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A jargon-free guide to Real Estate Investment Trusts (REITs)

A jargon-free guide to Real Estate Investment Trusts (REITs)

Real estate investment is favoured by investors looking for consistent results over time. However, not everybody can afford to purchase an investment property. That’s why some people choose to invest in Real Estate Investment Trusts (REITs) that provide a way to invest in commercial real estate without purchasing or managing a property themselves.

What are REITs?

Real Estate Investment Trusts or REITs are companies that own and manage a portfolio of real estate properties and/or mortgages. They provide investors with exposure to real estate by allowing them to buy units in their stock portfolio. 

REITs are somewhat similar to managed funds. They pool investors’ money to invest in commercial real estate, such as office spaces, shopping centres and hotels, as well as apartment buildings. The overall purpose is to own and manage a real estate portfolio for the benefit of shareholders by investing in properties with strong rental yield and potential for capital gain. 

Most of the taxable income from the portfolio, such as rental income, is passed on to shareholders as dividends. REITs are traded on the Australian Securities Exchange (ASX), and you can buy and sell them like stocks during trading hours. While it’s not possible to sell a portion of your investment property if you urgently need cash, REITs are highly liquid in comparison, which may add to their appeal for some investors. 

In Australia, REITs are usually known as A-REITs. They are traded on the ASX, and you will generally encounter two common types of REITs – Equity and Mortgage REITs. 

Equity REITs vs Mortgage REITs

Equity REITs Mortgage REITs 
Equity REITs are the most common type of REITs. They invest in properties and own them to generate income through rent. So, if you purchase units in an Equity REIT, you will become a part-owner of the income-producing assets held in the portfolio.Mortgage REITs, on the other hand, own property mortgages. They lend money to real estate owners and generate income through the interest paid. These loans are generally secured by real estate assets. So, if the borrower defaults on the loan, the lender (which is a REIT in this case) can take possession of the security property and sell it to recoup the outstanding loan amount.
Equity REIT invests in and owns real estate.Mortgage REITs don’t own real estate but lend money to real estate owners who mortgage their properties to secure the loans.
Equity REITs generate their income from rent.Mortgage REITs generate income through the interest paid on the issued mortgages.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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