How can I get my home dream to fly?


Q. I am 23 years old and have a dream to own a property. I want to start thinking about investing my money somehow. I’ve worked out on my salary that I could probably afford repayments of around $800 a month.

I have looked at home loans, but with what I am earning I can’t borrow enough money to afford anything. I have got $26,000 sitting in a high interest account but I am not sure what to do from here. What would be your advice for an investment that would give me the best return on my money?

A. If you are prepared to take a long-term view, and won’t panic when the stock market has one of its normal bad days, you could consider a margin loan for a quality share trust. Your money will be spread over a range of blue chip companies and you can start small.

Also, you will get a tax advantage as part of the income stream will be franked and you can add to your investment on a regular basis by reinvesting dividends or by making further contributions. If you seek advice and adopt a conservative loan to valuation ratio you should do well.

Q. My partner and I own five properties, including the house we live in. We are both 42 and our combined income is $250,000. The properties are currently worth $2.5 million, in good locations, with reasonable capital growth. We have between 10 and 15 per cent equity in each property, and the rents cover the outgoings.

Can you suggest a back up plan we should adopt, in case property prices start to fall and we are over-exposed to this type of investment.

A. If “outgoings” include interest, your properties are positively geared which has already given you an inbuilt safety factor. The biggest danger for property prices is rising interest rates, as this could force overexposed investors to dump their properties on a falling market. One way to protect yourself against rising rates is to fix your interest rate for the next five years. Another option is to pay the loans down to reduce your interest commitment, or simply accumulate surplus funds in an offset account.

Q. My parents have moved to a unit and are going to sell the family home which was built in the 1950s. Are there any tax or pension implications if they gift the bulk of the sale proceeds to their children?

A. There should be no tax implications for the parents, as the house is a pre capital gains tax asset and would be exempt irrespective of when it was bought, as it was their residence. However, if they are receiving benefits from Centrelink, there could be huge implications – the money is currently in the form of an exempt home but once the money is gifted to you, it will be treated as a financial asset and will be subject to deeming for the next five years. Make sure you take advice at every step of the way.

Q. My husband and I rely heavily on franked dividends for retirement income as we are self-funded retirees and have heard the government may be scrapping the imputation credits. If this happens, what impact would it have on the share market and the people who rely on the credits for tax free income? Hopefully it would not be scrapped entirely but phased out over time.

A. There is always talk about changes to the tax system and this includes scrapping negative gearing as well as making changes to the imputation system. In my view, it’s a long way from the crouch to the leap and expect huge opposition if any government gets serious about these type of changes. The abolition of the imputation system would have a massive effect on the stock market as Australian shares would become less attractive. It could create a swing to international equities, or horror, even more people investing in overpriced property.

Q. My wife and I are looking to buy our first investment property. We have a $60,000 cash deposit, $130,000 combined income, no debts and a good credit history. We are looking at buying a positive cashflow unit with sufficient growth to enable us to leverage into a second property as soon as we can.

Given we are starting with no capital, and a small deposit, is it worth using lenders’ mortgage insurance to borrow a larger amount, giving us more options in finding the right property? It would take us two years to save a further $10,000 or $20,000, which may mean we don’t need the insurance but we could miss out on potential gains from buying in the current market.

A. The correct strategy depends on the potential of the property you are going to buy. In other words, you need to weigh the cost of mortgage insurance against the extra cost you would have to pay if the property appreciated by more than the value of the mortgage insurance while you were saving. There is no easy answer, it is really up to you to understand the market.

from The Sydney Morning Herald here: