Australian Finance Group acquires strategic interest in Thinktank

Australian Finance Group Limited (ASX: AFG) is pleased to announce that it has entered into a binding agreement to make a strategic investment of 30.4% (fully diluted) of Think Tank Group Pty Ltd (“Thinktank”) for $10.9 million in cash consideration. In connection with the investment, AFG will distribute a white label Commercial Property product through its network of brokers.

Thinktank operates primarily as a small ticket (sub $3m) commercial property lender and was established in 2005. Thinktank operates nationally and has a loan book in excess of $750 million. It has established itself as a viable and competitive non-major commercial property lender in a sector that has been bereft of competition and choice for too long.

AFG Chief Executive Officer David Bailey explained the decision: “Our strategic investment in Thinktank represents the next evolutionary step for AFG to diversify its earnings base. The ongoing success of AFG Home Loans and the introduction of AFG Business are important contributors to the future growth of AFG. It makes sense to participate further in an asset class that we are comfortable with – both directly through the white label opportunity and indirectly through our shareholding to generate further earnings for AFG.

“The opportunity to blend Thinktank’s commercial property lending expertise with our own distribution and securitisation capability will benefit both businesses. It will also enable us to deliver further competition and choice to the small to medium enterprise (SME) market place at a time when it is most needed. AFG aims to bring the same disciplines to this white label proposition as we have successfully demonstrated with our own residential white label programme,” added Mr Bailey.

Thinktank CEO, Jonathan Street, commented: “The agreement reached with AFG marks a further significant step forward for our business and serves to further enhance our capacity to best service the finance needs of borrowers over the breadth of the Australian commercial property market.

In coming together, we see considerable opportunity to not only combine our efforts to great effect across the AFG network but equally in extending the same emerging advantages and benefits to our wider base of aggregation and broker relationships.”

Investment highlights:

  • Investment of 30.4% (fully diluted) of Thinktank Group Pty Ltd (“Thinktank”) for $10.9 million in cash consideration
  • Addition of a white label commercial property mortgage to AFG’s product offering with a strategic alignment with AFG’s commercial broking platform, AFG Business
  • Opportunity to increase Thinktank’s penetration of the market through AFG’s 2,900 strong broker network
  • Thinktank is expected to achieve profit after tax in FY18 of approximately $3.2 million
  • AFG has the right to appoint two directors to the Thinktank board and they will take up those positions immediately
  • Completion is expected to occur today following the transfer and confirmed receipt of consideration.

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Competition vital for all mortgage holders. Mortgage Index – April 2018

The release today of the AFG Mortgage Index (ASX:AFG) highlights that the ongoing regulatory intervention into the sector is potentially stifling growth in mortgage applications. Further growth in non-major market share reinforces an increasing appetite for these lenders and highlights the vital role mortgage brokers play in enabling these lenders to compete.

AFG Chief Executive Officer David Bailey explained the results, “Whilst there is likely to be some small seasonal impact on numbers for the quarter, the Index highlights some marginal softening compared to the same period in 2017 with lodgements down just 1.8% on the prior period and just 0.8% on a rolling 12-month basis.

“Given the timing of public holidays and suggestions that Sydney house prices are coming off a little, the fact that there does not seem to be any growth is not surprising,” he said. The only market in the country which appears to be generating ongoing growth is Victoria.

“Western Australia, whilst initially showing signs of some green shoots earlier in the quarter appears to have softened. First home buyers are a known stimulant for an economy, so we hope that the recently announced increased GST allocation to WA will be used in part to stimulate this sector.

Interest Only home loans appear to have levelled off at around 20% over the past three quarters. “With some lenders indicating they again have an appetite for this type of lending, we would probably call this the bottom for this segment of the market.

AFG’s data also shows the non-majors have continued to pick up market share to now be sitting at more than 36%.

“AFG has 45 lenders on its panel,” said Mr Bailey. “This distribution model creates competitive tension in the lending market which leads to increased consumer choice and, most importantly, improved loan pricing and service across the entire market which benefits all Australian borrowers.

Industry regulator ASIC concluded in its recent examination of the sector1 that mortgage broking promotes competition by playing a valuable role in providing a distribution channel for lenders, particularly smaller lenders, and exerting downward pressure on home loan pricing,” said Mr Bailey. “The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market.

 

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How to tackle more than one mortgage

Taking on a mortgage means taking control of your finances. Adding an investment property to your loan portfolio requires additional discipline and planning. With interest rates lingering at record lows, it’s important those taking on another mortgage look beyond the here and now and invest in some long-term thinking.

 

Positive or negative?

Positive gearing means your investment property income covers all the associated costs, including your mortgage payments and upkeep costs, such as rates and repairs. Negative gearing is when you have a shortfall between the rental return and the cost of owning the property. You may be able to claim the difference as a loss on your tax return, reducing your taxable income. However, it is wise to speak to your accountant or financial planner to check your personal situation. Note, however, when it comes to loan repayments, you can only claim the shortfall between your rental income and interest charges. You are not allowed to claim any repayments on your?principal.

Many Australians opt to negative gear to take advantage of the tax deduction but don’t let this be your single guiding factor. Long-term capital gain that adds to your personal wealth should still be your ultimate investment?goal.

If you decide to negative gear, make sure you budget for interest rate increases, which will stretch the loan gap you have to cover, and have funds in reserve to offset any lapses in?rent.

On the flip side, a positively geared property may deliver a high rental yield but could lag in capital gain, especially if an apartment in a high-density location. Similarly, make sure you have ample funds to cover any tenant vacancies (it is easy to be lulled into false financial security when your tenant takes care of your mortgage) and be prepared for interest rate?hikes.

Regardless of whether you gear positively or negatively, research is critical. Look at the location’s annual vacancy rates, average rental yields and historical and predicted property?values.

 

New vs used

The last federal budget1?restricted what property investors could claim for depreciation on fittings and fixtures in established properties, such as air conditioning, ovens and ceiling fans. In other words, you could once claim depreciation on renovations undertaken by previous owners. Now investors can only claim depreciation on equipment they have bought themselves. The new rules mean new properties are more attractive from a depreciation perspective, with many investors banking on this tax loop to help cover their loan repayments for the first several years. However, depreciation is only part of the financial equation and should be balanced against the property’s long-term potential for rental return and capital growth. Investors need to make sure they have the means to cover their mortgage for when the depreciation write-off dries?up.

Be sure to speak to your tax advisor before you purchase an investment property to understand fully how the new depreciation rules and other tax laws impact your finances and ability to afford your loan?repayments.

 

Applying for another loan

Investment lending has tightened in Australia in recent years to help cool the property market and to reduce the risk of over-borrowing and loan defaults. Investment loans now incur higher interest charges and may also require a bigger down payment to lower the loan-to-value ratio?(LVR).

Most investors rely on an accumulation of equity in their own home to cover the deposit and purchasing costs (stamp duty, conveyancing etc) on their first investment property but lenders are now being asked to be more scrupulous when it comes to affordability. As with any loan, you will be asked to demonstrate you have sufficient income to cover the investment repayments, including a reliable rental?return.

Many investors opt for interest-only loans, which means you are not covering any of the principal owed. While this reduces your loan repayments, you will not be paying off the property. Rather, you are relying on the property increasing in value by the time you decide to sell to eventually pay off the loan. While this long-term strategy can reap rewards, it is vital an interest-only loan is the right fit for your individual circumstances – you do not want to be incurring additional interest costs if there is no need. The Australian Prudential Regulation Authority (APRA) is also asking lenders to clamp down on interest-only loans so stringent assessment conditions are in?place.

Talk to us to help source an investment loan that is right for your circumstances. As a broker I bring choice to the table, and with access to loans from multiple lenders and up-to-date knowledge of lending rules, can take the pain out of navigating what is an ever-changing and increasingly complex landscape for property?investors.

 

Keep them separated

One of the biggest mistakes first-time property investors make is blurring their private and investment finances by dipping into their investment loan to cover personal costs. The aim is to leverage your personal finances to improve your investment potential and build wealth. While a redraw facility on a home loan is practical, it can create complexities on an investment loan, especially if you are drawing funds for personal use rather an investment property expenses. Remember, only the interest charges on your investment loan are tax deductible. If you start using your investment loan for personal uses, tax time will be messy and you are likely to attract the attention of the ATO. Importantly, you are also eroding your investment strategy, which is to get ahead?financially.

We can help set up the right loan facilities for both your mortgage and your investment loan to ensure each supports your cashflow requirements and investment?goals.

 
Tax: the information in this article does not constitute advice. As taxation legislation is complex we recommend you speak with your financial advisor, tax advisor or contact the ATO for further details and expert advice regarding your personal circumstances.

1. https://www.yourinvestmentpropertymag.com.au/news/how-changes-to-depreciation-will-affect-investors-236607.aspx
 

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Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.

How to sleep easier as a small business owner

Owning your own business can free you from the nine-to-five grind, help you fulfil your passion, create financial opportunities and give you more control over your life. It can also keep you awake at night. Just ask the two million or so Australians running small businesses1.

So what are some of the traps and trials of running your own show and what can you do to replace the stress with success and a better night’s?sleep?

 

Cash flow

Keeping enough money coming in to cover everything that needs to be paid out is probably the chief sleep depriver for small business owners. Many make the mistake of not having enough funds behind them to start with, putting unnecessary pressure on turnover from the?outset.

The other error is not reflecting your true operating costs in what you charge for your products or services. All ventures, no matter how small or what business they are in, have costs – rent, wages, supplies, equipment, electricity, freight and travel, to name a few. Under-estimating the full cost of operating your business is one of the surest ways to strangle your cash flow. You might win work or sell lots of product based on your prices but if revenue doesn’t ultimately outstrip expenses, you won’t be in business for?long.

How to remedy

  • Start with sufficient funds under your belt to cover running costs while you are building your business.
  • Consider a small business loan or overdraft to help get you started and manage initial cash flow. I can help point you in the right direction to find the right finance solution, so you can get on with doing what you do best – managing and growing your business.
  • Create an accurate pricing model that factors in all your running costs and how much profit you need to make.
  • If offering a professional service, ask for part payment up front.

 

The line between work and home

You might have more flexibility with work hours when self-employed but many small business owners find themselves spending more time toiling than ever before, blurring the line between their professional and personal lives. Our 24/7 digital world doesn’t help, making it easy to check emails from the couch or take a business call while driving the kids to school. Not only are long work hours taxing on you, the business owner, they can take a dramatic toll on your family and other important relationships, compounding your stress?levels.

How to remedy

  • Set boundaries and be disciplined with your work hours. While it’s important to be responsive to customers and spend time on your enterprise, you are ultimately in charge of your time outside of business hours. Find a routine that works for you and your family.
  • Eat well and find time to exercise to help manage your fitness and stress levels.
  • Make time for the most important people in your life. Maximise your flexibility to attend school events, read to your kids at bedtime, make a point of eating breakfast or dinner as a family, set a regular date night, steal a weekend away and catch up regularly with friends.

 

Lack of help

It’s a catch 22 and major source of stress for many small business owners – the need to wear multiple hats but insufficient funds, or lack of revenue certainty, to take on extra help. Most small business operators find themselves working in and on their businesses, straddling everything from bookkeeper and financial controller to human resources and marketing. Inevitably, something has to?give.

There are plenty of ways to access business support for start-ups if you are prepared to be?resourceful.

How to remedy

  • You might be eligible for a grant to support expansion. The Department of Industry, Innovation and Science offers a wealth of online resources to support small businesses, including information on available grants, plus free business advisory services and workshops. Visit
    www.business.gov.au/assistance
  • Tap into extensive skills and knowledge without the burden of full-time wages by employing experienced part-timers, such as parents who are looking to keep their professional skills up but don’t want to work full-time.
  • Talk to TAFEs and universities about internships or part-time employment opportunities for promising students. New talent can require extra supervision but the right hires can also bring energy, enthusiasm and fresh thinking.
  • Find a trusted mentor who understands your challenges and can help you navigate growth. Many business people are willing to lend an hour of their time on a regular basis to impart their learnings and wisdom.

 

Compliance

Between Business Activity Statements (BAS), tax, insurance, superannuation, public liability, payroll, workers compensation and leave entitlements, small businesses face a stack of red tape, rules and forms.
Compliance is a certain trigger for midnight tossing and turning. This is one area small business owners should not try to navigate?solo.

There are plenty of ways to access business support for start-ups if you are prepared to be?resourceful.

How to remedy

  • Get a good tax adviser who can not only help with your accounting but can make sure your business complies with the latest rules. Ask other business owners for their recommendations.
  • The Australian Competition and Consumer Commission churns out regular updates for small business owners, including compliance requirements and also information on your rights. Explore the many online resources and sign up to the Commission’s newsletters at?www.accc.gov.au/about-us/information-for/small-business
  • Employment laws can be a mine field. The Australian Institute of Human Resources portal (www.ahri.com.au/assist) has free resources to help you understand your responsibilities as an employer and be a better boss.

 

www.asbfeo.gov.au/sites/default/files/Small_Business_Statistical_Report-Final.pdf

 


Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.

The RBA decided to once again leave the official cash rate unchanged at 1.5%

The Reserve Bank of Australia decided to once again leave the official cash rate unchanged at 1.5% with the last rate move back in August 2016. I’d like to share today’s rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision.

With weak wages growth, continued low inflation and a lack of significant economic growth we can expect interest rates to remain where they are for the time being.

Even when rates are unchanged, the role of your broker remains the same. There may be different rates available from our lenders, so your broker is always on hand to ensure you have the right financial solution for your current circumstances.

If you’d like to have a chat about what today’s news means for you and your finances, please don’t hesitate to get in touch with an AFG broker.