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Development Finance Application

 

Development or Commercial Funding is a very profitable and at the same time risky business to finance.

Australian Mortgage Centre first piece of advice for prospective developers is to remember that borrowing for development is very different from borrowing for investment.

Financing property development is a lot riskier for lenders and therefore their requirements are more stringent. If you don’t have much experience in the field, banks may have an issue advancing any funding. Until you get a good reputation or a good track record, you should either bring an experienced person into your development team – such as a project manager or development manager – or use a good mortgage consultant, “because they’re going to understand what the different lenders’ requirements are”.

Every lender also has its own ideas about what constitutes a feasible project. The level of equity required, the profit margins expected and the risks they are willing to take will vary widely. Some lenders draw a distinction between ‘residential’ projects and ‘commercial residential’ projects – the difference lies in the number of units to be built.

The finance submission should start with an executive summary, outlining the broad scope of the proposal and the amount of money required. A thorough feasibility study should come next – but you can’t just punch random figures into an Excel spreadsheet and then massage them until they show the required profit margin. You need to show your working.

To increase your chances of success, the suburb you’re looking to develop in must show strong demand and have good access to infrastructure and transport. Lenders will definitely take these features into account.

Once the lender is satisfied that the numbers look reasonable, the valuers will be sent out to value the Gross realisation value of the development. Unlike the valuation for a simple investment property purchase, the development valuation process is always exhaustive. A professional valuer from the bank’s panel of independent firms will be appointed, and they will certainly uncover any issues that could potentially derail the development project.

The valuer will go through the feasibility study with a fine-toothed comb and ensure that you have included all of your expenses. Even if you’re not planning on selling the project, they will include selling and agents’ costs, just in case you default and the lender needs to liquidate

Finally, even if a development lender does accept your application, unforseen errors could possibly leave you exposed to a cost blow-out or even a mortgagee repossession if these are not mitigated prior.

Minimising your mortgage

Bid Home LoansFor most of us, paying off a home loan as quickly as possible is the smartest strategy to get ahead financially.

Structuring your home loan more efficiently can help you reduce your loan balance substantially and pay off your loan faster. Mortgage minimisation is based on good planning and tight budgeting.

Increase your loan repayments

It might seem obvious, but the best way to reduce your mortgage is to simply increase your repayments. The simplest and most effective way to do this is to increase your regular repayment amount.

Some other strategies to consider are:

• Paying fortnightly instead of monthly. There are 26 fortnights in a year but only 12 months, so by dividing your set monthly repayment in two and paying it fortnightly, you will be making one additional month’s mortgage repayment each year.

• Making extra repayments whenever you can.

• Keeping your repayments the same if interest rates drop at any time.

• Next time you get a pay rise, put 50% of it towards upping your loan repayments.

Get the right home loan

Making sure that you have the right loan to suit your individual situation is important, and your Australian Mortgage Centre Broker will help you choose a loan that you are likely to be able to pay off faster.

There are many loan products that offer flexibility – for example professional packs, line of credit loans, or standard variable loans with a redraw facility, or an offset account.

Make every cent work

100 per cent offset accounts enable you to have every cent of your money working to reduce your mortgage rather than sitting idly in your cheque or savings account. Line of credit loans can achieve the same result but can be more difficult to manage as they are like giant credit cards and require great budgetary discipline from you for them to work effectively.

Consolidate your debts

You can make significant savings in interest by consolidating all your loans – personal, car and credit cards – under your home loan, where the interest is usually at a much lower rate.

Remember, however, that putting short-term consumables under long-term finance can prove expensive in the long run.

Fixed or Variable Home Loans

Fixed or Variable Loans – Which One to Choose?

Fixed or Variable Home LoansDo you apply for a variable rate or a fixed rate loan – perhaps both…?

The toughest loan decision of all: whether to lock in an interest rate. A fixed rate gives you security, but a variable rate can add to your flexibility and cut your costs.

As you begin looking for a home loan, you’ll come across two main types of loans: fixed and variable. Which one you choose depends on your finances, the features you need in a loan, how long you plan to own the property and whether you believe interest rates will rise or fall. The good news is that as competition has intensified, the gap between fixed and variable rates has all but disappeared.

A fixed rate home loan is taken out for a set period with a set interest rate; when this period ends you can fix the rate again, or switch to a variable interest rate which fluctuates with the market.

Variable and fixed rate loans are more or less appropriate in different financial environments, and for different types of lender.


Fixed or Variable Loans – Which One to Choose?


Fixed Home Loan Products

With fixed interest loans, the rate is set for a specific period – usually 1 to 5 years. At the end of that time, the loan reverts to a variable rate or you can renegotiate a further fixed term. By locking in your home loan, you are protected against rising interest rates. And your monthly repayments remain the same throughout the fixed-interest period.

On the down side, fixed loans have fewer features than variable loans, are expensive to break and can attract a slightly higher interest rate.

[box type=”shadow”]Ask yourself:

  • Do you need predictable repayments?
  • Do you anticipate any major changes to your family arrangements, job or business?
  • Do you believe rates will rise in the near future?
  • Are you buying an investment or owner-occupier property?
  • If you answered yes to most or all of these questions, a fixed rate loan may suit.

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Fact: Fixed rate loans offer security and predictable repayments. But beware: breaking the loan early can cost thousands in what lenders describe as economic breakout cost fee.

Standard Variable Home Loan Product

Most standard variable loans feature accelerated repayment options, offset, redraw, split loan capacity, variable repayment schedules and portability. If you don’t plan to use most of these features, you are paying for window dressing and may be better off with a basic or fixed loan.

[box type=”shadow”]Disadvantages:

  • Rates can rise or fall at any stage
  • Very sensitive to economic conditions
  • Picking the next move in interest rates is very difficult


Advantages:

  • Very flexible
  • The most popular form of loan
  • Competition between banks is intense so the spread of rates is small
  • Big savings when rates low


Decide what’s important to you:

  • Redraw facility
  • Extra repayments
  • Portability
  • Flexible payments
  • All-in-one facility
  • Split loan option
  • Offset account
  • Loyalty discount
  • Top-up

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Let the Australian Mortgage Centre find you the right Loan to suit your needs.

 

Article Source: Homeloans

Return On Investment

Are you earning enough income from your investments?

Return On Investment

Generally income is the cash flow generated from an asset such as term deposits, bonds, equities and property. How much importance you and your clients place on receiving a regular income from your investment, can potentially affect your lifestyle.

People opt for less volatile, or defensive, assets such as term deposits and bonds, particularly during volatile times. While this makes sense, we believe you should keep an eye on the income you are receiving from these investments.

[box type=”shadow”]How is income calculated?

• Term deposit:

    The income from the term deposit is known as the interest rate. It is calculated by dividing the cash flow by the value of the investment.

• Share in a company stock:

    The income from the share is known as the yield. It is the annual dividend paid per share as a percentage of the share price.

• Residential property:

    The income is known as the yield. It is the annual earnings from rent as a percentage of the property’s value.

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Don’t forget about the impact of rate cuts on your investment income!

At AMP we believe that defensive assets can be an important anchor for your investment strategy, they can provide stability and a regular income. Don’t forget that Term deposits and savings accounts that were paying more than 6% pa a year or two ago, are now paying less than 4.5% pa¹. So for every $1,000 you would have received from a term deposit when rates were 6% pa, you would now only receive $750 at a rate of 4.5% pa.

Shares as a source of long-term income

Shares can generate income for you when the company pays dividends to its shareholders. The advantage of this is that if the company is continuing to make a profit, you may receive a regular income, which is generally paid on a half-yearly basis.

As investors, we tend to focus on the capital growth potential of shares rather than the income they provide.

However, Australian shares have proven to be a good source of long-term income through dividend payments.

Article Source: Homeloans