they inherently carry more risk. Borrowers are going to have to get used to the idea that they will pay more for investment loans.

– Less obvious are changes to the banks serviceability tests and the assumptions around these models.

* Take rental income as an example, until now the banks would use 80% of the actual rental income in the assessment. This provides a buffer if rental yields reduce. This week one of the banks announced that they will only use 60% of rental income.

* Another example is negative gearing. A number of banks would use the positive impact of negative gearing in the serviceability test. This week we witnessed the retraction of this policy. This will reduce the maximum loan amount borrowers will qualify for.

* A final example is the assessment rate. This is the rate used by banks to stress test the loan. It is not the actual rate you pay, it is an assumed rate in the test which helps measure the applicants’ sensitivity to potential interest rate increases. The banks have announced significant increases in the assessment interest rate in recent weeks.

All of the above have a simple outcome – REDUCE THE AMOUNT YOU CAN BORROW FOR INVESTMENT PURPOSES.

But does this mean you should stop looking to buy residential property for investment purposes?

We think NOT, and here is why

 1. The decision to purchase an investment property should be based on the net rental yield and the potential for capital growth. If it is a good investment it will always be a good investment no matter how the banks change their lending criteria. You may not be able to gear the property as high as you could prior to these changes, and this will result in a greater equity contribution and less negative gearing benefits, but these should not have been your key drivers in the first place. Your key driver should be – IS THIS A GOOD INVESTMENT?

 2. If you don’t qualify for a loan under these new tightened lending criteria – PERHAPS YOU SHOULDN’T HAVE BEEN APPLYING FOR A LOAN IN THE FIRST PLACE.

What these changes effectively mean is that you are going to need to do more homework and be more focused on the quality and investment potential of the property you are looking. If you run the numbers using the new assumptions of higher actual rate, more equity / deposit contribution and they don’t work, then ditch the property and look for a property that does work.

Oh, and get advice from a reputable broker.

Logical @ LogiX


Crystal Ball for 2015

All indications are that the property market will keep rising in 2015. The current environment of high property demand combined with low interest rates looks set to remain for the foreseeable future.

With the RBA indicating that rates will remain constant or even reduce by up to 0.5% there is a strong probability that we will be increased demand in the year ahead.

Having said this it is not a time to be complacent with your home loan arrangements. Understanding your current position and looking at alternative finance options could save significant dollars.

Logical @ LogiX