The Experts

Heidi Armstrong
Lending Expert
+ About Heidi Armstrong

Heidi Armstrong is the co-founder and Director of Operations for State Custodians Mortgage Company. Since founding the Company in 2006, State Custodians has grown to become one of Australia’s most respected non-bank lenders. Heidi holds a Law Degree, a Bachelor of Science and a Diploma of Finance and Mortgage Broking Management. An expert in credit policy and the mortgage industry, Heidi is passionate about sharing her invaluable knowledge to educate borrowers.

Widely recognised and respected by industry peers, Heidi was a finalist in the 2012 Australian Lending Awards for the Best Thought Leader. Moreover her Company, State Custodians, has received numerous awards. For six years running State Custodians has maintained a ‘5 Star’ CANSTAR rating on four of its main loans and most recently was awarded the 2012 Mortgage of the Year by Your Mortgage Magazine. The Company also won “Non-Bank Lender of the Year” in 2011 and 2012 by both Money Magazine and Your Mortgage Magazine.

Self-managed super funds and the property market

Thursday, February 07, 2013

Who should use a self-managed super fund?

The popularity of self-managed super funds (SMSF) is growing rapidly in Australia. There are many reasons for this. With a SMSF you have more control of your super, there are a wider number of investment options and you can even borrow additional funds to purchase certain assets such as property.

Managing your own super can be incredibly rewarding, but it is important to remember that it requires time, money and skill. You need to ensure that you have enough money in your fund to cover the initial expense of the SMSF set-up. If you are planning to purchase a property within your SMSF you need to have enough super savings to provide for a reasonable initial deposit.

Investing in property with a self-managed super fund

One reason that many people choose a SMSF is because they want to invest in real and direct property. They are comfortable with “bricks and mortar” investments – they have a good understanding of how to make them work.

While an ordinary superannuation fund can invest in property securities through managed funds, they have very different characteristics to direct property investment. Managed funds will typically be limited to commercial property – offices and industrial property. Many such funds have recently struggled - especially through the Global Financial Crisis.

Direct property is an alternative investment solution. Investors have been committing themselves to individual investment properties for years – it is a type of investment that many people feel comfortable making. Using this strategy, your super fund might only invest in one direct property and the overall portfolio can be diversified, including other classes of investments.

What type of property should you invest in?

The specific property chosen should suit the needs and purposes of the super fund.

Typically the near to medium-term requirement will be the growth of the assets and the longer-term requirement will be the maintenance of a high and steady income, indexed for inflation. The tax characteristics should also suit the need and these considerations should be consistent with the sole purpose of maximising retirement benefits. Appropriate advice should always be sought.

Many different types of property are available in today’s market and they have many different characteristics. Various types of properties include mining town residential properties, University neighbourhood properties, high rise apartments and commercial properties. However, more often than not a typical family home in the suburbs is a property class that many people are familiar with. The demand is likely to be great and capital growth for the right property typically is very good. Rental yield may be lower than for the other properties, but if it has been held for many years and has achieved significant capital growth, this may diminish this concern.

Arranging the additional funding to purchase the property

Many people who decide to purchase a property as a part of their SMSF will require additional funding to purchase the property. They may use a portion of their super savings for the deposit and then borrow the remainder from a lender. When looking for a SMSF loan, take into account:

  • No re-draw facilities: Unlike normal loans, there is no re-draw facility on a SMSF loan due to legislative requirements  
  • Refinancing: Refinancing is permitted, providing the loan meets all of the requirements. Accrued interest and costs may be included in the new loan’s principal amount borrowed. The new loan must be secured by the same asset as the old loan.  
  • Research: Make sure that you do your research for the best deal. The State Custodians SMSF loan, for example offers several competitive features - it will lend up to 80 per cent of the purchase price or property value (compared with the majority of self-managed super fund loans which will only lend up to 70 per cent). The loan is also a limited recourse loan – this means that the individual’s remaining super is protected, regardless of any difficulties that arise with repaying the loan.

You have decided to manage your own super and invest in property – what now?

Do your research, spend significant time tracking a variety of different properties and invest carefully. There are many additional factors that impact upon rental performance and capital growth, so learn and put that knowledge to good use.

Self-Managed Superannuation Fund loans provide further investment options for broadening portfolio flexibility. With a recovering housing market and low interest rates, there has never been a better time to consider diversifying into property.


Self-employed borrowers

Thursday, December 06, 2012

There are more than 2.1 million self-employed Australians who come from fields far and wide – from local shopkeepers and tradies to contractors and freelancers.

For many of these people, obtaining a home loan is out of the question. Many lenders put self-employed individuals through an endless rigmarole of paperwork when applying for a home loan. More often than not, an employee who has had a job for one year has a better chance of getting a mortgage than someone who has owned and run their own business for 10 years!

There is no doubt that the Australian banking system treats self-employed borrowers very differently to employed borrowers.

How do Home loan applications differ for self-employed individuals?

When an employee applies for a home loan, the process is relatively simple. The documentation required to verify the individual’s income is uncomplicated and may include a couple of payslips and the latest group certificate.

The process for self-employed borrowers is significantly more laborious and complex. Lenders will typically ask you to provide the last two years lodged tax returns to verify your income and better understand your financial situation.  Self-employed home loan applicants typically become overwhelmed by the mounds of paperwork required, including personal income tax returns as well as all company, trust, or partnership returns, financial statements and tax assessment notices.

What are lenders looking for?

A home loan is a considerable sum of money so the lender needs proof that your repayments will remain consistent for the life of the loan.  Lenders will often use your income levels to assess your ability to make repayments, so they are looking for consistency.

For example, if in Year One your tax returns state your income as $100,000 and then in Year Two your income increases to $200,000, lenders may see this as too inconsistent. This means that lenders will price your income at $100,000 or at best, $120,000 (a 20% increase on the lower amount) in order to determine your borrowing power.

It's a matter of timing

For self-employed borrowers, providing two years’ tax returns can be problematic if the timing isn’t just right. This is because the most recently lodged tax return could be 18-32 months old and more reflective of the business two or three years ago, rather than an accurate representation of the current situation.

For instance, while the business may have started to gain momentum two to three years prior, it could now be experiencing a consistent profit stream. If the business owner has not yet filed the most recent tax return, they won’t be able to easily demonstrate this position.

In short, self-employed people are at a disadvantage when applying for a home loan because their verification documents are often dated or incomplete.

Alternative ways to verify income

Thankfully there are alternative ways to verify your income.

It’s important to research a range of lenders to see if there’s an alternative option suitable to your needs. At State Custodians, for example, we offer products for people who may not have finalised their tax returns yet but have a genuine income and can afford a loan.

These alternatives may include looking at a business’ Business Activity Statement (BAS). The BAS can confirm the turnover of a business. As they are usually filed every month or on a quarterly basis, the BAS can be a more current depiction of the business’ financial position than a tax return which may have been lodged in a previous financial year.

The BAS may be examined in conjunction with older tax returns to get a more complete understanding of how money moves through the business. This creates a more accurate picture of your financial situation. 

It is also possible to verify income through the business’ accountant. This involves the accountant confirming the financials of the business and/or its owner.

While these alternate methods of income verification can help those who don’t have recent tax returns, going outside the more traditional method of verification will typically mean that the interest rate is higher.  It is the opportunity cost you have to weigh up when assessing if the higher interest rate is worth doing the deal.


Converting a home loan into an investment loan

Thursday, October 11, 2012

Property prices are currently flat, representing good opportunities for those who want to upgrade. While previously the “perfect home” was too expensive, now upgrading has become a realistic option for many people.  But… what do you do with your existing home given it’s not a good time to sell?

If you plan to convert your current home into an investment property (and sell in a better market) then you need to consider the implications of converting your home loan into an investment loan. It is doable but infinitely easier and more tax effective if you have operated your home loan using an offset account.

What is an offset account?

The offset account allows you to maintain your original loan balance while still getting the benefit of having additional funds work for you to reduce your interest payments. Because the additional funds are sitting in a separate linked account and not directly in the loan account, when you decide to upgrade and purchase your new home, you can withdraw these additional funds from your offset account and put towards the new purchase to reduce any personal owner occupied debt. Simultaneously, when you convert what was your old home loan into an investment loan, you have maintained the original loan balance from which to maximise your tax benefits and negative gearing.

What if I don’t have an offset account?

If you haven’t operated your home loan with the benefit of an offset account, the situation gets messier and your ability to maximise any negative gearing benefits reduces. If you have been particularly diligent in paying extra off your home loan, these additional payments into the loan reduce the loan balance. This is a problem when you go to convert your home loan to an investment loan. For example, if you had an original loan amount of $500,000 and contributed an extra $100,000, at the time when you convert this loan to an investment loan, even if you were to redraw the additional $100,000 from the loan (to put towards the new home purchase) the tax deductable portion of the investment loan would remain at $400,000 regardless that that full debt was $500,000. 

More about an offset account

Many people think that an offset account is only needed if you have investment debt. Because we never know what the future brings, it’s much better to set yourself up from the start in a way that will allow you to maximise opportunities in the future.  Home loans with an offset account provide this flexibility. If you’re thinking of upgrading, first and foremost speak with your accountant to understand clearly how changing your loan structure may affect your tax position. Your accountant is also very likely to suggest that at the time you move out of your old home, be sure you get it valued and that you keep the valuation! This will be important when you decide to sell the home once the market improves. As this property has been your principal place of residence, you want to ensure you receive the capital gains tax exemption for the period you lived in the property. Having the property valued at the time you move out, will provide evidence of the true market value after which time capital gains tax may become applicable.

1. A flat property market can be a good time to upgrade
2. Investigate your current home loan before you switch to an investment loan
3. Consider the advantages of an offset account
4. Talk to your accountant about your tax position