Using Australian Defence Force Entitlements for Investment Property Purchases
Those who’ve served in the Australian Defence Force have access to various entitlements. You can use some of these to purchase an investment property. This article covers the key information that you need to know.
If you’re serving in the Australian Defence Force (ADF), you may run into some issues when buying property. The biggest among these is often having little time to focus on the purchase. Your work commitments pull you away from the purchase, which can lead to it stalling.
Moreover, many also don’t realise that they can use their various entitlements to help them along. Here’s a case study to show you the basics.
Case Study: Daniel Breeze*
We recently worked with an ADF client named Daniel Breeze. Daniel lives overseas and often relocates due to his work commitments. Despite this, he had an interest in buying an investment property. Before coming to us Daniel completed his own research and began working with a broker. But as is often the case, this broker didn’t have lots of knowledge about the negatives of cross-securitisation and how it can leave an investor over exposed. This broker also didn’t communicate very well. So Daniel started losing confidence in him. More than that, this broker didn’t understand Daniel’s unique situation as an ADF client.
Bottom line: Daniel experienced an early setback and had to delay his purchase.
Then, a friend connected him to our team at Integrity Property. After Daniel relayed very specific instructions about the type of property he wanted, we scheduled a strategy session. During this session, we spoke about his current financial position and what he wanted to achieve. We also spoke about the entitlements that could aid his purchase.
Daniel also had an ADF Super fund in addition to money that he’d saved himself. But he had one big problem – he couldn’t dedicate the time that he needed to his research. That’s where our team saved the day for him by:
- Identifying growth hot spots
- Helping him find tenants for his property.
- Negotiating a great deal
- Knowing the ins and outs of ADF entitlements and then using them to his advantage.
- Making it all happen while he was on overseas deployment.
What’s most exciting is Daniel was so confident that he didn’t purchase one property… he bought two! And we oversaw it all from the documentation to the build process.
Integrity Property arranged the building inspections and the creation of a depreciation report. Plus, we organised all the relevant insurances, too. With the paperwork completed, the final fixing process ran smoothly.
From there, our Rental Manager secured tenants for both properties immediately. Before long, Daniel started receiving income, with one property attracting a higher rent than expected!
The Key Entitlements For The ADF
Let’s say you want to own one – or even two – properties like Daniel and you want to take advantage of all your entitlements. Which entitlements are you eligible for and which can help you buy property?
The following is a rundown of all of the relevant entitlements:
- First Home Owners Grant (FHOG). The FHOG isn’t an ADF entitlement. Instead, it’s an entitlement that’s available to anybody who’s buying their first property. This means that it’s not available to you if you’re buying a second home. Each state has different criteria in place for the FHOG. You may face caps on the value of the property that you can purchase. But the FHOG will also give you several thousands of dollars to work with if you meet the criteria.
- Live-In Accommodation (LIA). You may choose to live in ADF-provided accommodation. If so, you’ll pay LIA for the privilege. The amount that you pay depends on your rank and the number of beds in the room. The quality of the accommodation is also a key factor. However, you may not have to pay if you’re stationed in LIA temporarily. This only applies if you have a permanent residence elsewhere.
- Home Purchase or Sales Expenses Allowance (HPSEA). This scheme ensures that you’re not penalised for owning your own home while in service of your country. It focuses on the costs you incur when selling a home and buying a new one. This typically happens because the ADF has moved you to a new location. The entitlement starts with the purchase of an eligible home. If you have to change location afterwards, you have two years to sell the old property and four years to buy a new one. You can claim HPSEA if you meet those conditions.
- Married Quarter (MQ). Like LIA, this is a fee that you pay to the ADF for living with your spouse in an MQ. The amount paid per year can rise to about $15,000.
- Defence Home Ownership Assistance Scheme (DHOAS). You must meet several eligibility requirements to access DHOAS. Firstly, you must have served in the ADF within the last couple of years. Moreover, you must have completed your Qualifying Period of Service. In doing so, you must also have gained a Service Credit. Permanent members must serve for four consecutive years to gain the entitlement. The countdown to eligibility resets if you take a break from service. Once you receive your Service Credit, you can pay it into a DHOAS home loan.
- DHOAS Lump Sum. A secondary part of the DHOAS scheme, this allows you to receive your entitlement as a lump sum. You can convert a maximum of four years of Service Credit into a lump sum. Currently, this would result in a $10,608 sum. However, you can’t use this sum as a deposit on a new home. Moreover, you can’t claim it if you already own a residential or investment property. As a result, it’s best used by those looking to buy their first home.
- Rental Allowance (RA). You receive an RA from the ADF if you choose to live in rented accommodation outside of LIA. For investors, it’s often worth claiming RA and staying in rented accommodation. You can then use your purchased property as an investment and make deductions on the interest you pay on your home loan.
- Home Purchase Assistance Scheme (HPAS). This is similar to the FHOG, but it’s available only to ADF members. For eligibility, you must not have used a previous entitlement. Therefore, the home you buy must be the first home you’ve bought since you started service. The property must also be at the location that you’re posted to and you must live there for at least one year. There are slight adjustments to this requirement if you’re building your own home. You’ll receive $16,949 as part of the HPAS. But you’ll also have to pay tax on the amount. Still, it helps when combined with the FHOG.
Tips for Using Your ADF Entitlements
With so many entitlements available to you, it’s hard to figure out how to use them for an investment purchase.
Here are some general tips that will help you along the way.
Tip #1 – You Don’t Have to Claim Every Entitlement
You may feel a temptation to claim as many entitlements as possible. That’s not always the best idea. For example, claiming other entitlements may prevent you from accessing the HPAS. This could cause serious issues when trying to buy your first property.
Plan ahead and think about the entitlements that will best serve you when buying a property. First-time buyers will often use different entitlements to those buying second or third homes. Investors also have to consider the ramifications of the entitlement they use.
For example, using the HPAS entitlement means you must live in the property for a year. That obviously means that you can’t rent it out and make money from it. If that’s your intention, it may be best to wait and claim another entitlement later on, such as the DHOAS.
Tip #2 – Don’t Assume You Have to Buy Nearby
There are some entitlements that require you to buy a property in the vicinity of your station. This could lead to you limiting your search, which may damage your investment goals. If you’re not stationed in a growth area, you won’t see great returns from your investment.
But not every entitlement requires you to buy a nearby property. The case study above demonstrates this.
Don’t get stuck in the idea that you have to buy a local property. Have some patience and expand your search. Investors want to buy in growth areas. Make sure you’re not saddling yourself with a property that won’t generate a return. Again, choose the entitlements that will serve your needs.
Tip #3 – Have a Cash Buffer
As you can see from the figures mentioned above, an entitlement may not pay for your deposit. In fact, you’re sometimes prevented from using the entitlement as part of the deposit payment at all.
As a result, it’s a good idea to have a cash buffer to aid in your purchase. It may be best to think of the entitlement as an added bonus. It’s something that you can benefit from, but mustn’t rely on. Have the cash needed to complete the purchase available.
This is particularly important when using a lender that has strict requirements for genuine savings. Many lenders ask that 5% of your deposit comes from genuine savings. This is money that you’ve saved yourself over an extended period of time. Moreover, you must save that money in a bank account that’s registered under your name. In some cases, your entitlement won’t count towards these genuine savings.
Tip #4 – Don’t Just Check Your Own Bank
Many new investors make the mistake of using their current bank for their home loan products. That’s a mistake. Your bank only has a small number of products to offer you. Plus, you can’t guarantee that these products are the best ones available in the current market.
Use a mortgage broker to help you to find a better loan. Make sure the broker has experience with ADF entitlements and investment properties. This means that they know what to look for to best suit your requirements. You also want the broker to have access to multiple lenders.
Using the wrong broker may lead to you taking out a bad loan. You’ll have to refinance later, which costs time and money. The same goes if you take out a bad loan with your current bank. Again, it’s all about not placing limits on your purchase.
The Final Word
This article covers the basics of using ADF entitlements to help with the purchase of an investment property. When used properly, they could save you thousands of dollars.
But this isn’t all that there is to know. You need a property expert to help you to deal with the technical aspects of your purchase.
That’s where Integrity Property can help. Our team can help you carry out every step of your purchase in confidence. We also have access to top-quality mortgage brokers who can help you with your purchase.
* Name changed as a security precaution