Government scheme helps property investors

July 08, 2011

Would the promise of $100,000 paid to you in 10 tax-free annual installments help lure you into investing in property? If the answer is yes, then maybe the government’s National Rental Affordability Scheme (NRAS) is the right home finance service for you.

Unlike it’s more glamorous cousin, the First Home Owners Grant, the NRAS has until recently languished in the shadows, thanks to a lack of adequate promotion.

Now, however, with rental accommodation at an all time low nationwide, the program is gradually making its way into the limelight. And it offers good news for property investors who stand to receive a cool $100,000 in tax-free government incentives for investing.

So what’s the catch? To participate, you must buy a property from an approved participant and agree to rent it out to a low- to moderate-income household for a minimum of 10 years at 20 percent below the market rate. In return, the government pays you $9524 per year for 10 years, indexed each year against the rental Consumer Price Index (CPI).

Seventy-five percent, or $7143, of that sum is paid as a refundable tax offset from the federal government that is claimed at tax time, and the state government pays the remaining $2381 into a designated bank account.

NRAS was introduced in 2008 in a bid to address the housing shortage and increase the supply of affordable rental dwellings nationwide. NRAS properties are available in all states. They must be new, but can be purchased off the plan, as house and land packages or built according a to certain standard (as opposed to a price point) and you must also adequately maintain your property.

As with any investment, you need to do your research before you jump in, as each approved NRAS organisation will have varying models. Usually they fall into three variations: head lease, non-entity joint venture and managed investment scheme.

For more information, your best option is to speak to a financial advisor as the information available online regarding NRAS is patchy and inconsistent.

 

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What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

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A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

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What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

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