Here you will find common sense answers to the most common questions asked by our members. Answers are provided by the appropriate expert in that area.

We have a holiday home in Australia, do we have to pay tax on it?

We have a holiday home in Australia, do we have to pay tax on it?

In the modern era it is becoming increasingly common for people to keep a holiday home in Australia and visit it for extended stays during the year.

If you have purchased a home in Australia and you have decided not to relocate permanently then you will still be considered a non resident for tax purposes and will remain so until you chose to have a more permanent presence.

As a non resident, your worldwide income is not subject to tax in Australia, only Australian sourced income such as wages while living there or rental or capital gains on an Australian property.

If you have a holiday home that you do not rent out during periods when you are not using it, then there are no income tax requirements for you and you will not be required to lodge an Australian income tax return unless you do some paid employment during your stay in Australia.

You will however be subject to capital gains tax on the eventual sale of the property if you make a profit over cost of purchase, acquisition costs, any paid improvements to the property and selling costs.  If you have owned the property more than 12 months half of any net capital gain will be free of tax, the balance subject to normal marginal rates with the opportunity to do some effective tax planning to keep this to a minimum.

If the property is rented out in your absence, then you must lodge an annual income tax return each year declaring the rent received.  You will be allowed to deduct all expenses of ownership including maintenance, rates, electricity and interest on loans.

The expenses need to be reduced on a pro rata basis to remove the period of time that you kept the property for your own personal use.

You are entitled to claim costs relating to the property during periods of vacancy provided that it was “available for rent”.  That would need to be evidenced by such things as a formal listing with a property manager, advertisements stating the property was available and appropriate communication showing evidence that you tried to find tenants.

The rental system is well established to cater for short term lets, so you will find good support should you choose this option and it can ensure the financial cost of the property is kept to a minimum and maybe even turn a profit.

If you intend to keep the property just for your own personal use, it is usually best to have no mortgage on the property as you would want to minimise the cost of ownership.  That does not mean you need to leave the capital idol, as it can be used as collateral for further investment decisions including Australian property or other prudent investment options.

Using the equity in your holiday home to acquire an additional Australian investment property that is rented on an ongoing basis, can prove very tax effective as proper planning in this way can protect against potential capital gains tax on the sale of either property.

This needs to be done with due consideration and a clear understanding of the financial and tax implications, so it would be wise to seek professional advice to ensure you make the best decisions to suit your circumstances and maximise the benefits of your Australian property choices.

What sort of fees do I have on my Australian property loan?

What sort of fees do I have on my Australian property loan?

Australian property finance is a well establish, competitive and highly regulated activity.

As such, the costs involved are very reasonable when arranging your loan.  Costs would be split between the set up fees and the ongoing loan.

Loan Set Up

Typically there is an Establishment fee or Application fee when your loan is approved with a bank.   This is typically between A$300 to A$750.  At various times some bank offer incentives and reduce this if you are lucky.

Most banks do not require this to be paid until they have assessed your application and have confirmed their willingness to provide the loan.

This is true for both a formal application and also if you are seeking a pre approval prior to purchase.

If you use a Licenced Finance Broker, such as Specialist Mortgage, you should not be charged a brokerage fee, as the bank would normally remunerate the broker and therefor there is no need for any additional direct charge by the broker.  At Specialist Mortgage we do not charge any brokerage fees to our clients.

When the loan is approved and progresses to draw down, there will be additional costs such as loan documentation, property valuation fee and settlement attendance fees.  These are usually very modest and in many cases included in the application fee.

Under Australian lending regulations, the bank is required to clearly detail all potential costs when they make the loan offer so there should be no surprises for you.

Ongoing Fees

Many banks offer special packages that include discounted interest rates.  It may be that an annual bank fee is charged for you to obtain this, and is worth considering as it may lead to substantial savings.  Once again, the bank is required to advise you of all potential ongoing fees on the loan, including monthly charges and statement fees, in advance.

When we review your lending options we compare all the interest and fee options available to you between the banks and find the one that is best suited to your circumstances.

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Can I get a loan to buy an Australian property if I am living overseas?

Can I get a loan to buy an Australian property if I am living overseas?

Can I get a loan to buy an Australian property if I am living overseas?

Yes, we have access to multiple lenders in Australia and Asia who have specialist non-resident lending departments catered for offshore borrowers.

If you are an Australian citizen or hold a Permanent Resident Visa you have a few additional options for finance as more lenders are prepared to provide mortgages.

As a Foreign Investor you still have a very good variety of options available to you and should have no difficulty in obtaining finance provided you can demonstrate an ability to meet the repayments on the Australian property loan after allowance for the Australian rental has been taken into account.

Lending is generally available for 80% of your total Australian property portfolio, including the new acquisition.   Australian Citizens and Permanent Residents may qualify for a higher lending ratio.

Click here for further information on Australian Property Finance

I was thinking about buying a property in Australia but I am put off by the strong Australian dollar. Is it worth waiting for the dollar to weaken?

I was thinking about buying a property in Australia but I am put off by the strong Australian dollar. Is it worth waiting for the dollar to weaken?

When it comes to investment it is easy to find an excuse to delay a decision as there is always one to be found.  Market bubbles, interest rates and indeed currency are popular reasons to delay rather than act but many people don’t realize the cost of procrastinating when it comes to Australian property is more than they think.

From a taxation perspective, the many incentives on offer to reduce future tax on your Australian salary when you return to Australia require as much time as possible to accrue in order to achieve the best result so you do weaken your future taxation position, albeit not significantly if your delay is short lived.

From an investment perspective, the Australian property market continues to achieve sound and stable growth, so delaying the entry decision can prove more costly than any potential currency cost.

Many people are not aware of the fact that quality lending can act as a natural currency hedge by allowing you to minimize the deposit required and only be exposed to the high currency cost on the funds required to purchase rather than the full purchase value.

When using sensible lending, your cash outlay would be limited to your 20% deposit plus approximately 5% allowance for costs such as stamp duty and legal fees.

Depending on your point of view where the currency might move to, or how much it may be “overvalued” it is important to find the reality of your delay decision.

This is best explained in an example.  Let’s assume you are looking to purchase a property in Australia for A$500,000 of which you would require 25% for deposit and costs to acquire, the balance coming from an Australian dollar loan.

If you feel the Australian dollar is overvalued by say 10% at the moment and would improve that much in the next 12 months, then the “additional cost” of acting now would be 10% of the cash required of A$125,000, being A$12,500.  So if you waited the year for the currency to improve (assuming it does) then you would be better off by A$12,500.

However, if the property you are looking at grows by the average rate of 7%pa over the next year that can be more expensive.  The reason being is that it is calculated on the total purchase price, so a A$500,000 property would be worth A$35,000 more in 12 months if it achieves this average growth.

Hence the net cost of delay is the potential increase in property value, A$35,000, less the assumed currency cost, A$12,500, being a net A$22,500 which is a cost of delay if you wait, or if you were brave enough to act is a extra profit to you.

Many people don’t factor this cost in when assessing the merit of action or delay and find out too late the real cost of delay is far greater than the potential currency loss.

You can then make the additional reductions of the loan later when you feel the Australian dollar has better value.

If you already have an Australian property that has some available equity, this can provide a full hedge on your next purchase as the deposit can also be borrowed against your current property holdings, hence ensuring that you do not need to convert any currency and experience no potential currency cost due to the high Australian dollar.

I bought an Australian property off the plan, When should I start arranging my finance?

I bought an Australian property off the plan, When should I start arranging my finance?

Buying Australian property prior to commencement of construction is a common approach.

A typical build time is approximately 2 years depending on the scale of the project.

Under Australian regulations, the developer does not receive progress payments during the construction period, rather he has to wait until completion and then receives the full contract amount.

It is recommended that you look to arrange your finance between 3 and 6 months prior to the settlement date of your property purchase. This allows plenty of time for the loan application process and ensure all required documentation is completed prior to the expected settlement date so that completion occurs on time.

Most Australian property contracts allow for penalties if settlement is delayed by the purchaser, so by being ready in advance you can save yourself the risk of any penalty costs and have a smooth transition to ownership.

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Should I fix my interest rate on my Australian Property loan?

Should I fix my interest rate on my Australian Property loan?

The decision to fix your rate is one that is usually undertaken to create certainty.

With Australian property finance, you have the option of fixing your interest rate for periods of between 1 to 5 years.

The amount of the fixed rate usually depends on the market outlook of where interest rates may move.

If the market considers a rise of rates is likely, then it would be common to expect fixed rates to be higher than the current floating (or variable) rate.  If the market thinks rates may fall then fixed rates may be lower.

Another factor may be the supply of lending capital.  If the bank has too much cash available for lending then they may offer a “special” rate to encourage borrowers to secure a portion at an agreed fixed rate.

In deciding whether to fix or not you should compare the current variable rate against the fixed rates on offer then try and make a judgement call on where you consider rates may move.

You should also be careful to not fix an interest rate longer than you expect the loan to go for as if you wish to pay out the loan during the fixed period there may be some fees to do this.  Hence if you were considering selling your property in say 2 years, it would not be wise to fix the rate beyond the 2 years in case you did actually sell.

Click here for further information on Australian property finance

What is Lenders Mortgage Insurance?

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) applies to all loans that exceed a LVR of 80%.

It is a once off payment paid by the borrower to the bank to cover the bank for the additional risk they take on for lending over the 80% threshold.

It is an additional cost on the loan which some lenders are willing to add to the loan depending on the final agreed terms.

If you finance 80% of the purchase value or less then no insurance is required.

Click here for more information on Australian Property Finance

How much deposit do I need to buy an Australian property?

How much deposit do I need to buy an Australian property?

Usually you require a deposit of 20% of the purchase price of your Australian property when borrowing in Australian dollars, plus any transfer and settlement costs in order to satisfy the bank lending requirements.

If you are an Australian citizen you may be able to purchase with a lower deposit of between 5% and 15% of the acquisition price of the property if you qualify for mortgage insurance.

There would be additional fees involved in this so typically you may require another 2-5% of the purchase value to cover these.  Some banks are willing to add these fees to the loan, however in all cases the bank would want to establish a good savings history to confirm your capacity to afford the loan.

If you have any other Australian property, or are willing to put some cash deposits up as additional security, it is possible to increase your lending on your new acquisition as the banks are willing to lend 80% of the total value of all property, including existing holdings and the new acquisition.

Click here for more infomation on Australian Property Finance
I'm getting nervous about Australias rising interest rates. Should I switch my loan from variable rate to a fixed interest rate?

I'm getting nervous about Australias rising interest rates. Should I switch my loan from variable rate to a fixed interest rate?

The decision to fix your interest rates is always perplexing. Australia’s recent rise in interest rates has moved it above most other markets in the world.  Ironically this is the reward for a stable and steady economy that fared amongst the best during the recent Global Financial Crisis.

It does highlight the need to review your finances regularly to ensure that you have the lowest cost option.

With the Reserve Bank of Australia’s latest rise in November 2010, the base lending rate in Australia is now 4.75%pa and the standard lending rate to approximately 7.8%pa – inclusive of the banks’ margins.  Surprisingly, this is still on the lower end of historic averages.

It is possible to fix your interest rate over a specified period – usually for up to five years. This means any further increases would not affect you and is a useful option if:

You want the certainty of knowing your interest costs – regardless of changes over a desired period, or
You believe rates will rise even further and want to take advantage of the opportunity to “save” money – as your fixed rate will remain unchanged.

Certainty has its own value. Most people are not so concerned about the saving; they just prefer to have a set expense. But you’re still taking a chance, albeit on a wider platform. The current three-year fixed rate is 7.09%pa (as at November 2010) – a considerable saving on the standard variable rate.

Alternatively, most banks will offer substantial discounts to valued customers. After allowing for the discounts, a typical Australian dollar loan should be nearer to 6.97%pa, and at this rate, the gap is not so wide between the fixed and variable, so it is important to ensure you are getting the best rate from your bank.

If you decide to fix your interest rate you’re hoping rates will continue to rise, or stay the same – rather than go down. If rates reduce, fixing your terms could cost you more in the long run – as you’re locked into a potentially higher rate. And cancelling a fixed-rate agreement comes at a risk of incurring early repayment penalties.

Predicting which way rates will go is the hard part. But the market does help to decide this for you. Many factors influence interest rates – the health of the economy, inflation, exchange rates and the availability of capital. But generally speaking, when the fixed rate is lower than the variable, the market is suggesting rates will remain the same or reduce. When the fixed rate is higher than the variable, the market is predicting rates will rise.

Regardless, the most important issue when interest rates rise is to ensure you have the most cost-efficient loan available to you. To review your loan and compare it to all on offer, call to arrange an obligation and cost free assessment with our finance division – Specialist Mortgage.

We also post the current variable and fixed rates available on our website so you can check what is on offer online whenever you wish.

All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services provided by SMATS Services (Australia) Pty Ltd or any of it's related entities.