Here’s some good news to kick off 2019: APRA is removing its restrictions on interest-only residential mortgage lending from January 1.

The restrictions were put in place as a temporary measure by the Australian Prudential Regulation Authority (APRA) back in March 2017 to encourage lenders to adopt sound lending practices.

So why are they being removed now?

APRA’s announcement comes just weeks after CoreLogic figures showed Australia’s housing market recorded its weakest conditions since the Global Financial Crisis (GFC).

National dwelling values slipped by 0.7% over the month, led by Sydney where the drop was double the national average.

As such, many pundits believe the restrictions are being lifted to prevent the housing market from sinking further.

APRA, however, is claiming it’s simply a case of ‘mission accomplished’.

It says the restrictions have already led to a marked reduction in interest-only lending, which is now significantly below the target of 30% of all home loans that lenders issue.

Is the restriction removed for all lenders?

Most, but not all.

Earlier this year APRA announced it would remove its 10% restriction on investor loan growth for lenders who could prove they had strong lending standards.

Lenders who have passed this test will also no longer face restrictions on interest-only home loans.

But for lenders that haven’t yet proven the strength of their lending standards, the restrictions will remain in place until they do so.

“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” says APRA Chairman Wayne Byres.

“Both have now served their purpose of moderating higher risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.”

What does this mean for you?

With the restrictions lifted, it should now be easier for borrowers to secure an interest-only loan from January 1.

If that sounds like something you’d be interested in, give us a call. We’d love to help out.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Your ability to expand your property portfolio hinges on how well you structure your loans. We show you how to do it right. Portfolio planning and preparation are crucial to the long-term success of your property investment endeavours, and they do go hand-in-hand with structuring. There are two parts to structuring:

•  The loan structure of your investment portfolio
• The structure you choose as an investor from which to own your assets.

Ironically, while trying to save themselves a buck on their next property deal, many investors commonly overlook the importance of how they structure mortgages. They only realise that this is an area that requires at least as much consideration when it’s too late and they’ve lost a pretty penny. As an investor you need to not only consider what is best for you now, but also how your financial decisions will impact on you in the future. Put simply, you need to have a clear and concise plan of attack in all aspects of your property investment endeavours, and how you structure your loans is an important part of that plan. Get it right and it could save you thousands. In this chapter that’s exactly what I intend to help you do.

Why is loan structuring so important?

A loan structure will influence many things including the interest rate and fees you pay, the amount of tax that you pay, the amount of flexibility you have, your access to additional finance (i.e. your ability to invest more) and so on. A sound structure will ensure the following positive outcomes.

1. Debt is tax-effective

A good loan structure will ensure that your debt is tax ¬effective. One of the most common problems that investors face is an inefficient split of tax-deductible and non¬deductible debt. We have already learned that a home loan is a non-deductible debt and an investment loan is a tax-deductible debt. This means simply that the costs associated with setting up and servicing the loan for an investment property can be offset against your assessable income for tax purposes, whereas charges associated with your home loan cannot. It makes sense then to have the larger loans (that cost you more) financing tax-deductible debt. One of the mistakes many investors make is to have their home loan as too large a proportion of their total debt. Of course, we can’t be too tax-focused when it comes to loan structuring as tax is only one of many considerations. However, optimising your tax position will increase your cash flow and cash flow is very important when it comes to building an investment property portfolio.

2. You retain flexibility

Flexibility relates to your ability to make changes to ensure you make the most of opportunities. For example, a flexible structure will allow you to access a sum of money quickly so that you can take advantage of an investment opportunity that has unexpectedly arisen, or refinance one of your loans with a lender that is offering a sensational fixed rate for a limited time. An inflexible debt structure can also prevent you from ensuring you take the most tax- effective approach.

3. Risk is contained

Rarely do investors take a balanced approach to assessing risk. Investors tend to be either overly conservative and spend too much time focusing on why they shouldn’t invest or they are blind to risk and look at everything through rose-coloured glasses. Risk management is often about playing the devil’s advocate and thinking about all the things that could go wrong. What if you lose your job? What if you fall ill and can’t work? What if a tenant gets injured in your property and sues you? How you structure your loans can minimise this risk. For example, if you run into financial difficultly you may decide to sell one of your investment properties so that you can use the cash proceeds to pay for living expenses over the next few years. If you have the correct structure in place, this can be a good strategy. However, if your loans are structured incorrectly then the bank can control all the sale proceeds and force you to repay debt, rather than access the funds to stay afloat.

4. Account-keeping is easier

The more straightforward your account-keeping, the happier your accountant and the tax office will be. The onus is on the taxpayer to prove why they are claiming certain deductions. For example, if you have one big loan that relates to multiple properties and you sell a property but don’t repay any debt (because you believe no debt relates to that property), the onus is on you to demonstrate to the ATO that you are correct. If there’s any ambiguity (due to poor record-keeping), you risk the deduction for interest being denied. A correct loan structure will ensure you have a sound basis for claiming deductions through separating loans by property and purpose. There are principally two ways to structure your loans – some might say, a right way and a wrong way! In my opinion in the majority of cases, the right way to structure your investments is to take out stand-alone loans. The alternative (wrong way) is to cross-securitise.

Setting up stand-alone loans

Stand-alone loans provide investors with the greatest flexibility both now and in the future. The general methodology is to establish a stand-alone loan – secured by one existing property only – to finance a 20% deposit plus costs and arrange a further separate loan (secured by the new property only) for the remaining 80%.

Planning ahead

Many people fail to make any contingency plans to allow for unexpected changes in their circumstances. They might set up a loan structure that is totally suitable for their circumstances today, but that may not offer enough flexibility to adapt to the new state of play tomorrow brings. Remember life changes are often unexpected and unpredictable, but they are also inevitable and often unavoidable. How did John Lennon put it? ‘Life is what happens to you while you’re busy making other plans.’

Planning your move

• Make sure you plan as far ahead as possible.
• Remember that the removalists will be handling your valued and often irreplaceable possessions, so it is important to use a reputable firm.
• Consider insurance to cover your contents while they are being moved. Discuss this with the removal company.
• Obtain a quote for moving and ask for a flat rate rather than an hourly rate. If there are any delays and you have an hourly rate it can become more expensive than you anticipated.

Packing and Removal

• If you are packing yourself, start well in advance of the moving day and avoid the last minute panic.
• Defrost your fridge the day before moving.
• Go through the house with the removalists when they arrive, giving any special instructions you may have. Do the same when you arrive at your new place.
• When packing cartons, it is a good idea to mark the contents on the top and on the side for easy identification.
• It is not necessary to empty dresser drawers, but remove all fragile and heavy items and all liquids. Do not overload the drawers.
• You can use clean tea towels or tissue to pack breakable objects.
• Carry money, jewellery and valuable papers with you. Removalists will not accept responsibility for articles of extraordinary value.

Change of Address

• Notify utility companies (gas, electricity, water and telephone) when to discontinue services.
• Make arrangements in advance for all services to be connected at your new home.
• Notify people of your change of address, including bank, motor vehicle registration, post office and organisations of which you are a member.

What is Lenders Mortgage Insurance.

Lenders Mortgage Insurance (LMI) protects your lender when you default on your home loan and there is a shortfall. A shortfall occurs when the proceeds from the sale of your home are not enough to cover the outstanding balance you owe to your lender.

Your lender can recover the shortfall from the LMI provider. However, your LMI provider may seek to recover the shortfall amount from you. In a transaction that requires LMI, you’ll have to pay the insurance premium.

Unlike any other form of insurance, lenders mortgage insurance in Australia doesn’t provide you with any protection since it is catered for your lender’s protection.

Mortgage Insurance Protection

How would your mortgage be repaid in the event of your death or if you faced a serious illness or injury? What protection do you have and is it adequate?

We have a duty of care to offer you the information and options available without any obligation to commit. We ensure our houses and our cars but we should insure our most important asset ourselves.

Mortgage protection can provide peace of mind by helping protect you, your partner, your family, and your home if you die prematurely or get seriously ill. It helps to provide dignity, control, and choice in stressful times.

Although we do not specialise in lenders mortgage insurance and other types of insurance products, we do work closely with insurance brokers we know that can provide you with the right solution and service to suit your needs.

The providers we work with are involved to provide you with information that ensures that you have the knowledge to make an informed decision about what is right for your situation. There is no obligation to do anything! But it is not wise to not know what your options are. We strongly recommend that at worst you meet and discuss your situation.

General Insurance

We have partners that specialise in this field and they can help ensure your house and contents, investment property, and motor vehicle. This is more of a convenience for you to save you time if you don’t have anyone. They can provide a product that is well known, highly featured, and well-priced. Once again, this is optional to you and not something you have to do with us. We do offer it, though.

Interested to learn about our lenders mortgage insurance? Looking for adequate protection for your prized possessions? Key Strategy Solutions can help you out! We can connect you with the right people to assist you with your unique needs.