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Wealth Brief The Wealth Brief is brought to you by
Edition 5
Contact us Suite 1/36 Sunshine Beach road Noosa Heads, Queensland 4567 T: 1300 761 236 E: advice@insuranceChampions.com.au W: www.insurancechampions.com.au
IN THIS ISSUE Top Financial Tips for 2008 Top 11 Tips for coping with rising interest rates Do you have enough? What is a DIY Super Warrant? Successful property investment Fixed vs. Variable: The Great Debate When setting up a home equity loan there are four important points to remember: • Obtain professional assistance to choose the most appropriate loan and to structure it to ensure the interest is tax deductible. • Obtain professional assistance to set up a diversified investment portfolio suitable to your needs. • Only borrow an amount that still leaves a comfortable margin if house prices fall or there is a change in your circumstances. • Make sure you have income protection insurance cover in the event of serious illness or accident. Call us if you would like further information on this strategy.
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Top Financial Tips for 2008 1 Make or update your will If you want to make sure that your loved ones are provided for in your Will, that your estate is divided in the way that you wish and any bequests reach those you intend them for, it’s vital that you make a Will and keep it up to date.
2 Get Professional Advice Good information and advice can come from a variety of different sources. This could be a licensed financial planner, an accountant, lawyer or insurance specialist. Don’t wait until after the event to seek professional advice, the delay could result in you paying too much tax, to be underinsured, or to leave yourself open to legal issues.
3 Get Protected Reviewing your current level of insurance is vital to protect you and your family. If you have taken on new debts, increased your income or changed jobs, these and any other significant changes should trigger a review of your personal insurance situation.
4 Reduce your CGT liability By holding your investments for more than 12 months or postponing the sale of assets until your taxable income is lower are just two ways to reduce capital gains tax. For business owners there are a range of concessions that you could be eligible for when selling active assets. You also need to get professional advice in relation to the ownership structure of assets and too have these in place before you invest.
5 Get started now So what are you waiting for? We are now in 2008 and the years are flying by. Take control of you finances and investments and look at the real reasons why you are delaying. If you’ve had some bad experiences in the past then work through them, learn from them and get started!
6 Get yourself a plan Write down everything you want to achieve. When do you want to retire? How much money will you need? Put a time deadline on achieving certain goals and review these often. If you want to retire on $100,000 a year after tax and
inflation you will need approx $2,000,0000 invested. Will Superannuation be your wealth creation vehicle, property or shares?
7 Use your home as a springboard to wealth If you own your home or have sufficient equity, you can gear against your house or set up a separate investment loan that can be used for deposits on property or leverage into shares. The interest you pay would normally be tax deductible and by having a separate loan there will be no confusion between personal and investment expenses.
8 All your eggs in the same basket? Investments perform very differently and when the share market is booming, the property market could be flat. If you have a diversified investment portfolio of shares, property, managed funds and fixed interest this should reduce the volatility and even out your returns. Are you investing for cash flow, capital growth or both?, inside or outside super? These are some of the discussions you should be having with your adviser.
9 Keep money aside for emergencies You should have sufficient funds set aside to cover any unforeseen circumstances. As a general rule this should be a lump sum to cover 6 months of your normal expenses. This lump sum could be invested in an account the earns interest but allows you easy access without penalty. It could be a financial buffer you have built up on a line of credit mortgage or loan draw back facility. Income protection provides a tax deductible way to cover up to 75% of your income in case a sickness or accident prevents you from working.
10 Pay off Non-Deductible debt first Your main aim should be to reduce nondeductible debt as soon as possible. This could be your home loan, non-deductible car loan and any credit card debt. You are paying these loans with your after tax dollars and apart from your home loan they are normally depreciating items! Leave deductible loans until last as the government is footing part of your interest bill with tax breaks.
Top 11 Tips for coping with rising interest rates Are you feeling the squeeze of those extra few dollars on your mortgage repayments due to rising interest rates? There are a few simple steps that consumers can consider to help manage their home loan in changing interest rate conditions. For those borrowers who are feeling the pinch of rising interest rates or who are concerned as to how they will cope if rates rise further, it may be worth reassessing the current conditions of your mortgage to see if there are ways you can save. If you are looking at taking out a home loan, thoroughly consider all your options before committing to a loan to ensure you have the most suitable product for your needs. Here are some Top Tips to help you cope with rising interest rates. 1. Consider fixing part, or all, of your loan If you are working to a tight budget and want peace of mind that you will be able to afford your repayments for a fixed period of time, you may want to consider fixing part, or all, of your loan. You should weigh-up costs associated with fixing your loan, together with the higher interest rate you may pay at a fixed rate. Keeping part of your loan at a variable rate will also allow you to make extra repayments without penalty. 2. Consolidate your debts As interest rates rise on mortgages, so too do they on personal loans and credit cards. Consider rolling all your debts into your mortgage, so instead of paying up to 17 per cent on other debts such as cars, credit cards and personal loans, consolidate them all into your home loan, so you are paying only around 7 per cent. 3. Assess your current loan product and possibly refinance If you currently have a loan that offers features that you are not using (eg. offset, redraw), consider changing to a basic product without the ‘bells and whistles’ that may offer a cheaper interest rate. For example, on a loan of $250,000 over 30 years, the change from 7.97 per cent (standard variable) to 7.47 per cent (basic variable) is a saving of approximately $100 per month. 4. Reduce your loan amount with a lump sum payment If you have some money sitting in the bank or that is not being used for anything specific, consider investing it into your home loan. The difference between a $250,000 loan and a $200,000 loan over 30 years at 7.07 per cent is around $335 per month.
5. Refinancing extra repayments out of the loan to reduce loan amount If you have been making extra repayments on your home loan and you have reduced your loan amount, you can refinance your loan so your repayments reflect what you owe on your loan, not your original loan amount. For example, assuming a loan has 18 years remaining and is scheduled to be at $250,000, however, through extra repayments the balance has been reduced to $200,000, refinancing the loan over the same 18 year period at $200,000 will reduce your repayments by approximately $410 per month. 6. Contribute a larger deposit to your home loan It will take you less time to pay off your loan (as you’ll be paying less interest) and if you contribute more than 20 per cent of the purchase price of your property, you will also avoid paying Lender’s Mortgage Insurance (LMI). 7. Don’t be fooled by honeymoon rates Some borrowers are led into a false sense of security when they take out their loan with very low one-year honeymoon rates. However, often these rates default to a higher than standard variable rate after the one-year period has expired. Check comparison tables for all the associated fees and costs with your product, and if you do choose to take advantage of a honeymoon rate, make your loan repayments at the ‘post one-year period rate’ from the start – you’ll be ahead on your repayments, and avoid a shock when the honeymoon rate is over. 8. Discuss a one-off payment variation, permanent reduced payments or hardship variation with your lender
are self-explanatory, while a hardship variation can be requested if your loan is less than $125,000 and you cannot cover the repayments due to unemployment, temporary illness or another logical reason. You may even be able to postpone your payments under the Uniform Consumer Credit Code. If you have difficulty getting your lender to agree to new payments terms contact a financial advisor. And make sure you ask your lender about any fees these variations will incur. 9. Take out a loan term of 30 years If you are looking at taking out a home loan, consider the maximum loan term of 30 years. Based on a $250,000 loan at 7.07%, extending your loan term by five years will reduce your repayments by $103 per month compared to a 25 year loan term. 10. Factor into repayments further rate rises If you are looking at taking out a loan, or are reassessing your current loan, it may be a good idea to factor into your repayments further rises in interest rates, and if possible, start to make your contributions at the higher rate. It will not only ease the stress when your repayments increase, but making extra contributions will also put you ahead of your scheduled loan term. 11. Distinguish between those things you ‘need’ and ‘want’ Work out what things in life are most important to you and distinguish between things you ‘need’ vs. ‘want’. Look at small luxuries you may be able to forego and contribute that extra money to making up the difference in your mortgage repayments. You could even consider selling your property or other assets with a relatively high monetary value.
Each of these options means your loan term will increase but you will feel more comfortable with your repayments. The first two options
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Do you have enough? A recent survey conducted for the Investment and Financial Services Association by Rice Walker found that only 4% of those with dependants have sufficient life insurance1 . This has the potential to greatly affect families who aren’t covered if one parent were to die.
loved ones for more than one year if they were to die2. Many people insure their home and their car, but fail to insure their most important asset, their ability to produce an income, which is also their life. People fail to realise the value of their ‘working’ life. It supplies the money that fuels the lifestyle that you and your family enjoy, not just now, but well into the future.
Sufficient life insurance is generally accepted to be a figure at least 10 times the insured’s earnings plus paying off debts. But in reality, six in ten people with dependants don’t have enough life insurance cover to look after their
The table below demonstrates just how valuable an ‘asset’ your ability to produce an
income is. It shows your potential earnings over 20 years and takes into account annual CPI increases (3% pa) and pay increases (3% pa). The table represents your gross income, building over time. An annual income of $30,000 today is potentially worth more than $1 million in 20 years time. Imagine no longer having access to that potential income - through injury, illness or death - which is so vital to you and your family.
1 IFSA-Rice Walker Fast Facts: a nation exposed! 2 IFSA-Rice Walker Fast Facts: a nation exposed!
Who wants to be a millionaire? Your annual income in Year 1 Total income Year 2 Total income Year 3 Total income Year 4 Total income Year 5 Total income Year 6 Total income Year 7 Total income Year 8 Total income Year 9 Total income Year 10 Total income Year 11 Total income Year 12 Total income Year 13 Total income Year 14 Total income Year 15 Total income Year 16 Total income Year 17 Total income Year 18 Total income Year 19 Total income Year 20
30,000 61,800 95,508 131,238 169,113 209,260 251,815 296,924 344,739 395,424 449,149 506,098 566,464 630,452 698,279 770,176 846,386 927,170 1,012,800 1,103,568
40,000 82,400 127,344 174,985 225,484 279,013 335,754 395,899 459,653 527,232 598,866 674,798 755,286 840,603 931,039 1,026,901 1,128,515 1,236,226 1,350,400 1,471,424
50,000 103,000 159,180 218,731 281,855 348,766 419,692 494,873 574,566 659,040 748,582 843,497 944,107 1,050,753 1,163,798 1,283,626 1,410,644 1,545,283 1,688,000 1,839,280
60,000 123,600 191,016 262,477 338,226 418,519 503,630 593,848 689,479 790,848 898,299 1,012,196 1,132,928 1,260,904 1,396,558 1,540,352 1,692,773 1,854,339 2,025,600 2,207,135
70,000 144,200 222,852 306,223 394,597 488,272 587,569 692,823 804,392 922,656 1,048,015 1,180,896 1,321,750 1,471,055 1,629,318 1,797,077 1,974,902 2,163,396 2,363,199 2,574,991
80,000 164,800 254,688 349,969 450,967 558,025 671,507 791,797 919,305 1,054,464 1,197,731 1,349,595 1,510,571 1,681,205 1,862,078 2,053,802 2,257,030 2,472,452 2,700,799 2,942,847
90,000 185,400 286,524 393,715 507,338 627,779 755,445 890,772 1,034,218 1,186,272 1,347,448 1,518,295 1,699,392 1,891,356 2,094,837 2,310,528 2,539,159 2,781,509 3,038,399 3,310,703
100,000 206,000 318,360 437,462 563,709 697,532 839,384 989,747 1,149,132 1,318,079 1,497,164 1,686,994 1,888,214 2,101,507 2,327,597 2,567,253 2,821,288 3,090,565 3,375,999 3,678,559
There are many insurance products available that come under the ‘life insurance’ umbrella. Trying to sort out the best product to protect your family can be daunting and time consuming. Seek professional advice when choosing a life insurance policy.
What is a DIY Super Warrant? A DIY Super Warrant is issued by DIY Super Warrants Pty Ltd (www.diysuperwarrants.com.au) and is structured to provide a convenient way for investors and in particular, Self Managed Super Funds to use gearing to invest in direct property, with the financing, acquisition and management of the property being undertaken by the warrant issuer on behalf of the investor. Some of the features: • Investors can normally select the investment property
• No capital gains tax on transfer of the property to an investor or self managed super fund
• Potential for greater returns, by leveraging an investment using borrowing
• Loans are on a limited recourse basis, protecting an investor’s other assets
• The benefit of direct property ownership with an initial outlay that is a fraction of the total purchase price
Who should consider a DIY Super Warrant?
• Rental income from the property can be used to offset interest and other costs • Investors can repay the debt at anytime and take ownership of the property
DIY Super Warrants may be suitable for a SMSF with a positive medium to long term view of the property market and other considerations that may apply are: 1. Wanting to invest in a tax effective manner 2. Comfortable with gearing to potentially increase returns
3. Protection of other assets against borrowing risk by using limited recourse funding 4. The trustee of a SMSF, seeking a property investment with potential for capital appreciation and income returns, added to the benefits of gearing 5. The ability to purchase residential, commercial or industrial property so long as they are income producing and are approved superannuation assets For more information contact your financial adviser.
Successful property investment Low vacancy rates, rise in rents and the stabilising of property prices in most states is a great opportunity for Australians to consider buying an investment property. Great gains can be made from purchasing property if you buy in the right place at the right time. It could be a cheap unit in regional Australia, perhaps near a university, or a large house in a coastal area or a CBD commercial property… or something in between. All options are worth considering. Create a long-term property portfolio plan Realise that investing in property is usually a long-term strategy. The housing market is generally a 7-10 year cycle; it’s a rollercoaster ride that has highs, lows and steady patches. Always ensure you are comfortable with the advantages and disadvantages associated with a particular investment asset. Consider your goals and all possible outcomes. Consider all costs + positive vs. negative gearing Keep in mind that the interest and related expenses you incur (such as repairs and maintenance) are tax deductible. If your loan repayments, fees and other costs exceed your rental income, the net loss can be offset against other income you derive, meaning you will be able to reduce the amount of tax payable on your other income. This is called negative gearing. Or, you may consider positive gearing, where the annual rental income received from the property covers or is higher than the annual loan repayments and costs. Also think about capital gains tax you will have to pay if you decide to sell the property. Be sure to consult your taxation advisor. Research research research Read property-related articles, use reputable property research companies and the Real Estate Institute of Australia, search the internet, plus talk to people in the know, to research the areas you are interested in buying within. Find out each area’s average rental yields, what infrastructure is in place and planned, and the property price growth that has been experienced and is
expected. Invest the time to fully understand the market – it could save you thousands Consider using the equity in any other property you own Tapping into your home equity, or equity from another property investment, is a great launching platform for buying an investment property. Say your home is valued at $700,000, you owe $350,000 on your mortgage and you want to invest 10% of the equity (or $35,000) into another property. You can do so provided that you comfortably afford your repayments. Think about buying with friends, family or work colleagues Each year, affordability is a concern for many, so more and more Australians are taking advantage of pooling their resources with people they know in order to get into the property market or increase their property market ‘wealth’. With myriad lender and home loan options now in the marketplace, all it takes for applicants to have their application approved is the ability to meet home loan repayment requirements. It is of no consequence if one party earns more, or has greater liabilities, than the other/s – the home loan can still be paid off by all involved. The only difference is at the end of the loan term the property may not be owned in equal parts. An initial visit to the solicitor will result in a contract that outlines who pays what and how much of the property each applicant will own after paying off the mortgage. Choose a loan tailored to your current needs
current investment portfolio, there are a range of property loan products for you to consider. Will you go with an interest only or a principal and interest loan? Fixed or variable rate? Which features are needed? Will you provide a deposit or choose a 100% or even a 110% loan? Apply for a loan that suits your current needs and lifestyle because you can always refinance later. Use a buyers agent/property finder Seek advice about the type of investment property that will maximise your investment. For example, if your repayments are at an interest rate of 7% then you would need a property to secure you, as an average over the entire loan term, an annual return on investment (ROI) that is higher than the costs i.e. if net rent is 3% and the rate is 7% then it only needs to grow at more than 4% to be a sound investment. Buyers agents know the market better than most and are a valuable resource to use for advice or for negotiating with property sellers and/or their agents. Visit a financial advisor and/or accountant You also need to discuss your full monetary situation with someone who is very experienced with clients who have a range of investment assets because you need to make sure that your financial situation is improved by an investment property and that you can afford repayments without stretching the budget uncomfortably. Remember, you must make this investment work for you and your long-term strategy.
Depending on your monetary situation and
Fixed vs. Variable: The Great Debate Many borrowers are tossing up between fixing all, or part, of their home loan or leaving it at a variable rate. Before you make a decision, you need to assess whether the benefits of changing loans is greater than keeping the existing loan. If you are working to a tight budget and want peace of mind that you can afford the loan repayments for a fixed period of time, you may want to consider fixing the interest rate. However, there are costs associated with fixing that must be considered, together with the increased interest you may pay at that fixed rate.
It is useful to have some idea of how long you expect to have the loan before moving or changing product – if you think it is going to be a short time, consider the options carefully before choosing a fixed rate product. The biggest positive is that for the purpose of a reliable repayment for the entirety of the fixed rate term, a fixed home loan will certainly give you that. It will allow you the benefit of knowing
what your repayments are for a set period without fear of the effect of interest rate increases. For some, that is all that matters. Fixing your home loan is a big decision and may not be for everyone, and the same can be said for a variable rate loan. It depends on the lender, the loan product and your individual circumstances. There are benefits and drawbacks with both.
Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances. Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
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