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Coal Coast Mag - Finance Facts... Your money questions answered

Shares or and investment property?

You own your home, your mortgage is relatively low and you have savings left over each month. Where should you direct your hard earned cashflow; an Investment property or a share portfolio? The truth is both have been well performing investment assets, therefore consideration should be given to both. You would however need to ask yourself the following question; which asset works best for me given my personal circumstance, plans and current financial position?

The two options have differing qualities; investment properties incur ongoing costs such as strata, rates and insurance, shares do not. You can’t sell just a bathroom, whereby shares can be sold individually.

You cannot spread your cash between multiple properties in varying locations, whereas share portfolios can be spread across a range of businesses in varying sectors. Property is tangible and relatable for most, shares are intangible and tricky to evaluate. You typically only need a 20% deposit to invest in property, where typically no borrowing is used to fund a share portfolio.

This is where property (in the major cities) holds a slight advantage, in the last 20 years borrowing to purchase an investment property has been a lucrative strategy, maximising the return on your 20% deposit because the investment property returns have exceeded the after tax cost to borrow. What is important is ensuring your situation is well diversified – the old adage of not having all your eggs in one basket holds true. Holding varying assets will leave you less exposed to a single economic event – like a property downturn or a poorly performing business sector, reducing the financial impact. 

Ultimately what drives which is the better choice depends on your situation, personal preference and ongoing needs. Here is where a trusted financial adviser steps in to assist.

How often should I look into changing lenders for my mortgage?

This is a common question that most Australian’s find themselves asking and for good reason. If correctly considered, refinancing can provide numerous benefits to borrowers such as lower interest rates, repayment savings, lower fees, improved debt structure, and access to equity. There is no magic formula or standard timeframe. So this being said; when should you look to refinance? 

Generally, anytime that a refinance will provide a benefit to your circumstances is an ideal time to refinance. The lending market is constantly changing with new products and rates being offered, which creates opportunities for clients. Typically, most Australian’s refinance every 4-5 years, with some savvy borrowers who chase the best deals, refinancing every 2-3 years.

It’s important to note that refinancing does involve costs, and these must be taken into account. Our team ensure a review is completed at least annually for clients, in these reviews we run the numbers on whether a refinance makes commercial sense, outweighing the cost to move. We scour the market place for alternate options and have a good gauge on any promotions on offer. These promotional offers can range from $1,000 to $3,500 and in most cases, leaving a little extra cash in your back pocket after the moving expense. 

The key takeaway is to monitor your loan closely and consult a mortgage broker – the service does not cost the borrower, will result in a better outcome and keeps the banks honest.

August 2019 e-newsletter

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Coal Coast Mag - How to stash your cash... Your money questions answered

Should you make it a priority to pay off my mortgage before everything?

The debate over the best place to stash your cash is one that is hotly contested, with most people claiming that the home mortgage is the be all and end all. Whilst there is some merit in this, it’s important to look at the big picture before switching on auto-pilot and directing all your hard earned savings onto your mortgage, without a second thought.

Generally when interest rates are high, your best bet is to reduce your mortgage as quickly as possible. You know how it works; the larger the balance and the longer you leave it, the more interest you repay the bank - but current market conditions have changed the game. Interest rates are at their lowest levels in decades freeing up cash flow which can be used for investment opportunities.

Take Josh and Jenna, they are both 40 years of age, employed and earn $90,000 and $75,000 respectively. Together they have a $600,000 home mortgage with an interest rate of 6.00% (conservative long term average rate). They have $750 and $500 per month in surplus cash flow (after minimum principal and interest repayments) and are funnelling this combined amount to make additional monthly repayments onto their mortgage.

Rather than directing their combined $1,250 per month to their mortgage, if they went with a different strategy and made salary-sacrifice contributions into Super via their employer, at age 65 Josh and Jenna would be $149,786 better off with an additional $708,193 contributed to Super which far outweighs the home loan saving of $563,406.

This scenario assumes a modest annual investment return of 7% pa and captures just how generous Superannuation tax breaks can be. Josh and Jenna will not pay income tax on the portion they salary sacrifice into Super but pay a super contributions tax of 15%.

This strategy becomes even more compelling if Josh and Jenna were to come into a higher income bracket and earn $150,000 each. In this case they would be approximately $210,494 better off collectively. However, this strategy becomes less beneficial the higher the interest rates rises. The break-even point in this scenario would be an interest rate of around the 8.5% pa mark which is a far cry from the 3 and 4-point-something mark we are seeing at the moment.

So why aren’t we all feverishly salary sacrificing every last cent into Super? Before you jump in there are a few things to consider to determine whether this strategy is the right one for you. 

Firstly, there are contribution rules to minimise the pre-tax income directed to Super, which depends on your age and your income level.

Secondly, for most, the security of having a fully paid off home generally provides peace of mind, whilst freeing up income for any big monthly repayments, bills and other expenses. Accessibility is also a big factor - once you direct the benefits into your Super fund you usually cannot access it until age 65.

It all comes down to your individual situation and personal preferences. You must factor in your age when making a decision and give thought to how important it is to preserve your cash, whilst weighing up how disciplined you are. By putting your long-term goals and objectives down and considering what is most important to you, the decision can be made a lot simpler.

In answering readers' questions the advice is of a general nature and is not a substitute for personal financial advice from an independent adviser.

May 2019 e-newsletter

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