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Borrowing After The Budget Shift · My Accounting Advantage

• 0:00
  Speaker 2: Hello and welcome back to the podcast My Accounting Advantage.
• 0:04
  Speaker 2: Today we have a very in-real-time topic as we discuss thinking of borrowing.
• 0:10
  Speaker 2: Listen to this first.
• 0:12
  Speaker 2: And joining us again is Mai Harris from My Accounting Advantage.
• 0:16
  Speaker 2: Mai, welcome back.
• 0:17
  Speaker: Thank you, Lee.
• 0:18
  Speaker: Nice to be back.
• 0:19
  Speaker 2: Firstly, congratulations.
• 0:21
  Speaker 2: We had 750 downloads of the program.
• 0:24
  Speaker 2: Yes.
• 0:25
  Speaker 2: Everyone's sharing it with kids, family.
• 0:27
  Speaker 2: You need to listen to this.
• 0:28
  Speaker 2: People ask me a question now and I go, listen to this.
• 0:31
  Speaker 2: Especially on those three bank accounts.
• 0:34
  Speaker 2: It's been amazing.
• 0:35
  Speaker 2: Today, we're going to hit this topic that's just instantly changed in our world.
• 0:41
  Speaker 2: Whatever you thought about borrowing, let that go.
• 0:44
  Speaker 2: There's a new direction.
• 0:45
  Speaker 2: Take us into what we're going to discuss today.
• 0:48
  Speaker: Well, today we have a special guest.
• 0:49
  Speaker: It's our in-house mortgage broker.
• 0:52
  Speaker: Luke's very knowledgeable in um, you know, side.
• 0:55
  Speaker: He's a director of our mortgage arm, which is My Mortgage Advantage.
• 1:00
  Speaker: Since, you know, the federal budget announcements being announced a couple of weeks ago now, and there's been a lot of changes in, you know, lending requirements.
• 1:10
  Speaker: The banks are making changes to align with the new proposed legislation surrounding negative gearing.
• 1:18
  Speaker: So we've seen a lot of changes.
• 1:22
  Speaker: So just wanted to go through what has changed.
• 1:25
  Speaker: So basically, the federal budget announcement changed the negative gearing the way we can use it.
• 1:33
  Speaker: So basically, if you purchase an existing property, you can no longer use negative gearing.
• 1:40
  Speaker: And then CGT discount also effectively has been replaced with indexation.
• 1:47
  Speaker: So that really affects the way the bank is assessing the borrowing right now.
• 1:55
  Speaker 2: And in the financial review yesterday, they were talking about scrapping grandfathering of this as well.
• 2:02
  Speaker 2: That's a bit scary.
• 2:03
  Speaker 2: So what would you like our listeners to get out of the program today before we bring the wonderful Luke on?
• 2:08
  Speaker: Yeah.
• 2:08
  Speaker: So basically, what I want them to understand is what's happening right now, what they can do to accommodate for the changes in borrowings and also borrowing capacity assessments.
• 2:23
  Speaker: Be prepared for it.
• 2:24
  Speaker: And there are framework that you can follow so that you don't get lost.
• 2:29
  Speaker: So basically just, you know, plan well and see your accountant early on and make sure your structures are set up right.
• 2:39
  Speaker: And also, you know, you have a mortgage broker who is working well with your accountants.
• 2:45
  Speaker: So they are on the same page.
• 2:47
  Speaker: And then there is no gaps in what you are doing.
• 2:52
  Speaker 2: And unfortunately, that doesn't happen a lot.
• 2:54
  Speaker 2: Like it's very good that you've got it all blended in-house.
• 2:57
  Speaker 2: You're in the one space.
• 2:58
  Speaker 2: Whereas in the real world, people do not think to get those two people communicating.
• 3:03
  Speaker 2: Why is it important the accountant and your home loan advisor are on the same page?
• 3:10
  Speaker: It's really important because, you know, to get the loan set up right, especially tax deductibility purposes, you need to determine what structure suits you in this case.
• 3:23
  Speaker: Because, you know, everyone's different.
• 3:25
  Speaker: Everyone's got different goals and also have, you know, different financial background.
• 3:32
  Speaker: And you might be mum and dads who work as PAYG basically have a job, or you might be, you know, business owners.
• 3:42
  Speaker: They're all very different in terms of, you know, structuring for your borrowing needs and your investment strategies.
• 3:50
  Speaker: Which means that number one is you need to figure out what structure would suit you.
• 3:56
  Speaker: And especially now, you know, with the proposed change to the trust, family trust, especially, if you're going to put your investment in family trust structure now, you might need to have a think about that a little bit harder because the proposed changes.
• 4:13
  Speaker: Is it going to be better for you to put it under your name?
• 4:17
  Speaker: And can you get negative gearing?
• 4:19
  Speaker: Is it a um existing property or is it a you know newly built property that you are um purchasing?
• 4:27
  Speaker: So you need to get your strategy right, your structure right, and then you'll have a discussion, that's the next step, with your mortgage broker so that they can finance, you know, your investment with the structure in mind.
• 4:44
  Speaker 2: Do you know what I'd do?
• 4:45
  Speaker 2: I'd leave it up to you two.
• 4:47
  Speaker 2: Let's well, let's bring him on to the podcast, Mr.
• 4:50
  Speaker 2: Luke Talbot.
• 4:51
  Speaker 2: Luke, welcome aboard.
• 4:52
  Speaker 2: Thanks, Lee.
• 4:53
  Speaker 2: Thanks for having me.
• 4:54
  Speaker 2: Luke, in doing my background research, you've had a pretty wild business life in the world of administration, loans, and even a CEO of a mining company.
• 5:04
  Speaker 1: I was, I was.
• 5:04
  Speaker 1: It's uh it's been a long journey.
• 5:06
  Speaker 1: Primarily, it's been focused in finance, commercial lending, institutional lending.
• 5:11
  Speaker 1: Uh bit did I hiatus in in a mining company as a CEO of a mining company here in Australia, in Hong Kong and in Zurich, and did my time traveling and and and doing all that sort of stuff, fun stuff.
• 5:21
  Speaker 1: But um, yeah, set up my own uh mortgage broking business um nearly 10 years ago now, after doing nearly 20 years in the banking world.
• 5:28
  Speaker 1: So very diverse.
• 5:30
  Speaker 1: I mean, within within our business, there's not many brokers, you know, locally that look after the full gamut of finance, and that's everything.
• 5:37
  Speaker 1: All lending.
• 5:38
  Speaker 1: All lending.
• 5:39
  Speaker 1: So asset finance.
• 5:40
  Speaker 1: Exactly, exactly.
• 5:42
  Speaker 1: I mean, home loans is bread and butter, don't get me wrong.
• 5:45
  Speaker 1: But um, you know, we've got everything from commercial lending, self-managed super fund lending, asset finance, working capital, personal lending.
• 5:52
  Speaker 1: It's fun.
• 5:53
  Speaker 1: It's you know, you don't don't know what you're gonna get every time you you walk into the office every morning.
• 5:57
  Speaker 1: But yeah, it's it's good to be able to be holistic with our with our clients.
• 6:01
  Speaker 1: Very good.
• 6:02
  Speaker 2: Well, that qualifies you to speak.
• 6:03
  Speaker 2: And Mai wouldn't bring anyone into this studio that wasn't at the highest level.
• 6:07
  Speaker 2: I want to tackle this point first.
• 6:09
  Speaker 2: Um, how do you and Mai best work together to get the outcome?
• 6:12
  Speaker 2: Well, I'm a customer.
• 6:14
  Speaker 2: So if I wanted to, Luke, I've got this great idea, I want to use my self-managed super fund, I want to buy one of these, I'm gonna do a manor house, whatever I'm doing.
• 6:21
  Speaker 2: How do you two best work together?
• 6:23
  Speaker 2: Like Mai did my tax yesterday and did an amazing job, if I may say, very, very happy with this year.
• 6:30
  Speaker 1: How do you guys work?
• 6:31
  Speaker 1: The best thing about being, you know, jointly in business with the financial planning, accounting, and finance all in one house.
• 6:37
  Speaker 1: We can have the off-the-cuff conversations, you know, the the water cooler conversations.
• 6:42
  Speaker 1: We've got this client.
• 6:42
  Speaker 1: What do you think we should what could work in this situation?
• 6:45
  Speaker 1: You know, this is a roadblock.
• 6:46
  Speaker 1: What can we do from a tax point of view?
• 6:47
  Speaker 1: This is a roadblock, what we can do from a finance point of view.
• 6:49
  Speaker 1: This guy's got some ATO debt.
• 6:51
  Speaker 1: What can we do to fund and get rid of that?
• 6:52
  Speaker 1: Because the ATO is breathing down their neck.
• 6:54
  Speaker 1: This person, you know, they're transitioning into retirement.
• 6:56
  Speaker 1: They want to sell down the business to the kids.
• 6:58
  Speaker 1: We've got that full holistic conversation happening.
• 7:01
  Speaker 1: And we we catch up normal almost every day, you know, in the mornings and we have then dedicated um sort of whip chats.
• 7:06
  Speaker 1: We we break down the client's position, we break down what could work for them, what might not work for them, and we scenario test on the fly.
• 7:14
  Speaker 1: Whereas if you've got a lending um solution partner that's external to your accountant, it's a gap.
• 7:21
  Speaker 1: A gap.
• 7:22
  Speaker 1: It is a big gap.
• 7:23
  Speaker 1: And you might have a 20-minute chat with that accountant if you do have a chat.
• 7:27
  Speaker 1: Yeah, there's times where I've got clients that are outside of the My Mortgage and the My Accounting Advantage group.
• 7:32
  Speaker 1: I might have a quick chat with that accountant.
• 7:34
  Speaker 1: We might miss something that's so intricate but is so poignant to their finance position that we need to have it right.
• 7:41
  Speaker 1: So having it all co-located and you know all on the same page, it's the best situation for our clients.
• 7:47
  Speaker 2: Take us into the changes that we have to bring into our behaviour and decisions since the government's made their decisions on what we do for lending.
• 7:57
  Speaker 1: For me, the biggest thing is the negative getting, right?
• 7:59
  Speaker 1: So this is not just a tax change, right?
• 8:01
  Speaker 1: This is a total change of borrowing capacity.
• 8:04
  Speaker 1: Right.
• 8:04
  Speaker 1: So and that's immediate.
• 8:05
  Speaker 1: Stepping back for two seconds, these reforms have been passed by the House of Reps, but they haven't been passed with the Senate support yet.
• 8:12
  Speaker 1: But lenders are already treating the change as a foreseeable future event, and that responsible lending has already taken into effect.
• 8:20
  Speaker 1: Negative gearing will be limited to new residential builds.
• 8:24
  Speaker 1: Established residential investment properties purchased after that budget night will no longer allow those rental losses to be carried through to your personal tax position.
• 8:33
  Speaker 1: And so we used to be able to use those tax losses and the and the deductibility of those lending in the borrowing capacity of someone.
• 8:41
  Speaker 1: Without getting too technical, we can use that tax advantage to increase someone's borrowing power.
• 8:47
  Speaker 1: That's now gone for established properties post post-budget night.
• 8:52
  Speaker 2: What have you seen already in the marketplace?
• 8:54
  Speaker 2: What's been the response to people's thinking, or you had to get back to people saying, look, we were going to let this, it's it's now only going to be this.
• 9:02
  Speaker 1: I mean, that's that's the biggest thing, right?
• 9:03
  Speaker 1: So we've had to have a lot of serious conversations lately because if you've were pre-approved with a loan based on the old structure, it is now a whole new servicing assessment.
• 9:12
  Speaker 1: And we're seeing people's borrowing power come down by 12, 15, 17%.
• 9:16
  Speaker 1: And that's a that's a significant significant change to their borrowing capacity.
• 9:22
  Speaker 1: An example is someone might have been able to afford a $750,000 property.
• 9:28
  Speaker 1: Now it's a $640,000 property.
• 9:30
  Speaker 1: Yeah, wow.
• 9:31
  Speaker 1: So Which doesn't exist.
• 9:32
  Speaker 1: Which does it doesn't exist, right?
• 9:34
  Speaker 1: And I've got a couple of scenarios, and we can go through that in in a sec, but it's a big change.
• 9:39
  Speaker 1: You know, it's a big change.
• 9:40
  Speaker 1: And there's some there's some reports that are coming through that it's somewhere upwards of even nearly 20% borrowing reduction.
• 9:46
  Speaker 1: That is that is significant for someone's ability to buy into their first investment or their second investment.
• 9:53
  Speaker 1: We're not talking, and it has even a big effect, obviously, with these property investors, sophisticated property investors that have got like, you know, five, six, seven, eight, ten properties.
• 10:02
  Speaker 1: What it's what it's hurting is those mum and dad investors are picking up their first property, picking up their second property, trying to do that next step in their wealth creation.
• 10:10
  Speaker 1: That is the thing that has has been really affected.
• 10:13
  Speaker 2: My biggest concern here for the community is, and Mai and I spoke about this last week, that we use the term investor, because everyone gets that.
• 10:22
  Speaker 2: These mum and dads are the rental providers to the community.
• 10:26
  Speaker 2: Correct.
• 10:27
  Speaker 2: We've just allowed our nephew to take our granny flat out, which is all good.
• 10:31
  Speaker 2: But if you didn't have that option, what's out there?
• 10:34
  Speaker 2: There's a lot of investors saying, I've just had enough.
• 10:36
  Speaker 2: There's no point.
• 10:37
  Speaker 2: Yeah, I'm gonna do something different.
• 10:39
  Speaker 2: If they do something different, they trust property, and this is where we're gonna see a dramatic hit on the cost of rentals going through the roof.
• 10:48
  Speaker 1: The trust thing in the bricks and mortar, something tangible.
• 10:52
  Speaker 1: Some people just don't get shares.
• 10:53
  Speaker 1: And and I've gone down the share line and I was burnt, and I like bricks and mortar.
• 10:58
  Speaker 1: I like something that's tangible.
• 10:59
  Speaker 1: I may not want to go and touch it every day, but having that property portfolio is a big part of my diversification in my in my wealth position.
• 11:06
  Speaker 1: So having something that's tangible.
• 11:08
  Speaker 1: You've got property that you know might have capital growth, that, that, that rise in the property value of, say, seven, eight, nine percent year on year on average.
• 11:17
  Speaker 1: That's some good returns.
• 11:19
  Speaker 1: And that builds wealth to your retirement position.
• 11:22
  Speaker 1: If that's now going to get hit and you can't pick up that that next asset or that next investment, you need a change of tact and you need to understand where your position is now, but also forward tracking to what it looks like in the future.
• 11:36
  Speaker 1: And that's where that stop, take a breath, let's look at where you are.
• 11:40
  Speaker 1: What things can we do?
• 11:42
  Speaker 1: What things can we look at?
• 11:43
  Speaker 1: Exactly what is your borrowing power now with the new changes.
• 11:47
  Speaker 1: And banks have already gone.
• 11:48
  Speaker 1: NAB, Macquarie Bank, they've already changed their policies.
• 11:52
  Speaker 1: You cannot uh you know put in negative gearing into a purchase price, a purchased property that is post that 12th of May.
• 11:59
  Speaker 1: Mai, what's your thoughts on this?
• 12:01
  Speaker: Yes, that's a really big hit on to me, wealth creation plan for a lot of people, especially um those people who just um getting themselves ready to um invest in their first investment property.
• 12:17
  Speaker: To me, it's really taken away that ambition for people to grow their wealth even further.
• 12:25
  Speaker: Sacrifice is a lot, and I've um witnessed that myself.
• 12:29
  Speaker: And, you know, they saved, they worked hard, they are doing all the right things now.
• 12:35
  Speaker: And then all of a sudden, the government made these proposed changes, and that changed their borrowing capacity in overnight.
• 12:45
  Speaker: Now they are facing, you know, uh having to look at different strategies, spending more money on um, you know, advisors.
• 12:54
  Speaker: We we're seeing that.
• 12:56
  Speaker 1: Luke, what are these different strategies?
• 12:58
  Speaker 1: But we look at everything for the customer's position straight away.
• 13:02
  Speaker 1: And so that is what equity do they have in their house right now?
• 13:06
  Speaker 1: New builds at the moment is the clear winner, right?
• 13:08
  Speaker 1: And that and that's exactly what the government's trying to do.
• 13:10
  Speaker 1: They're trying to increase the housing stock into the market and they're trying to move or steer investors away from existing established property and into that new stock.
• 13:19
  Speaker 1: So new builds is a is a clear winner.
• 13:22
  Speaker 1: So having the conversation with bringing in another advisor, and that's maybe like a buyer's agent or something like that, to talk about what's happening in the market or what's happening with the new builds.
• 13:31
  Speaker: Luke that's very interesting. Mai what is your thoughts on this. Um, just wanted to hear um a little bit more about, you know, the borrowing criteria on commercial property Luke because at the moment, you know, the negative gearing on um commercial properties are still well and aligned.
• 13:48
  Speaker: Yeah, definitely.
• 13:50
  Speaker: Yeah.
• 13:50
  Speaker: So I think that could be a new strategies for, you know, even mum and dad who just want to get into, you know, property investments, but just not really making the cut because they're losing their negative gearing part, like um in the residential property space.
• 14:10
  Speaker: Yeah.
• 14:10
  Speaker 1: Yeah.
• 14:11
  Speaker 1: So what's I mean, commercial property is definitely a strong suit.
• 14:15
  Speaker 1: But again, it comes down to that conversation.
• 14:18
  Speaker 1: Commercial property provides some good yield, right?
• 14:20
  Speaker 1: Some good rental return.
• 14:21
  Speaker 1: Right.
• 14:22
  Speaker 1: Yeah.
• 14:22
  Speaker 1: Um, probably better than than than a lot of residential markets.
• 14:25
  Speaker 1: I think average is about six percent.
• 14:26
  Speaker 1: Yeah, five and a half, six percent is what we're seeing.
• 14:28
  Speaker 1: Whereas the residential market, we're seeing that three and a half to four point two five percent sort of yield.
• 14:33
  Speaker 1: So the good yield, probably a little bit of a slower capital growth.
• 14:36
  Speaker 1: So again, it comes down to what is the strategy of that that person that wants to invest in property and what is the end goal.
• 14:42
  Speaker 1: So commercial property is it's a slower application, right?
• 14:46
  Speaker 1: So let me put that straight down, right?
• 14:48
  Speaker 1: It's not something we can do in two days.
• 14:51
  Speaker 1: So you need to plan for this.
• 14:52
  Speaker 1: So if you're thinking about getting into commercial property, it is definitely a again, I'm gonna use the same wording, the stop, take a breath, have a look.
• 14:59
  Speaker 1: The application looks at the the yield, the the an example property.
• 15:04
  Speaker 1: Um, now, typically, depending on the type of property, if it's industrial or something like that, a bank would lend you up to 70% of the value of that purchase price.
• 15:12
  Speaker 1: Other commercial lend up to 80%.
• 15:14
  Speaker 1: But there are some lenders that will still allow us to use the equity that you've got maybe in your principal place for residence to be able to tap into that to borrow 100% of the purchase price.
• 15:23
  Speaker 1: So there is certain ways and certain strategies we can do to be able to get you into that property that we may have been able to use the same tactics back in the residential days prior to the 12th of May.
• 15:34
  Speaker 1: You've also got to understand that buying into a commercial property and buying a commercial lend, doing a commercial lend, slightly higher interest rates.
• 15:43
  Speaker 2: Luke, final questions for you.
• 15:44
  Speaker 2: And we've definitely established today that people need to come in and speak to you two.
• 15:48
  Speaker 2: Yeah, it's definitely a chat now.
• 15:50
  Speaker 2: It's changed.
• 15:50
  Speaker 2: There's options.
• 15:52
  Speaker 2: But if you're ringing up the bank, which is not easy because you'll go to a call center and your accountants not across what you're trying to do emotionally, you could really make a big mistake here.
• 16:04
  Speaker 1: 100%.
• 16:04
  Speaker 1: Costly, very costly mistake.
• 16:06
  Speaker 1: And it could affect your principal place of residence, it could affect your family, could affect uh uh you know, a lot of things.
• 16:12
  Speaker 2: So my final question for you is what about if you're a a business owner like myself, and you think we need a property for the business for whatever reason, and us being the tenant again is good, and plus family can park the caravan in there, possibly.
• 16:27
  Speaker 1: What's your guidance around the business buying the property?
• 16:31
  Speaker 1: Business can.
• 16:32
  Speaker 1: A business can buy the property.
• 16:33
  Speaker 1: I won't go into the tax position, that that's Mai forte, but a business can buy the property, and there is tax positions on that that we can that we can play around with.
• 16:41
  Speaker 1: And again, the negative gearing can still come into play with it.
• 16:43
  Speaker 1: Buying a commercial property can be any entity.
• 16:45
  Speaker 1: It can be an individual's, it can be a trust structure, it can be a commercial property, sorry, commercial entity, SMSF, anything like that.
• 16:53
  Speaker: I just want to add, I've been looking at the modeling of how we can use the um commercial properties more effectively, you know, changing tax environment that we are in now.
• 17:06
  Speaker: Is basically if you want to go down the route of negative gearing, or you actually have friends and family who are running a business and currently renting the premises like a commercial premises, it might be a good avenue for you to do negative gearing if you purchase a commercial property under your own name and then gear it at 105% using your equity.
• 17:35
  Speaker: And that loan is tax deductible.
• 17:38
  Speaker: So you can still do the negative gearing strategy in that case.
• 17:45
  Speaker: And also after, you know, in the meantime, whilst you are doing negative gearing and if your cash flow is good, you can use that cash savings from your tax refund to put more money into your super as you go every single year to reduce your tax payable even further.
• 18:09
  Speaker: What that does is it helps you accumulate balances in your super funds.
• 18:15
  Speaker: So that increases your balance, reducing your tax in the meantime.
• 18:20
  Speaker: And then the next step is to accumulate sufficient amount of super balance so that you can purchase that commercial property from yourselves and then, you know, pay off the loan.
• 18:35
  Speaker: But what that does, that strategy, you pay off the loan for that property much quicker.
• 18:42
  Speaker: And also you retain that capital growth within your own super fund.
• 18:48
  Speaker: In the meantime, working your money much harder by um obtaining tax deduction and reducing your tax as you go and then investing your money even further under the super fund environment.
• 19:04
  Speaker: So it's a win-win.
• 19:06
  Speaker 2: Well, what an action-packed program today, if that doesn't get everyone thinking out there.
• 19:11
  Speaker 2: And when I say everyone thinking, well, you and I were chatting about this the other day.
• 19:16
  Speaker 2: I've got some family members who have just started a brand new concrete business.
• 19:20
  Speaker 2: They're looking to buy a roller door warehouse.
• 19:23
  Speaker 2: But it's amazing how the family can come together and say, Well, I didn't want to buy a whole thing myself, but I might go 20% of that one.
• 19:30
  Speaker 2: Yeah.
• 19:30
  Speaker 2: And suddenly that Luke gives us that borrowing power for them to do the loan.
• 19:35
  Speaker 2: But there's so many things families can do, but we all think in isolation sometime.
• 19:40
  Speaker 2: And hearing Luke speak today, there is so many options, but you need the blend of knowledge from the two of you.
• 19:47
  Speaker: Yeah.
• 19:48
  Speaker 2: Mai in wrapping us up today, what's your final thoughts?
• 19:51
  Speaker: My final thought is, you know, if you are thinking of buying an investment property or, you know, just wanting to refine your in investment plan for the future, you really need to just give it some thought and put aside some time.
• 20:08
  Speaker: What are your goals for the future?
• 20:11
  Speaker: What does your investment portfolio look like?
• 20:15
  Speaker: And also get yourself an advisor that can advise you on your long-term goals and the path to get there.
• 20:24
  Speaker: So if you would like me and Luke to go through your financial strategies and also explain to you in plain English what's involved in this process, we can do that.
• 20:36
  Speaker: So give us a call or just contact us on myaccountingadvantage.com.au.
• 20:44
  Speaker 2: Well, to both of you, thank you for an absolute amazing episode for anyone who could listen to this.
• 20:50
  Speaker 2: And I look forward to seeing you next week, Mai.
• 20:52
  Speaker 2: But Luke, thank you for joining us.
• 20:53
  Speaker 2: Thank you, Lee.
• 20:54
  Speaker 2: Thank you, Mai.
• 20:55
  Speaker 2: Thank you, Luke.
• 20:56
  Speaker 2: Thank you for coming on the show.
• 20:57
  Speaker 2: No worries, anytime.