Written by Hudson Adviser Phillip McGann
A recurring phrase in share investing circles at this time of the year is;
“Are we going to see a Santa Clause Rally this year”?
What this really alludes to is the observation of a year end rise in share prices from late November to early January.
Here is a seasonal graph of the last 30 years (until Dec 2016) for the US based S&P 500 index (I could not find similar data for the Australian market but as the US market usually has a large impact on our market the effect can well be similar);
What this graph appears to show is a definite rise in share prices at the tail end of the calendar year.
Why is this so ?
It is likely due to fund manager activity trying to “window dress” their holdings to make things look better for the end of quarter / year reports and potentially to secure bonuses etc. Also they may well be adding investment funds before calendar year-end as part of their investment mandates.
It also could relate to year-end consumer activity feeding into large retail stocks which are increasingly a larger part of the share market – think Apple and Amazon etc.
And also it could well be a more positive attitude from individual investors at this time of year feeding into trading activity. No one really knows for sure.
So is this a reason to rush out and buy shares? No not really, but it is a potential counter point to a lot of the doom and gloom around of late that has infected a lot of investors.
Ho Ho Ho !
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Written by Hudson Adviser Ivan Fletcher
Who is It For ?
For those self-funded retirees who do not qualify for the Age Pension.
Who is it NOT for ?
You are Not Eligible if you are receiving a Centrelink pension or benefit, a DVA Service Pension or Income Support Supplement;
What Can it be used for ?
- cheaper prescription medicines through the Pharmaceutical Benefits Scheme
- various concessions from the Australian Government and state, territory and local Governments.
What are the General Residence Requirements / Criteria ?
- have reached pension age for Centrelink (currently 65.5 for men and women) or
- Department of Veterans’ Affairs (DVA) Service Pension (currently 60 for veterans)
- be an Australian citizen, a holder of a permanent visa, or a Special Category Visa
- holder and meet other residence requirements where applicable;
- reside in Australia;
- provide their tax file number.
Are there Travel Restrictions ?
Applicants are required to be in Australia at the time of claim, however once received, cardholders can travel outside Australia temporarily without having their CSHC cancelled providing the period of absence is 19 weeks or less.
Is it Means Tested ?
Yes, it is subject to an Income Test (but no assets test).
Your income needs to be under the following threshold :
Couple separated by illness
* Income limits are increased by $639.60 for each dependent child in a person’s care.
Exemption to Means Testing
Where a person lost their Age Pension because of the 1 January 2017 assets test changes, they were automatically issued a non-income-tested CSHC. These CSHC holders are still required to meet the General Residence requirements mentioned above.
ASSESSABLE INCOME COMPONENTS
- Adjusted taxable income (ATI)
- Deemed income from account-based income streams (Pensions)
1. Adjusted Taxable Income (ATI)
ATI = Taxable income (per tax return) plus the following add backs
- reportable superannuation contributions (including salary sacrifice, personal deductible and additional employer contributions);
- total net investment losses (including net rental property losses);
- target foreign income (tax-exempt foreign income and income from sources outside Australia which tax is not paid on), and;
- employer provided fringe benefits.
Proof of ATI - If you do not have a tax return or Tax notice of assessment for the financial year prior to the year of claim Centrelink/DVA will request other documentation to verify a person’s ATI.
2. Deemed Income - Specifically for Account Based Pension (Allocated Pension)
Under Age 60, APs are not deemed as they are still assessable via the Adjusted Taxable Income.
Over Age 60 - Any Personal Pension Accounts are not taxable and instead are deemed to earn an income (unless grandfathering provisions apply – see below)
Exemption (Grandfathering provisions pre 1 Jan 2015)
Where a person purchased an Allocated Pension (AP) before 1 January 2015 and that person was a holder of a CSHC on 31 December 2014, deemed income from their AP will be exempt from the income test as long as:
Up to $51,200
Up to $85,000
Example Case – Income Assessment
For example, Freddie is currently aged 66, single and does not qualify for the Age Pension under the Asset Test due to a holiday house he owns. He is working part time earning $35,000 per annum and also has an Account Based Pension worth $500,000.
Adjusted Taxable Income $35,000
Deemed Pension Income $15,482
Total Assessed Income $50,482
Single Threshold is $54,929 so passes the Income test.
Managing The Income Test
If you are close to the Income Test (above or below the threshold) it would be of value to discuss this with your adviser to look for avenues to reduce your Income calculation.
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Written by Hudson Adviser Michal Park
It’s no secret to my family and friends that I would like a dog. Preferably a small to medium, really cute dog that enjoys being cuddled and will cuddle me back – this is especially important as my three daughters get older and are less inclined to freely hand out hugs like they used to. The dog also has to be non-shedding and non-smelling, and above average in intelligence. And out of all of us, the dog must like me the best.
I know all about the health benefits of owning a pet: increased fitness, lower stress, happiness, decreased blood pressure, decreased cholesterol, etc. According to a 2011 study published in Clinical and Experimental Allergy (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3737566/), kids who grow up in a household with a pet are less at risk of developing asthma and allergies. And perhaps my favourite benefit of pet ownership is that they force us to live in the moment, because that is the only way they know how to live! They may appear simple, but our pets are very wise.
So the health benefits are all well and good, but, I recently found out that owning a pet can impact on your borrowing capacity much like having children can! We should all be aware by now of the stricter borrowing conditions that financial institutions are placing on potential borrowers. Reports that lenders are requesting transaction statements and going through individual expenses are absolutely true. Lenders are doing so to scrutinise how much and how often people are spending on discretionary items (holidays, clothing, Uber eats, shopping etc) rather than relying on the Household Expenditure Measure of old.
Obviously, the increase in the amount of paperwork required has all stemmed from the Banking Royal Commission, resulting in 40% of home loan applicants rejected in September versus only 5% 12 months ago (according to Digital Financial Analytics’ latest monthly household survey).
Money magazine editor Effie Zahos tweeted a few weeks ago about the reported experience of a loan applicant being questioned about a $59 purchase made at a pet store, and why they had not revealed to the bank that they owned a pet. Even though the loan applicant confirmed that they did not own a pet and that the purchase was a gift, the lender still asked for a further 60 days of the applicants transaction statements before approving the loan!
With the cost of owning a pet reported to be approximately $1,335 per annum, and given pet ownership and the amount people are willing to spend on their pets increasing over the past few years, is it any wonder that financial intuitions are now factoring these things into the conversation about home loans? Fur babies indeed.
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Article by Hudson Adviser Kris Wrenn
For most people home ownership remains part of the great Australian dream. If you want to see your kids get on the property ladder, maybe forward them this article.
They need to ask themselves;
What repayments can you afford?
To answer this question with certainty you really do need to do a budget. This should show you exactly how much money is coming in, how much is going out, and how much is left to service your mortgage. Your budget will identify what you are spending money on and may reveal areas where you can save more. If your plans include starting a family at some stage, factor in the likely drop in income.
How much can you borrow?
Once you know how much you can spend on mortgage repayments you need to work out the size of the mortgage these repayments will support. Hudson can help with this. We are large scale mortgage brokers, usually with access to lower interest rates than if you approach the bank yourself.
While you may be able to borrow at a much lower rate, and therefore afford a larger mortgage now, banks are required to check that borrowers can comfortably service their loan if there is a significant rise in interest rates. The figure currently set by the government regulator (APRA) is 7%, but some lenders use even higher figures.
What’s it really going to cost?
Aside from the purchase price, buying a home comes with a whole lot of other costs, some upfront and many ongoing.
Stamp (or transfer) duty is usually the biggest of these. Remember to allow for it when setting your purchase limit. Conveyancing, loan establishment fees and removalists are other up-front costs.
Buying an apartment or unit? Annual body corporate fees need to be funded. These, along with other ongoing costs such as council rates and insurance premiums must be included in your budget.
If this purchase will be your first home, check out details on first home buyer grants in your state or territory here www.firsthome.gov.au. Stamp duty concessions may also be available. Combined, these initiatives can save you tens of thousands of dollars. Make sure you understand the conditions that apply, such as limits on the value of the property. If eligible for a grant, factor this into your calculations.
What deposit do you need?
While you may still find lenders willing to loan up to 90% of the value of a property, 80% is a more likely and sensible limit. That leaves you to come up with 20% of the purchase price plus upfront costs.
Have you saved your deposit, or do you still have some way to go? If the latter, review your budget to see how much you can save. Then set some savings goals and document how you will achieve them.
What’s your savings record?
Your lender will want to see your bank account and credit card statements. Do they reveal a good savings history and responsible use of debt; or the habits of a reckless spender with a poor credit rating? If it’s going to take awhile to save your deposit, it’s not too late to build a good savings history that will impress your lender.
Try to clear current debts as quickly as possible. Cancel any unnecessary credit cards, and consider cutting back the spending limit on other cards. When you apply for a mortgage your lender will include your credit card limits, not the actual balances, in their calculation of your current debt.
Fixed or variable?
You have the opportunity to fix the interest rate on at least a portion of your loan for up to five years. A fixed rate will be an advantage if interest rates rise. If they fall, you’ll end up paying more interest than if you opted for a variable rate on the entire loan. Investigate the option of splitting your loan between variable and fixed rates.
Interest rates tend to rise when the economy is strong, unemployment low and the inflation rate is increasing. They tend to fall when the opposite conditions prevail. That said; it’s extremely difficult to predict future interest rate movements. Should rates fall, you may face significant fees on any early repayment of the fixed component of your mortgage.
How can you reduce your interest payments?
Your interest is calculated on your outstanding loan balance, so anything you can do to reduce that balance will help reduce your total interest bill. Many loans offer a linked 100% offset account. The balance in your offset account is subtracted from your outstanding loan amount when the interest is being calculated. It therefore makes sense to keep as much of your spare cash as possible in your offset account.
As financial circumstances allow, you can also increase your mortgage repayments to pay off the loan sooner. Using the example of a $400,000 loan at 4% interest, if you paid it off in 20 years rather than 25, the interest component would be only $181,741, a saving of more than $51,000.
Another option is to make fortnightly or weekly repayments, rather than monthly.
Ready to buy?
Be aware that it is now more difficult to get a loan due to lender and regulator concerns over high levels of household debt. However, there are still plenty of lenders to choose from, and Hudson’s experienced broker can talk you through all options.
When it comes to applying for a loan be prepared to provide your lender with pay slips, credit card and bank statements, and details of your assets and any debts you have. Then, before you start visiting open houses, consider seeking pre-approval from your intended lender. Be aware that pre-approval may not guarantee that your loan application will be successful, particularly if it’s an instant appraisal based solely on the information you provide. Check with your lender what their pre-approval actually means. If it’s a full assessment it will provide you with more certainty when making an offer. Even then, pre-approval may not protect you if, say, the property is unacceptable to the lender. Also be aware that making multiple pre-assessment applications can affect your credit rating.
What insurance cover do you need?
You’ll obviously insure the house and contents, but what other insurance cover do you need? With your ability to make mortgage repayments dependent on you earning an income, income protection insurance should be a high priority. Life and disability insurance should also be considered. And yes, the premiums all need to be included in your budget calculations. Hudson can discuss any personal insurances with you.
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How many times have you downloaded a new app or connected to free Wi-Fi and agreed to the terms and conditions without giving them a second glance? In your rush to gain access to the must-have service you may end up regretting what you've agreed to.
Of course, most companies who come up with absurd terms and conditions have no intention of enforcing them. Rather, the intent is to highlight the fact that most people don’t read the agreements they readily sign up to. In many cases that won’t have any significant consequences. Most businesses seek to be fair in their dealings with customers. However, in the case of legal and financial contracts, failure to read and understand the terms and conditions can prove costly.
What to look out for
When signing up for anything that will cost you money or expose you to other potential harm, it is important to read and understand everything you are agreeing to. Here are 10 key items to look out for:
- Is the contract in plain English? It should be. Too much legal jargon may be a warning that the provider is trying to hide something.
- What are the costs involved and when and how are payments to be made?
- What other charges apply, for example, late fees? Are they fair and reasonable?
- What is the term of the contract? Is it ongoing or a fixed length? What happens at the end of the contract? Will there be ongoing costs?
- When and how can you terminate the contract? What will it cost?
- When and why can the provider terminate the contract?
- Are refunds available? For example, if you cancel an insurance policy will the unused premium be returned to you?
- What personal information do you need to provide? Is it reasonable? How is it safeguarded? Will it be shared or sold to a third party? Is sharing your personal information necessary for the provider to deliver their service?
- Are liability disclaimers reasonable?
- Can you complain? Who to?
What protections are there?
For a contract to be binding a number of rules apply.
For example, those entering into a contract must intend for it to be binding. That should probably allow you to leave the toilet brush and rubber gloves at home. Nor can a contract be enforced if it contains an agreement to do illegal things or breach other legal requirements.
In consumer contracts there are also protections against unfair contract terms that disadvantage a consumer. Further rules apply to credit contracts.
As for the liability waivers that are common when signing up for an adventure activity, if you are injured while undertaking the activity you may still be able to sue the operator. This is an area where expert legal advice is required.
Even in plain English, terms and conditions make for pretty dull reading and they may still be difficult to understand. If you are unclear about what you are signing up to, don’t sign. Seek clarification from the contract provider. And if significant sums of money are involved or if it’s a credit contract, obtain qualified advice.
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