Written by Hudson Adviser Ivan Fletcher
Interest rates have never been lower, and it’s possible they might fall even further. This creates opportunities for householders and businesses, so how can you best take advantage of low interest rates?
1. Pay off your debt more quickly
By maintaining constant repayments as interest rates fall, you’ll reduce the time it takes to pay off your loan. That’s because interest will make up less of each repayment, with more going to reduce the outstanding capital. And the great thing is that to take advantage of this strategy you don’t need to do anything. Lenders usually maintain repayments after each drop in interest rates unless you instruct them otherwise. Avoid the temptation to reduce your minimum payment as interest rates fall (unless you are in cash flow crisis of course).
2. Refinance your home loan or Investment Loan
Lenders vary in the extent to which they pass on cuts in official interest rates. This is something Hudson have seen a lot more of in the last 6 to 12 months. Depending on the target market of the finance lender at the time, we have seen some institutions pass on bigger rate cuts for home buyers whilst other lenders have provided bigger rate cuts to investors.
Fixing rates can present a viable alternative. My caution to anybody fixing rates is that in the last 20 years, at least 90% of the time, the bank ends up the winner. For me the argument for fixing is tied more to the need for certainty or putting a maximum on your repayments (eg when household income is going to drop temporarily).
Beware of your existing Lender’s Fixed Rate Offer - If looking at Fixed versus variable it is very important to look across multiple banks. Too many times we have seen Hudson members lock in a fixed rate because it was presented to be just as good as the variable rate (completely unware that there was significantly better variable rate on offer elsewhere).
So if you want the best deal in the current circumstances it is worth at least doing a rate comparison on your existing loans to see what is currently available. This is something your Hudson Adviser can help you with. If you haven’t had a Loan review in the last 3 years, chances are the great deal you were previously on is no longer the best available. Give your Hudson adviser a call.
3. Buy a first home – or upgrade
Low interest rates create opportunities for first homebuyers to get a toehold in the property market, and for existing homeowners to upgrade to a bigger home, better location or proceed with that perfect renovation. While lower interest rates can be a bit of a two-edged sword, as they tend to drive up property prices, most people are happier borrowing in a low rate environment rather than when rates are high.
4. Borrow to invest
While Australians love to invest in property, borrowing to invest in shares is also a viable wealth creation strategy. Often referred to as gearing, the key to successfully investing borrowed funds is that the total returns must exceed the total costs. As the most significant cost is usually the interest on the loan, low rates make this strategy more attractive.
Take care, however. Gearing can magnify investment returns, but it can also increase your losses. It’s therefore important that you fully understand investment risk and how to minimise it.
The first step in considering such a strategy is to identify and quantify a whether you have a surplus in your monthly cash flow. From there you can discuss the pros and cons of property versus equities with your adviser.
5. Expand your business
The whole point of a reduction in interest rates is to stimulate the economy, and that includes encouraging business owners to invest in their enterprises. Low interest rates make it cheaper to borrow to buy equipment to increase productivity, to take on more staff, or buy out a competitor and generally expand the business.
Some of these strategies are simple ‘no-brainers’. Others involve significant levels of risk. To take a closer look at how you can make the most of low interest rates, talk to your financial adviser.Read in full + comments 0 Comments
Written by Hudson Adviser Michal Park
A recent email from a Hudson member prompted my article this week. This particular member is in the midst of establishing an SMSF in which to purchase a commercial property that his business will rent.
To reinforce the Productivity Commission’s report about the efficiency and competitiveness of superannuation, ASIC sent this Hudson member a fact sheet titled “SMSF’s: are they for you?” as a newly registered SMSF trustee. With 599,678 SMSF’s in Australia holding nearly $748 billion in assets as at 30 June 2019, it’s worth a fact sheet.
In a nutshell, the fact sheet is designed to highlight the downside to SMSF’s, identifying eight “red flags”, the first being those with low fund balances. ASIC research suggests that SMSF’s with balances below $500,000 produce lower returns on average (after expenses and tax) when compared to industry and retail super funds. In the past, the rule of thumb was that one required a balance of between $200,000 and $300,000 to make an SMSF feasible, but now it looks like the magic number is closer to $500,000.
All eight red flags, as identified in REP 575, are as follows:
- The client has a low superannuation balance and would have a limited ability to make future contributions
- The client wants a simply superannuation solution
- The client wants to delegate all of the running of the SMSF to a paid advice-provider
- The client wants to delegate all of the investment decision making to someone else
- The client does not have a lot of time to devote to managing their financial affairs
- The client has little experience making investment decisions
- The client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee)
- The client has a low level of financial literacy
Below is a chart directly from the ASIC fact sheet, illustrating the poor returns from SMSF’s with balances under $500,000:
I’ve compared these figures above the below Chant West table which shows the annual financial year performance of the median growth fund over the financial years:
So the question I ask myself is this: even with balances in excess of $500,000, is the significant time, costs, risk and obligations associated with establishing and running a SMSF really worth it? The returns are not all that different to a “garden variety” complying super fund, as illustrated above.
So, unless you are like my Hudson member with a specific purpose to establish an SMSF, or you want more control over your investment strategy (requiring skill, care and diligence), perhaps a SMSF is not right for you.
The complete fact sheet can be found here:Read in full + comments 1 Comments
Written by Hudson Adviser Kris Wrenn
The Emerging Markets sector carries with it a lot of inherent risk and volatility and it is not surprising to find that many investors have no exposure whatsoever to it. Ideally therefore if you are going to either dip your toe in the water for the first time, or consider increasing your exposure to this sector, it certainly helps to do this at a favourable point in the cycle. Could now be such a time?
What are the Emerging Markets?
Essentially it is a collective term for those countries that have certain characteristics of a developed country but do not meet the standards/criteria to be classified as one. You could say therefore that they are countries that have the potential to be a developed country in the future. As way of example, in South America you have Brazil and Argentina, in Europe Greece and the Czech Republic, in Asia India, Indonesia, Korea and Thailand, etc. They share the following characteristics –
- Higher Economic growth. The IMF recently stated that the Emerging markets are experiencing GDP of approx. 4.7% p/a, compared to 2.4% p/a for more advanced countries.
- Low income per person. The best example here is China, which is the 2nd largest economy (and many would argue will be the largest soon enough) but has GDP per capita of just $9,600 (unlike $48,000 in the United States).
- They have a larger % of unlisted companies (possibly a high number of Government owned), and are transitioning away from the Agricultural sector, into manufacturing and possibly more into the service sector.
Why invest in them?
It’s all about growth potential. As these countries continue to become more productive, often utilising technology created by and enhanced by develop countries, economic growth should ensue. Additionally, these countries (again, think China) have a fast growing middle class sector, spending more money and driving growth further. Finally, they continue to restructure to improve infrastructure domestically and increase both imports and exports internationally. As the country continues to move from an agricultural focus to manufacturing and eventually services, and as the big companies in these countries expand it should mean more returns for investors.
Why are they risky?
Buying shares in companies in such countries can be risky, for a variety of reasons. For example, you may find that the shares are not as liquid as those in developed countries, combined with potentially higher transaction costs of buying/selling. There is a higher degree of political risk, for example potential changing of Government legislation in the country in question – trade barriers/tariffs, higher taxes, weaker legal rights and copyright laws, etc. Finally shareholders may have less protection and CEOs may not put their interests first or provide as much information as larger companies in developed countries. A key way to avoid all of the above risks is to use a fund manager to diversify across hundreds of companies in 20+ emerging market countries.
Why may now be a good time?
The last decade (post-GFC) has arguably been a great time to be investing in the sharemarket. However there are significant differences in performance when you compare countries against each other. At one end of the spectrum the United States has gone from strength to strength and if you had put $1 into their market at the depths of the GFC you would have over $4 today. Many other countries have faired well also and in Australia your $1 invested back in March 2009 would now be worth around $2.80. The Emerging markets however, generally speaking, have been very ordinary over the same period.
The following graph shows the difference between the US (as measured by the Dow Jones) in Orange and the Emerging markets (as measured by the MSCI Emerging Market index) in green over the last 5 years.
There is, of course, no guarantee what lies ahead for either index, but the Emerging Markets certainly looks as though it has a good potential for some upswing over the medium to long term.Read in full + comments 0 Comments
Written by Terry Taylor of Specific Property
All you need to know about why now is the right time to buy:
We are living in uncertain times. That’s for sure. Everything around us is changing. The rapid advancement in technology and the upheaval that technological change is having on industry and our lives is mind-boggling, especially if you are a little older. Our children and grandchildren have a good grasp of the new technologies and to them, everything is quite normal, google or Siri, switch the light on or play this song. But change and rapid change makes many of us nervous and uncertain of what will come next. Many of us in this situation tend to sit on our hands and wait for the air to clear. Waiting and hoping to have clarity around the direction of the markets.
Despite the current uncertainties, Australia is still doing ok. Of course, there are plenty of comments, especially in our media, talking down the economy. Negative press sells media as we know. However, the real situation is somewhat different. Basically ninety-five out of every hundred people who want to work in Australia have a job.
What you can invest in to secure future wealth:
If you are aspirational and are planning to succeed you have to save and invest some of what you earn into assets that grow in value. For your future, this will provide you with an independent lifestyle in retirement. That’s certainly what most people want and aspire to. Other than investing in ourselves, upgrading our skills, furthering our education or building a business, there are really only three investment options: cash (money in the bank), shares (where you invest in a company) and property (residential, commercial, industrial).
What’s cash like as an investment:
In the past investing in cash was one of the safest and best things to do. I don’t think anyone would suggest money in the bank, with interest rates as low as they are currently is a good investment. There is also a further risk of lower rates still to come. We are being told that interest rates may be low for the foreseeable future. That leaves us with the growth asset options of shares and property.
Investing in Shares
When you invest in shares you are actually buying a part of a company. Given that the world is going through a technological revolution, perhaps similar to the changes which occurred during the industrial revolution, some companies which adopt innovative strategies and the new technologies will outperform the market. However, many will not and will cease to exist in the future, leaving those who invested in those companies very disappointed.
Picking companies to invest in is not easy. Even if you do pick well, you are dependent on the decisions made by the managements of the companies you buy the shares in. In these times, a bad decision can lead to massive falls in the price of the shares of a company. In addition, if the shares are paying a dividend, which of course will form a part of your future income, those dividends can be suddenly reduced or not paid at all depending on how the company you invested in is doing.
Which leads us to property and in particular to residential property. Australia is a great country and most people in the world would give anything to live here. We are incredibly fortunate which is why we still have substantial population growth. Many older industrialised countries in the world - think of Japan, France, Germany - are struggling to maintain their population growth to provide an economy that will support their aging populations. Those economies are struggling and often their young people want to migrate to the newer growth economies, of which Australia is one.
The growth in the Australian population:
With sustained population growth comes increasing demand for residential property. Guy Debelle, Deputy Governor of the Reserve Bank of Australia recently predicted that there would be a shortage of residential property in Australia in 2020. That is because the population of Australia has continued to grow at the same time as the construction industry has been in a downturn and with far fewer residential properties under construction or in the planning stages.
Residential properties to rent are experiencing particularly low vacancy rates. This is the case especially in areas where people want to live. Rental returns of between 3 and 5 percent are easily achievable. When you add to that the potential for capital growth of the property, those returns are so much better than you can get if you put your money in a bank. The returns are also far safer than investing in the share market where technological changes are likely to play havoc with many companies and affect both their share prices and dividend yields.
How can we help you?
Our specialty is in picking properties that offer our clients long-term wealth creation opportunities. This is based on working individually with you to hand-select quality properties that meet your needs and our strategic guidelines for safer property purchases.
Learn more about our services and how we can help you with your future property purchase.
Find out more:
- Learn more about what the Deputy Governor of the Reserve Bank has to say about Housing and the Economy
- More information on the Predicted Housing Shortage
Whether it’s doing up the bathroom or kitchen, or adding an entire new wing to the house, some focused planning will help your home renovation project run smoothly. Here are some tips to help you get the biggest ‘bang’ for your renovation buck.
1. Budgeting and saving
Renovating is a major expense so unless you’ve already saved up the necessary funds you will either need to prepare for increased loan repayments or get cracking on a savings plan.
First up, prepare a couple of budgets - one for the renovations, and another for regular living costs. Then, with your current spending and future savings needs laid bare, it’s time to play the penny-pinching game. Can you take lunch from home rather than buying it every day? Does avoiding the toll road add that much time to your daily commute? Are you paying for bottled water? And can you still enjoy life with less eating out or ordering in?
2. Avoid hidden surprises
Make sure that the fabric of the existing house is sound. Depending on its age, have the house inspected for asbestos. Its removal can add time and many dollars to your renovation. Termites and timber rot are other unwelcome surprises.
3. Find the right contractors
Shop around, get multiple quotes and check references and reviews. Also ask to see contractors’ licenses. Don’t just go with the lowest quote; make sure you have confidence in the tradie’s ability to do the job.
4. Release your inner handyperson
How much can you save by doing some of the work yourself? Most people can do a great job painting a room. How about laying your own tiles? The Internet abounds with ‘How to’ videos for all sorts of renovation skills.
5. Call in a favour
How many chippies, sparkies and plumbers in your family or friendship group? Of course, you won’t want to stretch a friendship or impose on them, so maybe you can swap one of your skills for some of theirs.
6. Shop smart
Extend your budget by buying seconds or second hand. Check out Gumtree and eBay, or get to know your local auction rooms - bidding at auction can be both fun and rewarding. Can you deal directly with any suppliers, and who can offer you mate’s rates?
7. Select your materials with your budget in mind
Hand basins, shower screens, kitchen sinks, taps, flooring, light fittings, ovens… Everything comes in a wide range of styles and prices to suit every budget. However, appearances can be deceiving. A cheaper bench top or bath can provide all the visual appeal of more expensive alternatives. Still, sometimes you may have to compromise and opt for ‘good’ rather than ‘best’. And if you’re renovating with a future sale in mind, it’s also important that you don’t over-capitalise on your renovations.
Undertaking major renovations can be a daunting prospect, but some thought and planning can deliver not just a more valuable home, but also one that provides you with years of satisfaction.Read in full + comments 1 Comments
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