For many people, debt is a dirty word. But not all debt is created equal. There’s good debt and there’s bad debt, and then there’s the good debt that can get pretty ugly if it’s not managed properly. Learning to use debt intelligently could make all the difference to your personal bottom line.

Good debt

Debt is considered good when it helps you buy wealth building assets. That can be an asset that grows in value over time and /or provides you with income.

Borrowing is often referred to as leverage because it helps you get more for your money.

Shares and property are regarded as growth assets because, when chosen well, they should grow in value over time. Shares can also offer regular dividend income while investment property provides rental income. In both cases, the income you receive can be used to help meet your loan repayments.

In many instances you can also claim a tax deduction on the interest paid on your investment loan.

Bad debt

Debt is bad for your wealth when you borrow to buy assets that fall in value, don’t provide any income and are not tax deductible.

Using a credit card or a personal loan to pay for holidays or expensive toys is an example of bad debt.

The trouble with bad debt is that you can often be paying for it long after the holiday has worn off or that new car has halved in value. If your bad debt is on a credit card, then it can be all too easy to let the debt roll over each month.

When bad debt turns good

Used well, bad debt can be put to good use. If you are disciplined and pay off your credit card in full each month this can help you manage your cash flow. It might also allow you to leave money sitting longer in a high interest savings account.

Credit card debt turns ugly when you buy things you can’t afford and pay only the minimum repayment each month. Because of the high interest rates that apply to credit cards, your initial debt can balloon and take many years to clear.

When good debt goes sour

Using good debt to pay off bad debt could also cost you dearly. Say you consolidate your debts by increasing your mortgage. The end result could be that you spread the cost of that debt over 20 years or more, dramatically increasing your total interest payments into the bargain.

The family home

Buying a home to live in will not provide you with income but it can still be regarded as good debt. Not only is it a form of enforced saving but in time it may also be used as leverage to fast track your wealth creation.

Once you build up equity in your home you can use this as security to take out an investment loan. Any income you earn from your investments— your good debt — can be used to make extra repayments on your mortgage. This can accelerate paying off your home loan and free up cash for more investments.

A power of good

Whether debt is good or bad, it’s generally wise to clear it as quickly as possible. Pay off your bad debts first – beginning with the debt that has the highest interest rate – as you should be able to take advantage of the tax concessions that may be available on your good debt.

In years gone by it was common to wait until you had saved up for what you wanted. Nowadays the ease of obtaining credit can lead to reckless behaviour. But there’s still an important place for good debt.

Given most of us will spend many years in retirement and would like to be self-funded, borrowing to accelerate wealth can be a very successful investment strategy. It’s just important to remember to keep bad debt to a minimum and make sure you use good debt wisely — otherwise it can all turn a little ugly.

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Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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Just like the property it allowed you to buy, your mortgage benefits from regular maintenance. Spring is the perfect time to look at your current mortgage and make any adjustments that are needed.

Here are four tips to assist you in reviewing your current mortgage, to set you up for the year ahead.

Is your interest rate as good as it could be?

Australia’s mortgage rates have remained at historic lows for a long time now. No one knows what will happen in the future but it’s a good idea to know what your current interest rate is and whether you can find a better deal elsewhere. At the moment, it’s still possible to find rates under 2 % fixed for one year. However, there has been a very slight rise this year[1].

Working out whether to go for the lowest rate for a shorter term or lock in a slightly higher one for longer is only part of your decision. You also have to consider whether fixed, variable or a mix of the two is better for your circumstances. You will also need to factor in the costs associated with leaving your current loan and entering a new one too.

When you’re reviewing your loan, it’s important to be aware of how rates vary across different loan structures. Offset and drawdown loans normally don’t have the lowest rates, for example, but if you can pay extra against your loan, they may be financially worthwhile.

We can help you sort through not only your loan options but also the rates available and discuss what is best suited to your financial situation. It may mean approaching your current lender to ask for a more competitive rate.

Does the type and length of your loan still suit you?

Deciding how long you want to fix a rate will depend on your own risk tolerance as well as thinking about what may happen in the future. Some people prefer to know exactly what their mortgage payments will be for a set time. Others are more comfortable with the risk of a variable rate that might go up or down at any time. And of course, as COVID-19 has shown us, our risk appetite can change in relation to what’s happening in our lives.

If your circumstances have changed or you would like to discuss whether your current loan set up still suits your lifestyle and future goals, please don’t hesitate to give us a call.

Could you consolidate debts into your mortgage?

If you’re paying off debts with higher interest rates than your mortgage, it may be possible to use your mortgage to pay them off. This will increase the size of your mortgage but the interest you pay will be lower than the current rate for your debt.

Paying off debt may be more straightforward if you already have a drawdown or offset mortgage with funds available, or you’re switching mortgages anyway. Other common ways to add debts to mortgages include negotiating an increase in your mortgage to include the debt.

How much equity do you now have and are you making the most of it?

Check how much equity you now have in your property by getting a valuation from your lender or a real estate agent. You also need to check your mortgage statement, so you know how much is paid off.

Once you know how much equity you have, you can think about whether there are other things you would like to do with that money. Many people use equity in one property to help fund another. It might pay for a renovation that could increase your equity even more.

As you can see, opening up your mortgage for a good spring clean can raise some exciting possibilities. The easiest way to act on these is to contact us for a review and action plan.

[1] https://mozo.com.au/home-loan-statistics

Fixed rate home loans

Average 2 year fixed rate for owner occupiers – June 2021

Average Fixed Home Loan Rates at a $400,000 loan amount, 80% loan-to-value ratio, owner-occupier, principal and interest, from the mozo.com.au database. Source: Mozo

If you’d like help or more information give us call.

[1] https://www.news.com.au/finance/economy/australian-economy/how-interest-rate-increase-would-impact-aussie-house-prices/news-story/e90dcf416558b4938884d8c3fd1b6abc

[1] https://www.smartline.com.au/mortgage-news/interest-rates/borrowers-rush-to-fix-loans-as-lenders-lift-longer-term-rates/

[2] https://www.savings.com.au/home-loans/term-funding-facility-ending-june

[3] https://mozo.com.au/home-loans/articles/more-lenders-hike-up-home-loan-fixed-rates-will-variable-rates-follow

[4] https://www.savings.com.au/home-loans/the-potential-35-000-cost-of-breaking-a-fixed-home-loan

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Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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When it comes time to investigate residential aged care for yourself, your partner, parent or relative, the search for a facility and how to pay for it can seem daunting. The system is complex, and decisions are often made in the midst of a health crisis.

Factors such as location to family and friends, reputation for care or general appeal are just as important as the sometimes-high price of a room and other fees in residential aged care.

Even so, costs can’t be ignored *

Accommodation charges

The first thing to be aware of when researching your residential aged care options is that there are separate costs for the accommodation and the care provided by the facility.

The accommodation payment essentially covers your right to occupy a room. You can pay this accommodation fee as a lump sum called the Refundable Accommodation Deposit (RAD), or a daily rate similar to rent, or a combination of both.

The daily rate is known as the Daily Accommodation Payment or DAP and is effectively a daily interest rate set by the government. The current daily rate is 4.04 %*. If the RAD is $550,000 then the equivalent DAP is $60.87 a day ($550,000 x 4.04%, divided by 365 days).

A resident can pay as much or as little towards the RAD as they choose, but any outstanding amount is charged as a DAP.

The RAD is fully refundable to the estate unless it is used to pay any of the aged care costs such as the DAP.

Daily fees

As well as an accommodation cost there are daily resident fees that cover living and care costs. There is a basic daily fee which everyone pays and is set at 85% of the basic single Age Pension. The current rate* is $52.71 a day and covers the essentials such as food, laundry, utilities and basic care.

Then there is a means tested care fee which is determined by Services Australia or Veteran’s Affairs. This figure can range from $0 to about $256 a day depending on a person’s income and assets. The figure has an indexed annual and a lifetime cap – currently* set at $28,339 a year or $68,013 over a lifetime.

Some facilities offer extra services, where a compulsory extra services fee is paid. It has nothing to do with care but may include extras like special outings, a choice of meals, wine with meals and daily newspaper delivery. It can range from $20-$100 a day.

A means assessment determines if you need to pay the means-tested care fee and if the government will contribute to your accommodation costs. Everyone who moves into an aged care home is quoted a room price before moving in. The means assessment then determines if you will have to pay the agreed room price, or RAD, or contribute towards it.

How means testing works

A means-tested amount above a certain threshold is used to determine whether you pay the quoted RAD and how much the government will contribute towards the means-tested care fee.

A person on the full Age Pension and with property and assets below $37,155* would have all their costs met by the government, except the $52.71* a day basic daily fee.

A person on the full Age Pension with a home and a protected person, such as their spouse, living in it and assets between $37,155* and $173,075* may be asked to contribute towards their accommodation and care.

To be classified as a low means resident there would be assessable assets below $173,075.20* (indexed). It is also subject to an income test.

A low means resident may pay a Daily Accommodation Contribution (DAC) instead of a DAP which can then be converted to a Refundable Accommodation Contribution (RAC). They may also pay a small means-tested care fee.

Payment strategies

The fees you may pay for residential care and how you pay them requires careful consideration. For example, selling assets such as the former home to pay for your residential care can affect your aged care fees and Age Pension entitlements.

If you would like to discuss aged care payment options and how to ensure you find the right residential care at a cost you or your loved one can afford, give us a call.

* All costs quoted in this article are current at the time of writing & are subject to change during the course of the year. The most current rates are available here: www.health.gov.au &  www.myagedcare.gov.au

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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Stay up to date with what’s happened in Australian and global markets over the past month.

Our August update video takes you through key economic indicators, as both markets and the economy react to the continued on-again, off-again lockdowns throughout numerous states in July.

Please get in touch if you’d like assistance with your personal financial situation

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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As we navigate ongoing lockdowns due to COVID-19 across Australia, here is a guide to the latest benefits you may be entitled to from the Federal and State Governments.

Australia-wide initiatives

The Pandemic Leave Disaster Payment (PLDP) is a program to support you if you find yourself in a situation where you are unable to earn an income because you are required to self-isolate, quarantine, or are caring for someone with COVID-19. The payment provides a lump sum of $1,500 per fortnight and you will need to meet certain criteria, which do vary between states and territories.

A COVID-19 Disaster Payment (CDP) is available for workers who are adversely affected by a state public health order including a lockdown, hotspot or movement restrictions. Again, the eligibility criteria vary by state, as can the amounts.

In addition, Centrelink provides a one-off Crisis Payment for National Health Emergency payment for those affected by COVID-19. You would need to already be eligible for income support or in severe financial hardship and are required to quarantine or self-isolate or are caring for someone required to be in quarantine or self-isolation. You will only be able to access 2 Crisis Payments for National Health Emergency in a 6-month period.

Victoria

• The COVID-19 Disaster Program is available for eligible Victorians between July 16 and 27th period. Although this period has lifted you still may be able to access this payment if you are eligible. The opportunity to claim closes on August 12th for the July 16-22nd July period and on August 19th for the July 23-27th period.
• The Pandemic Leave Disaster Payment will provide $1,500 for each 14 day period you must self-isolate or quarantine or are caring for someone who has COVID-19 or must quarantine or self-isolate.
• Victorian Government COVID-19 Test Isolation Payment provides a payment of $450 for workers who are required to self-isolate while waiting for COVID-19 test results.
• The Business Continuity Fund provides relief for up to around 30,000 businesses, that continue to be impacted by capacity limits on businesses with a $5,000 grant. There are 24 eligible sectors (including restaurants & cafes, gyms and hairdressers). For CBD businesses, that are also impacted by reduced foot traffic due to restrictions on staff allowed back into offices, you may also be eligible for an additional $2000 grant. To be eligible, for the Business Continuity Fund businesses must have received, or be eligible for the Business Cost Assistance Program round two.
• The Licensed Hospitality Venue Fund 2021 will receive extra funding to provide grants of up to $20,000, to support licensed venues that continue to be impacted by the current restrictions. This grant recognises the higher operating costs of larger licensed venues. Licensed venues that have received or were eligible for the previous Licensed Hospitality Venue Fund. CBD venues will again, also have an additional $2,000 grant available.
• The Small Business COVID Hardship Fund provides grants of up to $5,000 to small businesses with a payroll of up to $10 million where the current restrictions have resulted in at least a 70% reduction in revenue.
• The Alpine Business Support Program will provide $5,000 – $20,000 grants to 430 Alpine-based businesses, recognising the impact of restrictions of movement and limited interstate travel, throughout peak season. There is also an additional $5 million support to alpine resort operators and management boards.
• The Commercial Tenancy Relief Scheme has been reintroduced to assist eligible tenants with proportional rent relief and to support landlords assisting tenants. Eligible businesses must have experienced at least a 30% reduction in turnover and have an annual turnover of less than $50 million. Again tenants and landlords are encouraged to reach an agreement directly, the Victorian Small Business Commission (VSBC) will be available to provide mediation.
• The Victorian Energy Saver scheme is available to assist with paying energy bills.

New South Wales

• Due to the Sydney lockdown, as of July 2021, NSW residents may be eligible for a COVID-19 Disaster Payment. Eligibility criteria and dates vary by location across the state.
• The Pandemic Leave Disaster Payment will provide $1,500 for each 14 day period you must self-isolate or quarantine, or are caring for someone who has COVID-19 or must quarantine or self-isolate, and unable to earn an income.
• From July 14, there is a 60-day moratorium on evictions for residential tenants who have lost 25% or more of their income due to stay at home orders.
• Businesses that suffer a 30% reduction in revenue due to the restrictions, which have a turnover between $75,000 and $250 million, can now apply for up to $100,000 in JobSaver grants a week.
• For businesses with a turnover between $30,000 and $75,000, the COVID-19 Micro Business Grant provides a fortnightly $1,500 payment, if your revenue has declined by more than 30%.
• Businesses now have the option to defer the payment of their payroll tax, including the 2020-21 annual reconciliation, July and August 2021 monthly return periods until 7 October 2021. Interest-free payment plans will be available for up to 12 months.
• For businesses that have experienced at least a 30% decline in turnover, or for NSW businesses with grouped Australian wages of no more than $10 million, a 25% reduction of their 2021-22 payroll tax liability may be available.

Queensland

• In addition to the Pandemic Leave Disaster Payment, workers in Queensland may be eligible for support and relocation incentives.
• Small and medium businesses impacted by the South East Queensland lockdown commencing 31 July 2021 may be eligible for a $5000 grant to use on business expenses. To be eligible, the business needs to have a turnover of more than $75,000 and an annual payroll in Queensland of up to $10 million and need to have at least a 30% reduction in turnover as a result of the lockdown.
• Grants are also available for large hospitality and tourism businesses operating in the 11 local government areas in lockdown, eligibility criteria apply. Applications open mid-August.

Australian Capital Territory

• While the ACT has a number of smaller support packages in place to help the community, the primary COVID-19 relief scheme available is the $1,500 Pandemic Leave Disaster Payment.

Northern Territory

• Similar to other states, if you can’t earn an income because you need to self-isolate or quarantine for 14 days, or need to care for someone with COVID-19, you may be eligible for the $1,500 Pandemic Leave Disaster Payment offered to Territorians.

Western Australia

• On top of the state’s one-off 2020 $600 electricity bill credit, WA now offers the Pandemic Leave Disaster Payment.

South Australia

• In addition to the Pandemic Leave Disaster Payment, one-off grants of $300 are available to eligible workers required to self-isolate.

Tasmania

• In addition to the Pandemic Leave Disaster Payment, grants are available to eligible low-income casual workers or self-employed Tasmanians required to self-isolate.

If you have any questions about the grants available or whether you are eligible, please don’t hesitate to give us a call.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.[1] Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.

With the benefit of hindsight, some people may be regretting acting in haste. Although for others, accessing their super under the early release due to COVID measures was a difficult but necessary decision at the time.

As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28% in the year to June 2020 while global shares rose 37%. Balanced growth super funds returned 18% for the year, their best performance in 24 years.[2]

While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?

Lesson #1 Ignore the noise

When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes.

Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations.

One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.

Lesson #2 Stay diversified

Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings.

Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%.

The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax.

More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees. High growth funds returned 10.3 per cent per year and the most conservative funds returned 5.5 per cent per year.ii

The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.

Lesson #3 Stay the course

The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so.

Unfortunately, we can only ever be sure when a market has peaked or troughed after the event, by which time it’s usually too late. By switching out of shares and into cash after the market crashed in March last year, investors would have turned short-term paper losses into a real loss with the potential to put a big dent in their long-term savings.

Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed.

Timing the market on the way in and the way out is extremely difficult, if not impossible.

Looking ahead

Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and many older ones too, the coronavirus pandemic will be a defining moment in their investing journey.

Now that shares and residential property prices have rebounded strongly, investors face new challenges. That is, how to make the most of the prevailing market conditions while ignoring the FOMO (fear of missing out) crowd.

By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way.

We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.

[1] https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/?sh=241a03a46cfc

[2] https://www.chantwest.com.au/resources/super-funds-post-a-stunning-gain

Suite 2, 1 Railway Crescent
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Telephone: 03 9723 0522

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