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Properties with debt become inheritance headaches

If you inherit a property with a mortgage, who is liable for the debt? While it may seem blindingly obvious that it’s you, it becomes a real problem if you don’t have the means to pay off the mortgage.

A will needs to spell out whether the estate will cover any remaining borrowings on a property. Jamie Davies

“If a person inherits real property from an estate and that real property is encumbered with a mortgage or charge, then the debt goes with the property,” says Paul Salinas, a director of Campbell & Co Lawyers.

In a worst-case scenario, he says, the bank could foreclose and the remainder would form part of the estate. Worse, if the gift was specifically the property, “it is arguable that there has been an ademption (the gift has failed) and the beneficiary gets nothing”.

Salinas dubs this a Catch-22, citing a case where minor children were gifted their father’s property, but the bank would not allow the transmission to occur as the children could not refinance the property.

“The mother made a family provision claim which was ultimately successful and the will was effectively altered to give her the property subject to a charge in favour of the children which allowed her to refinance the debt,” Salinas explains. “This would not work in all circumstances, though.”

There are wider implications, which get particularly tricky when some assets have been used to finance the purchase of others. “It is important to carefully consider what liabilities a deceased may have and what secures those debts, as there could be unintentional consequences,” adds Salinas.

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Wills with a sting

Take a will, for example, that provides for one beneficiary to receive the house and the other to receive the share portfolio, where both are worth $500,000 but where the acquisition of the shares was funded from a mortgage secured over the house. “The one who receives the house is responsible for the mortgage and therefore is subsidising the other beneficiary,” explains Salinas.

Another example of where it can be an issue, he adds, is where a beneficiary may have lived with the deceased.

“You often see this where a family member moves in with an elderly parent to become a full-time carer and the parent in gratitude gives them their house,” says Salinas.

“If the house had a mortgage – I have seen houses with significant reverse mortgages taken out – then the beneficiary is going to be responsible for paying the mortgage. If they have not worked for some time they will find it difficult to get a loan to refinance the loan themselves.”

The way to get around this, he says, is to include a “contrary intention” in the will – an express statement that the executor must pay all liabilities of the deceased owing at the time of death from the estate.

But even where there is this contrary intention in place, there can be problems with inadequate planning.

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Olivia Agosti, solicitor with Townsends Business & Corporate Lawyers, cites another case in which a woman inherited a property in Bathurst that had a mortgage to Bankwest.

The will directed that the outstanding mortgage on the property be paid out by the rest of the estate. Although the New South Wales Supreme Court backed this up, there was not enough money in the rest of the estate to cover the payment of the mortgage debt.

“In light of this, the courts decided that the property was liable for payment of the remaining mortgage debt, essentially reverting back to the default position,” says Agosti. “Accordingly, she may not have inherited the property itself, unless she was in a financial position to help pay out the remainder of the mortgage to Bankwest.”

This article originally appeared on  on 31st August 2017 by Debra Cleveland.


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Most investors are too focused on tax rather than fundamentals

Most investors are too focused on tax rather than fundamentals

Housing affordability continues to make headlines, with a variety of strategies being canvassed to discourage investment in residential real estate. These include reducing the availability of interest-only loans, and Labor’s policy of allowing a tax offset against wages and salary only on brand-new investment properties.

Last week’s budget tried to dampen investor enthusiasm still further by preventing tax deductibility for travelling expenses for visiting a property, and eliminating the ability to claim depreciation on assets that were part of the original purchase by the use of a quantity surveyor certificate.

Remember: An investment’s tax benefits are the cream on the cake. Photo: Jim Pavlidis

There is anecdotal evidence that these measures are having an effect – which is a sad reflection on the mentality of the average property investor. There is a fundamental investment principle that should be framed and hung in every investor’s home:

An investment should be judged on its merits; any tax benefits that may come with it should be regarded as the cream on the cake.

I was reflecting on this with my accountant last week when we were discussing the state of the nation in general and the budget in particular. I said, “If I found a fantastic investment property, in the right location, that ticked all the boxes, and I could get it for a bargain, do you really think I would care what kinds of tax deductions I could get?”

He smiled, and responded, “Sadly Noel, most of my clients don’t have that mindset.”

Obviously, it’s time for a refresher course on investment. The main reason we invest is to buy an asset today in the expectation it will increase in value, enabling us to build wealth for the future. There are a wide range of assets in which one could invest, but most experienced investors prefer property or shares because, if well chosen, they should provide good capital growth over the long haul, and an income along the way.

Borrowing is a great tool for anyone investing in growth assets. It enables you to buy the asset now, instead of saving up for it, and also magnifies your net return.

Suppose a person buys an investment property for $500,000, and by using the equity in their own home as a deposit can borrow the entire purchase price on an interest-only basis. If the net yield from the property is 4 per cent, they should receive $20,000 a year in taxable income, and if they can borrow at 4.5 per cent, their cash outlay for interest is $22,500 a year. Their cash shortfall is just $2500 a year, and if the rents increase by inflation the property should be at least neutrally geared within five years, which means it is now costing nothing to own it.

If the property increases by 4 per cent a year, it should be worth $740,000 in 10 years.The debt would still be $500,000 so they have made a pre-tax profit of $240,000 for a minimal outlay.

But that is the perfect scenario. It assumes that interest rates stay where they are, the property is continually rented, there are no big outlays for renovation or maintenance, and the capital gain is 4 per cent a year. There are many people who are facing capital losses rather than gains, including those who paid more than $800,000 for properties in remote mining towns and are now facing losses of over $400,000 a property – or would be, if they could find a buyer.

Note carefully that these examples ignore any tax benefits that might go with the deal. As I said before, they are the cream on the cake. The message is simple – buy the right property and you should do well, buy a dud and you will take a bath. Remember, borrowing magnifies any investment outcome – positive or negative.

This article originally appeared on on 19th May 2017 by Noel Whittaker.

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When should you start your Self Managed Super Fund?

When should you start your Self Managed Super Fund?


Self-managed super funds (SMSFs) have grown enormously in popularity over the last 5-7 years.

Because people like to be able to control their income rather than have a fund manager do it for them.

Managing your own super also allows you access to a wider ranger of investment options, such as shares, direct property investment, and other asset classes that are not available to conventional super funds.

At Option Mortgages, we DO find that most people are creating a SMSF simply to invest in property.

And that makes perfect sense. As an asset class, property has outperformed everything else (when you consider relative risk and leverage) over the last 100+ years. It’s Australia’s asset class of choice.

And now, with SMSF rules allowing you to invest your super directly into property — subject to certain regulations — it makes a lot more sense for a lot of people.

However, SMSFs do incur some fees to run. So there’s generally a break even point where it becomes worthwhile. And where that break even point is, can often depend on your own, individual circumstances.

When deciding whether an SMSF is right for you, there are a few steps to follow:

Get professional advice – this is vital, to makes that you are fully compliant, and also to guide you towards appropriate investment decisions. Our friends over at Option Wealth Solutions [link to appropriate OWS page] can help you with this.

Make sure your balance is sufficient and that you have enough to ensure your SMSF runs in profit. Make sure the gains you make aren’t eaten up by the fees you pay to run an SMSF.

Understand the regulations so you know what you can and cannot invest in. (You may be surprised at just how many different investment options become available once you create your SMSF.)

Make sure you have a good accountant who can work through your record-keeping, reporting, and auditing obligations — these all sound like complex requirements, but it really is bread and butter to any decent accountant.

Once you have your SMSF established, which can take up to two months, you’re ready to take control of your own money and invest.

And if you’re interested in using your SMSF to invest in property, we really need to hear from you to make sure everything is set up correctly. There are certain property types that are not available within your SMSF, and some important rules to follow.

Call 1300 848 848 now.


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Is this the king of investment classes?

Is This The King of Investment Classes?


As the end of the financial year wrapped up, financial planners throughout all of Australia were busily reporting on the investment returns they’d achieved for their clients, and projecting their expectations for the next 12-60 months.

The vast majority of financial planners DO tend to stick with only a small range of investment classes – and these are not necessarily the best performing. They’re simply the asset classes and investment options that they UNDERSTAND.

One of the key measures that smart financial planners use is the Internal Rate of Return, or IRR for short.

What that refers to is the compound return on equity you can expect averaged out over the lifetime of the investment.

And the returns that are projected are routinely based on YOUR risk profile (by law, your financial planner needs to gather sufficient information about your attitude towards risk, before he/she can begin to make investment recommendations).

Typical returns for your average investor, project an IRR around 7% for the next 5 years, depending on how aggressively you chase the returns. That means getting 7% ROI, compounding each year.

7% may not sound like a lot, but it’s certainly the norm for many asset classes.

However, there’s another asset class that absolutely dwarfs these returns, making it Australia’s asset class of choice.

That’s (obviously): PROPERTY.

Although property has only historically increased at between 7-10% per year over the long term (although, many are predicting that to slow considerably now), the key factor in increasing returns through property has been leverage.

Banks are quite happy to lend, in some markets and at some times, up to 106% of the purchase price of a property. In the current market, 90% seems fairly achievable, depending on your circumstances. That means, your money can be working VERY hard for you, and in terms or pure IRR, the returns can push well above 20%.

You can also leverage with shares, by borrowing against your position to purchase more shares. But this can be highly risky. Share prices are generally a lot more volatile than property prices, and fluctuate daily. If the shares you’ve invested in have a strong, long-term outlook, your gains can be entirely wiped out by a temporary drop in the market that can push their value so low that the bank has to call in the loan and you can potentially lose everything.

So, when it comes to investment, the best advice is to have a financial planner who understands more than one asset class and can advise you on a broader ranger of options. And can help you create a wealth plan specific to you.

If you’d like to speak to us about how we might specifically be able to help you understand which investment classes might suit your investment portfolio and risk profile, we really need to hear from you.

Call 1300 878 898 to get expert advice now.


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What is the first step on your wealth journey?

What is the first step on your wealth journey?

Financial experts are currently warning younger people that unless they are able to invest much sooner than their parents, they may well be left behind on their wealth creation journey.

Several factors are combining in today’s investment market that make it harder and harder for young families to get ahead.

First, there’s the asset class of choice: Property.

Australia’s favourite and best-performing asset class is also the most expensive. And therein lies the problem. Once you have your first property, it can effectively—and rather easily—anchor your entire investment portfolio.

It’s what leads  John Hewison of Hewison Private Wealth to declare that there is “no question” home ownership has added enormously to the personal wealth of most Australians.

But home ownership is becoming so unaffordable in Australia’s two largest cities, that the younger generation are really struggling to get their own home.

Interest rates are at record lows, but banks are super tight on lending, making it extremely difficult to service the level of borrowing most first home buyers need.

The main issue seems to be the way the government incentivizes property investment as an asset class, rather than something home owners can take pride in as they create their version of the increasingly elusive “Australian dream”.

Until the government manages to balance the priorities, by disincentivising property investment, and promoting more owner occupiers, the situation is unlikely to change (and will probably worsen).

The situation is even worse for young families, where lending criteria really puts a stranglehold on further investment.

So what’s the solution?

Will the government continue to support property investment, under the guise of supporting the building industry and thereby creating more affordable housing?

That’s extremely unlikely.

With a government that generally tends to favour property investment (which makes one suspicious that a large proportion of politicians may well be landlords), investors, especially those in their early twenties, are left with a simply choice.

Find a way to acquire your first home, or be left completely out of the market and watch the prices rise inexorably.

It may seem unfair, but if these are the rules the government has created and enforces, then you can play the game and win, or sit on the sidelines (and lose).

If you need help working out how to acquire that elusive first property, we need to talk to you. There are a great deal of creative solutions that can get you into your first home, despite government policies and bank lending constraints.

So why not get a full evaluation of your options by starting right now?

Contact us on 1300 878 898 and we can start your journey. Find out exactly where you’re at and what you could achieve over coffee with one of our expert team.

Call 1300 878 898

Paul Hanna No Comments

The Hidden Costs of Purchasing Property

 The hidden costs of purchasing property

While some may say “ignorance is bliss”, it’s not a winning strategy when it comes to property.

The last thing you want is to be ‘pipped at the post’ and miss out on that dream property because your finance didn’t quite cover you for those ‘unexpected’ costs.

The reality is that buying a property, whether it be a home, or an investment isn’t as easy as saving up your deposit then waiting by the phone to see if your offer was accepted. That’s the easy bit.

Being smart is about ensuring you’ve got enough reserves to cover for all the unexpected costs that crop up.

And I it’s wise to be aware that the deposit you’ve saved is only part of the cost of buying.

The reality is, if you only tally up the costs of stamp duty and LMI you may have already dropped a big chunk of change.

To help you go in prepared – we’ve put together a list of things to be aware of.

So what costs are involved in buying a home?

Let’s assume that the property is worth $500,000, that you will live in it for at least the first year, you can get a mortgage of 5% for round figures, and you have a 10% deposit saved up.

If we take this example – here some estimated costs which vary depending on the lender and the state you’re buying in obviously.

1 – Legal fees: Approx. $1,500–$3,000, depending on how complex your structure is.

For example, if you’re buying in a company or trust structure, you could pay significantly more. The simpler the ownership structure, the lower your legal fees.

2 – Stamp duty varies from state to state. You can get an idea of how much stamp duty is by using online calculators. But for example, the  estimated stamp duty is approx $17,990 if you’re buying in NSW.

3 – A pest and building inspection will set you back $300–$400 and you’ll want to get this done, in particular if you’re buying established property. Even newer properties sometimes have defects that only a trained specialist can spot.

Unseen issues could cost you an arm and a leg – this is where a building inspection could save you tens of thousands.

4 – A document preparation fee/legal charges $200–$300 may be charged by the lender.

5 – Title insurance: $360 to protect you from any claims against the title of your property.

6 – A registration of title will be $75 – it’s the cost of registering the title with your state government.

7 – A loan application sometimes called establishment fee is approx $600. It’s a one-off cost charged by your lender when you apply for the loan. Occasionally you can get this waived – if you know how.

8 – A Legal searches and enquiries fee to ensure there are no encumbrances on the property will set you back $285.

9 – Lenders mortgage insurance will set you back $7,920 in this example. LMI is the premium you pay to insure the lender for lending you more than 80% of the value of the property.

I would highly recommend avoiding this if at all possibly by staying below 80% with your borrowing. It’s a safer strategy too protecting you against any unforeseen downturns in the market.

The final amount will depend on the insurer, but this is a good indication of how much you should budget for.

10 – A bank valuation fee of up to $300–$400 may be charged to arrange an independent valuation. Some lenders waive this but some include it in costs. It’s best to make sure you review all your options.

11 – Council and water rates will usually be between $500–$700

Not many people know but when you purchase a property, you must by law pay the vendor the remaining yearly or quarterly rates, like water and land. These will begin from the date of settlement and will be individual to the property and area.

          Total estimated costs: $11,540–$14,050

          Plus deposit: $50,000

          Total estimated cost of buying: $61,540–$64,050

So all in all the expenses of purchasing a property are nominal in comparison to what you’re getting. But they need to be accounted for all the same, so make sure you take all these costs into account when searching for your next home or investment property.

My advice? Enlist an expert…

With the right education and a little expert guidance you’ll drastically reduce the chance of any nasty surprises and be well on the way to a building a healthy property portfolio.

Call us today on 1300 878 898 to find out how one of our expert team can walk you through step by step what’s involved in your next big purchase or investment.

Call 1300 878 898

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The Importance of Having a Wealth Plan

The importance of having a wealth plan

“The person who has a plan, has their battle half won.”

So said Miguel Cervantes said more than 400 years ago. It’s as relevant now as it was then.

Why is having a plan so important? We’ve all heard adages, like, “Failing to plan is planning to fail.” But is it really true?

The simple answer is: YES. And it’s backed up by dozens of scientific studies that have proven, beyond a shadow of a doubt, that having a plan, target, or goal, drastically improves performance in any facet of life.

But sometimes having a plan is not QUITE enough. You may well want to achieve a specific level of financial affluence. At that point, you have options.

Understand this: your financial position is the key factor that determines what lifestyle options are at your discretion.

But merely having a plan is only the first of 4 critical steps…

  1. Having a goal of what you want to have financially
  2. Add a time you want that by, so now it’s not a goal, it’s a plan
  3. Take action to achieve it
  4. Have the discipline to stick to it

Most people don’t get past step 1. They have a goal, without any real time commitment, and never take any action (let alone, discipline themselves to ensure they continue along their chosen path).

They never reap the lifestyle rewards they could. They never get to sit back, and fully examine all the wonderful options their financial position affords them.

They fail.

So… in light of that… what makes some people succeed. What makes some people follow through and complete their 4 steps?

The simple answer is that they understand their REALITY. They make sure that their goals are ACHIEVABLE.

And then you work backwards.

In fact, Thomas Watson, who built IBM from his garage into a huge multinational described his process as, “I imagined what I wanted, and worked backwards.” He started with his goal, and worked backwards, developing his plan in smaller, actionable steps.

And in this complex day and age, for most of us, that means getting help from an expert.

There are an abundance of experts who operate in the growing “wealth creation” field. Experts who can reverse engineer your outcomes, guide you towards that goal, keep you accountable, and basically ensure that you reach your goals as efficiently as possible (without compromising on your lifestyle tooooo much!).

And why not get a full evaluation of your options by starting right now? Contact us on 1300 878 898 and we can start your journey. Find out exactly where you’re at and what you could achieve over coffee with one of our expert team.

Call 1300 878 898

Paul Hanna No Comments

Choosing A Home Loan – 5 Things to Consider

Have you decided to buy a property? Whether it’s your first home, an investment property or a relocation, the question most people are faced with is; Where do you start?


The whole process of choosing a home loan may feel incredibly daunting and like most, you may even find it a difficult process just to find a lender. The good news is that it doesn’t have to be. If you tackle the whole thing in planned stages then you can be sure to avoid disappointment and hopefully, much wasted time. What do you need to consider before going ahead and choosing your home loan provider? Here is a simple 5 step process to follow which can assist you along the way.


Step 1 – Weigh up the Costs vs the Benefits


There are four important things to consider at this stage:
• Needs – What exactly are your needs?
• Costs – What is your budget, your serviceability and your lending capacity?
• Features – What kind of things can you have built into your home loan?
• Benefits – Which of those features would provide you the most benefit?
Immediately you can see how taking some time to consider the above could help you in the long run.

Step 2 – Consider the repayment options available to you.

To get started, you need to consider whether you want to make the minimum payments or whether you would like to go ahead and make the extra payments. It is important to consider whether or not you would like to extend the home loan at a later stage, when planning to start your own family or if you would like access to your money for something else at a later date.


Step 3 – The purpose of the home loan

What will the purpose of your home loan be?
• Assist in the purchase of your primary home (principal place of residence), or
• As an investment
If you are going to live in the property or if you would like to borrow the money for an investment property then you may find the whole process to be vastly different. Added to this, some lenders may have different packages available depending on the option you are looking at.

Step 4 – Deciding on the length of the home loan

It is important to consider the length of the home loan. If you only need to make the minimum payments then this may cost you more money over time. If you are able to make additional payments, this will in turn assist you with offsetting your interest at a faster rate.

Step 5 – Determining your home loan structure (fixed vs variable)

When considering your home loan structure the important thing to remember is that you can choose between fixed and variable loans. A fixed rate loan is one which the repayments are paid at a fixed percentage. This means that your monthly repayments will never differ. Over time this can work in your favour should interest rates go up. The downside is that most lenders will offer you a higher fixed rate percentage to ensure that their interests are covered. A variable loan is such that your initial percentage offered to you by the lender, will be lower however should interests rates rise, so will your repayments as your rates vary on the fluctuation of the interest rates. This can be both beneficial and not as should interest rates drop, so will your repayments.


The important thing to consider is that the home loan suits your needs and personal financial situation.
Remember, that when choosing which option works best for you, you should also take into account the following:
1. your additional payments
2. the saving you will generate in terms of a reduced interest period

Choosing a home loan is one of the biggest financial decisions you will make, so assessing the situation and your personal circumstances is key, enabling you to make the right decisions and at the right time.

Ask Questions

Don’t be afraid to ask questions because if you ask them of the right people then you could potentially save yourself thousands of dollars at a later date. Asking questions is a great way for you to make the best decision.
Why don’t you get started today and find out more? It has never been easier for you to start making the right decisions in terms of your finances.