Archive for year: 2018

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Bitcoin – the ups and downs of investing

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Investing in Bitcoin – Some people may have made big money, but plenty of latecomers would have experienced dreadful losses.

If I could sum up the contents of my junk emails over the last 12 months in a single word it would be: Bitcoin. I can’t tell you how many unsolicited invitations I’ve received to start investing in bitcoin. This alone is a concern but when heavy hitters like the International Monetary Fund (IMF) start calling out the risks of bitcoin, the warning bells should definitely start ringing.

Bitcoin is one of many “cryptocurrencies” or digital currencies that aren’t backed by governments or banks. Instead it relies on a decentralised peer-to-peer network called a blockchain – a vast digital ledger that uses complex calculations to record all transactions made using bitcoin.

The technical details are complex. What’s much easier to grasp is the meteoric rise of bitcoin.

Big gains means big risks

For many years you could buy bitcoin for the price of a restaurant meal. Then in 2016 it started to take off. By mid-December 2017 bitcoin had soared in value to $AUD25,410. And that’s where things headed south. In mid-January 2018 bitcoin’s value had tanked to $AUD12,893.

As so often happens in speculative markets, some people have made big money. But plenty of latecomers would have experienced dreadful losses.

Security concerns

Hindsight is always a wonderful thing. But one of the fundamental rules of investing is that big returns come with big risks. Another maxim for successful investing is to only invest in something you understand, and it’s a reasonable bet plenty of people don’t fully grasp how cryptocurrencies work.

The problem is, crooks do. A report by the University of Cambridge notes that 22% of bitcoin exchanges having experienced security breaches. The same report says less than half the cryptocurrency payment companies in the Asia-Pacific, Europe and Latin America hold a government license.

It’s hardly reassuring stuff. And just recently the IMF warned that cryptocurrencies can “post considerable risks as potential vehicles for money laundering, terrorist financing, tax evasion and fraud”.

Yet despite all this, investors are still pouring money in, hoping to ride a second wave of gains.

Should I be investing in bitcoin?

History is littered with the fallout from speculative markets, and the pattern is often similar – a steep rise in value fueled by investors coming on board late in the cycle for fear of missing out.

For my money, a good investment is backed by a quality asset – like shares in a successful company, a well-located investment property, or units in a managed fund run by a reputable team. There are plenty such investments to choose from, and your adviser can help narrow down the choice of what’s right for you.

As it stands, cryptocurrencies are largely unregulated, and without the backing of an underlying asset there is no real reason why their value should continue to rise other than demand from over-exuberant investors. If you do plan to invest in bitcoin, my advice is to only tip in money you can afford to lose.

 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Investment property or home first, which is a better buy?

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There’s a lot to consider when buying an investment property or home, especially for the first time.

 

Have you been saving for a long time and feel ready to get into the property market? Maybe you’re considering buying a home to live in or investing in a property you can rent out to somebody else.

Either way, it’s worth knowing some more about both options to ensure you’re making a well-informed decision, noting that regardless of what you choose to do, property prices can go through major swings that can occur with little warning.

Buying your first property to live in

  • First home owner grants. Depending on which state or territory you live in, a first home owners grant could help you to finance your first home purchase. This doesn’t apply to investment properties, and in some states you’ll lose your right to this grant if you buy an investment property first.
  • Security and stability. You can stay in your home as long as you like, as long as you’re making your home loan repayments.
  • Exempt from capital gains tax (CGT). Any home that is classified as your main residence, whether it’s your first place or not, is free from CGT when you go to sell it. If you’d like to know more, read our article – What is capital gains tax?.
  • Expenses stack up and aren’t tax deductible. There will be initial costs, such as stamp duty and legal fees, as well as ongoing costs, such as water rates, building insurance and repairs. When buying an investment property, you’ll also be hit with these costs, but depending on your situation some of the costs attached to your investment property may be tax deductible.
  • You may have to make some sacrifices. Where you really want to live may not be where you can actually afford to buy. So, whether it means choosing a place that’s smaller, further out from the city, or looking for a job closer to your new home, you may have to make some trade-offs.

Buying your first investment property

  • You may get a cheaper place. An investment property doesn’t need to tick all the boxes of your ‘dream home’, which means you could potentially buy something at a cheaper price.
  • It’s not an emotional decision. Your purchase should be based on investment potential, including forecast rental return and capital growth. So, instead of walking into a place and having to love the look of it, you can walk in with your investor’s hat on.
  • Earn rental income. If you’re renting out your investment property, you’ll be getting money from someone else to contribute to your mortgage, which means you could pay off your loan sooner. Bear in mind however that the rent you receive may not completely cover your home loan repayments and additional costs.
  • Tax advantages and disadvantages. Many of the costs associated with an investment property are often tax deductible. For instance, the interest and fees you pay on your loan, advertising for tenants, as well as cleaning, gardening, maintenance and pest control. Also, if your property is negatively geared—which simply means the interest, and other costs you incur are more than the income your investment property produces—the loss can reduce the amount of tax you pay on your earnings at tax time. On the flip side, if you sell your investment property down the track and make a profit, capital gains tax may be payable.
  • Management and obligations. If you’re time poor or located a long distance from your investment property, another thing you’ll need to think about is appointing a property manager to take care of certain duties. On top of that, there are various responsibilities that apply to landlords before, during and when ending a tenancy and these can differ depending on which state in Australia the investment property is located.

Some other useful tips

We’re here to help

Whatever you decide to do, make sure your strategy suits your lifestyle, circumstances and financial goals. And, if you’d like to talk to our bank relationship manager about your loan requirements, call us on 9851 0300 or visit www.tdls.com.au.

What you need to know about buy now, pay later services

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Take your product home, pay for it within the specified timeframe, get charged 0% interest. What could go wrong?

Branded the modern-day layby, ‘buy now, pay later’ services essentially offer the same thing, except you get the product up front—the outfit, the watch, even certain domestic flights within Australia.

If you haven’t heard of buy now, pay later services, or are keen to know more, we explain what they are, how they work and when it’s possible you could run into financial strife if you’re not careful.

What are buy now, pay later services?

Buy now, pay later services, such as Afterpay, Openpay and zipPay, are offered by approved retailers and provide another form of payment option when you’re shopping online and sometimes instore1.

They allow you to buy a product, take it home and pay for it in instalments over a set period of time via an online buy now, pay later account, which deducts your preferred debit or credit card.

While payments are withdrawn automatically (for instance, over four fortnightly instalments if you’re using Afterpay2), generally you can make repayments before they are due as well.

Purchase limits do apply though and depending on the provider will typically vary according to things like how long you’ve been using the service and your payment track record to date.

How do they charge?

Many buy now, pay later services are interest and fee free (if you pay on time that is!). If a payment is scheduled to be deducted and you don’t have the money in your account, and haven’t attempted to pay what is owed via other means, you’ll typically be charged a late fee.

For that reason, it’s important you have the right amount of money in your account when each instalment is due, and that you’re across any other charges that might be payable before signing up.

According to buy now, pay later services, such as Afterpay, late fees are not a primary revenue driver, with the group saying 80% of its revenue is derived from merchant fees paid by retailers3.

Another thing to consider, if you’re using your credit card, is while the buy now, pay later provider might not charge interest on your purchase, you may still have to pay interest to your credit card provider if you don’t pay the full amount owing on your credit card by the due date.

Key considerations

Spending what you don’t have

While buy now, pay later services can be very handy if you have available funds and can pay on time, if you don’t, little debts stemming from things like late fees can quickly snowball into bigger debts, which can have a variety of repercussions. For this reason, it’s a good idea to have a budget in place when it comes to spending, so you don’t get in over your head.

How your credit rating could be affected

Many buy now, pay later services don’t check your ability to make repayments, so if you’re already in the red, further debt could mean bad news and possibly debt collectors at your door. On top of that, while these services might not check your history, they’re still able to report black marks against you to credit reporting agencies, which could make it hard to borrow money in future.

If you have a customer complaint

Because you’re not going direct to the retailer when using a buy now, pay later service, you might also want to check out the provider’s dispute resolution policy so that there are no surprises if something you purchased doesn’t turn up, or you want to refund or return something that wasn’t quite right.

More information

It’s important to check the terms and conditions before you sign up to any new service provider to ensure you’re across things like fees and various other policies so you don’t get caught out.

In the meantime, if you’re struggling at all with your existing debt, you can talk to a financial adviser at Tailored Lifetime Solutions  by calling 9851 0300.

11 wedding budget planning tips

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The happiest day of your life doesn’t need to be the most expensive.

For some couples, the most expensive day of their life will be when they tie the knot, with around 35% of newlyweds blowing their wedding budget before they even walk down the aisle.

With the average Aussie wedding costing $36,200, and more than half of that money going toward food, drinks and the venue, we check out some ways you could potentially minimise your spend.

Tips to avoid a wedding budget blowout

1. Talk about money early with your partner and families (that is, if they’re going to be involved).  Decide what you’ll be able to pay for, and if your family is helping with expenses, to what extent. Meanwhile, if you want to set a budget, our budget calculator can help you crunch some numbers.

2. Start saving early. Make a list of what you want, put a limit on what you hope to spend and try to find a balance in between. Remember, on top of the venue, you may be looking to put money toward things such as wedding attire, photography, decorations and entertainment.

3. Book in advance.  Try to book the venue for your ceremony, reception and honeymoon well in advance to potentially avoid disappointment, or being forced into a last-minute, more expensive option.

4. Grab a bargain. Search eBay or Gumtree, or hunt down end-of-stock bargains, such as DIY wedding stationery, pre-loved decorations or even a wedding dress.

5. Have an out-of-season wedding. Be different! Have a July wedding to cut costs without sacrificing your precious memories. Many venues and suppliers have lower-priced deals during the winter.

6. Be realistic with your guest list. If you haven’t been in contact with friends in the last 12 months, why do it now? And, remember to lay down the law with the family, so you don’t end up with tables full of relatives you’ve never met!

7. Explore your network. Call on talented friends who can swap a service for a gift, such as a photographer, a hair stylist or make-up artist. Maybe someone knows a band that can play at the reception too.

8. Cut the ties. Times are changing and so are weddings. It’s ok to shed some traditions. Be practical about whether you need all the trimmings, like a videographer, bonbonnieres, gifts for parents or even the bridal party, if you need to cut costs.

9. Adopt informality. Swap a formal sit-down dinner for a cocktail party and save on room hire and catering costs. Or, if the venue allows it, organise the drinks yourself.

10. Pay attention to the fine print. Read your suppliers’ contracts, even if they are long and complicated. Don’t get caught out by any extra charges which are sometimes in the fine print.

11. Wishing well. If you’re already living together, chances are that you have most of what you need, with a wishing well often providing a polite way to ask for money. You can then use this to pay for the honeymoon or pay off some of the wedding expenses.

Start planning now

If you haven’t already got a wedding budget, review your finances and make sure you give yourself enough time to save for the wedding you want.

If you need help with your savings goals, AMP’s Bett3r account may be able to assist you in staying on track financially, as it enables you to track your bills, set up savings goals and know what’s safe to spend.

Finally, you can relax and enjoy the celebrations, knowing that declaring your love doesn’t have to come at a price you cannot afford.

Should I rent or buy a home?

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Whether to rent or buy is a hotly-debated question. The answer might come down to where in Australia you live.

With the housing market continuing to boom in many parts of Australia, it’s no wonder some potential home buyers are wondering if they’d be better off continuing to rent. While for others, who are priced out of the property market or can’t save enough for an initial deposit, buying may not be an option.

With rent money often referred to as ‘dead money’ you’d be forgiven for thinking that renting was the inferior choice, but there are transactional costs to do with buying a home, such as stamp duty and home loan interest payments that might be regarded the same way.

So is it better to rent or buy? The answer, like most things to do with the economy, is far from simple.

AMP Capital economist Diana Mousina says that while the question of buying versus renting mainly depends on each individual’s circumstances and stage of life, which city you live in also has an impact.

Sydney or Melbourne

Diana explains that the ‘phenomenal’ house and apartment price growth in Sydney and Melbourne over the past three years has coincided with a large increase in housing construction in these cities (particularly for apartments).

The result of more new properties in Sydney and Melbourne is that rent increases are slowing as an oversupply of property hits the market.

As a consequence, investment returns for property investors are also slowing and Diana says this will lead property price growth in Sydney and Melbourne to slow over the next 2-3 years (especially for apartments).

The combination of slow growth in rents – and the expectation that house price rises will also slow in the next few years – makes renting the better choice in Melbourne, and particularly Sydney, Diana says, as rents become comparatively more affordable and the opportunity for buyers to benefit from the kind of capital gains seen in recent years diminishes.

The rest of Australia

In the other major capital cities, slower house price growth and less new housing construction compared to Sydney and Melbourne in recent years means that rent increases have been stronger, Diana says.

‘The difference between renting or buying is more balanced outside of Sydney and Melbourne,’ she concludes.

What do the statistics tell us?

Statistics from the latest Census reveal that more and more Australians are renting.

In 1991, 26.9% of the population were renting their home compared to 30.9% in the 2016 census.1

In line with the rise in renting, less Australians owned their home – either outright or with a mortgage – in 2016 than they did in 1991, with home ownership dropping from 68.6% to 65.5%.2

Diana says these numbers show the impact that the recent boom in housing prices, coupled with low wages growth, has had on housing affordability, with more households choosing or in many cases having to rent, rather than to buy because of increased difficulty in gaining a foothold on the property ladder.

Weighing the pros and cons

Economics and statistics only tell part of the story, as both renting and buying have their pros and cons:

Benefits of renting:

  • You’ll have more short-term financial freedom because you don’t have to pay interest on a home loan, or for landlord expenses such as building maintenance, repairs, rates and property insurance.
  • You’re more likely to be able to afford to live in the suburb you want (because you’re not paying for the expenses of owning a home).

Downsides of renting:

  • You generally don’t have the same freedom to change or renovate the property like you would if it was your own.
  • You’re never sure how long you can stay in a rental property. This might be fine while you’re young and flexible, but as you grow older you might want more certainty and stability.

Benefits of buying:

  • You could own your home within 25 to 30 years, or sooner if you pay your home loan off more quickly, and will own an asset which will hopefully have increased in value.
  • Owning a home gives you certainty around where you’ll be living and additional security in retirement.
  • Because you own your property, you can renovate it, nail pictures into the wall or even remove the walls if you want to!

Downsides of buying:

  • The costs of buying a property add up – stamp duty, legal and conveyancing fees, interest, loan fees, pest and building inspections, bank valuation fees, rates, possible strata fees, title registration and ongoing costs of property maintenance and insurance.
  • There’s no guarantee the value of your property will increase – it could fall, leaving you with an asset that’s worth less than what you paid for it.

What’s right for you?

Diana says that as the housing market goes through cycles every few years, the longer you plan to live in the property the more attractive buying is because home owners will be able to ride out any medium-term price fluctuations.

‘Over the longer term we remain positive on the housing market because of solid fundamentals in the Australian economy,’ she concludes.

For more help

Use our rent vs buy calculator, which illustrates the potential benefit of either renting or buying a property over time, to explore your situation, or our borrowing power calculator to work out how much you could afford to borrow.

For more information about the process of buying a property, check out our Goals info centre page, and whatever you decide, it’s best to seek professional advice and talk to your financial adviser. If you don’t have an adviser but would like to speak to one call us on 131 267 or use our online tool.

1, 2 Census 2016, Australian Housing section  

Affordable school holiday activities

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We asked our readers for their top tips to keep the kids entertained during the school holidays without blowing the budget.

AMP News&insights ran a competition on Facebook asking our readers for budget-friendly ways to keep the kids busy in the school holidays.

Art and craft, board games and movies at home all proved popular, as did visits to the park, playground, picnics, riding bikes and camping.

And perennial favourites such as taking advantage of museums and galleries with free entry, and visits to the local library, also rated a mention.

Our readers’ most creative low-cost school holiday activities

If you’re looking for some fresh school holiday inspiration, some of the most creative ideas included:

  • Looking through photo albums together and creating a family slideshow.
  • Putting on a concert or play for friends, getting the kids to create the show, make costumes and props, and make tickets and food for the guests.
  • Getting the kids to write books and turning them into movies.
  • Going on a park crawl, by setting a timer and after an hour at a park, moving onto another one.
  • Using old bottles and jars to create terrariums using succulents and plants from the garden.
  • Getting together with a group of friends and each taking all the kids for a day, so you only have one day to plan and pay for, and some child-free days during the holidays.
  • Making a list of things for the kids to spot then heading out in the car and playing car bingo.
  • Cutting out pictures from old magazines and cards and creating new homemade cards for upcoming birthdays and events.
  • Scouring the internet in the lead up to the holidays for free and cheap activities to create a lucky dip jar to draw from when boredom sets in.
  • Instead of just playing board games, making one, including planning the theme, rules, making the board, cards and questions, then playing it.

Any advice in this page is general in nature and is provided by AMP Life Limited.  The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters. AMP Bett3r Account is issued by AMP Bank Limited ABN 15 081 596 009, AFSL 234517. Consider the terms and conditions available on request by calling 13 30 30 or at amp.com.au/bett3r and whether this product is appropriate for you. Fees and charges apply. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.

All information on this website is subject to change without notice.  Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.

Changes to Powers of Attorney – Victoria

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On 1 May 2017 the Powers of Attorney Act 2014 (Vic) was amended by the Powers of Attorney Amendment Act 2016 (Vic).
The amending Act introduced changes to clarify some operational and other matters associated with the making of a power of attorney.
Further changes have been implemented via the new Medical Treatment Planning and Decisions Act 2016 (Vic) which came into effect in March 2018.
This article outlines some of the changes and revisits the purpose of a power of attorney.
Primary and alternate attorney appointments
The Act now provides principals with greater flexibility when appointing alternate attorneys and / or supportive attorneys under an enduring power of attorney.
A principal may now appoint multiple alternate attorneys for any primary appointed attorney. A principal may also appoint one alternate attorney for multiple appointed attorneys.
The amended provisions essentially confirm that a principal is not restricted in the number of alternate attorneys he or she may appoint – before the amendments, the legislation provided only for an alternate attorney to be appointed on a one-to-one basis.
Revocation
The Act promotes consistency by making it clear that a new enduring power of attorney will revoke a previous enduring power of attorney in its entirety, unless a contrary statement is made in the new appointment.
Previously, the Act required that a new enduring power of attorney specifically state the intention to revoke a previously-made appointment, otherwise the new appointment would only revoke the previous one to the extent of any inconsistencies.
What is a Power of Attorney?
A Power of Attorney is a legal document that enables you to choose another person or persons to act on your behalf.
There are presently two categories – a General Power of Attorney and an Enduring Power of Attorney.

A General Power of Attorney is usually used for a specified period and / or for a certain purpose. For example, you may appoint an attorney to act for you if you are purchasing a property and propose being overseas at the time the sale is finalised. Your attorney will be able to sign and act on your instructions which will be legally effective.
In Victoria, there are presently two types of Enduring Power of Attorney – and unlike a General Power of Attorney, these continue to be effective after the principal becomes incapacitated.
An Enduring Power of Attorney (financial and personal) allows the attorney/s to deal with personal matters, financial and legal matters, or both and are often made between spouses enabling one to continue with the daily management of personal and financial affairs if the other is unable to. Alternatively, an elderly parent may appoint a child or children as the attorney or an alternate attorney.
The other type is an Enduring Power of Attorney (Medical Treatment) which allows the attorney to make decisions about the principal’s health treatment.
Advance Care Directive
The Medical Treatment Planning and Decisions Act 2016 (Vic) came into effect on the 12 March 2018 and replaces the existing Medical Treatment Act 1988 (Vic).
New laws allow you to make a legally recognised Advance Care Directive and to appoint a medical treatment decision maker to cover the possibility that you may not be able to make medical decisions for yourself.
In the absence of such an appointment the new Act determines who has legal authority to make such decisions – generally this will be the person’s domestic partner.
A person no longer makes a separate Enduring Power of Attorney (Medical Treatment) document; however an existing appointment will still be recognised under the new laws. The present laws however do not allow for the inclusion of the principal’s wishes with respect to advanced care planning. This changes with the new laws.
An Advance Care Directive may include directives with legally binding instructions about future treatment to which you may consent or refuse, and a values directive outlining your values and preference with respect to future medical treatment. The Act also allows the appointment of a support person to assist and to help communicate a principal’s decisions with respect to medical treatment.
What do I need to do?
Planning for the inevitable is essential to ensure the ongoing management of your personal, medical and financial affairs are conducted in accordance with your wishes.

A Power of Attorney enables you to appoint one or more persons you trust to handle your legal and personal affairs, for when you are no longer able to do so yourself.
An Enduring Power of Attorney will help to ensure that your affairs are handled as you would want them to be, should you lose mental capacity.
If you already have a Power of Attorney or an Enduring Power of Attorney the law changes will not affect the validity of these documents.

Sourced from and article by Sally Nicolazzo & Associates Lawyers, June 2018

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Sport lovers enjoy better financial fitness

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Sport lovers enjoy better financial fitness

 

Online source: Produced by AMP Life Limited and published 2 October 2017

Print source: By AMP Life Limited, originally published on 2 October 2017

 

If your golf clubs have been under wraps or your tennis racquet has been tucked away for some time, it could be worth dusting them off. Research by AMP found Australians who play sport regularly are 64% more likely to achieve their financial goals than those who don’t.

Plenty of us think about getting in better shape. That can mean heading outdoors for a round of golf or just kicking a ball around the local oval with the kids. The health benefits of physical activity are well documented, but AMP’s study also found a clear link between our sportiness and the way we manage our money.

According to the survey, playing sport on a regular basis makes us more likely to think about our long term financial wellbeing. As a guide, people who frequently play sport are 66% more likely to make extra contributions to their super fund, and more than twice as likely to own an investment property as less active people.

If you ride a bike or play netball, take a bow – the AMP survey found you’re likely to be among the nation’s most financially savvy thinkers. Cricketers are most likely to have a financial advisor, and golfers top the league table for personal savings – with one in three having more than $50,000 in savings.

When you think about it, these results aren’t all that surprising. Keen sportspeople often achieve success by setting personal or team-based goals. So it’s a natural step to set goals in other areas of life like money management.

A number of overseas studies confirm AMP’s findings that physical and financial health often go hand-in-hand.

One group of US researchers explained the link, saying that people who make healthy choices today to enjoy good health tomorrow, are also more likely to regularly put money aside to achieve greater financial security in the future.

I freely admit I’m no sports scientist, but it’s fair to say there’s another link between physical health and fiscal fitness – both can be achieved when you make it part of a regular routine.

Getting physically fit involves taking the time to exercise regularly. It may not happen overnight but your fitness should improve over time.

The same applies to financial security. It’s all about developing and sticking to good money habits – like using a budget to gain control of your cash, spending less than you earn, and saving and investing for the long term. It’s not hard and it delivers great results without working up a sweat.

People who take their sport seriously use a coach for help lifting their game, and your financial advisor is like a mentor for your money. It could even be worth thinking about having your next meeting over a round of golf, and achieve two goals at the same time.

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Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

First home buyer help

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New legislation aims to benefit first home buyers

 

Online source: Produced by AMP Life Limited and published December 2017
Print source: By AMP Life Limited, originally published on December 2017

Changes aimed at improving housing affordability have passed through parliament. See what the new rules could mean for you.

Government proposals around improving housing affordability in Australia were passed through parliament on 7 December 20171.

As part of the changes, first home buyers will be given a tax concession through the ability to save for a home deposit inside super.

We take a look at what the changes could mean for you, bearing in mind that like with all important financial decisions, it’s a good idea to get financial advice before deciding what’s right for you.

Tax concession for first home buyers

From 1 July 2018, eligible first home buyers will be able to withdraw voluntary super contributions (which they’ve made since 1 July 2017), along with associated investment earnings, to put toward a home deposit.

How does it work?

Under the First Home Super Saver Scheme (FHSSS), first home buyers who make voluntary contributions of up to $15,000 per year into their super can withdraw these amounts, in addition to associated earnings, from their super fund to help with a deposit on their first home.

If eligible, the maximum amount of contributions that can be withdrawn under the scheme is $30,000 for individuals or $60,000 for couples.

Voluntary contributions can be made by salary sacrificing from before-tax income, by making personal tax-deductible contributions, or by making personal after-tax super contributions.

When the money is withdrawn, before-tax and tax-deductible contributions are taxed at your marginal tax rate, less a 30% tax offset, while after-tax contributions aren’t subject to tax.

Due to the favourable tax treatment, generally available through super, this scheme intends to help first home buyers grow their deposit more quickly.

Things to note

To make a withdrawal under the scheme, an application to the Australian Taxation Office will be required, and an eligible person is only allowed one FHSSS withdrawal in their lifetime.

There are super contributions which will not qualify and cannot be withdrawn under the scheme, such as super guarantee contributions made by your employer, as well as spouse contributions.

FHSSS amounts that are withdrawn and not subsequently used for a property purchase must be put back into super as after-tax contributions, or penalties will apply.

The first home buyer must reside at the property for at least six months in the first 12-month period from when it can be occupied.

Additional rules may apply to your situation, so make sure you do your research and speak to us before making any decisions.

Putting the global “debt bomb” in perspective – seven reasons to be alert but not alarmed

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Key Points

  • Global debt levels have reached new records.
  • Countries with very high gross debt to GDP include Japan, Belgium, Canada, Portugal and Greece. The main areas of rising debt since the Global Financial Crisis (GFC) have been public debt in developed countries (with more to come in the US) and private debt in emerging countries (and of course household debt in Australia).
  • Global debt is not as a big a concern as headline numbers suggest & debt to income ratios will tend to rise through time simply because of saving & investing.
  • Key signs to watch though are a broad-based surge in debt along with signs of excess such as overinvestment, rapid broad-based gains in asset prices and surging inflation and interest rates.

Introduction

Here’s my forecast: “The global economy is going to have a significant downturn and record levels of debt are going to make it worse.” Sound scary enough? Put it in the headline and I can be assured of lots of clicks! I might even be called a deep thinker! The problem is that there is nothing new or profound in this. A significant economic downturn is inevitable at some point (it’s just the economic cycle), debt problems are involved in most economic downturns and such calls are a dime a dozen.

A standard scare now is that memories of the role of excessive debt in contributing to the GFC have worn thin and total global debt has pushed up to a new record high of over $US200 trillion – thanks largely to public debt in developed countries (with more to come in the US as Trump’s fiscal stimulus rolls out), Chinese debt and corporate debt (and household debt in Australia of course). Also, that its implosion is imminent and inevitable as interest rates normalise and that any attempt to prevent or soften the coming day of reckoning will just delay it or simply won’t work. However, in reality it’s a lot more complicated than this. This note looks at the main issues.

Global debt – how big is it and who has it?

Total gross world public and private debt is around $US171 trillion. Adding in financial sector debt pushes this over $US200 trillion but that results in double counting. Either way it’s a big and scary number. But it needs to be compared to something to have any meaning or context. A first point of comparison is income or GDP at an economy wide level. And even here new records have been reached with gross world public and private non-financial debt rising to a record of 233% of global GDP in 2016, although its fallen fractionally to 231% since. See the next chart.

Source: IMF, Haver Analytics, BIS, Ned Davis Research, AMP Capital

The next table compares total debt for various countries.

Source: IMF, Haver Analytics, BIS, Ned Davis Research, AMP Capital

The next chart shows a comparison of developed world (DM) and emerging world (EM) debt – both public and private.


Source: Haver Analytics, BIS, Ned Davis Research, AMP Capital

It can be seen that the rise in debt relative to GDP since the GFC owes to rising public debt in the developed world and rising private debt in the emerging world. Within developed countries a rise in corporate debt relative to GDP has been offset by a fall in household debt, so private debt to GDP has actually gone down slightly. And a rapid rise Chinese debt (particularly corporate) has played a role in the emerging world.

Of course, it needs to be mentioned that measures of gross debt exaggerate the total level of debt. For example, because of government holdings of debt instruments via sovereign wealth funds, central bank reserves, etc, net public debt is usually well below gross debt. In Norway net public debt is -91% of GDP and in Japan it’s 153% of GDP. But as an overview:

  • Japan, Belgium, Canada, Portugal and Greece have relatively high total debt levels;
  • Germany, Brazil, India and Russia have relatively low debt;
  • Australia does not rank highly in total debt – it has world-beating household debt but low public & corporate debt;
  • Emerging countries tend to have relatively lower debt, but rising private debt needs to be allowed for particularly in China, where corporate debt is high relative to GDP.

The bottom line is that global debt is at record levels even relative to GDP so it’s understandable there is angst about it.

Seven reasons not to be too alarmed about record debt

However, there are seven reasons not to be too alarmed by the rise in debt to record levels.

First, the level of debt has been trending up ever since debt was invented. This partly reflects greater ease of access to debt over time. So that it has reached record levels does not necessarily mean it’s a debt bomb about to explode.

Second, comparing debt and income is a bit like comparing apples and orangesbecause debt is a stock while income is a flow. Suppose an economy starts with $100 of debt and $100 in assets and in year 1 produces $100 of income and each year it grows 5%, consumes 80% of its income and saves 20% which is recycled as debt and invested in assets. How debt, debt to income & debt to assets evolves can be seen in the next table.


Source: AMP Capital

At the end of year 1 its debt to income ratio will be 120%, but by the end of year 5 it will be 173%. But assuming its assets rise in line with debt its debt to asset ratio will remain flat at 100%. So the very act of saving and investing creates debt and {% rising debt to income ratios. 1 China is a classic example of this where it borrows from itself. It saves 46% of GDP and this saving is largely recycled through banks and results in strong debt growth. But this is largely matched by an expansion in productive assets. The solution is to spend more, save less and recycle more of its savings via investments like equity.
Third, the rapid rise in private debt in the emerging world is not as concerning as they have a higher growth potential than developed countries. Of course, the main problem emerging countries face is that they borrow a lot in US dollars and either a sharp rise in the $US or a loss of confidence by foreign investors causes a problem. This has started to be a concern lately as the $US is up 7% from its low earlier this year.

Fourth, debt interest burdens are low and in many cases falling as more expensive, long maturity, older debt rolls off. And given the long maturity of much debt in advanced countries it will take time for higher bond yields to feed through to interest payments. In Australia, interest payments as a share of household disposable income are at their lowest since 2003, and are down by a third from their 2008 high. There is no sign of significant debt servicing problems globally or in Australia.

Fifth, most of the post GFC debt increase in developed countries has come from public debt & governments can tax and print money. Japan is most at risk here given its high level of public debt, but borrows from itself. And even if Japanese interest rates rise sharply (which is unlikely with the BoJ keeping zero 10-year bond yields with little sign of a rise) 40% of Japanese Government bonds are held by the BoJ so higher interest payments will simply go back to the Government.

Sixth, while global interest rates may have bottomed, the move higher is very gradual as seen with the Fed and the ECB, Bank of Japan and RBA are all a long way from raising rates. What’s more, central banks know that with higher debt to income ratios they don’t need to raise rates as much to have an impact on inflation or growth as in the past.

Finally, debt alone is rarely the source of a shock to economies. Broader signs of excess such as overinvestment, rapid broad-based gains in asset prices and surging inflation and interest rates are usually required and these aren’t evident on a generalised basis. But these are the things to watch for.

Concluding comment

History tells us that the next major crisis will involve debt problems of some sort. But just because global debt is at record levels and that global interest rates and bond yields have bottomed does not mean a crisis is imminent. For investors, debt levels are something to remain alert too – but in the absence of excess in the form of booming investment levels, surging inflation and much higher interest rates, for example, there is no need to be alarmed just yet.

1.↩  [My favourite example of the complex relationships between income, saving and debt came from Bank Credit Analyst Research. Suppose there is an island with 100 people, each making 100 coconuts a year. Here’s three possibilities.

Case 1: Output is 10,000 coconuts with each person consuming 100. Saving and investment are zero and no debt is created.
Case 2: Each person consumes only 75 coconuts a year, selling the remainder to a plantation who buys them with a bank loan and plants them resulting in 2500 new coconut trees. Consumption is 7500 coconuts. Savings and investment are 2500 and debt has gone up by 2500 coconuts.
Case 3: Each person consumes 125 coconuts, by importing 25 each from foreign islands. Consumption is now 12,500 coconuts, savings is -2500 coconuts, investment is zero and the current account deficit is 2500. External debt goes up by 2500. This gets risky if the other islands want their coconuts back!

So debt can rise even if an economy lives within its means & invests for the future. ]↩ 

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