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Author Archive for: Greg Clough

Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.
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Productivity Commission’s Errors a Tragedy for Home Loan Borrowers.

I nearly choked on my brekky this morning when I read this article, “Why you can’t get a good deal on your home loan” on news.com.au.

The article has a crack at mortgage brokers using the Australian Government Productivity Commission (AGPC) report into the finance industry released today.  It’s a tragedy for home loan borrowers that AGPC has got critical issues so wrong.

Mortgage Brokers are Licensed

This line really got my hackles up – “Unlike in wealth management, mortgage brokers are not obliged by law to act in the best interests of the customer,”

This is just plain wrong. Mortgage Brokers are licensed by the Government through ASIC and one of the requirements of our license is that brokers “must complete an assessment as to whether a loan is ‘not unsuitable’ for a consumer”. The compliance is very strict.

Furthermore, I would happily line up the performance of mortgage brokers against the wealth management industry.  For 16 years we have provided quality advice to our clients always putting them first.

Banks Taking Advantage of Loyal Customers

I do agree with the statement that banks offer a better deal for new customers rather than established. I’ve been commenting on that for over a year now.  However, the report somehow puts the blame for this on mortgage brokers not doing their job.

The reality is that the clear majority of customers who switch banks do so through a mortgage broker arranging a home loan for them with another lender.

Instead of deriding brokers the AGPC should be encouraging more consumers to talk to a broker.

Why Criticise Choice? 

The report claims there are 4000 different home loans and that somehow this is a bad thing.  Home loan choice combined with professional mortgage broker advice is absolutely the best option for borrowers.

Don’t Forget the Non-Bank Sector 

The article also does not mention the “non-bank lending” sector. We have always been a strong advocate for non-banks. They play a key role in innovation and providing solutions for niche markets that would normally be unable to obtain finance.  Mortgage brokers are the main way borrowers find out about non-bank lenders because they don’t have the marketing spending power of the major banks nor a branch network.

Word of Mouth Speaks Volumes 

Like most brokers, we rely heavily on “word of mouth” referrals so it is in our best interests to deliver the very best outcome for our valued clients and if we don’t they are less likely to refer.  Furthermore creating a win, win environment is what makes the world go around. The commission system used to remunerate brokers only rewards us when we get the job done for the client and for making sure they are happy over the long term.

It’s a Tragedy

I’m surprised and disappointed that Australian Government Productivity Commission, an institution we rely on for knowledgeable advice, could get this so wrong.  If the Government acts on these views, its only going to lead to tragic consequences for home owners and investors. It will also in fact decrease competition as borrower’s access to alternate lenders will be become more difficult.

The Mortgage & Finance Association of Australia (MFAA) is disappointed by the report saying “The Report’s authors have failed to understand the reasons why consumers engage brokers to act on their behalf“.

 I’d Love to Hear from You

As always if you would like to chat about how we might be able to assist you or if you would like to discuss the content of this article I’m always up for a chat, so please feel free to call me direct on 0409 02 99 22.

 

UNDERINSURANCE BECOMING MORE COMMON IN AUSSIE HOUSEHOLDS
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UNDERINSURANCE BECOMING MORE COMMON IN AUSSIE HOUSEHOLDS

Stats show 29% of homeowners and 67% of renters don’t have home and contents insurance, and as many as 40% of households with insurance are still underinsured. Make sure you’re covered.

What is underinsurance? Are you underinsured?

Underinsurance is when someone does not have adequate insurance to cover the cost of loss or damage to the things they own, or is not insured at all for those belongings.

As far as material goods go, your home or property is likely to be your most valuable asset. Insuring it for less than what it would cost you to rebuild makes about as much sense as insuring a Porsche at a Hyundai price. You might get away with it, but at some stage the gap in cover is going to come back to haunt you.

How many people do not have home and contents insurance?

The David Murray Financial System Inquiry’s Final Report showed that 29% of homeowners and 67% of renters in Australia do not have any form of contents insurance.

How many people have home and contents insurance but are still underinsured?

Underinsured home insurance is surprisingly common, it would seem. The Insurance Council of Australia estimates that more than 40% of households fail to correctly assess the value of their home and contents, so there’s a real chance you could be under-insured.

Underinsured home insurance hurts homeowners at claim time

Cheap insurance may not be so cheap when you make a claim. Apart from not receiving enough home insurance money to cover the cost of your loss, there’s an added risk that can be far greater. If you have significantly under-insured your home or contents, your insurer may have the right to pay only part of any loss because you’ve insured for only part of what it’s worth.

 

Case Study:

Let’s say you insure your home for $150,000, but it’s really worth $250,000. A bushfire sweeps through the area and does $80,000 damage to your home. Your insurer may have the right to reduce the payout in proportion to the level of under-insurance.

In this case, there might be a payment of only $48,000. Sadly, that is nowhere near enough to repair or replace a $250,000 home.
When it comes to contents insurance, or even personal effects insurance, doing a household inventory of everything you own in your home is one of the most important steps you can take to protect your items. An inventory can help you keep track of everything, from your electronics and appliances to your jewellery and DVD collections. This can be invaluable when deciding how much contents insurance coverage you need and also at time of claim. We have also identified 10 ways you can cut the cost of your home and contents insurance.

Prevent underinsurance: Get your complimentary review today.

1300 1400 15

 

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2016-2017 FEDERAL GROWTH – A STEADY ROAD MAP FOR GROWTH
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2016-2017 FEDERAL GROWTH – A STEADY ROAD MAP FOR GROWTH

A Steady Roadmap for Growth

Budget-2016

Overview

As is custom, there were a number of official announcements and an abundance of rumours and unofficial ‘leaks’ in the lead up to the release of the 2016-17 federal budget. As widely anticipated, there was very little in terms of budget measures specifically aimed at housing. However, the significance of the tax reform contained within this budget was arguably underestimated, particularly if you consider the changes projected for the out-years. In the near term, small businesses are the main beneficiaries of the announced reforms.

The key areas addressed in the budget:

  • the Government has held firm on their commitment not to make any changes to capital gains tax or negative gearing provisions. Furthermore, comments within the Treasurer’s budget speech suggest the coalition have solidified this position ahead of the upcoming election;
  • the plan to lower the company tax rate to 25 per cent through a staged implementation over the next decade, with a number of changes for small businesses to take effect in this budget period;
  • a modest change to the personal income threshold for the second highest marginal income tax rate which was increased from $80,000 to $87,000 (slightly higher than expected) in order to ameliorate concern about bracket creep;
  • Commitment to the Smart Cities Plan;
  • A Youth Employment Package
  • significant reforms to the superannuation system;
  • the ATO has been provided with additional resources to bolster enforcement activity, primarily aimed at addressing multi-national tax avoidance.

In the sections below we discuss the overall economic and fiscal outlook presented in the 2016/17 Budget along with some of the key forecasts. This is followed by additional explanatory detail regarding the key announcements most relevant to the residential building industry.

Economic Backdrop & Fiscal Position

The Budget presents a “steady as she goes” outlook for economic growth over its forecast horizon. The key economic assumptions on which the Budget was developed are summarised in the table below.

Key Treasury Forecasts underlying Budget 2016-17:

federal budget graph

In terms of the economic assumptions underlying the Budget projections, the Treasury foresees the rate of economic growth returning to 3.0 in 2017/18 and remaining at this level over the forecast horizon. The acceleration of economic growth will help drive a reduction in the unemployment rate to 5.5 per cent by the end of the forecast horizon, a little lower than the 5.75 average rate expected for 2015-16. Against this backdrop, inflation is expected to pick up a little but remain in the relatively comfortable 2 per cent to 3 per cent range. Stronger GDP growth, and the decline in the cash value of the budget deficit over time means that the relative size of the deficit is expected to fall from 2.4 per cent of GDP in 2015/16 to 1.4 per cent of GDP in 2017/18.

Of note are the estimates of the contribution that dwelling investment will make to economic growth in the years ahead. HIA’s projections are for dwelling investment to fall by 5.4 per cent next financial year and by 6.7 per cent in 2017/18. The HIA’s forecasts are based on the assumption that new home commencements will decline from about 214,300 in 2014/15 to 160,100 in 2017/18, while renovations activity is projected to recover modestly over the same period. Realising the outcomes expected by Treasury will require a continuation of the current record levels of new housing activity and strong growth in the renovation market.

While the changes to superannuation and the lowering of the Official Cash Rate will encourage more investment in other avenues like rental investment, it is unlikely that this will be sufficient to deliver the continued growth in residential investment that Treasury is anticipating.

In terms of the projections contained in yesterday’s budget, the size of expected future deficits has increased since the forecasts in December 2015’s Mid-Year Economic & Financial Outlook. In 2015/16, the underlying cash balance is expected to reach $39.9 billion followed by $37.1 billion in 2016/17. Thereafter, the deficit is projected to decline significantly, falling to just $6.0 billion by 2019/20, the latest year for which Treasury forecasts have been prepared.

federal budget forecasts

Key Budget Measures

‘Ten Year enterprise Tax Plan’:

  • The tax rate applicable to small businesses has been lowered by 1 per cent to 27.5 per cent, which follows on from the 1.5 per cent cut in the previous year.
  • The definition of small business has been expanded from those with revenue of less than $2 million to those with revenue of less than $10 million.
  • Extension of the provision enabling small businesses to immediately depreciate assets valued up to $20,000 to the end of June 2017, and making this provision accessible to businesses with revenue up to $10 million.
  • A ‘Ten Year enterprise Tax Plan’ aims to incrementally lower the company tax rate to achieve a 25 per cent rate for all companies by 2026/27. Over time, the size of companies eligible for the 27.5 per cent tax rate will be lifted each year until all companies are taxed at this rate in 2023/24. The rate for all companies will then be incrementally lowered over the ensuing four years to reach 25 per cent by 2026/27.
  • The government will extend the unincorporated small business tax discount. From 2016-17, the discount will be available to businesses with annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8 per cent. The maximum discount available will remain at $1,000. Over the next decade, the discount will be further expanded in phases, to a final discount of 16 per cent.

The Youth Employment Package

  • This program, Youth Jobs PaTH (Prepare, Trial, Hire), has three components: the first provides pre-employment skills training for young job seekers; the second provides a $1,000 inducement to businesses to provide a 4-12 week internship for program participants along with an income supplement for the participant; and the third is $6,500 ‘Youth Bonus’ wage subsidy payment for employers who take on a young worker who has been in employment services for longer than six months.

Reforms to superannuation

  • The purpose of the superannuation system is to be enshrined in legislation in line with a recommendation of the Murray Review. This will define the purpose as: providing an income in retirement to substitute or supplement the Age Pension. This provides legislative basis the government of the day to target the superannuation tax concessions at those who would otherwise be likely to be remain dependent on the Age Pension, this is likely to come at the expense of tax concessions currently available to those likely to be self-funded in retirement.
  • Those with combined incomes and superannuation contributions greater than $250,000 will pay 30 per cent tax on their concessional contributions, up from 15 per cent. This represents a lowering of the previous income threshold of $300,000.
  • The superannuation concessional contributions (ie pre-tax contributions or contributions where a deduction is claimed) cap has been lowered to $25,000 per annum, down from $30,000 for those under 50 and $35,000 for those over 50.
  • This has been partially balanced by enabling unused concessional contribution caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less.
  • The government have introduced a $500,000 lifetime cap for non-concessional contributions (ie contributions made from savings for which no deduction is claimed).
  • The Government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017.
  • From 1 July 2017, the Government will lift current restrictions and allow individuals under the age of 75 to claim tax deductions for personal superannuation contributions to eligible superannuation funds.
  • The current spouse tax offset has been broadened. The income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000

Tax Integrity Package’ – additional resources for the ATO

  • The government have provided additional resources to the Australian Tax Office to establish the Tax Avoidance Taskforce. The key focus will be pursuing tax avoidance by multinationals and high wealth individuals.
  • The government will introduce a new ‘Diverted Profits Tax’ targeting multi-nationals shifting profits earned in Australia to lower taxing jurisdictions.

Source: HIA Economics Research Note – May 2016
https://hia.com.au/

RATE CUT PREDICTIONS 2016
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RATE CUT PREDICTIONS 2016

Rate Cut Predictions 2016

The Commonwealth Bank of Australia predicts another two official Reserve Bank of Australia interest rate cuts will occur in 2016.

It would take the cash rate to 1.25 percent.

CBA’s chief economist Michael Blythe said he felt obliged to add another cut to our cash rate profile in November following the one already pencilled for August.

The CBA is alone among the big four in tipping a 1.25 percent cash rate by November.

NAB expects the Reserve Bank to hold at 1.75 percent for the rest of 2016.

Westpac and ANZ Bank economists expect one more cut in August.

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THE LATEST RBA RATE DROP IS A BOON FOR INVESTORS
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THE LATEST RBA RATE DROP IS A BOON FOR INVESTORS

The latest RBA rate drop is a boon for investors

The latest RBA rate drop is a boon for investors and it’s also great for those with an existing mortgage and anyone wishing to enter the property market.  There’s also predictions of a further rate cut sometime around August. It’s what’s been dubbed the “global race to the bottom” and certainly we’re seeing countries such as Japan with zero interest rates. The cuts are being driven by inflation and slow growth. Other factors such as the end of the mining boom are also playing a part in the RBA’s decision.

Still, the fact is that we are living in an unprecedented time with the interest rates reaching historic lows of 1.75% and some experts recently predicting two more cuts this year. Click here for more information on the predictions in 2016. 

The RBA minutes suggest we will be in a low interest rate environment for the foreseeable future.

To look at where we are in historical terms, we’ve been seeing continual drops and interest rate cuts over the past six years. The last time interest rates were hiked was back in 2010. Since then, it’s been a steady series of cuts each quarter.

Those old enough may remember the days of the late 80s and early 90s when interest rates were at crippling levels of 17%. It’s hard to imagine Australia ever returning to those days, but right now the property investment market is under a patch of sunlight.

As mentioned at the start, this is good news for virtually all Australians. For those with an existing mortgage, this suddenly means you have extra capital to play with and use for investment. Even a small cut on one’s home loan rate can save thousands of dollars. This in turn can go back into play as investment capital. For investors with a portfolio, you can access these record low rates to expand and add properties. And for those desperate to enter the world of property investment these historic low rates allow a platform to do so.

It’s also an opportunity to review existing loans to get a better deal and take advantage of the new rates. The last few months have seen a significant drop in home and housing approvals, and this rate cut will bolster the figures.

The beauty of Australia with its vast land and varied property markets is that there is no end to finding an affordable property in a growth area. Whether it’s South East Queensland, Brisbane, outer Sydney or Melbourne, or growing regional centres like Port Macquarie, there are countless markets to enter.

For the investor this means you can acquire a property with a loan that’s already cheaper than it was a year ago and have the benefits of positive cash flow on top of capital growth.

All the discussion about negative gearing is becoming less relevant as more and more properties will be positively geared and positive cash-flow.

There’s no doubt that this is a rare and golden opportunity.  Those that don’t take advantage of such low rates and affordable housing will definitely have cause to regret it years later. We know that Australian property will always be attractive to both domestic and international investors. This exceptional period is a unique window of opportunity that would be foolish for canny investors not to open and enter.

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