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Archives for January 2019

How Does A Mortgage Work?

The word mortgage originated in England during the middle ages from the old French “death pledge.”   This pledge refers to a contract which ends (dies) when the debt is repaid, or possession of the property is taken by the lender in the event that the borrower cannot repay.

In more recent times, a mortgage involves a loan contract offered by a credit provider at interest, secured against the borrower’s property, with scheduled repayments over an agreed term.

Whilst there are many lenders, and there is an abundance of products and features available with a mortgage, the following may assist newcomers to clarify how a mortgage works:

Deposit

Most lenders will require you to save at least 20% of the value of the property as a deposit.  There are some providers who will offer a loan to borrowers with a reduced deposit, but traditionally, lenders will offer funds up to a maximum Loan to Valuation Ratio (LVR) of 80%.

Lenders Mortgage Insurance

In the event that your deposit is below the minimum required by the lender, you will be required to purchase Lenders’ Mortgage Insurance (LMI).  LMI is an insurance policy which protects the lender in the event that you are unable to repay the loan.  The cost of cover is paid by the borrower via a one off premium.  The LMI premium can be financed (up to limits) via the loan, which means it will be added to the interest you pay over the life of the mortgage.

Using your property as collateral

Banks love security and seek to minimise the risk in lending funds to a home buyer.  The security property can be used as protection by the lender in the event that you default on your mortgage.  If you cannot repay, or if you suffer from financial difficulties, the lender can take possession of the property (foreclose).  The lender will then sell the security property to clear the debt.

Types of loans available

When obtaining a loan there are several options to consider.

Variable Rate:  The interest rate and therefore the minimum repayments on a variable rate loan will move up or down with the rates set by the lender.  This may be due to movement in the official cash rate set by the Reserve Bank of Australia (RBA), or at the discretion of the lender.  Variable rate loans allow more flexibility in repayments and usually do not incur penalties for early repayment.

Fixed Rate:  The interest rate and minimum repayments will remain the same during the fixed rate term of your loan.  A fixed rate loan will provide certainty in your repayments over the period, however, there are often restrictions in repaying above the minimum, and penalties may apply for early repayment of the debt.  If interest rates fall, you are locked into the fixed rate.  If interest rates rise, your repayments and rate will remain the same.

Split loans:  A split loan allows you to lock in a fixed rate amount, and a variable rate amount.  You may wish to reduce the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period by obtaining a portion of your loan at a fixed rate.  The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments.  A split loan will allow you to ‘hedge your bets!’

Principal and Interest:  A Principal and Interest (P & I) loan is divided into two portions.  The principal owing is the amount you borrowed, less repayments.  Interest is the amount charged in addition to the principal, and is based on the interest rate and the principal balance.  The lender has worked out how much you will need to repay at each instalment to pay your loan off in the loan term you have elected.  This is known as the amortisation schedule and shows how much of your repayment goes towards interest and the amount that goes towards paying off the principal.  With a P & I loan, most of your repayment will go towards paying interest at the beginning.  As the loan progresses, the amount paid off the principal will increase.

Interest only:  As the name suggests, an interest only loan provides a facility whereby the borrower only pays the lender the interest component owing.  These loans are available with various interest only period options and will revert to a P & I loan at the end of the interest only term.  Interest only loans have been a popular choice for investors and for home owners looking to reduce the repayments on their property.

Repayments

Lenders will usually offer the option to make repayments on a weekly, fortnightly or monthly basis.  Loan terms are usually 25 or 30 years.

Redraw facility

If you make loan repayments in addition to the minimum payable, you can access these surplus funds at a later date.  A redraw facility allows you to withdraw money that you’ve already contributed on your home loan.  A redraw provides the benefit of paying more off your home loan, and not locking away the extra repayments.

The interest rate on your home loan will be higher than the interest rate offered in a typical cash management account.  The interest saved on your home loan by making additional repayments over the term of the loan will be substantial, and the redraw may come in handy in the event of needing to access funds in an emergency.

NB. A redraw facility may include fees and restrictions on the amount and frequency of withdrawals you can make each year.

Offset account(s)

An offset account is a savings or transaction account which is linked to your home loan balance.  The balance held in your offset account will reduce the amount you owe on your mortgage, and can be up to 100% depending on the loan product.  With an offset facility, the interest payable on your home loan is reduced by the difference between your loan balance and the offset account balance.

Please contact us today for a confidential, cost and obligation free discussion about your lending needs. Please note that this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored mortgage broking or financial advice, please contact us today.

Read more articles in our Financial Literacy series. 

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What You Need To Know About Health Insurance

Health Insurance, it’s a divisive subject. Some people swear by it, others refuse to even consider it.  The reality is, it is an individual choice and needs to be treated like any other insurance. It’s important to review it regularly to ensure you are getting what you pay for and what you need.

Most children will be removed from the family policy when they turn 22. This age could differ, as each fund is different. Once removed from the family policy, they can usually elect to stay on extra premium or they can arrange their own policy.  It is important to discuss with them the advantages and disadvantages of having health insurance, what their financial commitments are and if it is worth them having a policy.

Taking out health insurance after the age you have turned 31 carries a financial penalty called the Lifetime Health Cover (LHC) loading.  For each year after your 31st birthday that you don’t have private hospital cover, it adds 2% to the base premium.  This will eventually be reduced when the hospital portion of your cover is held continuously for 10 years.  There are other circumstances that can affect the reduction of LHC loading on a premium and you can review these on the Government website for private health.

Many young families start out needing cover for a variety of services including pregnancy and obstetrics but as their family grows up it is important to review the policy and check for any services that can be removed from the policy, perhaps offering a reduction on the policy premium.  As your family grows your needs will change and the policy will need to change to reflect these new circumstances.

The other important thing to remember is private health insurance is not compulsory in Australia.  We are very lucky in this country that we have a public health system that supports all Australian citizens.  In an emergency situation, you will always end up in the nearest Public hospital being treated with the highest care possible regardless of if you have private health insurance or not.  For families, it is important to compare the cost of the policy with the extra tax you may be paying by not having a policy.  And when speaking with your children coming off your policy it is important to remember this too.  The lifetime health cover loading will not be passed on until after they turn 31.

Key points to remember; like any insurance policy review it regularly, check for inclusions and, more importantly, the exclusions to make sure they fit your family.  It is also worth looking at your income versus the extra you would pay in Medicare Levy Surcharge if you didn’t have a health insurance policy.

Please note, the above provides general advice and has not taken into account your personal or financial circumstances. If you would like more tailored insurance or financial advice, please contact us today. One of our advisers would be delighted to speak with you.

Read more articles in our Financial Literacy series. 

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What Is Life Insurance? When Do I Need It?

Life insurance has a special part to play at various points in your life. But first, what is life insurance?

There are 4 types of insurance; there’s Life (or death), Total and Permanent Disablement (TPD), Trauma and Income Protection (IP).

Life insurance pays a lump sum amount in the event of death or terminal illness.  The purpose of life cover is to pay down any debts, provide an income to your surviving spouse or children, contribute to future education expenses if you have children, and assist with funeral expenses.

TPD is payable in the event you become totally and permanently incapacitated due to sickness or injury, and it is unlikely that you will ever be able to return to work.  Again, this cover will provide a lump sum to reduce or extinguish debts, and provide an income to you and your family.  It may also help with home and car modifications following your disability and can assist with ongoing medical bills.

Trauma cover pays a lump sum should you be diagnosed with a serious medical condition, or if you suffer from an event covered under the contract. Trauma insurance covers a wide range of conditions such as heart attack, heart surgery, cancer, stroke and other neurological conditions, organ failure and various blood disorders. Benefits can assist with the costs of specialist treatment and medication which are not covered via Medicare or private health cover.

IP covers you if you suffer an injury or illness that leaves you unable to work for longer than your waiting period.  Income Protection typically provides a monthly payment whilst you are unable to work.  Your claim will continue until you are able to return to work, or you have reached the end of your benefit period.  IP ensures up to 75% of your taxable income and you may also be able to cover ongoing superannuation contributions under some contracts.

In your 20s

When you’re in your 20s you have your whole life at your feet. You may or may not be debt free, and may or may not have children. Regardless of these last two points, you have your whole life ahead of you! If something was to happen to you that left you unable to work for the rest of your life and you didn’t have insurance, you would be left having to rely on family or government support. TPD and IP are a must have for people in their 20s.

In your 30s

Your 30s is when the real ‘adulting’ starts. You may start to take on some more debt like a mortgage and may start to have children. Both of which are joyous life events, however, if your partner or family are not protected should something happen to you, they could be left in a very difficult position. Life, TPD, IP and Trauma are essential in protecting your family against the unexpected.

In your 40s

Once you’ve reached your 40s the kids could be in school and taking up all your spare time with after-school activities and you’re still working towards paying off your mortgage or perhaps looking at purchasing an investment property. Again you want to make sure your family is protected. Life, TPD, IP and Trauma are essential in making sure the family home is safe and the kids are able to continue their schooling in the way you intended.

In your 50s

In your 50s the kids are becoming more independent as they start entering the workforce, your mortgage is slowly decreasing and you can start focusing on your retirement. However, all of the hard work you’ve put in over the years to build up your retirement savings could come crashing down in an instant if you were to fall ill or suffer an injury. Whilst you may not need the levels of cover you required in your 30s and 40s, you should still have Life, TPD, IP and Trauma in your suite of protection.

In your 60s

By the time you’re in your 60s, you’d expect the kids to be self-sufficient and mortgage all but paid off. You’re looking into the future to a sunny and relaxing retirement within the next few years. This is when you can start tapering off all of your insurance. It is best to seek advice at this stage (and at all stages) to see what your needs are.

Regardless of where you fall in the above categories, everyone is different therefore having a trusty Risk Adviser to step you through the process will make a world of difference.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or insurance advice, please contact us today. One of our advisers would be delighted to speak with you.

Read more articles in our Financial Literacy series. 

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Superannuation Through Your Life

Superannuation is not something that you should ignore. It’s important that you engage with it throughout your working life.

First job

When you begin your first job, your employer is likely to direct your compulsory superannuation guarantee contributions into the fund that they use as a default. If you are a casual employee, over 18 and earning more than $450 per month before tax is taken out, it is compulsory for the employer to pay 9.5% of your ordinary salary into super.  The same applies if you are under 18 and work more than 30 hours in a week.

It’s a good idea to make sure that the employer is actually paying super for you when you meet these criteria – over 18, earning more than $450/month before tax or under 18 and working more than 30 hours in a week.

In your 20s, 30’s and 40’s

It’s still a long time before you can access this money, but remember that it is accumulating for your retirement and you should monitor what is happening.

Make sure that you have all your contributions going into the one fund – when you commence a new job you need to advise your employer of the details of your fund so that contributions continue to go into that one.  In most cases you will have a choice as to where your contributions are paid, but possibly not if you are a government or university employee.

Check your statement each year:

  • How much have you paid in administration and other fees?
  • What has the performance been and can you compare it to another fund to see if it is keeping up?
  • Is the chosen investment option still the right one for you?
  • Are you paying premiums for insurance?
  • Is the insurance sufficient or should you be adding other insurance possibly outside superannuation?

This period in your life is likely to be the most financially challenging – marriage, children, mortgages and your career. For women, there is often a lengthy period out of the workforce while raising children.

These things mean that you may not be able to add to your superannuation from your own resources and paying down your mortgage will be the highest priority, but you should attempt to allocate an extra amount to super from your salary each pay period.  Settle on a small amount that you really won’t miss to begin with, even if it is $10 each week.  As you age, try to increase this amount for example if you get a pay rise, add extra to your super contributions.  The most tax-effective way to contribute is via salary sacrifice – pre-tax salary, but you can also add from your own resources.

You might consider seeing a qualified professional to review your financial situation and to help you to reach your future goals.

In your 50’s and 60’s

By now, your financial situation should be a little easier. Perhaps the kids have finished uni and left home, your mortgage is well under control. Your super balance too will be looking healthy, and guess what, retirement isn’t so far away any more.

If you haven’t already consulted a qualified professional now is a good time to set some financial strategies in place so that your future needs can be met.

You might be thinking of some things you would like to do when you have more time and travel may be on top of the list.

Now is the time where you need to be contributing as much as you can spare and that you won’t be needing before you reach ‘preservation age’ – the age at which you can begin to draw from super. For most people that is age 60.

Using salary sacrifice now will be a strategy that will work well for you – part of your pre-tax salary is contributed to super, and your take-home pay and the tax you pay personally will be reduced. There are other strategies for higher income earners, perhaps with a non-working spouse.  These include spouse contributions and contribution splitting.

In retirement

Now you have retired and you are living off a pension drawn from superannuation. Once commenced, you must draw a minimum percentage from super each year – at 65 this is 5% of your balance, but you may need to draw a greater amount.

It is vital that you manage your super, or have it managed by a qualified professional, so that what you have will last you for at least your life expectancy.  A male at age 65 can expect another 18.5 years so, you will need to watch and plan your spending.  At the time of writing, a couple wanting to live a comfortable lifestyle will need about $60K per year. This means that you will need to have accumulated nearly $700K to meet this need – and that takes you to your life expectancy.

What happens if you live longer than your life expectancy? What happens if you need aged care?

These things mean that you will need to accumulate a greater amount of savings through your working life so that these needs in later life can be met comfortably and without placing stress on yourself or your family. Taking care of your superannuation through your working life will benefit you at the time that it is most needed.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

Read more articles in our Financial Literacy series. 

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All About Superannuation

Superannuation is simply money paid into a long-term savings and investment account to provide for your retirement in the future.  It was introduced in Australia in 1991 and it is compulsory for employers to pay 9.5% of your salary into your chosen superannuation account.

Your superannuation is referred to as being in ‘accumulation’ phase during your working lifetime – accumulating retirement benefits.  It is locked until you reach ‘preservation age’ – at the moment that is age 60, and you can begin drawing from it then under certain circumstances.

Employees mostly have a choice as to which fund their contributions are paid. Some government employees don’t have this choice as their contributions will be paid to the government fund.

When starting a new job, it is important that you provide your accumulation account details to your employer with a request to have contributions paid into that fund. If you do not nominate a fund, the employer will pay it to the fund that they use as default and over time and job changes, you will end up with multiple accounts.

This is not a good idea as you will be paying extra fees and you will likely also be paying insurance premiums in each of the funds.

When you join a fund, you have the option of selecting life, total and permanent disablement and/or income protection insurance as part of your membership. The fund will disclose the premiums that you will pay from the balance of your account. If you have multiple funds, you may be paying for more insurance than is needed, on top of the extra administration fees – these things all reduce the amount that is available when you retire.

Selecting some insurance is important, depending on your age and stage of life and you should seek some advice from a qualified person in this regard.

While your benefits are accumulating, your chosen fund manages the investment of your benefit, which is pooled with the benefits of many others.  You should select an investment option that you are comfortable with – your money is invested in shares, property and fixed interest and is therefore subject to stock market, interest rate and property market fluctuations. You need to be comfortable with the profile that you choose throughout any period of weakness in these markets.  If your profile is too aggressive or risky, you won’t sleep at night.  If you choose a profile that is too conservative, your benefit may experience much less growth over time and could fall short of what is needed.

It is a good idea to contribute a little extra to your accumulation account when you are in a position to do so. This can be part of your salary after you have paid tax on it, or it could be pre-tax salary.  Contributing pre-tax salary to superannuation is called ‘salary sacrifice’ or ‘personal deductible contributions’ and can assist with reducing how much tax you pay.  These pre-tax contributions will help higher income earners and are not really effective for those on lower rates.

After tax contributions don’t lower your personal tax and they need to be made from money that you don’t really need because you can’t touch it before age 60, but if you add $10 from every weekly pay from when you begin working, you will accumulate quite a large amount over your working life.

Even though superannuation money is not available to you for many years, you should always take an interest in it.  It is real money and it will really matter in later life when you have finished work. When you do stop working, you can commence drawing a pension – convert your accumulation account into ‘pension phase’. Once you get to here, you will be pleased that you have nurtured your account throughout your working life for this will be funding your retirement dreams.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

Read more articles in our Financial Literacy series. 

Read more