Chasing yield in a low interest rate world

Low interest rates and unsettled sharemarkets make the chase for yield a challenging prospect. Yield is important, particularly for those approaching or already in the retirement phase as maintaining capital and enjoying a steady income stream are the two key factors to provide for comfort in the years ahead.

But how can you get a decent return when the cash rate is only 1.5% and the interest rate on many traditional fixed interest investments is not much better?

According to Canstar, fixed term deposits are offering an average of 2.69% for one year and 2.87% for five years.i While it is above the inflation rate of 1%, it’s still modest.ii

Of course, there are other conservative investments such as government bonds but even these offer only low returns. According to Bloomberg, 2-year government bonds have a yield of 1.59%, five-year 1.74% and 10-year 2.11%.iii

Corporate bonds

Corporate bonds generally offer better returns than government bonds, term deposits or cash because they carry a higher risk. With corporate bonds, you are lending money to a business in return for interest payments compared with shares where you become a part owner of the company. You can buy the bonds via a prospectus, but these days many are traded on the ASX.

You can currently get yields of around 2.75% for high quality, lower risk corporate bonds, however if you already have exposure to company shares on the market, then adding corporate bonds to your portfolio may reduce your level of diversification.

It is also worth considering investments such as hybrids, which have characteristics of bonds and shares, hence the name. You can currently get a yield of up to 6% in hybrid issues from household name companies including the major banks, ultilities, retailers and insurers.

As an alternative to selecting individual bond issues, a professionally-managed bond fund offers the opportunity to invest in a diversified portfolio of corporate and government bonds and cash.

Good returns from shares

Shares continue to be attractive for investors looking for regular income. The average dividend yield for listed companies is 4.2%; with capital growth, total returns are above 9%. In the latest reporting season some $24 billion was paid out in dividends from Australian listed shares.iv

One key advantage of shares is dividend imputation, where you may actually end up with a cash rebate on the tax that has already been paid by the company.

Stocks such as banks and telcos are often viewed as good sources of yield although concentrating your investments in one or two sectors reduces diversification and increases risk.

Similarly, focusing exclusively on yield may mean that your portfolio is not as diversified as it should be.

Property options

Residential investment property has featured as a major source of investment returns in recent years, but with house prices high and rents tightening the yield has been falling. Add to this the lumpiness of an investment in property – you can’t just sell the kitchen if you need quick cash – and property may carry increasing risk.

Commercial property may be a better option given that in the year to March the average annual return was 14%.v

As an alternative to direct property, listed Real Estate Investment Trusts (REITS) invest in a diversified property portfolio and can be bought and sold on the sharemarket. Since March they have performed quite strongly.v

The hunt for a decent yield in a low interest world is likely to be a feature of investment markets for some time. But your investments, and particularly those that constitute your retirement strategy, should be a long-term plan. Chopping and changing asset classes to try and get a good yield can prove costly.

Call us to discuss the best income-producing investments for your needs.

i www.canstar.com.au/term-deposits/the-current-term-deposit-environment/

ii www.tradingeconomics.com/australia/inflation-cpi

iii www.bloomberg.com/markets/rates-bonds/government-bonds/australia

iv www.commsec.com.au/content/dam/EN/ReportingSeason/August2016/ CommSec_Reporting_Season_August2016_Dividend-windfall-24billion-to-be-paid-out.pdf

v www.afr.com/real-estate/commercial/investment/commercial-property-the-top-investment- in-the-year-to-march-20160517-goxj63

Keeping score of your credit rating

In many ways, applying for a loan has never been easier. Interest rates are comparatively low and competition among lenders for new business is intense, so it can come as a shock when a loan application is turned down. The reason is often a bad personal credit score, but few people understand what that is, let alone how to improve it.

Having a good credit score can help you secure the best financial deals, but first you need to understand what your credit score is and what steps you can take to improve it.

What is a credit score?

Your credit score is based on information collected by credit reporting agencies and documented in your personal credit report. This information includes personal details such as your age and where you live, how much you’ve borrowed and who from, the number of credit applications you’ve made and any unpaid or overdue payments. These could relate to a bank loan, rent, mortgage or even an overdue phone bill.

Lenders and credit providers such as banks and credit unions use this information to work out how risky it is to lend you money.

How do you find your credit rating?

The good news is that you can get a copy of your credit file once a year for free as well as your credit score from online sites such as Creditsavvy, Equifax (previously called Veda) and Finder (which uses Equifax scores).

Depending on the credit reporting agency, you will receive a number out of 1000 or 1200 that’s broken down into five categories, from excellent to below average. If you fall into one of the lower categories, lenders may ask for more information or deny you credit.

It’s worth checking your credit file before you apply for a loan to make sure the information is accurate and that you haven’t been the victim of fraud or identity theft. If there are mistakes, credit providers and reporting agencies are legally obliged to investigate and correct them free of charge.

How to improve your credit score

You can increase your chances of being approved for a loan by understanding your score, correcting any errors and improving your creditworthiness with some simple actions.

  • Pay your bills on time.
    When you’re busy or on the move it’s easy to overlook an electricity bill or to forget a payment. One way to avoid this is to set up automatic payments.
  • Lower your credit card limits.
    You may think having a high credit card limit is a mark of success, but it can count against you. Lenders consider your credit limit as a liability even if you never use the full amount and pay your balance in full every month.
  • Consolidate your debt.
    By consolidating several personal loans or credit cards into one it can make it easier to keep track of repayments and save on fees and interest.
  • Avoid making multiple credit enquiries.
    Making lots of enquiries in a short space of time has a whiff of desperation about it and can lower your credit score. Do your homework, only consider a new loan or credit card when you need it and then apply for the options most suited to your needs.
  • Notify your credit providers if your circumstances change.
    If you move be sure to notify your bank, other lenders and utilities so your bills will be redirected and you won’t inadvertently miss a payment. The same goes if you change financial institutions – you need to contact loan providers to switch over automatic payments.

If you are about to start house-hunting or see an attractive investment, then timely access to credit is critical. Knowing your credit score and improving it if necessary can not only speed up your loan approval but also help you negotiate the most competitive rates.

If you would like to discuss ways to tackle debt and get your finances in shape, give us a call on 03 5434 7690.

Gearing up for growth

Record low interest rates are making it harder for your money to keep pace with the rate of inflation. While it may be a struggle to grow your wealth in such an environment, low interest rates do mean that it is cheaper to borrow.

So why not take advantage of this opportunity by borrowing money to invest in growth assets such as shares or property? Gearing (borrowing) can be a great way to fast-track wealth creation although it must be remembered that it is a double-edged sword. While using borrowed money magnifies profits, it also magnifies losses. However, by borrowing sensibly and cautiously, and investing in quality assets, the benefits can outweigh the risks.

As well as boosting your returns, there are also tax advantages because you can offset interest paid on your loan against your income.

What are your options?

There are a number of ways you can borrow to invest including home equity loans, margin lending, warrants and internally geared managed funds. Each has its pros and cons so it is wise to get professional advice.

Home equity loans

As the name implies, home equity loans let you borrow against the equity you have built up in your home by using a redraw facility or an additional line of credit.

This method of borrowing is relatively cheap to service as you are only paying mortgage rates of interest. The downside is that you put up your home as collateral.

Margin loans

The second method is via a margin loan where you typically borrow somewhere between 30 to 50% of the value of an asset. The lender will stipulate the maximum you can borrow, called the loan to value ratio (LVR).

If markets fall, your LVR will rise and if it rises above a certain level you have to pay extra money to rebalance your borrowing. This is called a margin call and may be requested at short notice, forcing you to sell some of the investment quickly (and at a bad time) to meet the call.

Warrants add leverage

Warrants, which are traded on the Australian Securities Exchange, give you exposure to an underlying asset for a portion of the price without the need for margin calls.

As a result, a warrant gives you leverage which means small changes in the value of the underlying asset result in larger changes in the value of the warrant. This magnifies gains and losses.

There are many types of warrants, each offering a different level of risk and leverage. Warrants can be on individual shares or on exchange traded funds which offer greater diversification.

The maximum you can lose is the amount you paid for the warrant. As the borrowing is non-recourse, you can walk away and only be liable for the loan.

Gearing made simple

The simplest alternative is to let a professional handle the borrowing for you with an internally-geared managed fund. The advantage here is that you don’t need to take out a loan yourself, risk your home as collateral or face a margin call.

Such funds are for investors seeking capital growth rather than income and should be viewed as a long-term investment as the funds are generally more volatile than the share market in the short term.

You can also gear up your self managed super fund with a limited recourse loan. The rules are complex so it is vital that you receive the right advice to make sure you comply with superannuation laws.

You can turn today’s low interest rates into tomorrow’s gains. If you would like more information or assistance in deciding the best borrowing strategy for your personal situation, such as refinancing your home loan while the interest rates are low, please give us a call on 03 5434 7690.

Homing in on retirement

Pick an Australian, any Australian, and chances are they dream of buying a home or upgrading the one they already own. There’s the emotional satisfaction of knowing you own the roof over your head, the freedom to rip up carpets and keep a pet, and the stability it offers as you raise a family. But home ownership also has a role to play in retirement planning.

For most of us, the long-term goal is to retire with a home fully paid for and enough investments both inside and outside superannuation to support a comfortable lifestyle. What is less well understood is that the better you manage your mortgage and other debts along the way, the more money you will have for income-producing investments to fund your dream retirement.

Spending too much on renovations or buying in the wrong location are common mistakes that may potentially reduce your retirement income. Moving is costly and if a renovation doesn’t add value then it is money that can’t be recouped if you decide to downsize later in life.

The right loan
The loan you choose can also make a big difference to your retirement nest egg. Interest rates may be at historic lows, but there are big difference in the rates available from different lenders so it pays to shop around. If you already have a mortgage, ask your lender for a better deal. More often than not they will reduce your interest rate to keep your business, which saves you the cost of refinancing.

It also pays to think about the type of loan you choose. While interest-only loans often make sense for investors, they can be an expensive choice for owner-occupiers even though on the face of it they appear more affordable.

The catch with this type of loan is that without any repayment of the loan principal, interest-only borrowers are continually paying interest on the full amount of the loan.

The Australian Securities and Investments Commission (ASIC) recently crunched the numbers and found that on a $500,000 loan at 6 per cent, making interest-only payments for just five years can add $37,000 to the long-term cost of the loan.

Once again, that money could be earning compound interest in super and bankroll some memorable travel experiences in retirement.

Tax efficiency
Tax also has a role to play when it comes to managing your housing debt for the best retirement outcome. While your family home is generally exempt from capital gains tax, the favourable tax treatment of the family home does not extend to your home loan.

Unlike investment loans, your mortgage is not tax deductible so paying down the mortgage and freeing up money for investment is an important step in your retirement planning. However, the best place for your surplus cash may depend to some extent on your marginal tax rate.

For people on high marginal tax rates, salary sacrificing into super may be more effective than paying down debt. That’s because pre-tax contributions are generally taxed at just 15 per cent rather than your marginal rate. This strategy is even more effective when investment returns are higher than home loan interest rates.

For people in lower tax brackets it is generally preferable to pay down debt first and reduce interest costs.

Home and hosed
The closer you get to retirement the more important it is to be debt free, especially if your resources are limited.

Unless you rent out a room or enter into a reverse mortgage – a product that has never really taken off in Australia – your home won’t produce any income in retirement. So a balance needs to be struck between the amount of money you sink into your home and the amount you direct into income-producing investments.

If you would like to take a more holistic approach to your retirement planning, including the role of your family home, give us a call.

first home loan buyer scheme

First Home Loan Deposit Scheme is nearly here – all you need to know

What is the First Home Loan Deposit Scheme?

The Australian Government has introduced a First Home Loan Deposit Scheme (FHLDS) to support eligible first home buyers purchase a home sooner. It does this by providing a guarantee that allows eligible first home buyers on low and middle incomes to purchase a home with a deposit of as little as 5%.

The FHLDS supports up to 10,000 first home loan guarantees each financial year. Eligible borrowers can use the guarantee in conjunction with other government programs like the First Home Super Saver Scheme, state and territory First Home Owner Grants and stamp duty concessions.

The guarantee is not a cash payment.

When does the First Home Loan Deposit Scheme start?

The First Home Loan Deposit Scheme commenced on 1 January 2020. Applications for the Scheme are now open.

What type of property can be bought under the Scheme?

  • An existing house, townhouse or apartment
  • A house and land package
  • Land together with a separate contract to build a home
  • An off-the-plan apartment or townhouse.

Who is eligible for the Scheme?

  • Australian citizens who are at least 18 years of age. Permanent residents are not eligible.
  • Singles with a taxable income of up to $125,000 per annum and couples with a taxable income of up to $200,000 per annum. Incomes will be assessed for the financial year preceding the financial year in which the loan is entered into.
  • Couples are only eligible for the scheme if they are married or in a de-facto relationship. Other persons buying together, including siblings, parent/child or friends, are not eligible for the Scheme.
  • Applicants must have a deposit of between 5 and 20% of the property’s value.
  • Loans under the Scheme require scheduled repayments of the principal of the loan for the full period of the agreement. If the loan relates both to the purchase of vacant land to the construction of a house on the land, the loan may be an eligible loan even if the terms of the loan agreement permit interest-only repayments for a specified period.
  • Applicants must intend to move into and live in the property as their principal place of residence (i.e. they must be owner occupiers).
  • Applicants must be first home buyers who have not previously owned or had an interest in a residential property either separately or jointly with someone else (this includes residential strata and company title properties, regardless of whether it was an investment or owner-occupied property and whether it was ever lived in).

Do property price thresholds apply?

Yes, the purpose of the Scheme is to help in the purchase of a modest home and the value of the residential property must not exceed the price cap for the area in which the property is located. The price caps for capital cities, large regional centres and regional areas are:

The capital city price thresholds apply to regional centres with a population over 250,000 (the Gold Coast, Newcastle and Lake Macquarie, the Sunshine Coast, Illawarra (Wollongong) and Geelong), recognising that dwellings in regional centres tend to be significantly more expensive than other regional areas.

Find your suburb or postcode on the property price threshold: www.nhfic.gov.au/what-we-do/fhlds/eligibility/

How do you apply?

Applications for the Scheme are now open however numbers are limited – The first wave of 3,000 scheme places have already been allocated since the scheme started 1 January. The second wave of 7,000 for this financial year will be available from 1 February 2020 when potential applicants will have a panel of 27 lenders to choose from.

NHFIC will not accept applications directly. Endeavor Finance can guide you through the whole home loan process, and work with your chosen participating lender to lodge an application on your behalf. If you would like to make the most of this scheme give us a call to get you ready. Call 03 5434 7690 or email endeavor@endeavorbendigo.com.au

 

This article was originally published by The National Housing Finance and Investment Corporation (NHFIC).

Finance brokers make the difference as banks tighten up

Access to finance has become difficult and time consuming, leading to a surge of enquiry to finance brokers, who are able to get a positive result efficiently by having market knowledge and access to dozens of institutions.

While major Australian banks are expected to face further scrutiny on their lending practices as a result of the Royal Commission, many smaller finance providers – who are far less impacted – have embraced the opportunity and are now growing their market share.

Non-bank housing credit has risen by approximately 13% over the past 12 months, compared to growth of just 4.8% for the big four Banks.

Growth in loans to housing investors has dramatically decreased with the big four banks too, jointly by the impact of the Royal Commission, but also due to the Australian Prudential Regulation Authority (APRA) placing a cap on interest-only lending, a favoured product for investors.

These policies do not apply to the entire market, leading to a sharp rise in interest-only investment home loan issuance among non-bank lenders who are able to offer the product and also at comparatively cheaper rates.

Obtaining finance will remain difficult for some time still, however the banking marketplace is large and knowing where to go for your particular circumstance is vital.

Endeavor Finance is available to help with a range of finance options. Whether you have been turned away by a bank or want to assess your options, they can assist. Call today to discuss what you need. 03 5434 7690.

What are white label loans and why you should consider one

White label loans are essentially a home-branded loan, much like the home-branded products you see in the supermarket. Like these products, white label loans aim to deliver many of the same great features as bank branded home loans, but for a lower cost. Read more

Annual living expenses calculator

Opportunities in the cooling property market

Things are looking up for first home buyers for the first time in years as house price growth begins to slow across the country. Read more

Tax and the family home

Australians love property and for the property owners among us, it’s been a nice feeling watching market values rise. It’s worth remembering though, the tax man could want a share if you sell.

Unless the property is your primary residence, you could find capital gains tax (CGT) taking a cut of your profits. CGT applies to investment properties, holiday homes and even vacant land.

What is CGT?

CGT is added to your tax bill in the financial year in which you sell an asset. It’s not a separate tax, but is part of normal income tax and is applied at your marginal rate in that particular tax year.  The tax applies to any increase in the value of an asset between the time you buy and sell it. Although most personal assets are exempt from CGT, many property assets are liable.

Calculating the cost

If a property is liable for CGT, the capital gain is determined by subtracting its ‘cost base’ from the sale price. The cost base is calculated as follows:

If you own the property for over 12 months, you receive a 50% discount on the amount payable.

An important factor to consider is the date of your property purchase, as assets bought before 20 September 1985 are usually exempt from CGT when they are sold.

CGT and the family home

When it comes to your ‘main residence’, CGT is generally not payable providing the home has not been used to produce assessable income (such as running a business or renting it out) and if the land is two hectares or less.

If you live in the residence but then choose to rent it out, you may be required to pay CGT on the periods when you were not the occupant. CGT is also payable if a family home is owned by a company or trust, or if the owner ceases being an Australian resident.

The ATO does not clearly define ‘main residence’, but it bases its assessment on a number of factors. For example, it looks at whether you and your family live in the dwelling and have your personal belongings there, if your mail is delivered there, whether you are registered to vote at the property’s address, or if you have phone, gas and electricity connected.

For your family home to remain exempt from CGT, you can only have one main residence at any time, unless you are in the process of selling your old home and buying a new one.

When this happens you are permitted a six month period where you can own two homes, but the second property must become your new main residence. You must also have lived in your original home for at least three continuous months in the year before you sell, and it must not have been used to produce assessable income during that period.

If you purchased your home after 20 August 1996, to be entitled to a full exemption you must have lived in the house when it was first bought and not have rented it out prior to moving in. Otherwise, the ATO will consider you bought it purely as an investment to produce income.

The 6-year rule

Even if you do move out of your family home and choose to rent it, you could still be exempt from CGT under the Temporary Absence Rule. Under this rule you can leave for up to six years, rent it out and not be liable for CGT. However, you must move back in for three months prior to selling.

If you leave your home but do not rent it out, you can claim a CGT exemption for an indefinite period.

When you buy another property and move in, you can elect to keep your original home as your main residence, but your new dwelling will be subject to CGT.

Inheritance and tax

Generally, CGT does not apply if you inherit a main residence and the property is sold less than two years after the owner dies. In some cases, it’s possible to apply to the ATO for an extension to this two-year period.

Take the example of Penny. As an only child, Penny inherited sole ownership of her mother, Shirley’s home when she died.

Shirley had lived in the house with her husband for the entire period since they first bought it in 1950.

Although she loves the home, Penny plans to sell the vacant property as she already owns a house closer to her work. If she sells within two years of Shirley’s death, any profit from the sale will be exempt from CGT. If she fails to sell within two years, Penny could be liable for CGT on the increase in the property’s value from the time of her mother’s death.

CGT is a complex area of taxation law and is dependent on your individual circumstances. If you have any questions about how CGT applies to your family home or assets, please call our office to discuss your situation on 03 5434 7690.