To fix or not to fix

To fix or not to fix

The variable versus fixed mortgage rate decision will affect a homeowner for years to come and could be the difference in thousands of dollars of accrued interest. 

At its May meeting, the Reserve Bank of Australia acted to curb soaring inflation by raising the official cash rate by 0.25%. With Governor Lowe warning that this is expected to be the first of many rate hikes over the next 12-18 months, many are wondering if they should fix their home loan to safeguard against rising rates. The right answer depends on your unique situation and tolerance for risk. 

Let’s start by looking at the advantages and disadvantages of each.

Variable rate loans

Advantages
  • The main advantage is flexibility.
  • Unlimited extra repayments which will help you pay your loan off sooner.
  • It takes advantage when interest rates are decreasing by lowering interest repayments.
  • Allows you to refinance or restructure your loan at any time, for example, by accessing excess equity for renovations.
  • Variable home loans generally come with more features such as a redraw facility or offset account.
Disadvantages
  • When interest rates rise, so too do your repayments.
  • As interest rates can change at any stage you lack a level of certainty over what your repayments will be in the future. This can make detailed budgeting quite challenging.

Fixed rate loans

Advantages
  • The main advantage is payment certainty, allowing you to budget your repayments for the foreseeable future. This leads to a greater sense of financial security.
  • Your interest repayments will be lower if, during the term, the variable rises above the fixed rate.
Disadvantages
  • Most fixed rates limit extra repayments to around $5,000 per year therefore if you benefit from a lump sum of cash, like an inheritance or bonus, you cannot place this directly onto the loan without penalty.
  • You do not benefit when interest rates go down during the term of the fixed loan.
  • There are penalties for breaking a fixed rate before maturity which makes restructuring or refinancing to another lender much more expensive. These penalties also apply if you sell your property within the fixed rate term.
  • Fixed rates generally do not come with additional features such as a redraw facility or an offset account.

As you can see, there is a lot more to consider than simply a bet on where interest rates are heading.

After considering these characteristics, if the certainty of fixed rate repayments is still appealing you should then consider whether you will likely be better off with the fixed rates on offer.

A common misconception is that if the variable interest rate rises higher than the fixed rate over the term of the loan then you will pay less interest. Of course, there are periods during the term when the variable rate will be lower so you must instead consider the average rate over the term. Take an example where a rate was fixed 1% above the current variable rate for a period of 2 years. After 1 year the variable rate had steadily risen to meet the fixed. To break even, the variable would need to continue to rise another 1% (approx.) over the final year of the term. When calculating the exact breakeven point, you must also consider the timing of the rate rises and that the loan balance may steadily decrease over the term.

The calculations in the table above are based on a 30 year $800,000 loan with monthly principal and interest repayments.

Hedge your bets

Often borrowers are drawn towards the certainty of fixed repayments but do not want the additional payment restrictions that come with it. By splitting the loan, you can essentially enjoy the benefits of both. To calculate the variable split, you should consider how many extra repayments you are likely to make over the term of the fixed rate as well as how much your balance will reduce by your regular payments. A good mortgage broker can help you with this calculation. You may also consider an even split if you are undecided which rate will work best for you.

 

If you’d like to discuss your specific circumstances, or simply interested in what fixed rates are available, please do get in touch.

4 new super contribution opportunities

4 new super contribution opportunities

For older Australians, it has been more difficult to build up their superannuation balances. Once you are 67 years of age, there is a requirement to meet a ‘work test’ in order to continue to contribute. This work test forced you to work 40 hours over 30 consecutive days in order for you to make a lump sum contribution (known as a non-concessional contribution) of up to $110,000.

With these restrictions, it was important to carefully plan your superannuation strategy from a younger age.

However, the Federal Government sought to amend these restrictions.

May 2021 Federal Budget

In the May 2021 Federal Budget, the government announced a number of initiatives to assist Australians in building up their superannuation.

These included:

  • Removal of $450 monthly income threshold for super contributions.
  • Reduction in age to 60 for the downsizer contributions.
  • Removal of the work test for people aged 67-74.

It also increased the withdrawal limit for First Home Super Saver Scheme (FHSS).

Legislation has now passed both houses of parliament and will apply form 1 July 2022.

4 new super contribution opportunities

Removal of $450 monthly income threshold

The government has finally scrapped the $450 superannuation guarantee threshold. This should make approximately 300,000 people eligible for super contributions from 1 July 2022.

Lower Age for ‘Downsizer’ contributions

In selling the family home, couples have the ability to contribute $300,000 each into superannuation as a personal contribution. The age for this contribution was 65, however, it has been lowered to 60. As of May 2021, 22,000 Australians have taken advantage of this opportunity to boost their retirement balances. It should also be noted that these contributions are not restricted by the $1.7m transfer balance cap.

The lowering of age to 60 will come into effect from 1 July 2022.

First Home Super Save increased capacity

This is a great opportunity for couples who are saving for their first home. This scheme allows people to make voluntary contributions to superannuation to save for this purchase. The current caps on these contributions are $15,000 a year and $30,000 in total.

However, it has been passed to allow voluntary contributions (both post tax or through salary sacrifice) up to $50,000 in total.

So a couple will have access to $100,000. It’s important to remember compulsory employer contributions are excluded. Only voluntary contributions may be withdrawn.

This will commence from 1 July 2022.

Removal of work test for 67-74 year olds

The most significant superannuation opportunity announced in the May 2021 Federal Budget was to allow 67-74 year olds to make a personal contribution to superannuation without meeting the current work test. This has now been passed and will come into affect on 1 July 2022.

However, not only will older Australians be able to make a personal contribution of $110,000 pa, but they will also be able to take advantage of the bring forward rule and contribute $330,000 as a lump sum.

Headwinds for Australian shares

Headwinds for Australian shares

The eighteen months from the end of March 2020 to September 2021 will go down as one of the most astonishing periods for the Australian share market. The ASX200 Accumulation Index jumped more than 50 per cent, taking pretty much everyone by surprise after expectations had been hammered by the wholesale closure of the global economy.

The 2021 financial year saw Australian companies report 27 per cent earnings growth, the best in more than 30 years, albeit bouncing off a low prior year comparison. After companies slashed dividends the previous year, cash holdings surged to a record $211 billion and dividends bounced back ferociously, almost doubling year over year.

Record iron ore prices underwrote spectacular dividends from the big miners; banks were awash in capital with a surging housing market and record low funding costs, and retailers reported record years as households spent up on tech and home improvements. There’s no question, the last 18 months have been very good to Australian share investors.

However, investors should be wary of presuming the Australian economy will continue to show the same resilience. There are at least three identifiable headwinds that warrant keeping a careful eye on.

The first, and by far the most influential, is the dramatic reduction in federal government support for the economy, particularly while the two most populous states have been hobbled by lockdowns.

In 2020, federal government programs such as JobKeeper and the JobSeeker supplement saw the injection of $251 billion into the economy. By contrast, between 1 June to 23 August of this year, Deloitte Access Economics calculated it injected just $3 billion.

JobKeeper alone injected an average of $1.7 billion per week and peaked at $2.5 billion. As of 23 August, the new federal COVID Disaster Payment was averaging only $217 million per week. Many businesses and workers will receive a fraction of the financial support they got last year, if they get any.

Household savings are still much higher than pre-COVID levels at almost 10 per cent, and there is every chance there will be a surge of spending when lockdowns finally end, but it’s unlikely to be the spending spree we saw last financial year and understandably much of it may be spent on doing things, rather than buying more stuff.

A second headwind might come from the red-hot housing sector. One of Australia’s highest rated economists, Tim Toohey of Yarra Capital Management, points out the federal government’s HomeBuilder program was wildly successful, with single home building approvals jumping more than 30 per cent to a record high.

At the same time state governments were offering other incentives to home buyers and the big banks were given access to $200 billion in super cheap funding. The result: the housing market has rocketed.

However, those housing approvals are simply drawing demand forward, creating a spike now with an inevitable trough on the other side, which Toohey points out will be exacerbated by immigration stopping dead. Toohey’s base case is 150,000 excess dwellings by 2023 and an inevitable slowing of the important housing construction sector.

The third headwind could come from China, where the regulatory upheaval from Xi’s common prosperity dictums is having a profound impact, especially on the real estate sector, which accounts for 17 per cent of the country’s GDP. Purely for context (as opposed to drama), at the height of the Japanese and US real estate bubbles the sector accounted for about 7 per cent of each country’s GDP.

It’s unclear how the Chinese government will deal with the fallout from excessive debt levels of companies like Evergrande, and autocratic governments can do things politically accountable governments can’t, but it’s possible the property sector will need to undergo comprehensive restructuring which will reduce activity. The significance being China accounts for three times the value of exports compared to our second largest trading partner, Japan.

It is entirely possible these three headwinds will be more than offset by the ongoing circulation of last year’s unprecedented fiscal injection and the unleashing of animal spirits when lockdowns are finally lifted and the urge to spend those accumulated savings takes hold. However, as always it pays to be mindful those headwinds don’t knock you off course.

Want to discuss your investment strategy with a specialist? Call us today.

Steward Wealth’s Co-Founders named as ifa Excellence Award finalists 2021

Steward Wealth’s Co-Founders named as ifa Excellence Award finalists 2021

Anthony Picone and James Weir – Directors & Co-Founders of Steward Wealth have been named as finalists in the ifa Excellence Awards for SMSF Adviser of the Year & Industry Thought Leader of the Year.


The finalist list, which was announced on 24 August 2021, features over 210 high-achieving financial services professionals across 27 submission-based categories. 
 

The ifa Excellence Awards is the pinnacle event for recognising the outstanding achievements and excellence of exceptional professionals across Australia’s independent advice sector.  

The awards were created to acknowledge and reward the contributions of professionals leading the charge within the financial advice industry, noting their dedication to their profession. 

After the past year of uncertainty and challenges brought on by the pandemic, now more than ever, it’s important to stop and take a moment to celebrate both your accomplishments and those of your peers. 

 “At a time of change and upheaval for the industry, and after another year of business and family disruption as a result of COVID, it’s so important to take some time and recognise the achievements of the industry and the fantastic innovations that are going on inside advice businesses,” says ifa editor Sarah Kendell. 

“A huge congratulations to all of this year’s finalists for their outstanding dedication to client service through such a challenging time and the excellent examples they are setting for their peers around adaptation and success through adversity.”  

James Weir, Director and Co-Founder at Steward Wealth, said that he was extremely proud to be recognised and endorsed as a finalist in the ifa Excellence Awards 2021.  

“This recognition for our contribution to the financial planning industry reinforces the strength of our services and capabilities as we continue to grow. Highlighting our dedication to connecting with the community and engaging with clients,” Anthony Picone, Director and Co-Founder at Steward Wealth added. 

Looking for an industry endorsed SMSF advisor?

Find out more about our SMSF services below or call Steward Wealth today on (03) 9975 7070.

What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.