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October 2016 e-newsletter

Creating your future, retirement outcomes aside from superannuation & a guideline to guardianship  - welcome to our October monthly e-newsletter

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We protect our cars and our houses, but why not our Income?

We protect our cars and our houses, but why not our Income?

Insurance for something you can’t see or touch, such as your income, may seem strange. But how would you pay your mortgage if you were unable to work due to sickness or injury?

When considering insurance, it’s common for people to pass it off as another added fee involved in owning a car, running a business or protecting a house against damage. Income insurance, on first glance, can seem like another costly precaution that’s unlikely to prove useful.

But when you think about how your income facilitates your lifestyle, it’s often at the top of the list in regards to things that you can’t afford to lose. Cars and houses can be replaced, but losing an income, perhaps for life, could see both lost.

Income protection insurance covers salary loss due to injury or sickness. Unlike workers compensation, it applies to injury or sickness at any place or time. And, unlike government allowances, it pays in accordance to your earning capacity.

If someone is injured under worker’s compensation, for the first few weeks they receive a higher rate, but then it drops. Therefore, people’s standard way of living is sacrificed if they depend on this form of protection.

Income protection policies vary in regards to their terms and conditions, but they usually offer 75 per cent of gross wages for a maximum time period. It’s a form of insurance that is particularly important for people who have regular repayments to make against loans.

The most important reason for income protection is when a person has a strong reliance on an income. When you have someone with ongoing financial responsibilities, like a family or a mortgage, that’s the most important time for income protection.

Having a majority of your current income insured against the possibility of being away from work helps you avoid defaulting on mortgage payments, personal loans or credit cards.

Holding adequate insurance can be the difference between remaining on track to meet any lifestyle or financial goals you have set following illness or accident, or being forced to dramatically change your lifestyle due to an inability to meet your financial obligations.

Most people these days have enough stress In their day to day lives. Income protection gives that little bit of extra peace of mind. It works when you can’t work. Considering how you will pay your mortgage if you were away from work for a period is essential, and we can work with you to help you find the right insurance to help ensure you are suitably protected. Get in touch with the team at The Wealth Connection to discuss your requirements.

September 2016 e-newsletter

50 powerful rules to ramp up your business game, views on the recent reporting season & More - welcome to our September e-newsletter

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Do you need a Finance Broker or a Financial Adviser?

Do you need a Finance Broker or a Financial Adviser?

When taking the plunge into the world of home loans and property investment, the challenge often lies in knowing which expert to approach for help. Brokers and Financial Advisers, although similar in our professional outlooks, cater to different financial endeavours.

 

Brokers that deal in home loans must be qualified and licensed loan advisers with in-depth knowledge of home loans and options suitable for a range of different financial situations. They negotiate with lenders to arrange loans and help manage the process through to settlement.

When it comes to talking about a client’s debt structure or interest rates, or the best way to set up a loan, it’s really something that needs to be done by a mortgage Broker who is qualified to give credit advice.

In contrast, Financial Advisers assist with anticipating and managing longstanding financial outlook. They help sort through and select options for investment and insurance, with attention paid to retirement planning, estate planning and investment analysis.

Planners take care of more of the long-term, wealth-creation strategy, as well as super and life insurance, and other sorts of wealth protection insurances. A Financial Adviser’s work is wide-reaching and important to your long-term financial health and stability. Options relating to loans and refinancing can only be recommended by qualified Brokers.

There are some situations where it would be best to include both types of financial professional. For instance, if your Broker is helping you refinance your loans in order to undertake a financial investment, a Financial Adviser can step in to help you to assess the best investment option for you.

There is rarely a time when we deal with a client on the loan side of things, where we’re not thinking about how it fits with what the Financial Adviser is talking about.

In terms of whether the client’s choice is a viable investment strategy or whether it fits in with their long-term wealth goals, that’s something that we absolutely have to refer back to our advice team to make sure that it fits in with their broader plan.

The answer? It depends on your situation - for loans, see a Broker, for investment advice, a Financial Adviser. Of course, it’s best to involve both for a holistic approach to any investment decision.

What is a pre-approval exactly?

What is a pre-approval exactly?

For those getting ready to stride into the world of home ownership, the uncertainties of pre-approval can cast a shadow of doubt over an otherwise exciting time. When is it necessary? How long does it last? And what does it involve, exactly?

Pre-approval is a lender’s assessment of your likelihood of being approved for an otherwise suitable loan. The appraisal is made on the basis of your ability to service a loan by looking into your living expenses and liabilities, your credit history, your employment circumstances and how often you have moved home or employment in the recent past.

 

As it is performed prior to a property being found and chosen, it does not take into account the particulars of a specific property and valuation, which is why uncertainties can arise.

Pre-approval is helpful for those who want to know how much they can borrow before attending open homes, and can be reassuring for new borrowers.

“When someone gets pre-approval they can start looking at properties knowing how much they can borrow. They know what their price range is,” explains Homeloans Ltd Senior BDM Rodney Cottam. “People take comfort in knowing that a lender has looked at their application to make sure it meets policy.”

Pre-approvals are usually valid for up to 90 days but, depending on the lender, may be renewed to allow more time to find a property.

It is very important to note that a pre-approval is not a guaranteed loan. It is your potential lender’s way of signalling how much they expect to lend you. This may change on your official application.

“Policies are changing day-to-day, week-to-week at the moment,” Cottam says. “For anybody with a conditional approval, it’s a good idea to speak to their broker to find out if any policies have changed.”

Another thing that may cause a lender to decline your loan application after pre-approval is a change to your pre-approval circumstances.

“We need to make sure the applicant has not gone and got another credit card or car lease, or any other debt that may affect their income and serviceability,” Cottam says.

Your pre-approval will also usually be conditional on a property valuation. If your lender does not deem the property a marketable asset, they may not approve a loan.

“We want to check that it is a readily saleable property. That’s the biggest thing. To make sure the actual security itself is acceptable,” says Cottam.

Potential lenders need to be wary of the changes that can affect their ability to take out a loan, regardless of pre-approval figures, to ensure they don’t overcommit without a guaranteed source of funding.

Pre-approval is not a guarantee, but is a very useful tool for anyone looking for a property. Speak to us at the Wealth Connection about pre-approval before you lock in your Saturday open home schedule.

Why to Refinance

Why to Refinance

Here's a great example of why refinancing your loan is a must in the current marketplace…

Today we received confirmation from the bank that a refinance for a client had been approved saving the client $4,000 in the first year - ($333 per month), and approximately $120,000 over the course of their loan. This client came to us after reading about the RBA dropping the cash rate, and were wondering how this would affect their situation.

This couple, like a lot of others, had borrowed up to their capacity in order to get into the market place. Their current repayments were a stretch, and with expenses mounting, any saving would be well and truly welcomed. The clients had borrowed $700,000 and were on a rate with their bank of 4.89%. Our loan specialist scoured the market for the best rate possible - with features that would benefit the client, and took care of the refinance from Bank A to Bank B, ensuring a seamless transition.

We believe everyone should have a debt health check to ensure you're getting the most competitive rate in the market place - in this instance it doesn't pay to remain loyal to one bank. We have seen time and time again the savings that can be made by simply going through this exercise. And best of all, this service doesn't cost you a cent.

Where Is The Best Place To Stash Your Cash?

Where Is The Best Place To Stash Your Cash?

 The debate over the best place to stash your cash is one that is hotly contested, with most people claiming that investing in Superannuation comes secondary to paying off your mortgage. 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 dramatically. Interest rates are now at their lowest levels in decades freeing up cash flow which can be used for investment opportunities.

 

Take Josh and Jenna, they are both 35 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 utilised a different strategy and made salary-sacrifice contributions into Super, 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 4-point-something mark we are seeing at the moment for long term fixed rates.

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. There is also an after tax income superannuation contribution cap.

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 -unless you are entitled under a hardship provision, which usually only gives you access to a certain amount. 

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. It’s best to seek financial advice from a professional before you proceed and that’s where The Wealth Connection can assist. By sitting down and having an obligation-free chat we can ensure you're heading in the right direction, with the strategy that best suits your life and circumstance. 

General Information warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. 

Is Your Debt Good For You?

Is Your Debt Good For You?

The home loan market is in a state of unprecedented change. While the RBA has slashed interest rates to historical lows, the property market is booming, and banks are going head to head in a struggle for market share. This has brewed the perfect storm for borrowers, but first you need to ensure that your debt is right and working best for you. 

People everywhere are taking advantage of a lower interest rate environment, and benefiting from the heavy discounting available in the market. Aside the obvious interest rate savings; there are also numerous other potential benefits that you could be taking advantage of. Make sure your debt is good for you – we can show you how.

Lower your interest rate

Lowering your interest rate can put money back into your pocket, loosening the belt on your household budget, and allowing you to enjoy the finer things in life.

The average rate on an outstanding mortgage at the beginning of 2014 was just under 6% according to the Australian Bureau of Statistics. With a falling cash rate and a competitive interest rate market, lender’s today are offering rates well below 5%, and fixed rates in the low 4%’s. A rate savings of 0.5% on a $500k loan equates to $2500 per year – that’s $75,000 over 30 years with the right loan. As long as you suitably consider moving costs, associated monthly charges, and other pitfalls, refinancing could save you thousands.

More often than not home owners will continue to pay the same contracted mortgage repayment as the day they were handed the keys to their home, without delay, change or question. It‘s an unfortunate reality that these loyal clients are often subject to higher interest rates which have come off the back of introductory terms, or simply stuck unawares in obsolete packages and are not privy to cuts in the standard variable rate. Promotional discounts are instead offered to new bank clients and are often not available to their current customer base. You’ll only know if you ask. At The Wealth Connection, we’ve been able to beat 8 out of 10 home loan rates we’ve come across. Do yourself a service and check your debt. 

Get your structure right

Loan structure is often overlooked, but is vitally important in making your debt work for you. Interest on an investment property is generally tax deductible, so you should avoid mixing your home loan with your investment loan. As such, you’d look to pay down your home loan as quickly as possible whilst maximising tax deductions on your investment loan. Likewise, you would look to structure the majority of debt and house ownership in the higher income earners name, all of which should be considered in a comprehensive investment strategy.

There are numerous features that lender’s will offer to facilitate whichever strategy you choose and help accelerate the repayment of your ‘non-tax deductible’ debt, whilst preserving any negative gearing benefits to your investment debt. As a general rule of thumb, home loans should be on principal and interest terms whilst investment loans should be on interest only. Similarly, choosing a fixed rate or a variable rate will depend on your circumstances, and should be considered carefully. Variable rates give you flexibility and access to many loan features, but are often priced higher than fixed loans, which are more rigid in nature. Another option is to split between the two to diversify your holdings and sometimes access even further rate discounts.

You might also benefit from 100% offset facilities, free redraw and accessible Internet banking features but again, these features should be weighed up with consideration to all of the above.

Good debt vs. Bad debt

Many of us have called the bank for assistance in buying that new car, paying for a wedding, or footing the bill for a much-needed holiday. The result can leave us with an expensive personal loan or credit card bill that never seems to go away.

Debt consolidation is the process of folding high interest debts into one low rate, usually your home loan. Although it won’t just disappear and you’ll have to pay it off one way or another, it means you have just one set of paperwork to manage, one loan to pay off and can take advantage of significant savings. The interest rate on a home loan is usually far lower than the rate on other types of credit. This lets you save on interest charges and helps you pay off the debt sooner. It can however turn short-term debt into a long-term expense so make sure you try to pay it off as soon as possible. 

Your Equity

Equity is the amount of money in your home that you actually own. It can be calculated as the difference between your home’s value and the balance of your loan. So, if you home is worth $700k and you have $400k in debt, you have $300k in equity available. That money could be used to build your wealth with the right investment strategy. 

Did you know that you can unlock your equity to not only purchase another investment property if you wish, but also diversify to invest in shares, managed funds or other investment options. Using borrowed money is a strategy that can provide significant benefits but also carries risk, so it’s important to obtain professional advice before making the call.

Debt holding is one aspect of your financial strategy that should be closely considered, and can be a significant player in any wealth creation strategy. You just need to ensure your debt is competitive and structured right. Get in touch for a free health check, and determine if your debt is indeed good for you. The coffee is on us.

General Information warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.