FINANCE SOLUTIONS FOR THE SELF-EMPLOYED

FINANCE SOLUTIONS FOR THE SELF-EMPLOYED

For people who work for themselves being able to obtain finance to buy a home, grow their business or purchase another asset can be a very challenging exercise. For a lot of self-employed there is a delicate balance between showing the Bank enough income to be able to repay a loan and claiming as many expenses against their income to reduce the amount of tax they pay.

Lenders also deem self-employed applications to potentially represent a higher risk as their income is not as predictable as someone in stable employment with a consistent income stream. It may also be difficult for some self-employed applicants to produce the financial information to satisfy a lender’s requirements.

With the changing nature of the employment market seeing more people opting to work for themselves by either starting a new business or contracting their services to another party, lending money to the self-employed is also changing. New providers in the lending market are trying to make it easier for self-employed applicants to access credit. Outlined below are some of the options available for those self-employed people who may fall outside the traditional lending options provided.

LOW-DOC LOANS

Low Documentation (Low Docloans are available for potential borrowers who are self-employed and don’t have access to the documents required to obtain a traditional mortgage. Usually borrowers cannot provide financial statements and tax returns to verify their income, so the lenders rely on other documentation provided by the applicant to determine whether they can afford to borrow the amount requested. The applicant would provide a declaration stating their level of income which would be supported by other forms of verification. This includes lodged BAS, trading account statements or a letter from the accountant for the business confirming the income declared is accurate.

The level of information required may vary between providers, and these types of loans are available for owner-occupied, investment and commercial properties.

These loans usually have a slightly higher interest rate than standard loans where full documentation has been provided, and not all lenders provide this option as part of their suite of products. The amount of property equity you would need to have to secure this type of loan will also be greater than a standard loan. But, if your circumstances mean you don’t fit the traditional type of borrower, this can be a good option to consider, particularly for Home Lending.

CASH-FLOW LENDING

Cash-flow lending is usually a short-term loan that self-employed applicants might use for any business purpose. This can mean covering a temporary cash-flow shortfall, investing in new equipment or purchasing another business. The loan amounts are small, in most cases less than $100k, and in a lot of cases no security is required.

Where traditional business lending requires the applicant to provide two years of financials and tax returns, cash-flow lending looks at things differently. The revenue performance of the business is used to determine the eligibility to borrow.

The cost of these loans can be quite high, above 10% per annum before you factor in fees and charges, as these are primarily unsecured loans so the risk to the lender is higher. But cash-flow lending is also one of the fastest ways to inject funds into a business. Some of the providers suggest that they can have funds available within 48 hours of receiving an application, and the number of providers in this market is growing, even including some of the major Banks who have developed a product to cater for these types of requests.

Where a self-employed applicant can meet the requirements to obtain finance through traditional means then usually this is a less costly approach to take, although potentially more inconvenient. Lenders are risk-averse businesses so the more information a self-employed applicant can provide to verify their income is stable and secure the better. If, however you are in a situation where that is not possible, at least you know there are options available.

If you would like to know any more about these products and whether they may be a suitable option please call me at SHL Finance on 0478 021 757, or come in and see us at 2/23 Ringwood Street Ringwood.

Reece Droscher

Managing Director of SHL Finance Pty Ltd

Best Interest Duty

WHY DEALING WITH A BROKER IS IN YOUR BEST INTEREST

For anyone who is looking to obtain Home Loan finance for a new purchase, refinance their existing loan or complete some renovations to their home, there is a choice to be made on who you engage to arrange the loan for you. Do you go directly to the financial institution to obtain the finance, or do you engage a broker to arrange this for you? Since the Royal Commission into the banking sector was completed a number of recommendations have been implemented by the government regulators to address misconduct within the banking and financial services industry. Once such recommendation was implemented on January 1st this year – Best Interest Duty.

BEST INTEREST DUTY ONLY APPLIES TO MORTGAGE BROKERS, NOT TO BANKS

Best Interest Duty (BID) creates the obligation for mortgage brokers to act in the best interests of consumers and, where there is a conflict, to prioritise consumers’ interests when providing credit assistance. The majority of mortgage brokers have always acted in their client’s best interest when providing advice, the introduction of BID now legislates it. However, what has now been created is a clear difference in obligation when dealing with a broker as opposed to dealing directly with your Bank. Mortgage Brokers must act in their client’s best interest, the Bank does not have this obligation.

This is because Mortgage Brokers have access to products and services from many providers, so understanding their client’s requirements and objectives in seeking advice is the basis for making a recommendation on a Home Loan. A Bank lender has one suite of products to offer, so they don’t have the same obligations as a broker and can act in their employer’s interests, not the interests of the customer.

It is another major reason to deal with a Mortgage Broker rather than going to a Bank directly. Mortgage Brokers have a legal obligation to act in their client’s best interests, providing them with comfort that the recommendation the broker has made is the most suitable to meet their requirements and objectives.

HOW DOES A BROKER APPLY BID WHEN RECOMMENDING A PRODUCT

There are a number of factors which may determine what product a broker will recommend to their clients as the most suitable to meet their particular circumstances, while acting in their best interests.

  1. Price – this will always be a major factor in recommending a product to a client, however is not the only factor. Price includes the interest rate, any Establishment and on-going fees, and mortgage insurance costs if applicable. Recommending the cheapest product on the market may not be in the clients best interest as their circumstances may not meet the policy of the lender. Every client’s requirements are different.
  2. Credit Policy – does the proposed transaction meet the policy of the lender? Lenders all have different criteria when considering a finance application, so the broker needs to be aware of each policy to ensure they do not recommend an unsuitable loan.
  3. Response Times – is the transaction time-sensitive? Will the lender be able to approve and fund the loan in the time required by the client?  This needs to be considered to ensure the broker acts in the clients best interest.
  4. Product Features – does the product have the features the client may require? Features like 100% offset, a secure rate, redraw.
  5. Conflict of Priority Rule – any conflicts of interest between the client and broker must be satisfied in the client’s favour. So when considering the best product to recommend the BID legislation states ”the conflict priority rule means that you must not recommend a product or service of a related party that would create extra revenue for yourself, your credit licensee or another related party, unless doing so would also be in the consumer’s best interests”.

In practice, if a broker has two products that would benefit their client, however lender A has an annual fee and offers the broker a higher commission payment, the broker must recommend lender B, even though lender A is still a great fit for their client. This satisfies the conflict priority rule.

Brokers must exercise judgement in the relevance of these factors when making reference to the client’s individual circumstances. So in satisfying BID the client can rest assured that their broker has spent a significant amount of time ensuring the product recommended is the most suitable and best to fit their requirements and objectives.

As a mortgage broker we act in your best interests. A lender has no obligation to do so.  At SHL Finance we have always acted in our clients’ best interest and would love the opportunity to help you too. Please call Reece Droscher on 0478 021 757 should you want to discuss your finance requirements.

WHY THE FESTIVE SEASON IS A GREAT TIME TO REVIEW YOUR FINANCES

As the Christmas and New Year period approach we are focused on spending time with family, perhaps getting away for a well-earned break and preparing to put a difficult 2020 behind us. This time of year is a great time to relax and enjoy being with our loved ones, but it is also a time where a lot of us find ourselves in a difficult financial predicament due to over-indulgence with spending. That’s why the festive season is a great time to review your finances and help yourself into a better position going in to 2021.

I have listed below some areas where taking the time to review your finances could have a major impact on saving you money.

CREDIT CARD DEBT

The most common problem we have once Christmas is over is looking at our credit card statement and wondering how it managed to get so out of control. Should you find yourself in this situation there are a number of potential solutions to help get your credit card debt back under control.

  1. Consolidate your credit card debt into a Personal Loan or Home Loan. By consolidating your debts you will have a set term to repay the amount owing at an interest rate which is generally much lower than what your credit card costs. However this may also mean you are paying the debt back over a long term, so you need to be disciplined to ensure you repay the debt quickly. You don’t want to still be paying off the kids 2020 Christmas presents 5 years from now. Set yourself a maximum two year term to repay the debt in full.
  2. Reduce your available credit limits. Once your credit card repayment arrangements are in place reduce your available limits to ensure you cannot get yourself into this position again. By having a small limit you will be able to manage the repayments more comfortably and clear the debt without further assistance.
  3. Look for balance transfer deals. A number of lenders will offer either low or even zero interest rates on balance transfers of credit card debt. These offers usually come with a time limit to repay the amount owing in full. On the surface this is a great way to manage paying your accumulated debt, however there are potential traps that you should avoid. If you are able to access a balance transfer deal you should cut up the card, so you are unable to use it and add to the level of debt. You can then set up a budget to repay the amount owing within the agreed term.

AFTERPAY/ZIPPAY ACCOUNTS

Many people are unaware that these types of buy now/pay later options come with a credit limit, and also now appear on your credit records. Banks treat them exactly like a credit card when assessing finance applications, so minimising their use will ensure your credit score is not negatively affected.

If you do get into a predicament with these types of accounts then the tips to helping with credit card debt will also apply here.

REFINANCE TO A BETTER HOME LOAN

Now is also a great time to review your Home Loan to make sure your lender is providing you with the most suitable loan to suit your needs. During the year we are generally so busy with life in general that reviewing what is usually our largest expense is put in the too hard basket. By taking some time now to see whether your current Home Loan is the best option you could save yourself thousands of dollars in interest and several years in time taken to repay your loan.

BUDGETING   

To avoid getting yourself into a financial predicament in the future set a realistic budget to keep a track of your spending and, most importantly, stick to it. Why most budgets fail is that we place unrealistic expectations on ourselves. By setting realistic goals we are more likely to achieve them. Being consistent and putting smaller amounts into savings on a regular basis is more effective than making larger deposits at random. Your spending habits will also be aligned to your savings goals, but don’t be too hard on yourself if you have a period where you are unable to reach your savings goals due to unexpected expenses. Things happen.

At SHL Finance we would love the opportunity to discuss your finance requirements with you. Please call Reece Droscher on 0478 021 757 to find out how we could help you save money or improve your financial situation.

On behalf of the team here at SHL Finance I wish you a happy and safe Festive Season and look forward to connecting with you again in the New Year.

Reece Droscher

SHL Finance.

CHANGES TO RESPONSIBLE LENDING OBLIGATIONS

CHANGES TO RESPONSIBLE LENDING OBLIGATIONS ON BANKS TO MAKE IT EASIER FOR BORROWERS TO ACCESS HOME LOANS

In a recent Federal Government announcement there are plans underway to loosen the responsible lending obligations on Banks and other credit providers to make it easier for everyday Australians to access credit products, such as Home loans, Credit Cards and Business Loans. So, what are these changes and what does this mean for everyday Australians trying to buy their first home, upsize into a bigger home or refinance their current loan and get a better deal?

What are the Responsible Lending Obligations?

When the Global Financial Crisis hit in the late 2000s the Australian Government at the time introduced the National Consumer Credit Protection Act, which was designed to make the lenders responsible for verifying whether a person applying for finance could afford to borrow. This would protect households from providing false information, from taking on loans they had no chance of repaying, and from predatory lending practices.

The responsible lending obligations involve:

  • making reasonable enquiries about a consumer’s financial situation, and their requirements and objectives
  • taking reasonable steps to verify a consumer’s financial situation
  • making a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer
  • if a consumer requests it, being able to provide the consumer with a written copy of the preliminary assessment or final assessment (as relevant).

During the Royal Commission into Banking it was determined that these rules needed tightening, so in fear of legal action the lenders introduced further hurdles that borrowers needed to overcome before they would be deemed to be eligible for finance. These hurdles were primarily around the first rule: making reasonable enquiries about a consumer’s financial situation.

For example, lenders would conduct meticulous examinations of an applicants spending habits to determine what their actual living expenses were, rather than relying on the standard Household Expenditure Measure (HEM). This resulted in a higher percentage of applications being declined for credit assistance, as it was assumed that an applicant’s current living expenses would continue unchanged when a new loan commitment was added, so the new repayment would be unaffordable.

Why are they being relaxed?

After a recent court ruling where it was deemed that borrowers could change their spending habits depending on their circumstances, and using current living expenses as a way of determining affordability was flawed, the Government now wants to reduce the “red tape” involved in accessing credit to stimulate the economy and get people spending.

This will result in reductions in the amount of paperwork an applicant for a loan needs to provide, as well as lenders taking much less time to process an application by removing the need to scour over account statements to see what is being spent on Netflix or Uber Eats.

Who will benefit from these changes?

Theoretically all potential borrowers will benefit from these changes to the rules around the treatment of living expenses. However the major beneficiary could be first home buyers.

Previously they were treated harshly as they may have been living at home, with a significant disposable income but did not need to adhere to a budget. So typically they would spend more on recreation and entertainment than on utilities or general insurance. Lenders would not make any allowance for their ability to adjust their spending habits once they owned a home.

With these changes lenders will not need to verify a borrower’s financial situation to the same extent, so the impact on current spending habits on the loan decision may no longer be a deciding factor.   

Another sector that should benefit are self-employed consumers. This sector generally declares a lower than standard level of living expenses, as a number of these costs are claimed through their business. With lenders able to use this information to determine finance eligibility these types of applicants should be able to access credit more freely.

When do these changes take effect?

The proposed changes are not legislated to come into effect until March 2021. We are currently operating under the same tight lending rules and regulations, and the lender has the onus of responsibility for ensuring the credit is affordable and ‘not unsuitable’ to the borrower.

Once these changes are made and the onus of responsibility falls to the borrower, it is important to note that significant regulation will remain in place to ensure lenders operate in a prudent fashion.

Lenders will still be required to ensure reasonable enquiries are made to determine an applicant’s income, estimated living expenses will still need to be declared as part of the application process and an applicant’s current credit exposure will also need to be verified.

It will be interesting to see whether these changes remain in place in the long term, given they are being introduced as an economic stimulus. Should we see economic recovery built on these types of measures, this relaxation of responsible lending obligations may only be a short term measure.

A mortgage broker can help borrowers navigate the way through the options to ensure they get the best outcome under the circumstances. At SHL Finance we are working with first home buyers, helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save thousands of dollars. We would love the opportunity to help you too.

Please call Reece Droscher on 0478 021 757 should you want to discuss your options.

HOW HEALTHY IS YOUR HOME LOAN?

As most of us are impacted by the effects of social distancing in the wake of the COVID-19 pandemic, be it physically, emotionally or financially, it is becoming increasingly important for anyone with a mortgage to understand whether their current loan is the best solution to meet any potential change in circumstances. Borrowers need to know how much their current loan is costing them, and how will their current lender support them in times of financial crisis. Is your Home Loan healthy enough to help you through this pandemic?

Workers in the hospitality, entertainment, tourism and retail industries have been severely affected by the restrictions put in place to prevent the spread of coronavirus . In response to this most lenders have announced programs designed to assist clients financially should their employment/income be impacted negatively.

The assistance package generally consists of repayment deferrals for periods of up to six months, but there is a misconception amongst borrowers that, with repayments put on hold, any other costs will also be deferred. This is not the case. If you decide to defer your loan repayments the interest on the loan is still being calculated and being added to the loan balance. Once the deferral period is completed, borrowers could find themselves in a worse position as they owe more than they did before the deferral period commenced. They may have to commit to a higher loan repayment than they were paying before the repayment deferral period commenced.

Should a borrower need to consider their lender’s assistance package there are ways to mitigate the impact of this, now and in the future.

  1. Review the current interest rate and approach your lender to switch to a cheaper option. This will help to reduce the amount of interest that would be capitalised to your loan during any repayment deferral period.
  2. Refinance to another lender should you still be employed. A number of lenders offer discounted rates to new customers, and these can be significantly cheaper than rates offered to existing borrowers.

A mortgage broker can help borrowers navigate the way through the options to ensure they get the best outcome under the circumstances. At SHL Finance we are already proactively helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save their clients thousands of dollars. We would love the opportunity to help you too.

Please call Reece Droscher on 0478 021 757 should you want to discuss your options.

FINANCIAL SUPPORT FOR SMALL AND MEDIUM BUSINESS

There are over two million small and medium enterprises in Australia, all of which have been affected in some way by COVID-19, be it positively or negatively. There have been several initiatives announced to help these SME’s through the crisis, the major ones being JobKeeper and the Coronavirus SME Guarantee Scheme. What is this scheme and is it something owners of a SME should consider?

THE SCHEME IN A NUTSHELL

The Coronavirus SME Guarantee Scheme will provide small and medium sized business with timely access to working capital to help them get through the impact of the Coronavirus.

The Government will provide eligible lenders with a guarantee for loans with the following terms:

  • SMEs, including sole traders, with a turnover of up to $50 million.
  • Maximum total size of loans of $250,000 per borrower.
  • Loans will be up to three years, with an initial six month repayment holiday.
  • Unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.

Under the Scheme, the Government will guarantee 50 per cent of new loans issued by eligible lenders to SMEs.

The Scheme will enhance lenders’ willingness and ability to provide credit, supporting many otherwise viable SMEs to access vital additional funding to get through the impact of Coronavirus, and will be available for new loans made by participating lenders until 30 September 2020.

There are currently 36 lenders who are participating in the scheme, including all four major banks and several large tier 2 lenders.

THE DEVIL IN THE DETAIL

  1. Loan terms of 3 years with a six month repayment holiday – Firstly, any assistance for SME’s during this time is welcome. We all hope the economic affects are short-term and businesses can get back to normal operations soon. However, there is a distinct possibility that it will take longer than a few months for businesses to operate at a level close to where they were pre-pandemic. Owners of these SME’s need to be mindful that, once the initial repayment holiday expires, they will need to be able to meet loan repayments which may be quite high, given the short-term nature of the finance.
  2. Loan funds can only be used for cash-flow purposes (paying staff, rent of a premises, etc). You cannot use these funds to refinance other existing debt or buy an asset, so this will be an additional commitment the business will need to meet.
  3. Participating lenders will determine a SME’s borrowing capacity using a combination of current and historic business performance information, such as BAS, previous business tax returns and financial statements. If the business takes longer to recover than the initial six-month repayment holiday then their capacity to meet this new loan repayment will be impacted.  
  4. Interest is capitalised for the initial six months. Once this repayment holiday period expires the loan amount to be repaid will be greater than the initial amount borrowed. If a business has the capacity they can make repayments during the repayment holiday period to reduce the amount of interest charged.
  5. The Government Guarantee – these loans are partially guaranteed by the Federal Government to provide the participating lenders with some security that, if the borrowing SME is unable to meet the loan repayment commitment, the Bank will at least be able to retrieve some of the debt (50%) via the Guarantee. The SME is still effectively on the hook for the full amount, the Guarantee is just a safety net for the lender.
  6. Application Fees – most lenders are waiving the normal application and monthly fees associated with these loans under the Scheme.

Assistance for SME’s is vital to help them navigate their way through the current economic environment. If you are a sole-trader or small to medium enterprise who would be eligible to participate in the Scheme, your local mortgage broker is well-placed to run through the pros and cons of this option. At SHL Finance we are open for business and able to assist you with any business lending requirements. For more information please call Reece Droscher on 0478 021757, or email reece@shlfinance.com.au.

The 5 C’s of Lending – The Secret to Getting Your Mortgage Application Approved

There are many aspects to a Home Loan Application that financial institutions consider when assessing whether to approve or decline the application. Primarily the success or failure of an application will come down to the applicant’s ability to overcome the 5 C’s of credit: Character, Collateral, Capacity, Capital and Conditions. So what are these C’s and how do they impact on your ability to get a Home Loan.

CHARACTER

The first C of Character is based on your willingness to repay your mortgage. Lenders will refer to your credit history when determining whether you have a proven track record of repaying any previous credit facilities on time, or have operated a continuous credit line such as a credit card within the terms of the facility. Any issues identified on your credit history, such as payment defaults or bankruptcy, may immediately see your application fail this test and therefore it is declined.

Other aspects of the Character test that are considered are:

  • The applicant’s employment stability.
  • Does the applicant change address regularly?
  • Are bill payments made on time?

If your credit history is not great it does not mean you are unable to get a Home Loan. You may need to consider looking at non-conforming Home Loans, which are available for applicants who may not overcome the Character test when applied to credit.

CAPITAL

Capital is the second C and represents the applicant’s net worth, the value of your assets minus the liabilities. Effectively the lender will look at personal assets like cars, savings in your bank accounts, investments such as shares and any property that you own, and deduct things like credit cards, personal loans and any other loans or credit facilities you have at the time of submitting the application. The value left is your net worth.

The lender considers this as it demonstrates an applicant’s ability to accumulate assets. It works in conjunction with the first C, Character, as the willingness to repay debt should assist improve an applicant’s net worth.

An applicant’s life stage will also influence whether an applicant passes the Capital test. A young applicant would not be expected to have accumulated as many assets when compared to a middle-aged applicant. Where an older applicant does not have a significant net worth it may indicate that they spend too much and haven’t allocated any money into savings or buying other assets. Most lenders will decline an application where the applicant’s net worth is below what is expected of someone of their age.

CAPACITY

Lenders use the third C of credit, Capacity, to determine an applicant’s ability to repay the proposed debt. They measure this by calculating all forms of income an applicant receives (salary, rental from investment properties, share dividends, some Government pensions) and compares this to the loan repayments or commitments an applicant currently has, including any living expenses, credit card limits, personal loans or other loans.

Should there be enough income left over after deducting these repayments to meet the proposed repayment on the Home Loan requested, then Capacity has been met. Please note that Banks will use a default interest rate, usually a margin of 2.5% above the advertised interest rate,  when completing Capacity calculations as they like to see that the applicant will be able to meet the repayments should interest rates go up.

COLLATERAL

Collateral refers to the property that is used to secure the loan. For a Home Loan this is the property that you will be purchasing or, for a refinance, a property you already own. Typically, the value of the security should be greater than the size of the home loan requested.

The fourth C is very critical to the success of your loan application as the lender must hold adequate security to ensure their risk of lending to you is mitigated. If you’re unable to make your mortgage payments as agreed, the bank has the right to seize your property to repay the debt after all other avenues have been explored. There needs to be sufficient value in the Collateral offered to clear the debt in full should this situation occur.

There are other options available should you be unable to meet the Collateral requirements, such as guarantor loans, that you may be able to consider.

CONDITIONS

The final C is the one that can be the most challenging to meet as it is sometimes out of the applicant’s control. Conditions refers to the general market conditions that are present at the time you apply for the loan, such as the current interest rates available, perceived employment security and other events that may impact on your ability to meet the proposed loan repayments. This is particularly pertinent to the current situation we have for those people employed in the hospitality, retail and tourism sectors which have been severely affected by the pandemic.

For example, some lenders have made the decision to remove from consideration any applications for finance which come from anyone employed in these sectors, as their short and medium-term income and employment prospects are potentially bleak. These applicants are seen as too risky for lenders to consider at this time, even if the applicant is currently employed and earning an income.

The purpose of the loan is also an important part of overcoming the Conditions component of the 5 C’s of credit. Buying an investment property is seen as a riskier proposition by some lenders, who have reduced the percentage they would lend for this purpose to 80% of the security value, whereas buying a home for owner-occupation would achieve a loan up to 95% of the security value (subject to mortgage insurance approval of course).

If you are able to pass all of the 5 C’s you should not have difficulty proving you are a credit-worthy prospect and would meet the criteria to have your application approved. However even if you don’t pass all of the 5 C’s there still may be options out there to assist you. Your mortgage broker is best-suited to help you navigate through the market and find the most appropriate solution that meets your needs.

At SHL Finance we are ready and willing to help you achieve your Home Loan finance goals. Please call Reece Droscher on 0478 021 757 to discuss all of your Home Loan needs.

First Home Loan Deposit Scheme

In February I wrote about the launch of the Federal Government’s First Home Loan Deposit Scheme, a program designed to support eligible first home buyers, who have managed to save a 5% deposit, buy a home sooner. The scheme proved to have a great take-up rate, with the initial 10,000 places fully subscribed, meaning a significant number of first home buyers have now been able to achieve their dream of home ownership.

On July 1st the Government released a further 10,000 places in the scheme which are now available to be taken up. The scheme is managed by the National Housing Finance and Investment Corporation (NHFIC) and allows first home buyers, who have to meet certain eligibility criteria, to purchase a home with only a 5% deposit required. They are able to avoid having to pay the additional cost of mortgage insurance, normally required for any loan where the borrower is unable to contribute a 20% deposit, which saves them a significant amount of money that would otherwise be incurred.

To be eligible a first home buyer applying as a single applicant cannot earn more than $125,000, a couple no more than $200,000 combined, and the purchase price must not exceed $600,000.

If you are eligible to participate you will need to be quick to reserve your place before the allocation is fully exhausted. As part of the process you will have to ensure your tax return is completed for the 2019/20 financial year, so please get your return completed as soon as possible. The NHFIC won’t reserve your place in the scheme without this step being completed as they will require a copy of your Tax Assessment Notice to determine your eligibility.

For more information regarding the FHLDS and to confirm your eligibility please contact our office directly, or you can log in to the FHLDS website https://www.nhfic.gov.au/what-we-do/fhlds/

Reece Droscher

Managing Director

SHL Finance

SMSF Lending

PLANNING TO BUY A PROPERTY IN YOUR SMSF? WHAT YOU NEED TO KNOW.

For some time now if you have a Self-Managed Super Fund you have been able to borrow from a Financial Institution to buy a property for investment purposes. Many SMSF’s have taken advantage of this option to invest in bricks and mortar, however before you start heading to property inspections and dreaming of building a property portfolio to support you in retirement, there are some things you will need to know about how lending to an SMSF works and which lenders will support this type of finance.

SMSF PROPERTY RULES

Buying a property inside a SMSF comes with a particular set of rules and regulations to which the trustee of the SMSF must comply.

  1. The property must not be lived in by fund members or any related party.
  2. The property must be acquired for the sole purpose of providing retirement benefits to fund members.
  3. The property cannot be rented to fund members or related parties.

There is one exception to the rules above and that is where a SMSF purchases a commercial property that is to be occupied by a fund member’s business. The business can occupy the commercial premises but must be paying market rent.

Buying property inside a SMSF also comes with higher costs. To enable the SMSF to buy a property a special holding trust needs to be established, and the property is placed in the name of this holding trust, so there are additional costs for this to be set up.

SMSF members are also required to obtain legal and financial advice as part of the buying and borrowing process.

SMSF BORROWING

Borrowing for property using your SMSF comes with very strict conditions, and as such not many lenders currently offer loans to SMSF’s. These loans are classed as ‘limited recourse loans’ which means that if a SMSF defaults on a loan, the lender’s only recourse to repay the debt is limited to the property asset held in the SMSF. They cannot access any other assets within the SMSF.

Loans to SMSF’s are more costly to lenders who participate in this market, so interest rates and establishment fees applied to these types of loans are significantly higher than loans provided for buying property in your personal name. Be aware that rates above 6% are common for these types of loans. There is no correlation between the rate applied on a standard Home Loan and the rates applied on a SMSF property loan.

SMSF’s are solely responsible for meeting the repayments on the loan. Rental income from the investment property combined with super contributions on behalf of the fund members are the primary sources used by lenders to determine the borrowing capacity of the SMSF. The cash liquidity position of the fund is also a contributing factor, as there must always be sufficient cash in the fund to meet the loan repayments even when the investment property is vacant.

Lenders are therefore more conservative when it comes to gearing levels for loans provided to SMSF’s. Most lenders will not allow a SMSF to borrow more than 80% of the property value, however this will depend on the type of property being purchased. In some instances, say for commercial property or residential property in some regional areas, the percentage may be reduced to 70% and potentially lower, so the SMSF would need to contribute more cash towards a purchase than a natural person.

Furthermore, a property purchased within a SMSF cannot be altered or renovated to change the character of the property until the SMSF loan is repaid. Borrowed funds can be used to cover repair and maintenance costs, but any alterations or renovations which are classed as improvements must be paid for through the accumulated funds of the SMSF and cannot change the asset type. For example, a property originally purchased as a standard residential home cannot be altered to become a medical practice as this changes the asset type to a commercial property.

PARTICIPATING LENDERS

Due to the highly regulated and specialised nature of this type of lending, most lenders in the market do not offer SMSF lending as part of their suite of products. However there are a few lenders still remaining in this market, such as Latrobe Finance, Liberty and Think Tank.

There are also a number of private lenders who offer these products, however it is always best to speak with a mortgage broker who has experience in these types of transactions, as they will be able to help you navigate the complex lending process and ensure that you are able to access the most appropriate product to suit your needs.

BEFORE YOU START LOOKING FOR A PROPERTY TO BUY….

If you have a SMSF, or are thinking about establishing one, please ensure that you get the right team of experts to provide you with advice before you make the decision to buy property and borrow through your fund. That would mean speaking with your financial advisor to determine whether to buy property would align with your investment strategy, and getting legal advice to ensure the SMSF structure is in place to allow for a property to be held in the fund.

Should the advice suggest that buying property inside your SMSF is the best option for your retirement planning strategy, and finance would be required to facilitate this, ensure that your mortgage broker has experience in SMSF lending. Due to the complex nature of these transactions a lot of mortgage brokers have not participated in this market. At SHL Finance we have assisted many SMSF’s through the complex finance process and work with your financial advisor to ensure the lending solution aligns with the investment strategy.

Please call Reece Droscher on 0478 021 757 for any SMSF lending requirements.

CAN YOUR HOME LOAN SURVIVE COVID?

As most of us are impacted by the effects of the current State of Emergency lockdown in the wake of the COVID-19 pandemic, be it physically, emotionally or financially, it is becoming increasingly important for anyone with a mortgage to understand whether their current loan is the best solution to meet any potential change in circumstances. Borrowers need to know how much their current loan is costing them, and how will their current lender support them in times of financial crisis. Is your Home Loan healthy enough to help you through this pandemic?

Workers in most industries have been severely affected by the restrictions put in place to prevent the spread of coronavirus . In response to this most lenders have programs designed to assist clients financially should their employment/income be impacted negatively. As at June 30th  the data provided by Home Finance lenders showed that around 10% of  Home and Investment loans were under a repayment deferral program, representing around $195 billion in loans. Small business had also taken up the offer of repayment deferrals on commercial loans at around 17% of the total small business loan market.

The assistance package generally consisted of repayment deferrals for periods initially up to six months, however a large percentage of those loans under the repayment deferral program will be coming to the end of this period. Some lenders have commenced reviewing the requirements of those who took up the deferral option in the first wave of restrictions. Most lenders have advised that, for those who still require assistance, there will be options available to extend the deferral period, however these will be subject to regular review and arrangements will be for shorter periods.

There is also a misconception amongst some borrowers that, with repayments put on hold, any other costs will also be deferred. This is not the case. If you decide to defer your loan repayments the interest on the loan is still being calculated and is added to the loan balance. Once the deferral period is completed, borrowers could find themselves in a worse position as they owe more than they did before the deferral period commenced. They may have to commit to a higher loan repayment than they were paying before the repayment deferral period commenced.

If you are a borrower who is about to finish the initial repayment deferral period, or due to lockdown need to approach your lender for repayment deferral assistance, there are ways to mitigate the impact of this, now and in the future.

  1. Review the current interest rate and approach your lender to switch to a cheaper option before you request the repayment deferral. This will help to reduce the amount of interest that would be capitalised to your loan during any repayment deferral period.
  2. Re-commence your repayments as soon as possible to reduce the additional interest costs if you can afford to do so. Even setting up a part-payment arrangement with your lender will help to offset some of the extra interest which will be charged during the deferral period.
  3. Refinance to another lender should you still be employed. A number of lenders offer discounted rates to new customers, and these can be significantly cheaper than rates offered to existing borrowers. Some lenders will take JobKeeper into account as acceptable income to repay a Home Loan, so even though you are receiving some assistance you may still be eligible to borrow to refinance and get into a better position.

A mortgage broker can help borrowers navigate the way through the options to ensure they get the best outcome under the circumstances. At SHL Finance we are already proactively helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save their clients thousands of dollars. We would love the opportunity to help you too.

Please call Reece Droscher on 0478 021 757 should you want to discuss your options.

0478 021 757