{"id":21513,"date":"2018-06-18T01:00:28","date_gmt":"2018-06-17T15:00:28","guid":{"rendered":"https:\/\/realestatetalk.com.au\/?p=21513"},"modified":"2018-06-18T01:00:28","modified_gmt":"2018-06-17T15:00:28","slug":"geeting-the-facts-on-finance-cate-bakos","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/geeting-the-facts-on-finance-cate-bakos\/","title":{"rendered":"Getting the facts on finance \u2013 Cate Bakos"},"content":{"rendered":"

We sometimes get equity confused with savings by losing sight of the fact that we still have to pay the repayments on the equity loan.\u00a0 That is just one of the finance misunderstanding we discuss with buyers agent Cate Bakos<\/strong>.\u00a0 Also, is P&I at a lower rate better than I\/O at a higher rate and how long does a pre-approval last?<\/p>\n

Transcript:<\/strong><\/p>\n

Kevin:\u00a0\u00a0<\/strong>Joining me once again, Cate Bakos. Cate is a buyer\u2019s agent out of Melbourne. A couple of weeks ago, we talked about the four incorrect assumptions that investors can make. I want to swing this across\u2026 Cate is back with me again.<\/p>\n

Good morning, Cate.<\/p>\n

Cate:\u00a0\u00a0<\/strong>Good morning, Kevin.<\/p>\n

Kevin:\u00a0\u00a0<\/strong>I want to talk about finance now, because there are some finance misunderstandings that I\u2019ve come across as well, and I\u2019d love to get your tilt on these. People get equity confused with savings.<\/p>\n

Cate:\u00a0\u00a0<\/strong>Yes. This is a significant point, but it\u2019s a really short and sharp point for me to make. There is a big difference. When you have equity available to you for investment purposes or for whatever, it\u2019s really just an easier way than saving the old-fashioned way where you\u2019re putting money aside until you have a substantial enough deposit. You can use that equity as a deposit, but the key thing is that you\u2019re still borrowing it.<\/p>\n

So, when people say \u201cI have equity and I have $1 million borrowing capacity, so I have $1 million plus the equity,\u201d the equity needs to form part of that borrowing capacity because they\u2019re borrowing it, they\u2019re not\u00a0[1:02 inaudible]<\/strong><\/p>\n

Kevin:\u00a0\u00a0<\/strong>Yes, very important. What about P&I as opposed to interest-only? Because P&I at a lower rate is sometimes thought to be better than interest-only at a higher rate. What\u2019s your take on that?<\/p>\n

Cate:\u00a0\u00a0<\/strong>It\u2019s a really topical discussion right now, because obviously, we\u2019ve had a lending clampdown on interest-only that was instigated by APRA some time ago now. But a lot of people are asking me this question, and sometimes when we run the numbers, the P&I option might win. It really does depend on the differential, but there are critical things to bear in mind. You have to factor in your cashflow, obviously, and there are tax deductions to calculate.<\/p>\n

Now, I never let tax deductibility be a reason to do something, but it\u2019s definitely a benefit. So, when you\u2019re deciding between interest-only lending or principal and interest, you have to be looking at what else that principal could be doing for you. And if you could offset it against a principal place of residence and achieve your goals that way and it still stacks up for you to do so, then the interest-only option might be the one to go for.<\/p>\n

You also have to bear in mind how it impacts your future borrowing capacity, because interest-only will be for a period of time, and then when that fixed term lapses, you\u2019ll then face the prospect of P&I over a shorter period, so your payments will be pushed up as well.<\/p>\n

So, it does require sitting down and running the numbers, and if you\u2019re unable to do so, you need to talk to your banker or broker about giving you that information so that you can see it for yourself.<\/p>\n

Kevin:\u00a0\u00a0<\/strong>Yes, I think it\u2019s an important point that you actually discuss it with your banker or your broker, because everyone\u2019s situation is different, isn\u2019t it, Cate?<\/p>\n

Cate:\u00a0\u00a0<\/strong>It absolutely is, and future planning comes into it, where you might be with your income. There\u2019s a lot to take into consideration, and it shouldn\u2019t be taken lightly.<\/p>\n

Kevin:\u00a0\u00a0<\/strong>I want to deal with another one now, Cate. This is a big one, I think, and that is that past approval borrowing as a capacity and the conditions that apply to that approval don\u2019t last long-term and they need to be renewed or reviewed, don\u2019t they?<\/p>\n

Cate:\u00a0\u00a0<\/strong>Yes. This is one that I couldn\u2019t agree harder on. We\u2019re in a really turbulent time when we consider lending pre-approval and the rate of change in policy and how tough it is out there for a lot of borrowers.<\/p>\n

So to assume that your borrowing capacity has lapsed but you\u2019re in a safe place because your situation hasn\u2019t changed is really na\u00efve and really dangerous, because the lenders are changing their policy at quite a rapid rate, and for some people who did service a particular loan comfortably, they can go back to the lender and find that that amount has reduced because the lenders have really clamped down on all kinds of things, including discretionary spending, and they\u2019re paying very careful attention to it.<\/p>\n

Kevin:\u00a0\u00a0<\/strong>Yes, and this applies very much to anyone who\u2019s, say, bidding at an auction, as an example, or buying in any situation where you don\u2019t have a finance clause. Another instance in here could be \u2013 and I\u2019d love to talk to you about this \u2013 buying off the plan, because when you buy off the plan, it\u2019s possible that you won\u2019t be settling for anything up to a year, and with finance-only, that approval sitting in place for three months, it should be renewed before you go to settle.<\/p>\n

Cate:\u00a0\u00a0<\/strong>A really interesting point, Kevin, and it\u2019s a frightening one when you think about it. Off-the-plan purchases can sometimes span for years, and you can look at sunset dates, but there is no pre-approval that will eclipse a sunset date that\u2019s a year or two.<\/p>\n

People need to have contingencies for all kinds of things, whether there\u2019s market movement and the price drops, whether lending scrutiny continues and they find themselves unable to settle the purchase themselves. They really need to think carefully about plan B if they\u2019re taking that risky step.<\/p>\n

Kevin:\u00a0\u00a0<\/strong>Yes, that\u2019s a great topic, and we\u2019ve demystified a few more of those finance misunderstandings for you. Cate Bakos has been my guest. Cate is a buyer\u2019s agent out of Melbourne.<\/p>\n

Cate, thanks again for your time.<\/p>\n

Cate:\u00a0\u00a0<\/strong>Thank you, Kevin.<\/p>\n","protected":false},"excerpt":{"rendered":"

We sometimes get equity confused with savings by losing sight of the fact that we still have to pay the repayments on the equity loan.\u00a0 That is just one of the finance misunderstanding we discuss with buyers agent Cate Bakos.\u00a0 Also, is P&I at a…<\/p>\n","protected":false},"author":176692473,"featured_media":21503,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[32,10,11,13,36,22,25,27],"tags":[101],"class_list":["post-21513","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buying-a-property-topic","category-kevin-turner-sponsored-channels","category-kevin-update","category-latest-story","category-property-investment-topic","category-research-topic","category-sponsored-channels","category-trends-topic","tag-podcast"],"yoast_head":"\nGetting the facts on finance \u2013 Cate Bakos - 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