Packaging For Profit
Sydney Morning Herald
Tuesday September 24, 1996
THIS year continues as the year of the investment borrower. Interest rates remain down and loan packaging ensures high levels of flexibility. The driving market forces are competition from non-bank financial institutions and the volumes of money looking for safe havens.
In this environment, no-one should have to pay an interest rate premium above that of a home loan. In many instances, homes are used as collateral for investment loans, further weakening any case for a premium rate.
The challenge for borrowers is to make the best of the competitive situation, which is expected to continue until around the end of this financial year. The managing director of Cannex, Andrew Willink, has compiled the table, Top Investment Loans for NSW, as a guide to the market for borrowers seeking various types of investment loans.
He says that, as with any investment, the investor wants a decent profit at the end of the day and loan structuring can contribute to that profit. The borrowing, or gearing, has tax advantages because borrowing costs can be deducted from gross earnings, and these should be maximised.
"If you are pre-paying interest for a tax benefit to yourself, you also should get a slightly reduced interest rate because the lender has a return on funds ahead of time," he says. "But, if you have a redraw facility in the loan, you must be careful not to use any redrawn funds for personal consumption, because it could be regarded as income and taxable. Redrawn funds must be directed to investments."
Borrowers unsure of the direction of interest rates can enjoy a hedge play. This involves taking something like half of the funds on a fixed rate and the balance on a variable rate. For a small fee it is not too difficult to switch out of a variable loan if rates start to move up.
The managing director of a mortgage originator, Austral Mortgage Corporation Pty Ltd, Victoria Edema, says loans can be packaged in many ways. Packaging can let a loan be moved from one purchase to another, allow for a change in the loan's security (collateral) base, allow a redraw facility and facilitate business refinancing if a borrower wants to leave the traditional banking system or another lender.
One of Austral's most popular products is its Wealth Optimiser. In essence, this combines a home loan and an investment loan. Regular loan repayments can be directed to the home loan, which attracts no tax relief. During this time - until the home loan is repaid - interest on the geared investment loan is capitalised and that interest is a tax deduction.
"After the home loan is repaid, the home remains as security for the investment loan," Edema says. "The size of the payments remains the same throughout the loan unless interest rates vary or you wish to increase them. The result is the home loan is repaid many years sooner and the negative gearing benefits on the investment are increased."
Usual security for investor loans are registered first mortgages on metropolitan residential property. You can borrow to refinance or to buy real estate, shares and managed equities. Terms are usually five to 25 years on fixed or variable interest rates. Loans usually start at $100,000 and can go up to $50 million, depending on the lender. Most lenders will lend up to 90 per cent of the value.
Most funds have fixed exit fees, usually a month's interest, for early payout of the loan.
The non-bank finance institutions have been giving the banks a tough run for their customers in the past few years. The home mortgage and investment loan market is about $46 billion and the non-banks have about $4 billion of this on their books. But banks are starting to fight back, particularly on the interest rates front.
Of the non-banks' borrowers, about 70 per cent are residential investors and 30 per cent home owneroccupiers. Of these, 80 to 90 per cent have chosen variable rate loans.
For those uncertain about what to do when considering an investment loan, advisers are available. These include groups like Mortgage Choice, Moneytec Investment Management Limited and Express Home Loans. Moneytec has mortgage management and wealth creation programs based on existing bank products. It charges an initial plan fee, but any other fees "are sourced from monies either generated or saved by the program", according to Moneytec's general manager, Eric Wojcik.
Express charges no fees on mortgage products and acts for some 25 lenders, which provide its income. The investment loans are residential loans, and commercial and chattel finance. The director of Express, Carl Le Soues, says the big benefit of seeing a loan adviser is that it is usually not trying to sell one product. He adds: "We find the most suitable loan package from many parts of Australia - both banks and (non-banks) - places people would not think of borrowing from in a month of Sundays."
TOP INVESTMENT LOAN IN NSW
Company Initial Rate Revert
Rate Appl Fee $ Ongoing Fee
Variable without any redraw facility
Superannuation Mbrs 'HL 8.3 8.3
500 No Ongoing Fees
Settlers Home Loans 8.3 8.3
350 No Ongoing Fees
BMC Mortgage 8.3 8.3
750 No Ongoing Fees
Austral Mort Corp P/L 8.35 8.35
600 No Ongoing Fees
Bank of New Zealand 8.5 8.5
Nil No Ongoing Fees
Variable with redraw facility
Locums Group 8.25 8.25
250 No Ongoing Fees
Suncorp - Sydney 8.45 8.45
650 Monthly fee: $8
Priority One Home Loans 8.59 8.59
500 No Ongoing Fees
Access Home Loans (NSW) 8.65 8.65
325 No Ongoing Fees
Aussie Home Loans 8.65 8.65
600 No Ongoing Fees
Fixed 2 Years
ING Bank 8.4
8.75 500 No Ongoing Fees
Hongkong Bank 8.43 9.25
750 No Ongoing Fees
Suncorp - Sydney 8.45 9.25
650 No Ongoing Fees
Advance Bank 8.5 9.25
700 Monthly fee: $3
Illawarra Mutual B Soc 8.5 9.95
600 No Ongoing Fees
National Mutual 8.5 9.25
500 Monthly fee: $3
Commonwealth Bank 8.5 9.25
600 Annual fee: $30
Fixed 3 Years
ING Bank 8.6
8.75 500 No Ongoing Fees
Suncorp - Sydney 8.65 9.25
650 No Ongoing Fees
Commonwealth Bank 8.7 9.25
600 Annual fee: $30
ANZ Direct 8.7 8.75
600 Annual fee: $60
NAB 8.7
9.25 600 Monthly fee: $5
Illawarra Mutual B Soc 8.7 9.95
600 No Ongoing Fees
ANZ Bank 8.7
9.25 600 No Ongoing Fees
Bank of Melbourne 8.7 9.75
Nil No Ongoing Fees
Fixed 5 Years
ANZ Direct 8.9 8.75
600 Annual fee: $60
Commonwealth Bank 8.95 9.25
600 Annual fee: $30
Suncorp - Sydney 8.95 9.25
650 No Ongoing Fees
St George Bank 8.95 0.4
600 No Ongoing Fees
BankWest 8.95 9.45
500 No Ongoing Fees
Access Home Loans (NSW) 8.95 8.65
325 No Ongoing Fees
NAB 8.95
9.25 600 Monthly fee: $5
All data should be checked with the respective institutions. The lowest AAPR is
used to sort the
most competitive variable and introductory products whilst the lowest nominal
rate for fixed 2 to 5
years. Source : CANNEX PollFax 019 725 661 Dial using fax machine for updated
information. (75cper minute - Telstra)
© 1996 Sydney Morning Herald
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