$120k a year

Getting into the property market is a challenge but the right kind of loan, coupled with first-time buyer incentives, can make it easier

Sophie, 29, earns $120,000 a year plus super. Because of employment opportunities, a few years ago she moved away from home and has been renting with a friend. She has been a good saver over time, using an account set up years ago by her parents when she was in school.

Although she earns good money and is a good saver, she is financially naive about managing her financial situation more effectively. She has not compared interest rates, bank accounts or any money strategies, as she has been satisfied with her savings regime.

Sophie does have car insurance but she has no other insurances, such as private health cover. Her main goal is to get into the property market and now she wants to make a concerted effort to buy a property, either to live in or as an investment.

Three key tips for Sophie are:

1Health fund cover

Sophie should contact health funds to compare the type of cover that would be suitable for her. She shouldn’t get cover for conditions or items she doesn’t need. There is a penalty for people aged over 30 who do not hold private health insurance hospital cover. For each year over 30, a 2% loading (cumulative) is added to the premium up to a maximum of 70%. Health funds are required to charge different premiums based on the age of each member, depending on when they first took out private insurance.

Also, Sophie should note that there is a Medicare levy surcharge, which is levied on taxpayers who do not have private health insurance. With Sophie’s current income, she would have an extra 1.25% applied to her, above the 2% Medicare levy. Having private health cover actually provides two financial benefits.

2Buying her first home

Sophie is considering buying her first home. She has been with only one bank and may lazily go to it for a mortgage. She should now contact a good mortgage broker who can find the right loan arrangement for her (as they deal with dozens of loan providers), work out her borrowing power, do the legwork and help with pre-approval for when she starts seriously looking. This way she knows what she can spend (including stamp duty and other costs).

For her first home, which she may want to keep as an investment property in future, she could consider using an interest-only loan with an offset account for her loan structure:

By using an interest-only loan, she is not reducing the principal (balance) of the loan. However, any funds she has in an offset account will reduce the interest she pays on the loan, which has a similar effect to reducing the loan balance. For example, if she had a $500,000 loan and $200,000 in an offset account, she would only be charged interest on $300,000 – the loan balance less the offset balance. Funds accumulated in an offset account can be withdrawn and used for other purposes as they are not actually reducing the balance of the loan.

Interest paid on a loan that funds an investment property is tax deductible whereas interest on a home loan is not. If she wanted to keep her first home as an investment property and upgrade to a new home, to be as tax effective as possible she would want the loan on the new home to be as low as possible (the interest is

not tax deductible) and the loan on the (now) investment property to be as high as possible (the interest becomes tax deductible).

If she used an interest-only loan with an offset account, she can withdraw the funds from the offset account on the (now) investment property and use them to help fund the new home. By doing so, she reinstates the original balance of the loan (now that it is not being offset), maximising the tax-deductible interest and reducing the amount she has to borrow for the new home. If she had used a principal and interest loan and had been paying extra money off the loan, the equity would now be “trapped” in the investment property, meaning that she would have to take on a higher home loan. She cannot just refinance the loan back up to the original balance of the loan and use the extra funds for the new home and claim a tax deduction, as this would be borrowing for personal (non-investment) purposes.

However, in using this strategy, she needs to be very disciplined in managing her cash flow as the funds in the offset account can be easily accessed. Also, due to recent restrictions placed on banks, interest-only borrowing is harder to come by.

3First home buyer super option

She should also look to utilise the new first home buyer super option by contributing $10,000 a year to super. Starting on July 1, she can allocate $10,000 towards a first home deposit (maximum of $15,000 a year). When she contributes the $10,000 she gains a tax deduction. The money is taxed in the fund at 15% and there is a withdrawal tax, which means that after three years she can withdraw $25,780 plus the return on the investment (which is now based at 4.78%). Note that the total cap is $30,000.

Various states may have first home buyer grants. Recently NSW announced that, from July 1, 2017, it will scrap stamp duty for first-home buyers on existing and new homes costing up to $650,000. There will also be stamp duty discounts for homes up to $800,000. These changes are expected to provide savings of up to $24,740 for first-home buyers.

The NSW government will also abolish the stamp duty charged on lenders mortgage insurance, which will save around $2900 on an $800,000 property.

Sophie should speak to her parents about the possibility of a family pledge, if required, to help with her deposits and possibly reduce the need for mortgage insurance when applying for a loan. Her parents, as guarantor, can use their home's equity to guarantee part of their family member's loan.

4Other things Sophie should do

Have a budget. It may be able to enhance her position by determining what her net income is and what her actual expenses are. There are many budget planners and apps that Sophie could use to work out how best to manage her cash flow.

Pay off credit cards every month.

Move savings to a high-yielding online account that encourages regular top-ups.

Combine super into one fund that has good investment options and insurance.

Ensure life, disability and income protection insurances are sufficient.

Prepare a will, power of attorney and enduring guardianship to protect herself and her estate.

Ensure that her super fund has her tax file number. If no TFN is provided, then the super guarantee and concessional contributions are taxed at 49% instead of 15%. Simply ensuring her fund has a TFN on file results in a massive saving.

Sophie should consider the many aspects of her financial affairs as a package. She should explore the full range of opportunities available, such as higher-yielding savings accounts, government funding for first-home buyers, getting a good mortgage plan and making sure her most important assets – her income-earning ability and health – are covered.

Laura Menschik is director at WLM Financial. She is a certified financial planner and SMSF specialist adviser.

Sophie should speak to her parents about the possibility of a family pledge