It might seem like just yesterday we were welcoming in 2022 and now it’s almost mid-year.  With June 30 – the end of the financial year (EOFY) – just around the corner, now is the time to gather your receipts and maximise the incentives still available to property investors.

Unsure as to where to start? Whether this is your first time preparing your return or you’re familiar with the process, these steps can help you get organised and make the most of what is available to you.

Compile your receipts

Whether you’ve been diligent in record-keeping or not, a good place to start is by preparing and filing your receipts. If you’ve been organised throughout the year, this will be as simple as looking through the system you’ve used, such as an app, email folders or printed documents.

Otherwise, it’s worth spending the time locating and looking over your receipts in order to claim any deductions.

Thinking ahead, if you want to be better organised for the next EOFY, set up a system to keep you on track throughout the year – you can download the ATO app to log your expenses as you go.

Identify what you can claim

If you have an investment property, you’ll be able to claim expenses such as council rates, loan expenses and costs related to advertising, accounting and alterations. Interest expenses for an investment property and related bank fees can also be claimed.

Keep in mind though that these claims only apply to the periods in which your property was tenanted or advertised, not for the entire time you’ve had the property.

Don’t forget to claim any costs related to the investment property’s repairs and maintenance (including services such as pest control or gardening). Your role as the landlord also enables you to claim expenses relating to the running of the property, which can include phone calls to the tenants or real estate agents and internet charges, but these must be portioned according to how often they were used for this purpose (rather than personal use).

You can also claim any depreciation related to the building itself, as well as its appliances (such as the dishwasher, heater/aircon units, etc), there are certain second-hand assets you can also claim depreciation deductions on.

Dates also come into it for other expenses you can claim. If your investment property was built after 16 September 1987, you can claim a depreciation deduction on the construction costs of 2.5% a year for a period of 40 years. The same applies to renovations that were done after 27 February 1992.

Prepay your interest

By prepaying your investment property interest, which you can do for up to 13 months, you could save more in the long run, reducing your interest payable.

You might also reduce your taxable income by prepaying your interest, as what would have been a tax deduction next year, could be claimed this financial year.

Consider capital gains

If you’ve sold your investment property and made a capital gain on the sale this financial year, this will be included in your taxable income. If you have owned your investment property for over 12 months, you may be eligible for the capital gains tax (CGT) discount of 50%.

Calculating your capital gains can be complicated, online tools can help, but it’s worth talking to an expert.

Reassess your loan

With rates changing, it’s also worthwhile reassessing if your current loan works for you. Perhaps you would be better off with a variable rather than a fixed-rate loan, or vice versa.

End of financial year is a time when many people start looking deeper into their finances and considering whether they need to make changes to their loan. This can then set you up to be in a better position for this time next year.

Getting in on time

The last thing you want is to be fined for a late return or scrambling to play catch up, so make a note of the ATO’s lodgement dates.

EOFY can sneak up on you and be overwhelming for even the most experienced investor, so it pays to get started early.

With interest rates looking like they’re on the rise in Australia, it’s worth asking yourself how your finances would handle a rate increase. You are likely to find out the answer to that soon enough, with the increase expected to occur by mid-year, ahead of schedule. This year will bring with it four rate rises, according to the major banks.ⁱ

It pays to be prepared, so now is a good time to consider a fixed-rate loan if you haven’t already. You might think it’s too late, as fixed rates have already started increasing, following record lows last year. It is a different story now, with Canstar finding that 19 providers have increased 513 fixed rates by an average of 0.35 percentage points.ⁱⁱ

It can still prove savvy to make the switch, bearing in mind the following pros and cons and taking into consideration your financial situation.

The pros and cons of a fixed rate

Fixed rates have grown in popularity in recent times. While 20% of outstanding mortgages were fixed mortgages in pre-pandemic times, they now make up 35%, with first home buyers most likely to fix rates.ⁱⁱⁱ

As the name suggests, with this type of loan, your interest rate and repayments remain the same during the fixed term. This obviously is a good thing in the case of impending rate rises, as is being predicted for 2022, as it offers protection against these.

It can also make budgeting and planning more straightforward, as you will know exactly what your payments will be during the fixed period, so there shouldn’t be any nasty surprises.

While fixed-rate loans tend to be seen as the ‘safer’ option, they do have their drawbacks. For instance, you may be unable to make additional repayments during the fixed term, which might not be ideal should you be able to pay off the loan more quickly. And should interest rates drop, you’ll lose the opportunity to receive better rates.

It can mean having to pay break fees if you want to re-mortgage; as is the case if you want to swap to a variable rate. You may also have fewer features with a fixed-rate loan, so if you need redraw facilities, for example, you may be better served with a variable loan.

Exploring your options

It might make financial sense for you to have a fixed rate, however, you don’t have to go all in. You can split the loan to have a fixed rate component as well as a variable rate. That way you can get the best of both loan options, this may soften the impact of any of the previously mentioned drawbacks of a fixed interest rate.

You can select the proportion to fix so you can find an arrangement that suits your needs, rather than having to allocate the loan 50:50, which is a common misconception of split loans.

You also want to think about the length of your fixed-rate loan. Given the security of this type of loan, you will need to be conscious that you may have to pay more interest the longer a loan is fixed for. Generally, the duration of a fixed-rate loan is one to five years, with the maximum term being ten years. After this period, either you move onto a variable rate or will need to refix at a new rate (if this is allowed by your lender).

Tips to prepare for a rate rise

• Know your finances

• Create or update your budget

• Know your loan terms and conditions

• Watch your spending

With all the news of impending rate rises, it can be an anxious time for many homeowners, as well as confusing. Now is a great time to speak with us about your current loan and to look into whether it still suits both your current and future needs. We can help you select an option to best support your financial goals, which may be fixing your home loan, or looking at other possibilities now or into the future.

i https://www.news.com.au/finance/economy/interest-rates/big-banks-warn-of-four-rate-rises-this-year-as-scott-morrison-bids-for-reelection/news-story/f5a6c96a7c562c75aef751faa0ae328b

ii https://www.canstar.com.au/home-loans/prepare-rate-rise/

iii https://www.smh.com.au/property/news/should-you-fix-your-home-loan-now-20220311-p5a3yo.html

Is the constant property market coverage making you feel anxious about your plans? It’s little surprise with headlines such as ‘New study finds housing affordability in Sydney, Melbourne, Brisbane & Adelaide now worse than New York’.ⁱ But this doesn’t have to signal the end of your property dreams.

Whether you’re looking to buy, upgrade, invest or simply to restructure your loan, you probably have more options than the 24-hour news cycle leads you to believe. Now is a good time to re-examine your property goals and how you’re going to achieve them – even in these volatile times.

First home buyers – time to broaden your horizons?

First of all, stay up to date on all the government schemes, both current and upcoming, that you’re eligible for.

Next, if you’ve been looking at areas you can’t afford, now’s the time to realistically consider what you can and can’t accept. Broaden your options by considering other locations, looking at apartments instead of houses or buying off plan. These are all ways to uncover more affordable options. If you can work from home or in a regional area, it might be worthwhile investigating a move to the outer suburbs or a regional centre.

Changing what you consider ‘must-haves’ may also need a rethink. Would you accept an older renovation or smaller outdoor area? Can you live with street parking? Could the kids share a bedroom? These changes can reduce costs significantly.

Don’t go it alone

If you have family members who can act as a guarantor or contribute to the deposit, then seriously consider it. This can allow you to enter the market sooner rather than later and avoid expensive Lenders Mortgage Insurance.

Buying with others is another option. If you’ve house shared together, it’s going to be easier to ensure your needs and mid-term plans are compatible. Seriously consider drawing up a legal agreement that spells out what happens if one of you wants to sell, rent, renovate or defaults on their payments. It can save relationships and headaches later on and the process will ensure you are both on the same page before heading into the investment.

Rentvesting: the best of two worlds

If you’re committed to living in an area you can’t afford to buy in, rentvesting is a popular option. This is when you buy an investment property in a cheaper area and continue renting where you prefer to live. Regional areas are booming, so if you do your homework, this may be a profitable option. It’s also a good way to buy into a market at a lower price if you’re thinking of moving there in the future.

Restructuring to fuel an investment

Restructuring your mortgage is useful if you want to release equity to renovate, buy an investment property or support a child’s first purchase. It could also lock in a lower interest rate for a set period of time.

Get your calculations right

With all the talk of mortgage rate rises and volatile property prices, both investors and owner-occupiers will need to crunch their numbers very carefully.

It’s especially important for investors to calculate their yield and expenditure ratios. You’ll need to be able to cover any regular or extraordinary shortfalls.

Investors also need to be clear if they are buying for a regular income, mid- or long-term value increase or for another purpose like providing accommodation for their children or parents.

Get your spending patterns under control

Whatever your goal, getting your mortgage approved often involves banks assessing your financial responsibility by running a fine-tooth comb over your spending. They check that you can afford repayments, usually with up to 5% interest. This can mean cutting back on unnecessary expenditure and reducing debts.

Whether you’re looking to buy, upgrade or simply restructure your loan for the times ahead, you don’t have to give up on your property goals. Please get in touch and we can discuss your options to make your property dreams a reality. You probably have more options than the 24-hour news cycle leads you to believe.

i http://www.demographia.com/dhi.pdf
ii https://www.canstar.com.au/home-loans/housing-affordability-in-australia-2022/