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Is a HECS Debt Good or Bad for You?

In Australia, there is a Federal Government run education support scheme commonly known as HECS with a full title of the “Higher Education Contribution Scheme”. Over the last couple of years there has been a growing concern about HECS and the ability of graduates to pay off the loan associated with the scheme.

This is part of the Higher Education Loan Program known as HELP.

Conditions of Application

To get a HECS-HELP loan there are a number of conditions to be met including, but not limited to:

  • Being an Australian citizen or a New Zealand Special Category Visa holder or a few other visa types.
  • Having enough balance on your HELP loan.
  • Being enrolled with an education provider that is part of the scheme.
  • Meeting the completion rates.

How Does It Work?

On meeting the conditions of application, the Government will lend the student the funds to pay for the course they are taking. Repayments only start when the applicant reaches an agreed earnings threshold. When repayments start, the borrower can pay into the fund via their payroll system. It’s a great way for students to be able to learn and to get a career in their chosen field – long gone are the days when the Government simply funded the courses!

What Could Possibly Go Wrong?

The first concern is that – unlike other loans – there is annual indexation applied, although the debt is technically interest free. Next, the repayments only start when the borrower reaches the agreed earnings amount, so what happens if they struggle to get a job that covers the debt? Well, that means that the debt simply rises each year! On the 1st of June, the outstanding amount is indexed, which means that a prevailing CPI rate is applied to the balance, which last year (2023) was 7.1% and is expected to be 4.8% this year. So even though the loan is “interest free” it still rises if the borrower is not careful.

Is a HECS Debt good or bad for you?
A University Campus where your HECS Debt is spent!

How to Pay Off the Loan?

There are two ways – compulsory and voluntary payments are available. The compulsory payments are lump sums that are part of a tax return and the voluntary payments can be made at anytime. Now, the timing of the compulsory payment is key – the indexation occurs in June and the payment is made any time in the new financial year starting in July, at least one month later. That timing means that the balance has risen before the payment has been made, so the balance will not reduce as much as expected!

Good Debt v Bad Debt

In my view, a HECS balance is bad debt. Why? Because having a HECS debt hinders your ability to borrow for a home loan, yet a personal loan doesn’t – which makes it good debt. This is because the HECS debt is connected to your earnings and not your discretionary spending. So in effect, a lender will reduce the income when doing their servicing calculations.

Financial Strategy

It is important to consider a future financial plan if you have a HECS debt. Is it worth paying it off quickly? Or using a debt consolidation strategy that coverts it to a similar length personal loan? If the plan is to buy a home to live in, this is a very real decision to make, based on the amount of finance needed to make the purchase.

Madison Wells Pty Ltd Can Help!

Through our finance arm, Astute St Leonards, we can crunch the numbers and even introduce you to a financial advisor if needed. We are focused on helping you find the right property at the right price and at the right time!

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A Home Loan With No Deposit?

Are you serious? Yes! With a Deposit Loan!

The finance broker arm of Madison Wells Pty Ltd, trading as Astute St Leonards, has partnered with another specialist to help more people get into a home!

One of the Biggest Issues Today is the Deposit

As properties get more and more expensive thanks to ever increasing competition for a home, it becomes harder to save for that elusive 20% deposit. Some lenders have provided 90% loans for a while and often these attract Loan Mortgage Insurance (LMI), which is a cost that the buyer has to bear.

Now there is another option that gets a buyer into a home using a Deposit Loan that tops up any savings to the 20% required. This means no LMI and a competitive rate across the loan structure.

Deposit Loan

The Deposit Loan Structure

The loan is split between the deposit loan and the lender who provides the other 80% to buy the property. The loans have a competitive aggregated interest rate compared to the main lenders.

A buyer can now get on the property ladder for just 2% of the property value (+GST) upfront. Remember, standard government fees (transfer duties etc) will need to be factored in. Like all loans, it is subject to eligibility and assessment. Lending criteria, term and conditions will apply.

Why not book some time with me to discuss how we can help you buy a property with small savings. Click here to access my calendar.

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Household Expenditure Measure

Do you know what the Household Expenditure Measure is? If you are buying a property and need a loan, then it is important to know this metric!

Often simply called HEM, it is a standard benchmark that lenders use to assess an applicant’s monthly and annual expenses. It is often used to assess the borrowing capacity of the applicant(s), so is a very important number to have under control!

HEM is an Australian created benchmark, developed by the Melbourne Institute off the back of their annual HILDA (Household, Income and Labour Dynamics in Australia) report. It defines what a typical family unit should be spending each month and therefore each year.

HouseholdIncome < $50KIncome $50-70KIncome $70-85KIncome $85-100KIncome < $120KIncome < $140K
Single – 0 Dependants$1,450$1,765$2,139$2,437$2,819$3,191
Single – 1 Dependant$1,866$2,203$2,576$2,875$3,257$3,631
Single – 2 Dependants$2,352$2,669$3,044$3,344$3,727$4,102
Single – 3 Dependants$2,832$3,150$3,529$3,831$4,216$4,594
Each Extra Dependants$440$440$440$440$440$440
2 Adults – 0 Dependants$2,571$2,887$3,289$3,606$3,942$4,245
2 Adults – 1 Dependant$2,935$3,252$3,654$3,972$4,308$4,611
2 Adults – 2 Dependants$3,238$3,554$3,955$4,273$4,608$4,911
2 Adults – 3 Dependants$3,494$3,810$4,211$4,528$4,864$5,167
Current HEM Monthly Expenses Benchmark (as at December 2023)
Household Expenditure Measure Shopping Bag
Getting your monthly expenses in order is a key action to get a home loan!

Improving Your Household Expenditure Measure

If you are buying a property with a loan, either as an owner-occupier or as an investor (where you are the guarantor), you will need to consider how your expenditure matches the above table. If you are above or below the respective figure for your household, then you will need to explain why to your broker or lender.

Finance lenders expect a borrower to be close to these numbers, although if your expenses are explainable and the loan structure supports the purchase, then most lenders will note the difference and assess the application.

Our broking arm (Astute St Leonards) will provide templates to help you define your expenses as part of a loan application. We can also introduce you to a financial planner if required.

In recent weeks, there has been an increase in media articles about so-called “Liar Loans” where applicants have been less than truthful about their circumstances. It is worth remembering that lenders have access to all the data, so they can ascertain whether the expenses defined are accurate or not!

We are here to help you purchase a property, so get in touch here for a no-obligation discussion! We will help map your Household Expensiture Measure.

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Bridging Loans Ease Stress

A traditional property move means trying to settle on two properties at the same time. Often there is a chain of buyers/sellers all wanting to complete their respective transaction on the same day. No one is really in control. I regularly hear horror stories where one party has a delay that causes issues down the line. Bridging loans ease stress when multiple transactions are in play.

A Bridging Loan uses both the existing property and often the property to be purchased to define the equity requirements of the loan structure. In essence, the borrower will have a loan that funds the purchase of a new property that is then covered partially or completely by the sale. The loan period would be three to six months, allowing the sale of the existing property and then a possible refinance if there is still debt to be covered.

This helps the buyer to purchase the new property, move in and then get the old property ready for sale. It splits the process of the property change-over into three parts: the purchase, the move and the sale. Now, the buyer is in more control of the process and can define the timeframes to suit them. This could help get a higher price for the sale, simply because they can negotiate for longer!

Bridging Loans Ease Stress - enjoy the move without the tears!
Ease the stress of a property move with a Bridging Loan

A Real Example – how Bridging Loans Ease Stress!

During the last COVID lock-down in 2021, my wife and I started to think about the future. We were both in our late 50s and still working. However were not happy with our residential location on the Lower North Shore of Sydney. The apartment building was in excellent condition and we had owned it for about 17 years. The area was earmarked for significant over-development – which meant construction noise, more traffic, more dust and the removal of views in all directions. Importantly, the new buildings would remove all natural light and heat resulting in higher energy costs if we stayed put.

We had recently sold an old renovated house and had some equity locked away. Our primary residence, although in a well-maintained block, showed the signs of 17 years of being lived in and needed some “tlc” to bring it back to a sellable standard. We wanted to use the equity from the house sale to fund some of the renovations and also as part of buying in a suburban area. That meant that timing was an issue – we needed to be out of the first property whilst those renovations occurred. We also needed to use both equities to fund the new property.

The Bridging Loan Solution

The solution was to use a Bridging Loan. The structure was straight forward: a refinance of the existing mortgage and used some of the equity to cover the purchase of the new property. The plan was to end the move debt-free. The loan was for six months and the interest was deducted up front, so no mortgage payments were required. Now we were now able to move on our terms.

We bought the new property on the Northern Beaches. We then had our apartment on the Lower North Shore repainted, smartened up and restyled ready for the market. It sold for more than the bridging loan within a few weeks and we paid out the new loan in full, receiving a credit for the unused interest prepayment! It also left us with enough funds to plan some future property enhancements to suit our lifestyle.

The benefits of using this type of loan included a stress-free move (no time issues), no pressure to get the old apartment spruced up for sale and reduced stress in selling the property because we knew the sale price would cover the bridging loan. Financially we are much better off because we no longer have a mortgage – or any long-term debts – with funds to buy smaller properties that will provide an ongoing income.

The Benefits of a Bridging Loan

It simplified the move and we now live a much more relaxed and quieter lifestyle away from the hustle and bustle of inner city living. It has reduced stress and our health is better for it! Even though we still work, we are doing so in a better environment. Finally, the move means that we can enjoy the community and all its amenities for many years and not have to make the move in later life when it would be even more stressful.

To learn about our finance broking services – how bridging loans ease stress, click here to go to Astute St Leonards. Access our calendar to schedule a no-obligation discussion.

If you are looking for a property to purchase on the north side of Sydney, talk to us about our buyer’s agent services.

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Deposit Bonds for Property Purchases

One option for property buyers is to use Deposit Bonds for property purchases. For example, for the initial payment rather than handing over their own funds. This is especially important when buying off the plan or a property to be constructed. In these instances, funds may be handed over six to twelve months before settlement. A Bridging Loan may not have the term length needed to facilitate the transaction, so a Deposit Bond may be a better option.

What is a Deposit Bond?

A Deposit Bond is in effect an insurance guarantee – the holder of the bond is agreeing to provide the full deposit on an agreed date. This helps with liquidating other assets to pay for a deposit or allows the bondholder to retain their funds until the agreed payment date.

Deposit Bonds were first created in Australia in 1988 by the local arm of Royal Sun Alliance (RSA), an insurance company. They owned a subsidiary, Deposit Power who designed the concept which has now gone global. RSA became known as Promina and are now part of the ever growing Suncorp business.

How to use Deposit Bonds for Property Purchases

An example would be: a buyer is looking to purchase a property and doesn’t have the full deposit immediately due to cash in deposits that will be available within a few weeks. They would like to lock in the purchase, so they use a Deposit Bond to pay for the deposit and then within a few weeks have their home loan and cash ready to completed the transaction. The buyer pays the bond issuer and the vendor separately to close all accounts.

Another example would be a buyer of a yet to be constructed house, using a Deposit Bond as the first payment to the builder. They then put their own funds into a high interest short term deposit account to earn some interest. This should match the term of the bond. It may be possible to cover the cost of the bond through the interest earned on the funds locked away.

Unlocking your finances with a Deposit Bond to make property purchases.

Risks Associated with Deposit Bonds for Property Purchases

As with all financial instruments, there are potential risks to be assessed by the bondholder. Firstly, the selling agent or vendor may not accept the bond. Secondly, if the transaction fails, then the issuer will expect the bondholder to cover the full amount of the bond. Finally, the bond issuer may not consider the buyer a good credit risk and may decline the application! Remember, the bondholder is borrowing the funds.

Talk to Madison Wells Pty Ltd today!

Madison Wells Pty Ltd is a finance broker, trading as Astute St Leonards and a property buyer’s agent. We understand the property purchase process intimately and can help define the best finance solution for the purchase.

The first step is to ensure that your finance is in place. You can arrange a time to discuss your requirements by accessing our Calendar here.

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Cash Flow Finance Frees Up Time to Focus on Your Business

One of the biggest day-to-day issues all businesses face is the collection of unpaid invoices. This is where cash flow finance can really free up your time to focus on your business!

In today’s economic climate it can be very difficult to balance the cash flow of a business if you want to maintain a good relationship with your suppliers. This means paying them on the agreed terms when your clients may be pushing the limits of their payment terms with you.

It doesn’t matter how big or small your business is, there are times when you will need to reduce the risk of late payments – hurting your cash flow and potentially hindering growth.

There are several options when it comes to financing – use a line of credit, take a fixed term loan, refinance a property owned by the business or use invoice financing. This last option is a cost-effective way to deal with unpaid invoices.

Cash Flow Finance via Madison Wells Pty Ltd.

Invoice Finance – aka Cash Flow Finance

Madison Wells Pty Ltd through our finance broker team at Astute St Leonards can arrange cash flow finance that pays up to 80% of the outstanding invoice such that your business can remain solvent and pays its dues as and when they fall due.

Facilities have a minimum term of six months. Credit collection and trade insurance services are also available from some finance providers. This means that whilst you run your business, someone else has that difficult talk with your client!

Only invoices issued to Australian businesses can be covered by cash flow finance with approvals typically in as little as 24 hours. Funding can start in 48 hours, so this is a fast way to unlock working capital in the business!

For more information and a non-obligation discussion about cash flow finance, please contact Stephen using this link to book some time with him.

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Self Managed Super Fund Property

St Leonards Apartments

A Self Managed Super Fund is a great vehicle to buy property in readiness for a comfortable retirement!

Many people have created a Self Managed Super Fund (SMSF) to better manage their retirement savings plan. This is a great idea when you have the time or an advisor to guide you through the extra paperwork that needs to be filed. Properly managed, an SMSF is a great vehicle to build wealth for future use.

However, many super funds have no property – or only one property – held by the underlying trust. Considering the cost of setting up and maintaining the fund, this could be a waste of the fund’s reserves. The whole concept of the fund is to increase wealth over a long period of time. The fund is under the control of the trustee(s) rather than a large third party super fund.

Super funds are split into two “phases”: Accumulation and Retirement. It is critical to ensure that the accumulation phase is as productive as possible. It is worth noting that there may be a short period where the fund transitions and both phases are active. The advice is always to maximise the accumulation!

St Leonards Apartments suitable for a Self Managed Super Fund
Apartments in St Leonards

Property held in a Self Managed Super Fund

Holding property long term in a fund is a great way to grow wealth over a longer period of time. Although a quick gain in equity may be made, some of that gain will be lost in taxes along with the cost of selling the property. Therefore, consider holding the property longer and using the rental income to pay down any loan required to purchase the property. The goal should be that the property is debt free, before you move into the Retirement Phase.

Many funds bought townhouses in the outer suburbs of major cities which at the time was a great strategy. However, there are some great value studio or one bed apartments close to the city that provide a good rental yield. This market, especially on the Lower North Shore is running red hot at the moment!
It is worth noting that with the current infrastructure boom around Sydney’s North Shore, the ability to rent out an apartment held by an SMSF is strong.

Financial Advice

It is critical to get advice when managing a fund of any kind from a licenced advisor. For advice on starting or managing a Self Managed Super Fund, please talk with our financial advice partner: Apexx Wealth.

Finance Broker – Self Managed Super Funds

Madison Wells Pty Ltd trades as Astute St Leonards, a specialist in providing loan structures for Self Managed Super Funds. There is a growing competitive market within the lending community for these types of loans. This is putting pressure on interest rates and loan policy – to the benefit of the fund and guarantors.

Property Buyers Agent

Stephen Wells, our MD, is also a registered Buyers Agent in NSW. He has access to a wide stock of apartments on the Lower North Shore with rental yields in the 5%-7% range (based on a 60% Loan Value Ratio). Talk to Stephen about the opportunities on the Lower North Shore by booking some time here.

In summary, a Self Managed Super Fund is a great vehicle to build wealth for your retirement. With opportunities to purchase in suburbs close to new public transport infrastructure, any SMSF will benefit from buying now!

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Get Help to Buy a Home – Shared Equity Plan

Sydney Skyline

The media is constantly full of stories about people not being able to afford a house or an apartment and that most properties are out of reach of a larger group of residents. The reality is, is that there are a wide range of ways that someone can buy a property. One such plan recently introduced by the NSW Government is the Shared Equity Plan to help people buy a home.

What is the Shared Equity Plan?

As a single parent, older single or first home buyer “key worker”, you may be eligible for the Shared Equity plan where the State Government will pay a proportion of the purchase price of a property in exchange for an equivalent ownership share of the property.

The NSW Government will fund up to 40% of the purchase price of a new dwelling and up to 30% on the purchase price of an existing dwelling, in effect taking those percentages as ownership of the property. This helps the buyers through having to only finance the remaining portion which reduces the amount that would be needed to be borrowed. To help further, applicants need only find 2% of the purchase price as a deposit.

As always there is some fine print! The price threshold (highest price) for a property in Sydney or a major regional area is $950,000 and $600,000 elsewhere. The property must be occupied by the applicant(s). If the applicant is capable of securing a loan for the property without help, then the Government will not be a shared equity partner!

This initiative started accepting applications during the last financial year (2022–23) and will be in place for this financial year as well (2023–24). However, there will only be 3,000 places per financial year.

Who Can Apply?

The applicants will come from the following demographics:

  • Singles over 50 years old
  • Single parents with a dependent child
  • First Home Buyers who are “key workers”, namely
    • Police Officers,
    • Medical – Paramedics, Registered Nurses, Midwives,
    • Teachers and early childhood educators.

Single applicants must earn less than $93,200 pa and joint applicants must have a combined income less that $124,200 pa to qualify.

A Worked Example

An applicant wishes to buy an owner occupied property for $900,000.
The Government takes 40% – therefore $360,000.
Outstanding amount would be $540,000.
Applicant Deposit (at 2%) would be $18,000.
Maximum loan would be $522,000.
The applicant would need to cover the cost of the loan, legals etc, which could be $2,000.

How Can We Help to Buy a Home with the Shared Equity Plan?

Madison Wells can help in two ways:
Firstly, we can help you apply for a loan with the Shared Equity plan through our finance broker Astute St Leonards. This is a specialised loan with only a few lenders registered with the Government.
Secondly, we can find the right property that fits within the definition of the plan through our Buyers Agent work.

Book some time with me to discuss your requirements.

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A Successful Business Uses Finance

Did you know that finance brokers do more than just mortgages? Many provide finance options for successful business too!

Options for small business finance are growing with an increasing number of lenders and products on the market. Madison Wells Pty Ltd, trading as Astute St Leonards, can help you make sense of all the options.

Finance Successful Business

We know that small businesses may need to access finance for a number of reasons whether it be to expand, acquire another business, to buy inventory or equipment or to meet immediate costs.

Depending on your type of business and what you’re looking for, some financing options include:

Invoice Financing

These allow a business to borrow against the amounts due from customers and helps to smooth out cash flow.

Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.

Invoice financing is also referred to as debtor financing, accounts receivable financing and receivables financing.

Business Loans

A business loan could be secured or unsecured —

A secured business loan uses the business’ assets as security. Assets could include real estate, vehicles or inventory.

An unsecured business loan is approved based on a business’ creditworthiness, it is not secured against any type of collateral so the interest rate is often higher than a secured loan.

Unsecured Line of Credit

A loan that allows a business to access the funds as required for working capital or operational needs. It is not secured against any asset and is approved based on a business’ creditworthiness.

A line of credit is also referred to as a ‘revolving loan’ as the borrower can withdraw funds, repay, and withdraw again.

Contact Madison Wells Pty Ltd, trading as Astute St Leonards!

Call us today – or book some time – to talk about options regarding finance for your successful business today.

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Lenders Mortgage Insurance – A Cost to Avoid

Lenders Mortgage Insurance (LMI) Can be Avoided

Lenders Mortgage Insurance (LMI) is required when the value of a loan is more than 80% of a property’s purchase price, or property valuation if refinancing. In very basic terms, a lender considers a loan to carry a higher risk if the Loan to Value Ratio (LVR) is above 80%, in which case LMI is payable.

Not to be confused with mortgage protection insurance, which is designed to protect the borrower, LMI covers the lender’s risk within a residential mortgage transaction in case the borrower fails to make loan repayments. LMI is a fairly common practice within the industry, particularly for first home buyers who may struggle to save a 20% deposit. 

Even though the actual property acts as security for the mortgage, the nature of the property market, like any investment class, means there is a chance that its value declines. This could result in a financial loss for the lender if the borrower is unable to repay the loan and the property is sold at a price below the value of the loan.

The cost of the LMI premium is dependent on several factors, such as the loan size and property value. Most insurers are flexible when it comes to the method of payment of LMI, it can either be a one-off upfront premium payment, or a premium could be included in the overall cost of the loan and included in the regular repayments. 

It is not transferable, which means a new loan, for example if the borrower refinances the loan, may require a new LMI premium depending on how much equity the borrower has in the property.

What’s In It For Me?

While LMI protects the interests of the lender, there is value to borrowers in paying the LMI premium. 

Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20% of the desired loan amount is required for a borrower to not be deemed ‘high-risk’. For many buyers it is difficult to save this amount, LMI allows those borrowers with smaller deposits to enter the market sooner rather than later.

The major benefit of LMI is that it can allow the dream of homeownership to become a reality for a lot of first home buyers. 

How Can I Avoid Paying LMI?

Depending on your circumstances, you could save for a higher deposit – a higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.

If you don’t have the financial capacity to meet a 20% deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor, and they use the equity in their property to help you secure yours and keep your total loan below 80%. However, it’s important to remember that acting as a guarantor does come with some risks too.

Madison Wells Pty Ltd has access to an LMI company who can provide this insurance on monthly instalments. This means that the buyer of the property could save thousands by spreading the cost over several months and at the same time reducing the LVR down to a pre-defined value set by the lender.

Talk to us about how we can help you avoid LMI!