Interest Rate Changes – Minimal Deposit – Superannuation Changes
It’s July, there’s a nip in the air and winter has well and truly set in, as Australia deals with COVID outbreaks across several states. But July also marks the start of the new financial year, a good time to reflect on how far we have come since this time last year and to make plans for the year ahead.
As the financial year ended, there was plenty to celebrate on the economic front despite the continuing impact of COVID-19. Australia rebounded out of recession, with economic growth up 1.8% in March, the third consecutive quarterly rise. Interest rates remain at a historic low of 0.1% and inflation sits at just 1.1%, well below the Reserve Bank’s 2-3% target. Despite fears that global economic recovery will lead to higher inflation and interest rates, the Reserve has indicated rates will not rise until 2024 or annual wage growth reaches 3% (currently 1.5%).
In other positive news, unemployment continues to fall – from 5.5% to 5.1% in May. Retail trade rose 0.1% in May, up 7.4% up on the year, as consumer confidence grows. The ANZ-Roy Morgan consumer confidence index lifted by almost a point in June to 112.2 points.
Australia’s trade surplus increased from $5.8 billion in March to $8 billion in April, the 40th consecutive monthly rise, on the back of strong Chinese demand for our iron ore and other commodities. Iron ore prices rose 6.7% in June and almost 36% in 2021 to date. Oil prices have also surged, with Brent Crude up 8.4% in June and 45% this year. That’s good for producers and energy stocks, but not so good for businesses reliant on fuel and consumers at the petrol bowser. The Aussie dollar finished the year around US75c, up from US69c a year ago but down on its 3-year high of just under US80c in February due to US dollar strength.
Rates on the rise – time to lock in?
Fixed term rates have never been lower in Australia but with some lenders starting to move fixed rates and further changes on the horizon, is it time to have a look around to ensure you are getting the best deal?
Here’s what you need to know about what’s happening to help you decide whether or not to fix your rate.
Current environment for rates
Interest rates have been at an all-time low for quite some time now due to the COVID-19 recession, with the RBA cutting the official cash rate to 0.1% in November – down from the previous record low of 0.25%.
The current low rates have boosted Australia’s property market, with over 100,000 first homebuyers buying property since the start of the pandemic.i
These low rates have also spurred existing mortgage holders to review their arrangements. If you’re looking to refinance, you’re joining a growing number of Aussies doing so – 1.5 million according to a recent survey, with 45% of new lending occurring at fixed rates – this is usually around the 15% mark, so it’s a notable increase.ii
Why banks might shift rates
Despite the RBA stating they don’t intend to raise the official cash rate until 2024, some lenders have started to increase their longer-term fixed interest rates.
Concerns about inflation are having an impact on fixed rates. There has been conjecture that the RBA may be forced to increase their rates earlier than 2024 to put the brakes on inflation as the economy recovers from the COVID induced recession.
The anticipation of changes to lending conditions are also contributing to the possibility of increasing interest rates. Lenders have been able to access money at very low interest rates through the RBA’s term funding facility which was put in place to mitigate the impact of the coronavirus crisis, however this expired on June 30.iii And with bond yields on 4-, 5- and 10-year fixed rates increasing, there is pressure on lenders to increase longer-term rates.
Money website Mozo recently reported that at least 25 out of 99 lenders have increased their fixed rates since January, the majority being for 4- or 5-year terms.iv
Is it worth fixing your rate?
Despite the some lenders beginning to lift some fixed rates, it can still pay to look around for lower rates. Refinancing can put you in a better financial position and fixed rates could be the way to go, but it’s worth being mindful that if you need to break a fixed loan early, this could prove costly.
And even with record low rates, always be aware of the possibility that rates can drop, in which case you could be spending more. Fixed rate loans also tend to be more restrictive than variable as you won’t be able to make additional repayments, or if you are, they will be capped. They also tend to have fewer features so you won’t be able to link to an offset account or redraw funds.
Should you want out, you will have to pay a ‘break fee’, and this doesn’t tend to come cheap. Savings.com.au reported break fees from a few thousand dollars to much more, so this is something to keep in mind. While fixed rates are less flexible than variable, it could be argued there has been no safer time to choose a fixed rate than now, so you’re less likely to want to get out of the loan.
If you have an existing loan, it’s always a good idea to reassess your rates and check that the type of loan you have in place is the best match for your circumstances. And for prospective homeowners, it is important to get advice on what loan is most appropriate for you before signing on the dotted line. There are a lot of things to take into consideration beyond getting the best rate so reach out today to find out more.
Investing in property with a limited deposit
The Australian property market is a national obsession. It’s a popular topic around the barbeque, with bricks and mortar remaining one of our best loved investments. It’s little wonder, given the potential for providing a solid ongoing rental income and recent rises in property prices providing some optimism as to capital appreciation when it comes time to sell.
However, the rising prices that make property investment seem so attractive also mean it can be increasingly difficult to raise the deposit needed to invest. So let’s look at some ways to buy an investment property with a small deposit or even none at all.
Use equity in another property
If you already have a property, you can use the equity you have in it towards a deposit for another property.
Equity can be calculated by finding the difference between the current value of your property and the amount you still owe on it. Lenders have a basic formula they use to work out how much of your equity they will allow you to access. The maximum lending value is usually 80% of the existing property’s value. Say you have a property valued at $1,000,000 and you still owe $300,000 on it. Your equity is $700,000 and the 80 per cent borrowing rule means you can only draw on a maximum of $500,000.
This formula is a guide only and lenders look at many other factors when deciding to re-mortgage a property for investment purposes. It’s always best to talk to us about your particular circumstances and your ability to service the loan.
Choose a low deposit loan
Many lenders offer low deposit loans for investment properties. Lenders take into account the expected rental returns and your own repayment potential when calculating how much they will lend. But remember, if your deposit is under 20%, you will likely have to pay Lenders’ Mortgage Insurance (LMI) on top of your repayments.
Ask your family to act as guarantor
If your family is in a position to help, you could consider a family guarantee loan.
This is a situation where a relative (preferably a parent, grandparent or sibling), provides additional security for your home loan. Most commonly, equity in your guarantor’s property is used as security for part of your loan. While no money changes hands, this will allow you to top up your deposit, and avoid paying LMI fees.
These arrangements should not be entered into lightly. In the unfortunate event you are unable to make your repayments, your guarantor will have the responsibility of paying back their secured portion of the loan, even if this means selling their home.
It is important to demonstrate that you understand the risks you’re asking your family to take for you. We can help explain the obligations for both you and your potential guarantor.
Invest with a friend
If you don’t have enough to buy a property on your own, why not invest with a friend or family member? Combining your savings will increase the deposit you can put down. This could mean avoiding LMI costs or buying a more expensive property.
There’s also the benefit of splitting repayments, repairs and fees. Of course, splitting costs also means splitting profits and any tax deductions.
We strongly advise getting a detailed agreement drawn up if you go down this route to ensure the partnership and obligations are clear from the onset.
Using your SMSF
If you have a self-managed super fund (SMSF), you may consider buying the investment property through your fund. Keep in mind there are very strict rules you need to be aware of.
Essentially, the only purpose of the property is to provide retirement benefits to the SMSF members. The property cannot be acquired from a fund member or a close associate, and fund member or their associates cannot live in or rent the property.
The rules around commercial premises, are slightly different. In all cases, you need to check that you’re fully complying with SMSF law before you buy. The government’s Moneysmart website has useful information.
Examining your financing options can seem daunting. So please get in touch if you’d like to talk through which might suit your circumstances and investment goals.
New Financial Year rings in some super changes
As the new financial year gets underway, there are some big changes to superannuation that could add up to a welcome lift in your retirement savings.
Some, like the rise in the Superannuation Guarantee (SG), will happen automatically so you won’t need to lift a finger. Others, like higher contribution caps, may require some planning to get the full benefit.
Here’s a summary of the changes starting from 1 July 2021.
If you are an employee, the amount your employer contributes to your super fund has just increased to 10 per cent of your pre-tax ordinary time earnings, up from 9.5 per cent. For higher income earners, employers are not required to pay the SG on amounts you earn above $58,920 per quarter (up from $57,090 in 2020-21).
Say you earn $100,000 a year before tax. In the 2021-22 financial year your employer is required to contribute $10,000 into your super account, up from $9,500 last financial year. For younger members especially, that could add up to a substantial increase in your retirement savings once time and compound earnings weave their magic.
The SG rate is scheduled to rise again to 10.5 per cent on 1 July 2022 and gradually increase until it reaches 12% on 1 July 2025.
The annual limits on the amount you can contribute to super have also been lifted, for the first time in four years.
The concessional (before tax) contributions cap has increased from $25,000 a year to $27,500. These contributions include SG payments from your employer as well as any salary sacrifice arrangements you have in place and personal contributions you claim a tax deduction for.
At the same time, the cap on non-concessional (after tax) contributions has gone up from $100,000 to $110,000. This means the amount you can contribute under a bring-forward arrangement has also increased, provided you are eligible.
Under the bring-forward rule, you can put up to three years’ non-concessional contributions into your super in a single financial year. So this year, if eligible, you could potentially contribute up to $330,000 this way (3 x $110,000), up from $300,000 previously. This is a useful strategy if you receive a windfall and want to use some of it to boost your retirement savings.
More generous Total Super Balance and Transfer Balance Cap
Super remains the most tax-efficient savings vehicle in the land, but there are limits to how much you can squirrel away in super for your retirement. These limits, however, have just become a little more generous.
The Total Super Balance (TSB) threshold which determines whether you can make non-concessional (after-tax) contributions in a financial year is assessed at 30 June of the previous financial year. The TSB at which no non-concessional contributions can be made this financial year will increase to $1.7 million from $1.6 million.
Just to confuse matters, the same limit applies to the amount you can transfer from your accumulation account into a retirement phase super pension. This is known as the Transfer Balance Cap (TBC), and it has also just increased to $1.7 million from $1.6 million.
If you retired and started a super pension before July 1 this year, your TBC may be less than $1.7 million and you may not be able to take full advantage of the increased TBC. The rules are complex, so get in touch if you would like to discuss your situation.
Reduction in minimum pension drawdowns extended
In response to record low interest rates and volatile investment markets, the government has extended the temporary 50 per cent reduction in minimum pension drawdowns until 30 June 2022.
Retirees with certain super pensions and annuities are required to withdraw a minimum percentage of their account balance each year. Due to the impact of the pandemic on retiree finances, the minimum withdrawal amounts were also halved for the 2019-20 and 2020-21 financial years.
Time to prepare
There’s a lot for super fund members to digest. SMSF trustees in particular will need to ensure they document changes that affect any of the members in their fund. But these latest changes also present retirement planning opportunities.
Whatever your situation, if you would like to discuss how to make the most of the new rules, please get in touch.
Daniel Grusd and Onelife Wealth Management Pty Ltd (ACN 139 437 513) are authorised representative of Synchron, AFS Licence No 243313. Trading as Onelife Financial, Suite 806, 251 Oxford St, Bondi Junction NSW 2022. Unless specifically indicated, the information contained in this newsletter is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where necessary, seek personal advice from a financial adviser’.