McLEAN AND CO DECEMBER
2005 NEWSLETTER PAGE
2
FIVE STEP MORTGAGE GUIDE
House buying is like looking for a needle in a haystack - it's often
hard finding the home you love and that fits your budget. Chances are
you'll also have to negotiate a mortgage. So how do you go about getting
a good deal on a mortgage?
1. Work out how much you need to
borrow
The first step is working out how much you need to borrow. Remember to
factor in other costs, such as solicitor's and application fees, and
future expenses such as renovations.
2. How much can you borrow?
The next step is to work out how much a lender will lend you. This
depends on two things: how much you can afford to repay, and the maximum
a lender will lend on a particular property.
What you can afford to repay
Lenders want to be sure you will keep up with your repayments and still
have enough disposable income left over to live on. Some say that your
fixed payments (the mortgage repayments plus any other loan or hire
purchase payments) should be no more than 30 to 40 percent of your gross
income.
If you're borrowing a high proportion of the purchase price, lenders
will expect you to have more spare income so you can cope with any
future uncertainties.
Lenders will also look for a cash deposit. The greater the deposit, the
smaller your mortgage will be and the better you will be able to manage
the repayments. That makes you a better lending proposition.
How much a lender will lend on
a property
Many lenders will lend up to 95 percent of the value of a house, and
some may even lend 100 percent if you have a large and reliable income.
However many lend less for properties outside urban areas, and on
apartments.
To work out how much a lender will allow you to borrow, ask them for a
calculation (you'll have to tell them your income, spending details and
the property value).
3. Choice of interest rates
There are usually three interest rate options: fixed, floating and a mix
of the two. With fixed interest rate loans, you pay a fixed interest
rate that stays the same for a fixed period of time - usually between
six months and five years.
With a floating rate, lenders will lift or lower the interest rate as
interest rates in the wider market change. This means your repayments
may go up or down.
It's also possible to split a loan between fixed and floating rates.
This lets you make extra repayments without penalty on the floating rate
portion, while you currently get lower rates on the fixed portion.
Each has its advantages and disadvantages - so do your homework to work
out which one best suits your circumstances.
4. Repaying your loan
Your lender will offer a range of repayment options. The most common
type is a table loan. With this repayment option, most of your early
repayments pay the interest, while most of the later repayments pay off
the principal (the lump sum you borrowed). The option you choose will
influence the total cost of your loan so it's critical you understand
the implications of each.
5. Striking a deal
By taking out a loan with your chosen lender, you're giving them your
business - so look at it as a deal where you can negotiate. When
negotiating, try not to be distracted by giveaways, competitions or
gimmicks which don't have any effect on the loan itself. Focus on
negotiating a loan that suits your circumstances that you can pay off as
quickly as possible.
McLEAN
AND CO DECEMBER 2005 NEWSLETTER
PAGE 3
CHOOSING YOUR LOAN FINANCE TYPE
Your home is likely to be the
biggest purchase of your life, and a mortgage your biggest financial
commitment. Deciding which type of mortgage - fixed, floating or a mix
or both - can save you thousands of dollars over the lifetime of your
loan.
If you're on a tight budget and like the security of knowing how much
you will pay each month, a fixed rate may suit you better. But if you
have a fluctuating income, or would like to pay lump sums without being
penalised, then a mix of fixed and floating might be preferable.
The level of fixed and floating rates is driven by the market and the
types of rates offering the lowest interest does vary. Recently fixed
rates have been lower than floating.
Fixed Interest Rate
With a fixed rate loan, the interest you pay is fixed for a period -
usually between six months and five years. At the end of the period, a
fixed interest loan automatically moves to a floating rate unless you
negotiate another fixed term.
There are several advantages of a fixed rate loan:
•You know exactly how much each repayment will be over the term;
•Fixed rates are currently lower than floating rates, as lenders
compete with fixed rate "specials". A one percentage point
difference in interest rates can save you thousands of dollars over just
a year or two;
•You can "lock in" lower rates if market interest rates are
rising however the flip side is that you lock in higher costs if they
are falling.
The disadvantage of a fixed rate loan is that you will often be
penalised for lifting repayments or making
lump sum payments. And if you take a longer term, there is a risk
floating rates may drop below your fixed rate. Capped rates can overcome
this issue because with capped rates the interest rate cannot rise above
the "cap", but will drop if floating rates fall below the
capped rate.
Floating Interest Rate
With a floating rate, lenders lift or lower the interest rate as
interest rates in the wider market change. This means your repayments
may fluctuate over time.
The main advantage with a floating rate is that you can lift your
repayments or lump sum repayments without penalty. It can also be easier
to consolidate other debt into floating rate loans than fixed rate
loans.
The disadvantages of floating interest rate loans include:
•Floating interest rates are currently higher than fixed rates;
•When rates go up, the repayments also go up, squeezing your budget.
A Mix Of Both
It is possible to split a loan between fixed and floating rates. This
lets you make extra repayments without being penalised on the floating
rate portion, while you may get lower rates on the fixed portion.
So Which One?
Which interest rate option best suits you depends on both your
circumstances and on current financial markets. If you're someone with a
fixed budget who likes stability, you may decide a fixed interest rate
is better for you. Another person might decide a mix of fixed and
floating rates best suits them because it allows them to plan while
still having the freedom to pay lump sums without being penalised. On
the other hand, during a period of falling rates and if rates are at a
relatively low, stable level, the floating rate option may be better.
No matter which option you choose, it's important you do your homework
first. Take the time to read up on the 'ins and outs' of mortgages, shop
around to find the best rates, and if you're inexperienced or confused,
seek advice from an experienced expert.
McLEAN
AND CO DECEMBER 2005 NEWSLETTER PAGE 4
UNDERSTANDING FINANCIAL
STATEMENTS
For
most small business owners, the term financial statements refers to
three key documents – the Income Statement (or Statement of Financial
Performance), the Balance Sheet (or Statement of Financial Position) ,
and the Cash Flow Statement.
The
descriptions and tips below are designed to ensure you use these
documents effectively, to give you a solid grounding in basic financial
controls.
INCOME
STATEMENT
What it is?
A view of your revenues and expenses for a period of time
such as a month, quarter or year. Also called the profit and loss
statement or P&L.
How you should use it? Look
at it to make sure that you are making money. An income statement shows
you whether you are making money when all expenses are taken into
account. It is useful because many business owners overlook overhead,
insurance or other expenses when conducting an informal profit analysis.
It can be helpful to create an income statement for a specific product,
project or client, to be sure that each part of your business is firing
on all cylinders.
How often you should refer to/create? A
monthly income statement is advisable for many small businesses. Any
more often may be too much for you to find time for, any less frequently
and you may miss problems that are brewing.
BALANCE SHEET
What it is?
A
snapshot of a company’s assets and liabilities including so called
non-cash items such as depreciation.
How you should use it?
Typically
created to coincide with your income statement because it complements
your profit picture (income statement) by providing a complete view of
all assets and liabilities. A balance sheet provides a picture of what
your equity in the business is worth.
How often you should refer to/create?
Time
its creation to coincide with your income statement.
CASH FLOW STATEMENT
What it is? Also
called a “sources and uses” statement, this document lists your
sources of income and your uses for this money, e.g., what you spend
money on. A cash flow statement tells you what your cash position is
currently and how you have progressed from your previous cash position
to this one, in other words, where your money has gone.
How you should use it? One
of the most important documents for small business owners, a cash flow
statement presents a picture of where your business’ money goes. It is
useful for determining if you are spending wisely.
How
often you should refer to/create?
Monthly
timing suits many businesses, but more frequent is appropriate if you do
a high volume of business
BUSINESS SURVIVAL
Your chances of surviving is business are said to be double if you have
regular accounting reports. The bigger your business the more often you
need to analyse its profit. By
monitoring the progress of the business, you can correct trends early.
McLEAN
AND CO DECEMBER 2005 NEWSLETTER
PAGE 5
DEALING WITH CASHFLOW PROBLEMS
Many small businesses experience cashflow problems occasionally and need
working capital.
For
most, the immediate response is to go to the bank and ask for an
overdraft or overdraft extension. But the money might be there in your
business. To unlock your hidden funds, and make your business more
efficient at the same time, you need to look closely at your assets,
customers and suppliers.
ASSETS
Your
assets include debtors,
stock, pre-paid expenses, vehicles, plant and equipment, fittings and
property. Each of
these is a possible source of funds.
Debtors
Are
you letting some customers have the free use of your money for months?
This is a common occurrence in small businesses where the owners are so
busy getting products out the door or services completed that they don't
pay enough attention to basic business procedures. Many customers will
take advantage of this 'free money', but your business isn’t a bank.
Stock
Do
you have excessive capital tied up in stock? This can occur if you are
carrying large numbers of items
that you could obtain from suppliers at short notice, or if you have too
many slow-moving items.
It’s
important to regularly review your stock levels and turnover rates, and
your purchasing policies.
Can
you free up money by reducing stock? What about moving out of the
slow-moving lines or having a quick
sal
e of the
slow-moving stock? It might pay you to discount some items quite heavily
to get some money in quickly. If you need additional funds to purchase
more stock, make sure that you're replacing slow-moving stock with the
faster selling lines.
Pre-paid
expenses
These
pre-paid expenses often relate to services. For example, you might pay
your insurance bill for the year all in one hit, but you could arrange
to pay small monthly amounts. There might be an additional cost for
doing this, but you must weight the extra cost against the advantages of
12 small payments which your cashflow can comfortable handle versus one
large annual payment.
Fixed Assets
Fixed
assets can often be the source of a significant amount of cash. Do you
really put all your assets to full use? You might be able to sell off
little-used assets and hire suitable replacements when you require them.
You might be able to sell vehicles and lease others instead.
Customers
Your
customers can be a source of business funds. Apart from the good debt
collection tactics referred to above, try these tactics:
If
you're starting a new business, consider establishing it on a cash-only
basis to keep the funds
inside your business rather than locked up in
If
you supply goods over a period of time, or if you're a service business,
ask if you can invoice for progress payments. Otherwise, you’ll have
to wait until the job is finished and then another 30 days or more
before you get paid. This approach also gives you an early warning if
the customer isn’t going to be pay, allowing you to cut your losses
and get out. It’s a very suitable approach for tradespeople
subcontracting to a developer. (cont
Page 6)
McLEAN AND CO DECVEMBER 2005 NEWSLETTER
PAGE 6
Suppliers
Ask
your suppliers if you can buy on consignment, meaning you don’t pay
until you make a
sal
e. Or ask them
for extended payment terms to give you the opportunity to sell the goods
before you have to pay. If
the supplier won't budge, try splitting the order in two and offering to
pay normal credit terms (30 days) on one half and 90 days on the other
half. Your suppliers will be more likely to agree to this kind of
arrangement if you've paid them promptly in the past.
WHAT
TO CHECK BEFORE SIGNING A LEASE
A
lease agreement is a major business commitment and therefore requires
caution. If the building or location turns out to be unsuitable, you
might (through a personal guarantee) find yourself and the business
committed to several years’ rent, even though you may have moved out
of the premises.
CHECK
THE LEASE
Always
get the lease checked by a lawyer with experience in commercial leasing
who can spot unfavourable clauses. The lawyer can help you negotiate
balanced terms.
Important
tip: Despite its name, a preliminary ‘Agreement to lease’ document
actually binds you to some essential terms that will appear in the final
lease. Don’t sign it or any other document before you have your
lawyer’s approval.
LENGTH
OF THE LEASE
Whether
you should sign a short-term or long-term lease depends on your
circumstances. A new and relatively unproven business might see
advantages in the freedom of a short-term lease (or even a sub-lease if
one comes on the market) that allows it to test both the business
concept and the location without longer-term financial commitment. A
more stable and established business might value the security of a
longer tenure and see considerable merit in renewal rights.
Most
leases are medium term: for instance the 4 + 4 formula (four years lease
with the right of renewal for another four years) is popular. Get advice
from your lawyer and accountant on the term of your lease.
SUITABILITY
OF THE PREMISES
It’s
important to do research before you sign a lease. For a destination
business (a business like a supermarket or video shop that consumers
need to visit), a good location (high foot and road traffic, good access
and parking) is vital. Other businesses (for example, businesses that
sell to other businesses) might be more concerned with good access for
trucks and containers.
THE
SEVEN FINANCIAL STAGES
We
may need further information from you to determine the best options for
you.
IF YOU THINK YOU CAN’T PAY BY
DUE DATE
Contact
IRD before the due date to let them know about your financial
difficulties. Penalties and interest apply to tax bills that are unpaid
by the due date but, if your financial situation prevents you from
paying on time, IRD may for example set up an arrangement where you pay
the amount owing in instalments. If you contact IRD and make a formal
arrangement before the due date, as long as you meet all of your
obligations under the arrangement you will only be charged one late
payment penalty of 1%. No further penalties will be charged.
Note
that even with an arrangement you are still charged interest on the tax
owing. So you may wish
to consider borrowing money from elsewhere so that you can pay the tax
bill by the due date.
IF THE DUE DATE HAS PASSED AND
YOU HAVE AN UNPAID TAX BILL
If
you make an arrangement after the due date, any penalties already
charged will stand. If you
meet all of your obligations under the arrangement, no further penalties
will be charged, however, use of money interest continues to be charged.
NEGOTIATION PERIOD
In
some instances when you contact IRD to discuss your payment options, IRD
may need further information from you to determine the best option for
you. This may require you to phone IRD back, complete a form or file a
return. You will be given a
specific timeframe to provide the information that we need. During
this time, IRD will not impose further late payment penalties or take
new debt recovery actions. Late
payment penalties and recovery actions will recommence only if a
conclusion is not reached before the end of the negotiated timeframe.
The use of money interest continues to be charged during the period of
negotiation.
OVERDUE INCOME TAX RETURNS
If
you are required to file a tax return and you have not yet done so, IRD
will estimate the amount of tax they think you owe. This is called a
"default assessment". You may also be charged a late filing
penalty. It is important that you file the overdue return so that your
correct tax position can be confirmed. You may even be entitled to a
refund.
McLEAN AND CO DECVEMBER 2005 NEWSLETTER
PAGE 8
TAX TITBITS
FAMILY
ASSISTANCE INCREASES
Family
Assistance is made up of four types of payments – Family Support,
Child Tax Credit, Family Tax Credit and Parental Tax Credit. You may
qualify for one or more, depending on your personal situation.
From
1 April 2005
the maximum rate of Family Support will increase by $25 a week for your
first child, and $15 a week for each other child.
Some
families receiving a benefit will have part of their payments
transferred to their Family Support. This will affect their benefit, but
they will be better off overall with the increases to Family Support.
From
1 April 2006
:
