Welcome to Mortgage Watch 2016 issue 3. I hope you find the information in this issue useful and informative. Please feel free to pass it on to your family and friends.

In this issue:
Cash rate remains at historic low
Barebones buying: Finding a fixer-upper
Are you at risk of being targeted for a property investment scam?
What do I need to know about interest-only loans?



Cash rate remains at historic low

The Reserve Bank of Australia has elected to keep the cash rate at its current level, leaving the door open for further rate cuts later in the year, if necessary.

Governor Glenn Stevens of the RBA had this to say in his official statement: "Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this."

"Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities."

So, what does all this mean for you? Despite the cash rate remaining steady, lenders may choose to move independently to the Reserve Bank’s decision. Now is the time to consider whether your current loan is the right one for you, right now.

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Barebones buying: Finding a fixer-upper

There's something extremely satisfying about bringing a broken property back from the brink. So satisfying, in fact, that it turns from a hobby into a full-blown career for some. But how can you get started on buying your first fixer-upper? How is it different from purchasing an established property? And what considerations do you have to make for your home loan?

Structure, not aesthetics
When purchasing a fixer-upper, the first thing you will need to recalculate is your real estate priority list. If you're like most Australians that responded to a Real Estate Buyers Agent Association of Australia (REBAA) survey, you might be after an open plan living area, or a butler's kitchen, or plenty of natural light. While that might be a consideration while viewing an established property, when you are buying a fixer-upper you get the opportunity to build these features yourself, so long as you have a good initial framework.

As such, unique features should be less of a concern and you would do better to focus on the base structure of the home. There's a 34 per cent chance that the home will have minor water damage, according to Archicentre, and a 4 per cent chance it could have major damage that would require more than $10,000 to repair. And that's just one kind of structural issue. It's perfectly fine to purchase a property in such a condition, but be aware of the additional costs that will be involved and factor it into your mortgage repayments.

For yourself or for resale?
You might be inspired by the people on The Block and think to resell the home once you've fixed it up. This is a great option for people who want to invest through sweat equity, but you have to be selective on your design choices. While you may not particularly want, say, two or more living areas, but that was among the top 10 features that Australians desired according to the REBAA survey. It pays (literally) to play to your audience.

One major mistake that people make is designing their fixer-upper according to their personal tastes, and that's fine if you are renovating for yourself. Less so if you are trying to resell. Try to stay away from permanent furniture such as built-in televisions or bookcases. Buyers will likely want to bring their own furniture, so try to keep your interior design and structure as creatively demure as possible. This also applies to quirky paintjobs and wallpapers, or odd structural choices. Keep it average, and you'll appeal to more people.

Making sure you get the right loan is integral to maximising your profit, so ensure you get as much choice as possible by talking to us!

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Are you at risk of being targeted for a property investment scam?

Property is a brilliant asset to have. Unlike other classes, it doesn't just build wealth - it puts a shelter over your or your tenant's head. Investing in bricks and mortar is an incredibly popular choice, whether you're a first home buyer just starting to figure out how much you can borrow, or a seasoned investor looking for the next big growth hotspot.

However, the sheer popularity of real estate has brought with it unscrupulous individuals hell-bent on illegally parting you with your capital in the most efficient way possible. The Australian Competition and Consumer Commission reports that in one year, Australians lost $229 million to scams, with dating and romance scams as well as investment schemes accounting for only a few reports, but the majority of losses.

So how can you make sure you don't fall victim to these professional swindlers?

Stay aware
Knowledge is power in property. Whether it's knowing whether a piece of real estate is a lemon or realising the person you are dealing with isn't quite above-board, making sure you are in the know is integral to making sure you aren't wasting your mortgage repayments on an illusion.

So how can you spot a dodgy investment scheme? They come in many forms, but the majority of scam attempts came via the phone, according to Scamwatch. If you find yourself talking with an "investment expert" who you don't recognise, with a once in a lifetime, low risk offer, your alarm bells should be ringing.

Are you a target?
Everybody from young Aussies to retirees invest in property, so everybody is a target to scammers. However, Scamwatch tells us that 40 per cent of scam reports come from those who are over 55. Perhaps these criminals consider retirees to be easier targets or just want to access their superannuation capital. In either case, older people do seem to be targeted more, so be extra careful if you are in this age bracket.

However, that isn't to say that young people aren't targets too. People who are new to the property market and don't have the right mortgage advice may be tempted to borrow large amounts of money to invest in a "low risk" property venture. This kind of mistake could cost you dearly, so ensure you work with us, your trusted mortgage experts, to keep yourself safe.

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What do I need to know about interest-only loans?

In your quest to find the right home loan, you might have encountered the term "interest-only loan", and wondered what it meant. To help you make an informed decision, here's a quick rundown on what they are, what benefits they have and what risks there could be.

Interest and principal
Interest-only loans are different from standard loans in that you only pay off what you are accruing in interest to begin with, usually for the first five of your loan. You don't pay off the principal, and as a result you will not need to make as large a mortgage repayment as you would with a standard loan.

After the interest-only period is up, you will revert back to a normal mortgage, where you are paying off the principal as well as the interest.

For owner-occupiers
The Australian Securities and Investments Commission found that interest-only loans tend to be more popular for investors (more on that later), but some owner-occupiers still choose to take them on over a standard loan. It can be a good deal, giving you the opportunity to make lower repayments in your mortgage's infancy, and you can also use an offset account to help reduce your repayments even further.

However, you have to be aware that your repayments will be going up at the end of the interest-only period, and you must factor this into your home loan comparisons when considering if you will be able to sustain it further down the line. You will also not be building as much equity in your home by not paying off the principal. Be aware of these pros and cons before going down the interest-only path.

For investors
Many investors choose to take on interest-only loans for the exact reason that they are cheaper to maintain initially, allowing them to rapidly expand their portfolio. The equity issue is also not as much of a big deal, as investors are offsetting this through targeting properties that experience rapid capital gains.

As a result, the house will be building equity at the top end, rather than through repayments at the bottom end. The fact that you can also claim your repayments come tax time is an added benefit for investors as well. Remember, if you are considering taking on an interest-only loan, make sure you speak to us to ensure that it is the right choice for you!

Should you have any questions or comments, please do not hesitate to contact me.

Gleeson Loans
ABN : 20617141539
Brendan Gleeson
Phone : 02 8810 7167
Mobile: 0404 874 296
Email : brendan@gleesonloans.com.au

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Warning
Information included in our newsletters is for general information purposes only and must not be considered financial advice. We do not hold an Australian Financial Services Licence. You should seek independent professional advice in relation to financial, taxation and legal matters relevant to your individual circumstances.