Friday, December 5, 2008

Rates on credit cards not coming down

Rates on most Australian credit cards have not budged despite the Reserve Bank (RBA) slashing cash rates by 3 per cent since September.

Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.

According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.

Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.

ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.

Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.

Tuesday, November 25, 2008

Good news and bad news

If the Debt Futures Market (DFM) know their stuff, the Reserve Bank of Australia (RBA) is going to lower its cash target rate to 2.75 per cent by April next year. That represents a fall of another two and a half per cent from the current cash rate 5.25 per cent. To kick off this reduction, markets are pricing a massive cut of 125 basis points when the RBA meets at its next board meeting on December 2. That would be the biggest one-month cut in official rate since the onset of the 1990 recession.

If these forecasts prove correct, the cash rate will be at its lowest level for several decades. According to the monthly average of official daily data published by the RBA , the cash rate was at a low of 2.98 per cent in January 1960.

Economists argue that a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively. A 125-basis-point rate cut next month would take the cash rate to 4 per cent. It would be the biggest cut since April 1990, when the RBA slashed the then 16.5 per cent cash rate by 150 basis points, as the Australian economy entered into a recession.

This is both good news and bad news.

  • Good news because exsitng and new mortgages will be so much more affordable. In the long run, this will help the broader economy in areas like retail, property and personal and business services.
  • Bad news for people who rely primarily on bank deposits for income (retirees) as deposit rates fall.
  • Good news for equities markets as return on investment in shares become more attractive relative to income earned in bank deposits

However, its really bad news though because rate cuts of this magnitude highlight the seriousness of the economic conditions we are about to head into.

(source: Faifax Ltd)

Thursday, November 20, 2008

Tight, easy and neutral

Monetary policy is a tool by which government (usually through an independent central bank) can influence the economy by affecting interest rates.

To stimulate the economy when things are slow a central bank, like the Reserve Bank of Australia or the Federal Reserve in the US, will typically reduce interest rates to encourage people and businesses to borrow. To constrain the economy, they do the opposite and rates are increased. This makes the cost of loans more expensive and discourages people from borrowing. When things are going OK they neither raise nor lower rates.

When banks are raising rates they are said to be employing tighter monetary policy. When they are lowering rates they are easing monetary policy. When they leave rates alone monetary policy is said to be neutral. This is very general and other factors in an economic cycle can influence whether monetary policy is tight, easy, or neutral.

At present Australia, like almost all other world economies, is experiencing significant economic downturn. Despite the optimism that we may avoid a recession, the Reserve Bank (RBA) is still very concerned about the effect interest rates are having on economic activity and therefore are in the process of easing monetary policy.
Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent

The RBA states in its minutes that the reason for lowering rates by three-quarters of one per cent last month was that "given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral position".

This means that despite the large interest rate cuts we have experienced recently, the RBA considers official interest rates may only be back to a "neutral" setting. Given that we are on the brink of a recession, this statement highlights how much further the RBA will cut so that rate are "easy" and therefore begin to stimulate the economy.

This means that Australian home-owners with a variable rate mortgage can look forward to an RBA cash rate around 3.50 per cent by March or April next year. For your mortgage this means a rate of about 5.10 to 5.60 per cent

Friday, November 14, 2008

Are your goals SMART?

In the long run you only hit what you aim at.
Therefore, though you may fail to begin with,
you should aim at something high.

Clear goals are important because they provide you with something to look forward to. Financially qualifying where you wish to be at some point in the future gives you both a target to aim for and something to measure your progress against. The thing about all goals is they should be SMART.

SPECIFIC: What exactly will you accomplish?
MEASURABLE: How will you know when you have reached your goal?
ACHIEVABLE: Do you have the resources to attain your goal?
RELEVANT: Why is the goal important to you?
TIMELY: When will you achieve your goal?

Ask yourself these five questions when you set yourself a goal and you'll go a long way towards achieving it.

Tuesday, October 28, 2008

Do your goals inspire you?

This might sound corny, but "Are your goals inspiring?" If your goals are too practical and limited, you wont have incentive to discipline yourself to do the things necessary to achieve them. If you don't involve your emotions and imagination in your goal-setting process you'll find it extremely difficult to stay motivated and interested.

We understand it is necessary to set short-term goals as "milestones" along the road to acheiving your longer term goals but even with these, well defined markers in place, long-term goals will be hard to relate to if they are not specific enough. Consider this goal plan:

I want to save enough money so my children can attend university and then have enough left over so I dont have to live of the pension.

With this:

I want contribute $________ towards John and Sue's university education. I also want to trave to (name of country) for (number) of weeks. I want to save $________ for this purpose. I will have enough money invested so I can draw a monthly income of $_________.

The more colourful and personal the plan, the more real and exciting it becomes. The easier it is to visualise the goal the better. Its your responsibility to arrange your life in any way that suits you. Put some effort into having something to look forward to besides simply meeting a financial obligation.

Set Goals!

Wednesday, October 22, 2008

Stupid, stupid vendor

Sydney newspapers are reporting that vendors are increasing the prices of their properties in anticipation of an increase in vlaue caused by the recent changes to the First Home Owners Grant Scheme (FHOG). The grant was recently increased from $7,000.00 to $14,000.00 for existing properties, and a whopping $21,000.00 for newly constructed homes. The Sydney Telegraph calls these sellers “Greedy” but I would be more inclined to call them Stupid.

In case you haven’t noticed, the property market is really depressed. Forget all the kybosh that the various real estate bodies are pedaling, nobody’s buying. In other words – it’s a buyer’s market. So it’s a bit of a surprise that some vendors would think to put their prices up. They haven’t been able to sell their properties at their current asking price so they think the best idea is to increase the price? Right - good idea. Not.

I wrote this off as a one off but last week I was helping a client to restructure their loan to assist them with an investment purchase. They had their eye on a renovator near the beach on the Sunshine Coast which had been on the market for a while. After we had finance in order our clients went back to the vendor to make a cash offer (subject to valuation and building inspection) but guess what? The asking price was now $30,000.00 more than it was a week ago. What had happened?

During the process of arranging the pre-approval, the FHOG went up. So somehow, in a severely depressed market where house prices are clearly falling, the seller thinks this house is now 12% more valuable. Our client, and their cash offer, walked away. Stupid, stupid vendor.

Friday, October 17, 2008

Merry Christmas Mr Rudd

The Federal Government has announced a $10 billion financial stimulus to help prevent the Australian economy from sliding into recession in the next six to 12 months. The package is aimed mainly at low and middle income earners, and includes five main planks:

  1. $4.8 billion in new support for pensioners and carers, to be paid in the form of lump sums later this year.
  2. $3.9 billion for low and middle income earners. Eligible families will receive a payment of $1000 per child.
  3. $1.5 billion for first home buyers, with the first home buyer bonus to be doubled from $7000 to $14,000 on established homes and tripled to $21,000 for new homes.
  4. $187 million to double the number of training places available to 113,000.
  5. Fast-tracking of the Government’s $20 billion infrastructure program.

The package is designed to stimulate economic growth by boosting consumer spending, so retailers stand to benefit most of all, as pensioners, carers and families will all have around $1000 more in their wallets. Most payments will be made around 8 December so this should mean the Christmas trading period will be a lot better than previously thought.

The Government’s support for the property sector has also attracted approval. The Housing Industry Association is predicting a big jump in construction activity and an improvement in housing affordability. When the first home owner’s grant was doubled for new house purchases in 2001, the number of new dwellings built increased by 3000 per month over a nine month period. This time around, HIA is tipping new housings starts will jump by 15,000.

Time is of the essence for those wanting to take advantage of this initiative as the changes to the grants are only available unitl June 30, 2009. Because of this "urgency", a wide range of property services and construction businesses should feel immediate benefit, including real estates agents, builders and other trades, home maintenance companies and conveyancers.

Friday, October 3, 2008

Why can't banks just lower their rates?

Even with the recent write downs announced by banks like ANZ and NAB, in general terms, our banks have always been far more prudent with their lending than their US counterparts. With the odd lapse now and again this prudence has become a feature of the Australian Financial system for a number of social, political and economic reasons. Despite the way we disparage our politicians, Australians display a broad cultural acceptance of government that allows regulation, prudential supervision and legal safeguards against the sort of reckless behaviour that has permitted what has now become known as "the US sub-prime crisis".

As Saul Eslake from ANZ bank points out, despite the current turbulence,

"Australian banks are still profitable and still adding to their capital and therefore to their capacity to lend. However, the Australian banking system has at least one point of vulnerability – we don't save enough in the form of bank deposits to finance all our loans. This means the banks rely on "wholesale funding" for the difference. This difference is reflected in Australia's large current account deficit that requires overseas borrowings by Australian banks to finance it."
That overseas borrowing has become more expensive since the financial crisis began to unfold in August last year and dramatically so over the past two weeks as the crisis has deepened. This upward pressure on funding costs is the reason banks have raised their rates on top of the increases that were handed down by the Reserve Bank in recent months. If things continue as they are and the Reserve leaves its cash rate at the current 7 per cent, its quite concievable the retail banks would have to begin putting their rates up if they want to contine lending at their current levels. To leave their lending rates where they are would mean, in the short term, they would have to restrict their already reduced levels of lending. Either outcome would have catastrophic consequences for our economy as credit for business investment, housing and consumer goods either dried up or was priced beyond reach of most borrowers and crippled those already in debt.

However, this is not going to happen. The reason the RBA cut rates last month is because they see a slow down in the economy as potentially more damaging than any lingering threat of inflation that last caused it to raise rates back in March. Inflation will still be on the RBA's radar but the onset of recessionary conditions in the US and elsewhere globaly (New Zealand is already in a technical recession) will help to kill off any immediate inflation worries. We are already seeing markets forecast lower global demand in the falling price of oil. The reason the Australian Dollar has gone from US$0.96 to $US0.78 in just a few weeks is because of the expectation that commodities like coal and iron ore are going to be affected by lower global demand.

The Reserve will want to see retail interest rates continue to fall in an effort to stimulate a faltering economy and it will cut the official cash rate when its board meets next Tuesday. If they want to see retail banks pass the rate cut onto customers, then the cut will need to be a generous half of one per cent because the cut given to customers by the retail banks will definately be more modest.

(References: Saul Eslake, ANZ Bank. Cited in The Sydney Morning Herald, 30 September 2008)

Thursday, October 2, 2008

First home saver account facts

  • Only first home buyers can apply.
  • You must be between 18 and 65.
  • Limit one account per customer.
  • You must save $1000 a year to get the 17 per cent government contribution.
  • You can't take the money out until you buy a home at least four years down the track.
  • If you change your mind about buying, the money goes into your super fund.
  • Earnings are taxed at 15 per cent.

Wednesday, October 1, 2008

Extra money towards your first home

The burden of saving for your first home has never been greater but, for those saving to purchase in a few years time, the job might be just a little bit easier. From today the federal government’s First Home Saver accounts become available.

If you're saving to buy or build your first home then a first home saver account may suit you. The accounts are complicated by a few rules and regulations but in essence they allow you to attract a contribution from government of up to $850 a year and the tax on the interest you earn is capped at 15 per cent (the same as your superannuation).The overall account balance will be limited to $75,000 and a minimum of fours years needs to pass before the money can be withdrawn to buy a home. The real bonus is that operating one of these accounts doesn’t disqualify your eligibility for the First Home Owners Grant Scheme (FHOG).

To earn the maximum government contribution you need to have saved $5000.00 per year yourself. The contribution is calculated as 17 per cent of the amount saved in each year (17% of $5000.00 = $850.00). If you can achieve this for 4 years you will have $23,400.00 saved which includes the government contribution plus any interest you have earned (less some tax at the lower rate). Add to this the FHOG of $7,000.00 and you’ve got yourself a tidy deposit of just over $30,000.00.

This represents a 6 per cent deposit on a home with a price of $500,000. With the recent exemptions from government stamp duty on homes up to this amount, $30,000.00 will go a long way towards getting you into your first home.

Saturday, September 20, 2008

Central banks are just doing their job

I’ve been reading a lot of comments on blogs complaining about US and other government action in wake of the current crisis of confidence gripping financial markets. Most of the complaints are directed at the US Federal Reserve and based around the idea that western economies are basically free markets and that governments have no place interfering in failing businesses.

The first thing I would say about this is that most western countries are not pure free-market economies but mixed economies where markets operate within a regulatory framework set by authorities and governments themselves perform some economic functions rather than leaving them to the private sector.

This is particularly so when it comes to banks. Banks are different because of the role they play in commerce. We all use Banks and expect them to be safe places for our savings and many individuals and businesses depend on them for loans. Banks borrow money for short periods that they then lend to you and me for long periods. Some of these short term funds they use include deposits that can be withdrawn at will. If too many people were to demand their money back from a bank at the same time, the bank wouldn't be able to pay them and would fail.

The other thing that banks do on a regular basis is settle transactions between accounts held by different banks. This happens every night, night after night (except weekends). Sometimes, banks find themselves short of liquid funds (cash) and they borrow from banks that have more liquidity than they need. In return for this, the lending bank charges the borrowing bank a rate of interest which happens to be the cash rate. This is partly how the cash rate affects retail lending products like your mortgage - its the rate we all currently wait on feverishly every month in the hope that it has fallen. In Australia this is set by the Reserve Bank.

In Australia, Open Market Operations are conducted by the RBA to ensure sufficient liquidity exists between retail banks. This happens on a daily basis as the RBA ‘intervenes’ to keep the price of funds at its targeted cash rate. If the RBA didn’t act in this way the price of funds exchanged between banks in overnight settlements would become erratic. A shortage of funds would ‘bid up’ the price and monetary policy would be ineffective (and your mortgage might become more expensive). In the opposite situation, a surplus of funds would drive the price down (when there is an excess of funds in the market the RBA becomes a buyer to keep the cash rate from falling).

This is what central banks do all over the world. However, given the present conditions retail banks are particularly reluctant to lend to each other both in the US and elsewhere. So the world’s central banks have stepped in and are lending to any bank that finds itself short of funds to complete its daily settlements. They are doing this to maintain stability in the price of funds (the interest rate) and to restore confidence in the banking sector generally. What we are presently seeing is an extreme version of what central banks do every day: manipulating the balance of demand and supply - keeping cash rates in accordance with their present policy settings. At some time in the future, when the market calms, the central banks will re-enter the market and withdraw the resulting surplus of liquidity.

Whether you think we live in free market economy or some other version of it, the banking system depends on public confidence for its stability. It's the responsibility of governments and their agencies to ensure the system remains stable.

Thursday, September 11, 2008

A scam story

Being involved in finance for many years has meant that, unfortunately, we have come across customers who have fallen victim to investment scams.

On one occassion a customer had substantial equity in their home in Sydney. It was just before the recent property boom and they were looking to make a further investment in real estate. They obtained a loan facility so they could be in a position of strength to make an offer on a house when appropriate.

The loan facility was established and they set about looking for suitable properties. During their search they came across a company offering investments in 'offshore vehicles' that were producing very high returns - 15 to 20 per cent. Our clients visted their very impressive offices and checked out their web site and everything looked good. Despite our protests to get further opinion our customers invested their entire borrowings with this company.

For a while everything looked good. The promised dividends arrived every month and our clients couldn't believe their luck. But after about four months the payments stopped and the company dissappeared.

Unfortuneatly these people found themselves victim of a classic Ponzi scheme. This is where some one makes a claim that they can invest your money and provide returns, substantially higher than that offered by other standard investment products. Once you invest, you are rewarded for your 'shrewd' decision by the dividend payments that come in each month as promised. Everything looks good and you are making money! What this can do is make you an advocate - a sales person for the investment - and you tell your freinds and they become involved too, investing their savings or loans.

At some point the money invested reaches an amount that satisfies the scammer and they leave town. You become aware of this development when your monthly dividend payment doesn't arrive but by then its too late. The flashy offices are deserted, the website is down and the phones don't work. Suddenly you realise that what you thought of as exceptional dividend payments were in reality, only some of your initial investment being returned to you.

This is only one of a dozen stories of people we have come across who have been defrauded. They are all very competent, decent, honest people. The trouble is, the people who perpetrate these frauds are ruthless, professional con artists.

Don't give your hard earned money to anyone for any reason with out consulting some one esle about your intentions. Please, please be guided by the advice of professionals. If something seems to good to be true - it usually is.

Wednesday, September 10, 2008

Avoiding Scams

In all the ways we manage and use money, it is important to protect ourselves from loss or detriment. This is where we need skills to manage the various risks that occur throughout our lives.

A popular belief that makes people vulnerable to scams is the idea that there are secret short cuts to wealth that are only known by certain financial “gurus”. The offers these types of people make often vary but tend to involve unusually high rates of return on investment. Believing that all businesses must be legitimate and that wealth or other benefits can be obtained through special tricks can place you at risk.

Before you invest money with anybody you should do these things first:

  1. Ask for the names of organisations that they are members of. People dealing with money and investments usually belong to well known government and industry bodies who could testify to their membership and conduct.
  2. Ask for written testimonials or verbal references from customers.
  3. Check government regulators like ASIC and state Offices of fair Trading.
  4. Seek the advice of a professional you know and trust like your accountant, solicitor or financial planner.

The Australian Securities and Investments Commission allows you to search a company and establish when it was formed, check disqualified persons, and provides alerts on recently uncovered scams and other useful consumer information through its affiliate site FIDO at .

State government Fair Trading offices also provide information on bogus investment schemes. Check the Queensland Office of Fair Trading at . You can also look at other statement websites in similar departments for alerts on recent scams as well as other useful information on consumer protection.

Monday, September 1, 2008

First home-owner hope

A recent Housing Industry Association survey showed that a record 50 per cent of Generation Y Australian’s (people born between 1975 and 1990) are living at home with their parents. The figure for Queensland is slightly lower, at 44 per cent and from this week, it might just get a little bit better.

Three reasons:

  1. From today, the Queensland state government has abolished stamp duty on homes with a purchase price up to $500,000. First-home buyers will be exempt from stamp and mortgage duty on homes up to $500,000, a saving of around $10,000. Prior to today, the purchase price threshold for exemption from these taxes was $350,000.
  2. Tomorrow, a mortgage will cost just that little bit less with the Reserve Bank (RBA) widely tipped to cut interest rates. A cut tomorrow by at least a quarter of one per cent will be the first easing since December 2001 and will help make life a little easier for potential first home owners. The prospect of banks not passing on the RBA cut to retail customers now seems unlikely with recent announcements by NAB, ANZ and Suncorp. On top of this Wizard Home loans has stolen a march on its much bigger rivals. As of today Wizard, cut its standard variable lending rate by 25 basis points in advance of tomorrow’s RBA announcment.
  3. The housing market is stagnant (despite what some real estate agents might optimistically say) and house prices are falling. So although prices are still very high (Australia currently ranks as having some of the least affordable property in the english speaking world), it’s a buyers market.

While home affordability is still very tough, these three developments should put some welcome purchasing power in the hands of the first home buyer (and maybe free up a spare bedroom for some Boomer Generation mum and dads)

Sunday, August 31, 2008

Fixed rate fix

Yesterday, a customer contacted me about a letter they received from their bank. It was an offer to move from their current variable rate home loan to a fixed rate “to avoid the uncertainty of rising interest rates”

Ordinarily there would be nothing wrong with this. Banks often try to retain customers by getting them to fix their rate for a number of years and in some circumstances this can be advantageous to both the bank and the customer. However, this letter was sent only a few days ago when so much of the current media is devoted to the extreme likelihood of interest rate reductions.

Most of the major banks have already announced substantial reductions to their 2,3 and 5 year fixed rates. They have also begun to reduce their interest rates on a number of deposit products. This is an important signpost for the direction of interest rates for variable mortgages.

After 12 rate rises over the past several years, we may be headed for a period of interest rate reductions. To advertise to a customer to move to a fixed rate “to avoid the uncertainty of rising interest rates” at this time is just a bit shallow, particularly if a series of rate reductions by the Reserve Bank result in a further reduction in short term fixed mortgage rates.

Wednesday, August 27, 2008

Even the bookies think rates will drop

From today, Australian betting agency, Centrebet will be taking wagers from punters on changes to the Reserve Bank’s official cash rate, with the initial odds favouring a drop in rates when the bank meets next Tuesday.

Centrebet is paying $1.25 for a rate cut of one quarter of a per cent and $3.50 for a cut of more than a that.

If you place a bet for rates to stay the same, and you’re right, the bookmaker will pay you $5 and if you back an increase of one quarter per cent – a scenario considered highly unlikely – you’ll get $51.00

For a rate rise of more than a quarter per cent, Centrebet is paying $201.00!

A spokesman for Centrebet predicted the book would be popular because of the high level of interest in rate movements.

I’m not placing a bet, I’ll save that for the Melbourne Cup. But if you want my tip – go for the favourite - a quarter per cent reduction.

(Source: The Australian, 27 August 2008)

All prices quoted are AUD

Friday, August 22, 2008

NAB's rate cut pledge

Good news for home owners with a mortgage! National Australia Bank (NAB) has gone public with a promise that if the Reserve Bank of Australia (RBA) cuts rates by 25 basis points in September, NAB will pass that reduction on to customers. NAB chief executive Ahmed Fahour said that a recent easing in short-term funding costs had enabled NAB to make the commitment to reduce its standard variable rate. "While we continue to see volatility in international markets and increases in the average cost of long-term funding, we have experienced some short-term funding relief, which we are keen to pass on to our customers," Mr Fahour said.

While other banks have been reluctant to make any similar commitment, they will now be under considerable pressure to do likewise. Analysts believe they will fall into line with NAB when the Reserve makes its rate announcement. ANZ indicated last night it was likely to pass on the full benefit of any official cut by the RBA to home borrowers. "If the current funding environment remains as it is, and the RBA cuts, the likelihood is we'll be passing on the benefit to home borrowers," said ANZ's Paul Edwards.

While this is encouraging news, what happens if the RBA cuts by 50 points? NAB has only given an undertaking to pass on the full rate cut in the event of a 25 point reduction.

I think it is highly likely that as rates continue to fall over the next several months, the major banks will take some opportunity to increase their lending margins by not passing on a full RBA rate cut or two at some stage in the easing cycle. What do you think?

(references: Herald Sun, 22 August 2008; National Business Review, 22 August 2008)

Wednesday, August 20, 2008

Make low-interest-rate cards work for you

You can look at credit cards in all sorts of ways but typically they all fall into two major categories;

  1. Interest free period and high interest charge cards
  2. No interest free period and lower interest charge cards

If your current finacial situation doesn’t allow you to pay off your credit card in full each month, and you’re using the first type of card, then you need to look closely at swtiching. This is particularly important if you think your current financial downturn might be protracted. Why pay a higher interest rate on credit that is revolving each month when you could be paying a much lower rate?

There are a number of low-rate cards are on the market which have interest rates up to 9 per cent lower than the higher rate cards currently charging 18 to 20 per cent.

Balance transfers

A number of providers also offer even lower rates for the first six months or so on balances you transfer from another card. Like credit cards, balance transfers can also be placed into 2 important categories.

  1. Reduced “introductory rates” for a set period (say 6 months) then interest charges revert to the standard credit charge that appies to that particular card
  2. Reduced rates for the life of the balance transfer.

If you do decide to take advantage of the second type of card, offering a reduced rate for life of balance of transfer, you should consider not using this type of card for additional purchases until the debt you transferred is fully paid out. The cards offering this type of payment arrangement usually don’t have lower rates. Typically you will find that while the interest you pay on the balance transfer will be around 7 per cent (currently), the charge for additional purchases is likely to be around 20 per cent. But here’s the catch, the payments you make go to reduce your original balance transfer amount. New purchases and interest accrue and attract further interest at the higher amount.

In general, if you’re not able to pay your credit card each month switch to a lower rate card. If you think you’re still going to need to use your card for purchases now and then, go for the introductory low rate. If you can avoid using your card while paying off the balance transfer from your old card – consider the low rate for life of balance transfer type but don't ever use it for new purchases.

Monday, August 18, 2008

Greedy but not stupid

While the beginning of an economic slowdown has been enough to convince the Reserve Bank of Australia (RBA) to contemplate an easing of monetary policy, it will want to remain reasonably tight until there is evidence that inflation is moving into its target zone of 2 to 3 per cent. Although the RBA cannot wait for a fall in inflation before it starts cutting rates because it has to act pre-emptively, there is still a lingering inflation problem and downward pressure on prices needs to be maintained. In saying this, the RBA will go for a 25 basis point cut on September 2 then another 25 points in October. Beyond that the Reserve can determine whether it thinks the economy is about to fall into a hole and can then continue to cut rates if necessary.

However, the scope for official rate cuts is complicated by another matter – will the major banks pass on reductions in official rates to their retail lending rates and ultimately to our home mortgage rates? In spite of their recent profit announcement, banks like the Commonwealth Bank of Australia are tight lipped about passing official rate cuts onto customers.

In the 1990s the banks were labeled “bastards” for outrageously increasing fees, closing branches, and getting rid of low value customers. It’s a reputation the banks have only just repaired and a period they would rather forget. They might be greedy but they’re not stupid. If they live up to their threats not to lower lending rates despite what the RBA does, the banks know they’ll be roundly condemned by everyone – both sides of politics, the media and every radio talk-back shock-jock in the business.

(references: Sydney Morning Herald 18 August 2008; Canberra Times 17 August 2008)

Tuesday, August 12, 2008

keeping your previous home as an investment property

Our customers upgrade and move homes for all sorts of reasons and many of them keep their original home as an investment property. They are generally aware that in most cases, the cost of servicing the existing debt on their old home then becomes deductible for tax purposes. However, many have not considered the capital gains tax implications of this kind of arrangement.

The previous home was their principal place of residence, and if sold, would normally attract no capital gains tax (CGT). Now that the home is being used for investment purposes, any future sale of that property is most likely going to trigger a CGT event and some amount of tax will probably be payable. How this is calculated can be complex but it is important to note that CGT will be calculated on the difference in value of the property from the date it was first used as an investment and the sale price when it is finally disposed.

If you are considering such an arrangement it will be important for you to establish the value of your home at this time. To do this you should have the home properly valued by a quantity surveyor or a registered valuation expert.

As the amount of tax you will pay in the future depends on current and future values, it will be ideal to for your house to be valued at as high a price as the valuer can professionally allow. This will help minimise the difference in the sale price and the current price and therefore help minimise any future capital gains tax.

As always, before you make any decisions regarding investing your money, consult your accountant or financial advisor and get advice best suited to your individual circumstances.

Friday, August 8, 2008

Rates on fixed loans start to fall

It seems bank customers have felt for some months that the Reserve Bank (RBA) might be about to cut interest rates if figures from the Australian Bureau of Statistics (ABS) are any indication.

Data released this week shows 11.7 per cent of new mortgages approved in June were at a fixed rate, the lowest market share for this type of product since October 2005. That was a big fall from March when fixed rate loans commanded 23.9 per cent of all new housing finance commitments.

The ABS data showed fixed rate loan numbers have fallen for three successive months, even though the major banks have lifted their standard variable lending rates independent of increases by the RBA.

In response to this falling demand for fixed rate products, ANZ Bank and Westpac Bank have both lowered their rates on a number fixed rate terms - up to half of one per cent on on ANZ’s seven year term. However, ANZ says changes to fixed rates are due to a reduction in the cost of funding.

Will this influence the major banks to pass on rate cuts to variable rate mortgages when the RBA lowers rates next month? Don't bet your house on it.

Tuesday, August 5, 2008

RBA to flag rate cuts

We think the Reserve Bank of Australia (RBA) will leave its key interest rate unchanged after its monthly board meeting today. However, in a measured response they will announce that they are moving to an "Easing Bias" and may even suggest lower rates are on the way. In no uncertain terms, that will be welcome news to borrowers coping with interest rates at a twelve year high.

So the RBA will leave its key cash rate at 7.25 per cent for a fifth straight month. Rates were last raised in March this year, the fourth of four straight increases that started in August 2007. However, depsite inflation still running above the RBA target of 3 per cent, it is expected the central bank will highlight the downside risks to economic growth after several weeks of dour readings on economic activity.

Despite calls in some quarters for a rate cut today we think they are more likely to stay on hold at least one more month. A rate cut today would send an ominous signal about the outlook for the economy in the short term. Also, as the ANZ reminds us, “We do have to remember inflation is at a 16-year high, so the RBA is not going to be rushed into cutting interest rates".

However, while inflation will be a key focus, we feel there are two important issues (among the many) playing on the RBA’s mind. One is the interest rate increases that have been added to bank margins in addition to recent increases in the cash rate. The other is the further deterioration of credit conditions due to continuing fallout from the US credit crisis. Both these will begin to have a significant impact on demand as they play out in the domestic economy and put significant downward pressure on future inflation.

The RBA has raised the cash rate 12 times since May 2002, and last cut it in December 2001. My eldest boy was only 8 back then!

Monday, August 4, 2008

5 year fixed rate blues

Recently we had a bit of a blue with a customer about the interest rate he was being charged. We wrote his loan shortly before the onset of the US financial crisis and, all things considered, the rate was very competitive. But he was with a non-bank lender and his rate has climbed a bit lately – about the same as other non-banks but slightly more than the standard banks. He has since been approached by another bank (a reputable and substantial bank) about fixing his interest rate. Nothing wrong with a little bit of competition between lenders.

However, this discussion took place about 8 to 10 weeks ago when (strangely) some financial analysts were still forecasting a rate rise or two. We haven’t been thinking this way for a while and urged our customer to take time and consider because what the intervening bank was proposing was a 5 year fixed rate marginally lower than that which he was currently being charged.

In view of recent economic data, some commentators have suggested the Reserve bank will need to cut the cash rate to 5 percent from the current 7.25 (see previous post). This morning Alan Kohler said “the cash rate will need to be around 5 per cent this time next year, possibly in the 4s”.

To cut to the chase, our customer was panicked and took the advice of the other bank and moved to a five year fixed rate at close to 9 per cent. I wonder how a fixed rate of nearly 9 per cent will compare to the prevailing discounted variable rate in 12 months time and how the advice of the other bank will be viewed.

Friday, August 1, 2008

Bravo Messers Carr and Cooke!

In February this year, we ran an article on our website about the prospect for interest rates. Counter to the arguments at the time it was titled “Interest rates to ease by end of 2008”. We based this claim on statements by two economists - Adam Carr of UBS and Andrew Cooke of Goldman Sachs-JBWere.

Speaking at a conference in Sydney in February this year, Cooke said he would "throw out the controversial point" that rates may be easing as we get to the end of 2008 even though the Reserve Bank (RBA) has signalled very strongly that further interest rate rises are likely. He argued that "as we go through the remainder of the year, consumer demand may slow too much…so things [might] change pretty quickly.

At about the same time Adam Carr, senior economist at UBS, was making similar, wild claims stating, “inflation isn't really our [the consumers] fault and that crunching demand through tighter monetary policy [higher interest rates] is only part of the answer". At the time Carr was concerned that to curb inflation the nation was faced with the challenge of a significant, policy induced slowing of growth (and rising unemployment) just as the global economy is slowing and credit markets are contracting in the wake of the US sub-prime mortgage crisis. Talking later on the ABC Radio program, “Counterpoint” Carr was concerned that the RBA would be faced with the need to quickly reverse its stance on monetary policy to avoid stalling the economy.

This indeed is what now seems to be happening. On the back of some seriously bad economic data, several commentators are now saying we can expect rates to fall by the end of this year. Some are even talking recession. Although it should be noted that many of these same commentators were predicting that rates would still be rising at this time. Remember it was only several weeks ago that ANZ came out and said that we were facing one or two more rate rises before this Christmas. While the ANZ still feel that rate cuts are not due until early next year, they have certainly backed away from their earlier forecast.

Conditions now are looking so different to that of a few weeks ago that Terry McCrann believes that when the RBA meets on Tuesday next week what we are likely to see "is a very clear statement that the economic and policy cases have now been made for a shift to lower interest rates” and that “a rate cut at the September meeting …is certain. [Further] it won't be the last and it could be a half of 1 per cent[!]”

However its not yet that clear a picture. In the same week of the news about the sharp slump in retail sales, a fall in borrowing, decreasing house prices, and stretching payment terms, The TD Securities-Melbourne Institute monthly inflation gauge was released stating that inflation rose 0.4 per cent in July, after a 0.5 per cent increase in June. Annual inflation ticked down to 4.6 per cent from a record high of 4.8 per cent the previous month – still well above the RBA target band of between 2 and 3 per cent.

Earlier this year the RBA needed to tap the interest rate brake on inflation. Painful though it has been no one would argue with that. What seems to be happening now is that they have come to the conclusion that they may have tapped the brakes once or twice too many. To stop the economy coming to a halt and perhaps even going into reverse (a recession), we’re going to get a nice little surprise just before Christmas – if the pundits are right, the RBA will lower rates sometime between September and December this year. Bravo Mr. Carr! Bravo Mr Cooke!

(references:, Feb 14 2008; HeraldSun, 1 Aug 2008;, 1 Aug 2008)

Thursday, July 31, 2008

Flight to safety

As consumer sentiment in the UK continues to decline, the mortgage market there is moving towards long-term, fixed-rate deals. Research quoted by Banking and Insurance Business Review indicates the proportion of fixed-rate mortgages on the UK market with terms over 10 years has almost doubled in the last 12 months. And as the current liquidity crisis continues, the number of available mortgages has plummeted by 41% overall, but long-term offerings have seen an increase from 127 available products to 137. According to, the average initial rate payable on 25-year fixed-rate mortgages, at 6.56%, is notably lower than the market average of 6.9%, but still higher than last year's average of 6.38% for a comparable deal. MoneyExpert's director attributed the findings to "a flight to safety" by customers as a result of the credit crunch, and noted that both borrowers and lenders are currently keen on deals that offer certainty.

The Federal Government is conducting a review via a senate committee into the competitiveness of the home lending market here in Australia. One of the proposals put forward by the Melbourne Business School, and supported by the likes of David Liddy from Bank of Queensland and John Symmons from Aussie Mortgage Market, is for the establishment in Australia of an agency similar to Freddy Mac and Fannie Mae in the US, although the model they are proposing is more like that which operates in Canada which continues function normally despite current conditions. If adopted in Australia, one thing a funding model like this might be able to provide is longer term, fixed rate mortgages.

If they became available would you consider using fixed rate mortgages for terms of 20 or 30 years?

(references: Banking and Insurance Business Review, 31 July 2008)

Wednesday, July 30, 2008

Low-Doc Loans

Although some banks offer Lo Doc loans to PAYG earners, they are generally designed for self-employed customers who are not able to produce documents to substantiate their income. If you take out a low documentation loan, you won't need to give your lender as many documents to prove your income. You still have to apply in writing and sign your loan agreement, but you genrally are not be required to produce things like pay slips and tax returns. With most Low- Doc loans you are simply asked to state your income in a declaration know as “self-verification”.

Generally, any bank or other type of lender that offers these products will want to see proof of your assets and liabilities. In most cases they will attempt to make some comparison between the amount of income you are declaring and your asset position. If you are stating a very high income to service an expensive loan, a potential lender will expect to see a reasonably good net-asset position.

It's vital that you understand what you're getting into and not use a Low-Doc product to obtain a loan you simply otherwise couldn’t afford.

While some banks offer lo doc loans at rates equal to the prime lending rate (the rate offered to customers who fully verify their income), others charge a premium of around a half to one per cent higher. We are all familiar with the fact that banks have been increasing interest rates in advance of that levied by the Reserve Bank. Recently however, lenders have been moving the rate charged for Low-Doc products even higher. There are customers of several major banks who took out Low-Doc loans at near prime rates that are now being charged 10.50 per cent.

In wake of the recent wholesale funding difficulties (usually referred to as “the US sub-prime crisis) many lenders have withdrawn from the Low doc market. According to Cannex there were 180 Low-Doc loans being affered by46 lenders in January this year. This has shrunk to 153 loans from 38 lenders. Those that have exited include Bluestone, Virgin Money and big banks like HSBC and Macquarie.

The good news? Low-doc products made up 1 per cent of all loans in Australia last year, well below the 13 per cent that represent US sub-prime loans in that market.

(reference: 30 July 2008;

Monday, July 28, 2008

How much can you borrow?

If you’re like most of us, buying a home is the biggest investment you will ever make. Since very few people are able pay cash, obtaining a loan is the foundation of home ownership. How much you borrow depends on a number of factors:

  • Your income and expenses
  • Estimated repayments
  • Serviceability
  • Assets and liabilities
  • Your lifestyle
  • Your deposit

Before you start looking for a home, think carefully about your spending habits. Compare expenses and income by preparing a budget noting all major upcoming expenses such as replacing your car, holidays, school fees, etc. Knowing exactly how much you spend each week is essential in determining how much you can afford to borrow. Having a realistic picture of your finances will avoid costly knock-backs from a potential lender.

Avoid being rejected for a loan. Lenders frequently trade credit information. A decision to decline a loan appears on you credit report and can harm your chances of obtaining a loan with another lender.

When deciding how much you can borrow, lenders will look at your serviceability - whether you can afford the repayments over the life of the loan, not just while interest rates are low. To do this, they use a benchmark figure that is usually several percentage points higher than the prevailing variable rate. Your repayments will also be assessed against your income. In most cases, the upper limit for minimum repayments is about 35 per cent of pre-tax income (or about 30 per cent of combined income for joint borrowers). Some lenders may use your uncommitted income - what is left over after all household expenses - to determine your repayment capacity.

In most cases, to be eligible for a loan you must own more than you owe. Lenders will look carefully at your existing assets and liabilities. Assets include furniture, jewellery, car, savings and investments that you may have built up over the years. Lenders will assess your credit risk to determine whether you are likely to default on the loan. Factors like your occupation, employment history, where you live and past loans are used to build a credit profile. Your credit risk can influence how much you can borrow.

Friday, July 25, 2008

Planning a budget

We have reached a point where we buy on impulse with no thoughts to the consequences. In order to reverse this trend we need to become more responsible with our spending habits. One of the best tools to help an individual accomplish this is the personal budget. Many people do not see the value in creating a budget as they simply have no desire to restrict their spending habits. However, budgeting is not about “financial dieting” but rather it is a decision-making process. While it is about numbers it is not about accounting. It is about making decisions in your life and choosing specific plans to make your goals a reality.

The object of a good budget is to make your money help you reach your goals, not to force you to conform to rigid rules. Don't be discouraged if your plan doesn't work for you right away. You may have to revise it several times until it fits your wants and needs.

Thursday, July 24, 2008

Wants, needs and likes

Most of us would have heard of wants and needs and their importance in effective goal-setting. So often our financial ambitions are thwarted because we continue to choose to buy what we want and not what we need.

This is an important aspect of money management to be aware of. While our wants are very powerful motivators and can be central to the goals we aspire to, it is important to recognise that what you think you want may only be the things that you would just like.

The fundamental difference between the two is that you put your energy and effort into acquiring the things you want, while you just wish for the things you would like. To help understand the difference, look at your behavior and the energy you put into achieving some things but not others.

Some of the failure you may have experienced in achieving goal outcomes might be because you have set your goals on things you really only would like to have rather than those that you really want.

Wednesday, July 23, 2008

Cut your repayments

ABS statistics show that Australian household debt is at record levels with many people paying high rates of interest, particularly on credit cards.

If you have debts, especially those with very high interest, you might be considering debt consolidation as a way to provide some relief. This strategy can have the benefit of saving you money and making it easier to track and control how much you owe but only if you approach it with the right frame of mind and the correct loan structure.

When it comes to consolidating your debts there are a range of options available. Which one is the most appropriate for you depends on your individual circumstances and factors such as whether you own a home, the nature and number of your debts and your overall financial situation. Working through all your options and taking everything into account can be complex, but very rewarding.

One of the most cost effective ways of consolidating debt is to use the available equity in your home – Rolling your entire consumer debt into a single loan repayment. This can reduce both the repayment amount and the overall interest rate charge. However, in doing this you must be aware that you are probably extending the repayment terms of what was otherwise short-term debt. Any personal loans you had, difficult though they may be to pay now, would have been taken over terms like 3, 5 or 7 years. By putting this debt into a mortgage you will now pay off these amounts over 25 or 30 years. This means that you while you will be paying a lower interest rate, you will pay a lot more interest on the original debt over the term of the loan.

A potential way to avoid this is to structure the loan so that your original property mortgage and the new, consolidated debts are separated through a split loan account. Many banks can offer this facility in one way or another without any increased costs. This will allow you to continue to pay your mortgage at the original amount so it will clear in the least time possible (at least within the original loan term). You can also pay your consolidated debts at the lower mortgage interest rate but with a repayment amount that will allow you to clear this debt at somewhere near an acceptable 5, 6 or 7 year term.

And really, if you are prepared to commit to paying something like the amount you were obligated to before you consolidated the debt, you will pay this new loan off in 1,2 or 3 years.

Tuesday, July 22, 2008

What is negative gearing?

Negative gearing is when you borrow to invest and the income you earn from your investment is less than the interest and other associated costs. This loss is claimable against your other earned income – typically your salary or wages.

How does negative gearing work?

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. In simple terms, your investment must make a loss before you can claim the tax benefit. Negative gearing not works only for property, but also other investments like shares and bonds.

Claimable expenses

Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:

  1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, and insurance.
  2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once.
  3. Claims for building allowances – Owners can also claim depreciation of capital works, specifically for building and landscaping. The current rate is 2.5% over 40 years. Commissioning a depreciation schedule from a qualified quantity surveyor is a good way to maximise your depreciation allowances.

Keeping it at arm’s length

In order to claim deductions your dealings with tenants and lenders must be at arm’s length. If you’re renting your property to a family member or a friend at less than the commercial value then you’re not acting at arm’s length, and you cannot claim deductions as you would in a purely commercial arrangement

Keeping records

It’s easier to get your tax right if you’re keeping good records, and this is very true of rental deductions. If you’re keeping good records, it’s much easier to understand which category your expenses fall into, and makes completing your tax return a much simpler task.

Risks associated with gearing.

There is an inherent risk associated with borrowing to fund any investment. While gearing can help you increase your gain on borrowed funds, the losses can be large in adverse circumstances.

As a general rule, only investors with the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.

You can minimise the risk of gearing by:

  1. Choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period.
  2. Having sufficient income to cover the interest repayments if your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to fund ongoing repairs and maintenance.
  3. Taking out Mortgage Protection Insurance with your investment loan

Friday, July 18, 2008

Banks may be reluctant to pass on cuts

Over the course of the past few years banks have offered discounts of up to 70, 80 and 90 basis points – depending on loan size. For example if the standard variable rate is 9.57 per cent and you have a loan which is around $250,000.00, at most banks you can attract a discounted rate of 8.87 per cent.

Of course we’ve now experienced the US sub prime credit crisis and the colapse of securitisation markets which is where non-bank lenders go to get the money they lend us. But the non-banks aren’t the only ones who raise funds through securitisation, the major banks (NAB, ANZ CBA Westpac, St George) have all used securitisation as a way to meet increased demand for credit.

The cost of funds in these types of markets has become much more expensive as investors seek higher returns because of the risk now associated with mortgage backed securities as a result of the sub prime fall out. This higher cost of funding is not just evident in the increase in our interest rates but also in the exit of lenders like Macquarie Mortages and the demise of RAMS.

Its for this reason that the banks have been saying they have to put their rates up independent of what the RBA is doing. Instead of moving in lock-step with the RBA as they have for years, a 25 basis point increase is passed on to customers as a 30 or 35 point increase and we all know that when the RBA has decided to sit tight, the banks have gone ahead with a 10 of 15 point increase of their own. They have done this for several months now. Overall the banks have rasied their rates by around a full one per cent (100 basis point) more than the RBA since August 2007.

Its been tough for some months and a long time since any of us enjoyed long term stability in interest rates let alone a cut. You may not remember but it was a way back in December 2001 when, as home owners with a mortgage, we were last able to celebrate a fall in interest rates. Back then the RBA cut rates by 25 basis points. This cut was more or less quickly passed on to customers by the banks and other lenders.

But now the mood is different – something has changed. The chief of the Reserve Bank has restated his optimism that Australia is winning the battle against inflation. Mr Stevens confirmed the view in the RBA's board minutes, released on Tuesday, that a slowdown had precluded the need for a further interest rate hike in the near term and, in response to this statement – “you shouldn't be waiting until it's really obvious that inflation has gone all the way back down…before you can conclude you've got to start doing something,'' – some commentators are even saying that rates will soon be falling.
"a slowing global economy will put a brake on inflation and usher in a 12-month period of cash rate reductions from 7.25 per cent to 6 per cent."

ANZ is about to undertake a review of its interest rate forecasts in response to Mr Stevens' comments and the growing signs of an economic slowdown. A spokesman for ANZ admitted there was now only "a slim chance" of its previous forecast of two more interest rate rises this year being proved correct. Of more interest is NAB’s assesment, forecasting an abrupt end to a six-year cycle of official rate increases in the first quarter of next year, when, it says, a slowing global economy will put a brake on inflation and usher in a 12-month period of cash rate reductions from the current 7.25 per cent to 6 per cent.

In this scenario will the banks pass on the lower rates and how quickly?

Speaking in Adelaide, CBA chief executive Ralph Norris has refused to rule out more rate hikes, independent of any Reserve Bank action. "Basically it depends on where pricing goes internationally. If rates continue to remain high, or increase, there is always a risk there will be further out-of-sequence increases."

This was the experience in the UK, where banks failed to ease the burden on borrowers despite official rates falling 75 basis points over six months. However, according to a NAB spokesman, the reason it occurred there was to offset higher credit costs, adding "it could happen here if the market continues to deteriorate". In Australia, though, the starting point is different. The banks have been pricing loans to reflect their higher cost of funds whereas the UK banks had no such opportunity to reprice their loans prior to the UK Central Bank lowering official rates in an attempt to stimulate a stagnant economy.

My view? In the absence of substantial competition, Australian banks will reluctantly pass on future cuts by the RBA as they attempt to re-establish the margins on home loans they enjoyed prior to the competition from non-banks. By this I mean they might pass on a 20 basis point reduction when the RBA cuts official rates by 25 points.

(References: The Australian, 17 July 2008; The Herald-Sun, 17 July 2008; Sydney Morning Herald, 17 July 2008)

Tuesday, July 15, 2008

Get thrifty - save some money

Here are some tips that we've used ourselves or that people have told us about that can help you save some money.

  1. Have a look at your mobile phone bill. Can you cut a better deal. Look at other providers and see what's available. We just moved providers and our mobile bill has come down from $300 per month to $90 pm. Try to text rather than calling mobile phones when its appropriate.
  2. How high is your electricity bill? With privatisation we're not tied to one provider. Call another and see if they can service you. We just moved to Integral Energy and they guaranteed to take 8% off our bill. That represents a saving of about $60 a quarter. Use your clothes dryer only when you desperatley have to. Turn off lights when not in use and turn off appliances at the power point.
  3. What about your insurance? Consider consolidating them with a single insurer for extra savings on premiums.
  4. Do you outsource? If you have a cleaner or gardner come in once a week, consider having them come in once a fortnight. Even better, look at the jobs you can do yourself.
  5. Consider selling unused items around the house. A client had her kids collect all the Playstation games they have in the room that they don't use any more. They traded them in and received $200. Is there money sitting around your home?
  6. Cut down on tuckshop for kids and keep bought lunches for yourself to a minimum. Make it yourself, you will save a fortune. Baking cakes from packet mix is fine for their morning tea and let the kids help with the cooking. I do and my little ones think its great.
  7. Stop the take away! Sure its (somestimes) quick and easy but it really is very expensive for what you get. Haven't you wondered how they can afford all those commercials? Have a no take away rule in your home.
  8. Cut down on your coffee. At $4 a cup just 2 a day adds up to $40 in a week! And I know people who are drinking more than that a day.
  9. If its convenient shop 1 hour before the supermarket closes, they mark down a lot of fresh produce - especially meat, just before they close.
  10. Email, to keep in touch rather than using your mobile phone.
  11. Cut down on your Austar or Foxtel subscription. Hiring the video is cheaper!
  12. Do you have consumer debt? Credit cards, personal loans etc. Consolidate them and pay the one loan at a lower interest rate.
  13. Don't buy bottled water. Get a water bottle and take your own water. Australian tapwater is of the highest quality and you will be helping the evironment by not purchasing more plastic bottles and saving money!
  14. If you really want to save money, take the savings you have made by using these tips and put it on your mortgage. Over time you will save thousands of dollars.

If you can think of other savings tips, or if there is something you have done that was particularly successful, please let us know.

Friday, July 11, 2008

What is investment risk?

All investments have some form of associated risk: they all expose you to the chance you could lose money (either notionally or permanently). Here are seven of the more common types of investment risk.

  1. The risk of permanent loss of capital. Poor quality investments usually experience falls in their value from which they never recover. In extreme cases, their value can fall to zero.
  2. The risk of volatility. Investment volatility is the risk of the value of your investment moving up and down. With high quality investments, their values should move up more than they go down.
    Investments which are expected to produce higher long-term returns (such as shares) tend to
    experience higher levels of short term volatility. On the other hand investments which are expected to generate lower long-term returns (such as bonds) usually experience less volatility in the short term.
  3. Wealth risk. This is where your investments do not generate sufficient returns to help you achieve your wealth or retirement objectives. This is typically the case when a person chooses not to employ an asset that has a higher level of investment volatility (and also a potentially higher return). In that case, the person will need to lower their wealth or retirement expectations.
  4. Credit risk. Credit risk usually applies to fixed term investments and means that the institution you have invested with may not be able to make the required interest payments or repay your money.
  5. Inflation risk. This is where your money loses purchasing power because your investments do not keep pace with inflation. Cash is a good example of an investment that usually falls prey to inflation risk.
  6. Liquidity risk. Investments which are fixed term expose you to liquidity risk. For example, if you need to access your money from fixed term investments before the term expires, you may be prevented from doing so under the contract. Or, if you can access your money, it might take longer than you want, and/or you may be charged significant penalty fees. Poor quality share and property investments also expose you to liquidity risk. The risk is that no one will want to buy them from you or will only buy them at a substantial discount.
  7. Currency risk. When you invest overseas, your money is usually converted to the currency of the country in which you invest. If the Australian dollar subsequently rises in value compared to the other country’s currency, your investment will be worth less to you. On the other hand, if our dollar falls in value, your investment will be worth more.

How can you manage investment risk?

Investment risk can be managed using three prudent principles of investing:

  1. Only invest in high quality investments.
  2. Construct a properly diversified portfolio.
  3. Regularly review your investments to ensure they continue to maintain their quality

Talk to a qualified financial planner about the best way to invest and manage risk associated with your investments

Monday, July 7, 2008

Is it time to refinance?

Increased competition between lenders has given Australians unprecedented choice when it comes to finding the right home loan. Recent figures show that around two thirds of all new loans are in fact refinancing of existing loans. This number is higher than ever, as more and more borrowers are discovering that reassessing their home loan and reconsidering their lender can save them thousands.

What is refinancing?

Refinancing involves taking out a new loan, and using some or all of the funds to pay out your existing loan. This may or may not involve switching lenders. So, what are some of the main reasons for refinancing?

  1. Putting your finances in order – You can take out a new loan as a way of consolidating your debts, by rolling them all into a new home loan. In other words, you take out a larger home loan and use it to pay off various debts. This can result in savings since the interest rate on your mortgage is usually lower than on credit cards or personal loans.
  2. Borrowing more – Borrowers who have built up equity in their home often take advantage of refinancing to access this equity via a larger loan. This can be a way of financing a home renovation, a new car, or investment.
  3. Getting a better deal – High competition in the lending market means that unsatisfied borrowers may get a better deal if they shop around. However it’s not as simple as choosing the loan with the cheapest interest rate and the lowest fees. You may want a mortgage with different features to your current loan. Often the decision to switch is prompted by a change in personal financial circumstances. For example, if your salary has increased you might want a loan that allows you to make higher repayments in order to pay off your mortgage sooner.
  4. Fixing your loan – On occasions when fixed rates are lower than variable rates, many borrowers take advantage of the opportunity to lock in a low rate for a fixed term. If you’re concerned about risk of interest rate rises, switching to a fixed rate loan can give you peace of mind. You might also consider fixing a portion of your loan.

Tip: With enough equity in your home, you might consider borrowing more to take advantage of discounted lending rates. Using a correctly structured loan means you pay less interest

Finding the right fit

There are many factors you need to consider to before you decide which loan out of the hundreds of products available is the best for you and your circumstances, now and in the long term. Consult a good broker that has the knowledge, access and expertise that’s needed to get the loan to best suit your current circumstances.

Friday, July 4, 2008

Women and their super

Women tend to be less concerned about superannuation even though they probably have a greater need for it in retirement. Women have a longer life expectancy, take greater time out of the workforce for parenting and, on average; working women earn less than men.

In general, women will have a need for more super to support a longer life but their circumstances mean they will generally have less in their accounts.

There are simple things women can do to boost their superannuation, including:
  1. Keep as few accounts as your employment circumstances will permit. Multiple super accounts mean more fees than necessary. Also, keep your address up to date with your providers to prevent accounts from going astray.
  2. Find lost super, especially if you've done a lot of casual or part-time work. You could easily have little pots of money in accounts you've forgotten about.
  3. Top up your super when you can afford it. Tax concessions make super an excellent way to save for retirement. Outside of your home equity, most people will save more through super than through any other way.
  4. Get interested in your super – read your 6 monthly or annual statements and keep track of how your super is growing. Balances may vary from year to year but over time, with steady and appropriate contributions, your super will grow into a tidy nest egg on which to enjoy a comfortable retirement.

Wednesday, July 2, 2008

5 Tips to get kids saving

As parents, we want to do everything we can to help our kids get the best possible start in life. One of the most important things you can do to help them get off on the right foot is to teach them to respect and value money.

  1. Talk about money with your children as they often see you spending money and getting money from an ATM, but they don’t see the monthly bills and other expenses. As a result, children develop a perception that money is easy to come by and don’t understand how it needs managed. When appropriate, sit your children down when you are balancing your chequebook or paying the monthly bills. This will give them a broader view of how money is earned and managed.
  2. Pocket money will allow children to practice saving and spending money, and is a great way to teach them how to be responsible with their money. Spending money all at once and losing money is part of the lesson most children will go through in order to develop financial care in the future.
  3. Provide the opportunity for your kids to earn money – Children should be accountable for the regular daily chores around the house – making the bed, watering the plants, washing the dishes etc. However, for those tasks outside of the day-to-day running of the household, you should create opportunities for your child to earn a little extra pocket money.
  4. Take your children grocery shopping – Get your children involved in identifying grocery items and how much they cost. This will teach them how smaller priced items can quickly add up to a much larger total.
  5. Set up a savings account for your child – Maintain controls, which you govern (like when they can make withdrawals), but let them see their deposit book or statement regularly, particularly when interest is credited. This will teach your children about rewards and saving.

Tuesday, July 1, 2008

No rate rise required

It’s the first day of the new Financial Year – a good day for the Reserve Bank of Australia (RBA) to meet and decide whether home owners with a mortgage will be spared more financial pain by keeping interest rates on hold.

Yesterday, the last day of the fiscal 2008, the RBA released figures that show the property market cooling and momentum in business credit is starting to weaken. Quoted in the Sydney Morning Herald, the figures indicate the property market is experiencing the slowest growth in 17 years, and business investment, while rising in the month by 0.6%, has hit the lowest level in a year on an annualised basis.

In December last year, business investment was powering ahead at 23.8%. It was, essentially, a major propellant for the economy. The list of major investment projects underway at the moment is impressive, but experts believe the number of new developments will start to slow.
The combination of higher interest rates, the blowout in funding costs and weaker business and consumer sentiment will hold back the commissioning of new projects. Business investment in new capacity, particularly last year, was the new driver of the Australian economy. Now, perhaps, that won't be the case going forward.It is a similar story with the housing market. The rate of borrowing to buy property has slipped to the lowest level since September 1991, spelling gloom for the market.

The Reserve Bank does not need to move interest rates today or indeed, for the rest of the year
Add to this the increasing price of oil is likely to feed into the cost of other goods, pushing up prices and therefore inflation. However, it will also have a dampening effect on discretionary spending as consumers adjust their budgets to find the extra dollars required to fund their largely inelastic demand for fuel - meaning interest rates wont necessarily be the only thing constraining demand.

The potential for inflation in the current circumstances will not be due to excesses in demand. The RBA has the time to examine how the current slowdown in construction and business investment will play out does not need to move interest rates today or indeed, for the rest of the year.

Friday, June 27, 2008

Women falling into a financial trap

Of all those who need a helping hand planning their financial future, women approaching retirement with a modest net worth are highest on the list. I was recently asked to contribute to an article on this subject for the Courier Mail Newspaper here in Brisbane.

You can view the full article here:,25479,23758162-5013953,00.html

Wednesday, June 25, 2008

Little interest in high interest

Recent research by Citibank indicates that 81 per cent of Australians don't know what rate of interest they are earning on their savings account. The survey of 1,100 people, shows that those on a household income below $40,000 were more likely to know exactly what rate of interest they get on their savings (30 per cent) than those earning a higher income of $70,000 or more (16 per cent). This suggests lower income households need to keep a closer eye on interest rates than their higher income-earning counterparts.

Men and Women

The research also shows that 24 percent of men know exactly what interest rate they are currently earning on their savings. While for women this figure drops to 15 per cent. One in five men (21 per cent) knew the interest rate when they opened their savings account but have since forgotten. For women, the corresponding result is more than one in three (34 per cent).

Women are also more conservative than men when it comes to knowing the top interest rates available in the market. When asked for the highest interest rate on offer at the moment, 20 per cent of men said 8 percent or more compared to 12 per cent of women.

Thursday, June 19, 2008

The cost of a little discipline

A personal loan may be more costly than home loan rates but they have the advantage of instilling discipline in certain borrowers when purchasing consumer items.

Consumer finance is by definition, finance for items that get consumed - things that get used up or wear out. It would be perfect if we could always access the cash when we needed it to buy these kind of items.

When you're looking at a new car, holiday, boat or other worthwhile purpose, the cheapest way to get it is to save. But when these items cost upwards of $20,000 saving might not be an option.
Borrowing for consumer items using credit that operates on a revolving basis, like credit cards or some home mortgages has its advantages. But when it's used by borrowers with limited or fixed income, often the principal remains unpaid for years or never gets paid off at all.

When you do need to borrow for consumer items a personal loan might be the best option. A personal loan allows you to access goods and services now, that you might not otherwise be able to take advantage of if you were forced to save. The repayment of the loan, both principal and interest is required to be made over a specific period of time, usually one to seven years.

Borrowing for consumer items can make good sense. If your car is older and is in need of constant maintenance and is costly to run, there may be good financial reasons to borrow funds for a newer and less costly vehicle. The running costs alone might be preventing you from saving any money towards a new vehicle. However, before you consider borrowing on this basis ask yourself a few questions first. Do I really need the item? Would it be possible to get something a little less expensive and save for it? Also consider the consequence additional debt will have on other financial goals you may have. If you are a first homebuyer looking to enter the mortgage market, it might be better to defer the decision to borrow for an overseas holiday until you are in your new home.

The simple fact is that some people do need the discipline of a certain payment every month for a set period of time to pay things off - and there's a lot to be said for that. But if you're on a higher income and you have the discipline and can afford to service new debt, then you've probably earned the right to make the choice to "consume now and pay later"

Tuesday, June 17, 2008

Tax breaks

Tax time is almost here so it makes sense to see what you can do to maximise your return. Consult you tax specialist and look at ideas to make the most of your refund.
  1. Pre-pay interest on an investment loan. Paying 12 months interest now means you receive the tax deduction this year
  2. Make a super contribution for your spouse. If they earn less than $13,800 and meet other criteria you can boost their super by $3000 and reduce the tax you pay by up to $540
  3. Defer income and bonuses until after July 1 if you can. This will push your tax down slightly when the new rates come into effect.
  4. Donate to your favourite charity before June 30 and claim the deduction this year.
  5. If you've made a profit on the sale of property or shares consider the rest of your investment portfolio. If you've got some dud investments, crytalising the loss now means they'll be claimable against your other profits.
Consult your tax specialist as soon as you can about your tax position and get their recomendation before the financial year closes. If you're self-employed, spend your valuable time maximising your revenue and profit and let the tax experts manage your tax - not vice versa.

Monday, June 16, 2008

Relationship breakdown and debt

If money wasn't the cause originally, problems with debt can occur when a relationship comes to an end. To reduce the financial impact of relationship breakdown, ensure that your ex-partner does not take savings and use available credit from any joint bank accounts, home loan redraw facilities and credit card accounts.

Five things you should do in the event a relationship turns sour.

  1. Establish a new transaction account in your name only and ensure that your salary and other payments are diverted to the new account immediately.
  2. Close joint accounts unless these are being used to pay joint debts of the relationship, childrens expenses etc.
  3. Tell your bank or lender about the relationship breakdown and demand, in writing, that it stop any further use of the any loan redraw facility. This will be critical if the redraw facility allows either party to access the available credit without the other borrower's authorisation.
  4. Cancel any right your ex-partner may have to access your credit card account as a secondary card-holder.
  5. Arrange for copies of all joint account statements to be sent to you in the event you change address.

If the breakdown is permanent, you will generally need advice from a family law lawyer about dividing the property of your marriage or de facto relationship.

Wednesday, June 11, 2008

The super self-employed

By Jaeneen Cunningham

A report by the Association of Superannuation Funds of Australia (ASFA) says that Many self-employed Australians remain unprepared for retirement with little or no superannuation or other appropriate savings. According to the chief executive of ASFA, Pauline Vamos, the research has revealed a significant gap in the retirement savings of the self-employed when compared to wage and salary earners in Australia. The report shows that while the self-employed sector makes up over 10 per cent of labour force, 28 per cent of the sector has no superannuation at all, while a further 53 per cent has a super balance of less than $40,000.

We know small business is under greater financial pressure than ever but given the tax incentives aimed at boosting contributions, self-employed people should consider superannuation as part of a strategy to increase their retirement savings. If you're self-employed its imperative you dont let all the years of hard work slip away by not providing adequately for youself in retirement. Look at your expenditure and find a little to make those important contributions now!

Tuesday, June 10, 2008

Creating Wealth with regular savings

With rising interest rates and rising house prices, your dream of one day buying your own home is possibly just that - a dream. You can give your medium term financial goals a kick start by setting up a regular savings plan now.

A regular savings plan is an arrangement you make with a fund manager or someone similar to invest an initial lump sum followed by regular investment installments; the most common installment period being monthly. A lump sum amount of $1,000.00 will get you started and minimum monthly amounts usually start at around $100.00. You can invest anything above these amounts according to what you can comfortably save. If you're like most of us, it can be a good idea to have your monthly payments direct debited from your bank account to make sure you stick with the plan.

Tuesday, June 3, 2008

Your Money Personality

By Jaeneen Cunningham

Have you ever wondered why money seems to work so well in some people’s lives and so destructively in others? Why some people control money while others allow it to control them? Or why some of us can manage it so effortlessly to fulfill life’s plans and goals, while others never stop to question how they want money to serve them?

Kathleen Miller says that its because for many of us, money is never just money. It can represent many things: love, power, happiness, security, self-esteem. As a result, we have intense feelings about money: feelings we sometimes hide from which keep us from dealing with it productively.

Just as our feelings about money can vary, so can our behaviour towards it. Some people hoard it while others spend it like a drunken sailor. Some people take great care with their financial responsibilities, while others avoid the same tasks as if avoiding some great pain. Some people make no effort to invest, some very conservatively, and others take significant risks - often at their peril. In my time as a Finance Coach it has become apparent that it is important for each of us to understand our issues surrounding money.

In business, I have had great success using the psychology of persoanlity profiling to better understand my strengths and the strengths of my co-workers. Once I understood where these strengths lay, I stopped beating myself up because I couldn't do one thing or another and focused on the things that I was good at. I also stopped beating up on my co-workers which was also a good thing. Now I use the same psychological pricples to help understand my clients needs by conducting a Money Personality Diagnostic.

"Money can enhance happiness and prosperity, or it can destroy them. No one simply drifts to the pinnacle of success—you have to climb." Kathleen Gurney

Why do I want you to understanding your 'money self'? Because it will help you gain insight into how and why you react emotionally to money - why you have those reactions and how they affect your financial successes. If you don't know your money strengths, you can't use them. If you don't know what's preventing you from getting money, you will remain a money victim. If you don't know what you want from money, you may never reach your financial goals. If you aren't willing to change your money attitudes and habits, you will stay in your financial status quo.

Sunday, June 1, 2008

Tame your mortgage monster

by Jaeneen Cunningham

Getting debt under control is not as difficult or as daunting as it seems. Coming up with strategies to tame your mortgage monster is easy - it is implementing them and sticking to them that requires will power.

Home loan customers have probably known for some time that the best way to save money on a mortgage is to pay it off as fast as you can. The longer you take paying back the principal loan amount the more interest you pay along the way, the higher the overall cost of the loan. You can do this in a number of ways: you can pay slightly higher repayments on a regular basis. You can make your payments more regularly than required – say weekly instead of monthly. This means two things: there will be a slightly lower interest charge as your loan balance reduces each week, and more significantly, you will be making one full extra repayment each year.

You can get even more savings if you 'park' your spare cash in your mortgage. A popular product to help achieve this has been the Line of Credit. A loan like this lets you put all you money directly into the loan account and then lets you access your money as you need it through a debit or credit card. In theory the result is a lower regular loan balance and therefore less interest charges. No set repayment amount is required as long as you pay the interest each month. On some loans the interest can even be 'capitalised' up the limit of the original loan that was first approved.

However, we have found many customers using a line of credit have tended to pay the interest charges only. It has only been with the passage of time that they have come to realise that the loan isn't coming down the way they planned. The idea that you would pay more into the loan than you were taking out seemed like a good idea at the inception of the loan. However, as time passes so do priorities and maybe those goals that were set three or four years ago have had to make way for other important life changes like career moves or family.

In general there are really only two simple ways to clear debt quickly and save money: use a product with the lowest possible interest rate that fits with your current circumstances, and pay the bank more than you are required to under the terms of your loan. With the booming property market many customers have not been concerned about the persistent level of their line of credit debt and if it suits your lifestyle, why not spend a little of the capital gain that you are making now rather than later when you sell the property. On the other hand, If you have found yourself struggling with a line of credit limit that just wont come down and you are concerned, then maybe its time to restructure your debt into a loan that is a bit more restrictive on your spending habits.