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

As November drew to a close, and we look towards the end of the year, all eyes were on the new strain of the coronavirus, Omicron.  Click here for our Dec update video.

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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This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.

For those of us who’ve been in and out of lockdown over the past 20 months, this has meant a significant shift in the way we shop, not only physically, but the way we pay for our goods has changed too.

For many years now EFTPOS, cash, and credit cards have been the most common ways to purchase items. However, over the past five years we’ve seen alternate payment services like Buy Now Pay Later (BNPL) emerge. They’re becoming increasingly popular, so much so, that the total amount of credit extended under buy now pay later arrangements has almost doubled.

What is BNPL?

Buy now pay later services allow you to purchase items and take them home immediately – if purchased in-store – and pay them off in instalments (usually four fortnightly payments). It’s important to recognise that this service is still a credit facility; however, you won’t have to go through the same credit checks as you would if you were applying for a credit card.

BNPL services do not charge interest but if you do not meet the required repayments, you might incur a fee and this could have an impact on your credit rating which may then be an issue if you apply for a loan in the future.

Keep track of your spending

Around this time of year, we’re usually counting down the days until we can take a break from work and we look forward to spending more time with family and friends.

During this time, our spending tends to increase too, and the repercussions can end up lasting longer than the holiday period.

Buying gifts for family and friends can be expensive, even if you’re spreading out your payments by using BNPL services, and so can social occasions like celebrating the end of the year with work colleagues or family and friends.

Try to plan early and set yourself a budget, working out how much you can afford to spend will help to ensure you don’t end up with a financial hangover in the new year.

Create a budget

A good place to start is to work out which family and friends you’d like to buy a gift for then set a limit for each. If you’re unable to buy a gift for everyone, why not suggest a Kris Kringle; that way you can purchase one gift and perhaps spend a little more than you normally would if you buy an individual gift for each member of the family.

Do the same with social activities. Try and plan as many outings as possible and set yourself a spending limit for each. There are always going to be occasions where you’re unable to plan ahead so creating a buffer within your budget allowance could help pay for those unexpected activities. It could also help if you do overspend on gifts.

Plan ahead and don’t blow the budget

Manage your time effectively. Our time is such a precious commodity, we never feel like we have enough. As we approach the holiday season, try to plan in advance as much as you can. The moments we feel rushed are when our spending levels tend to increase. For example, last minute gifts, higher priced tickets and more expensive shipping so our delivery arrives in time. You’ll also have the added bonus of eliminating some of the holiday stress, with more time to relax and enjoy with friends and family.

Having fun this holiday season will be a priority for most of us this year, especially if this is going to be the first time you’ve seen loved ones in quite some time but making sure you don’t go overboard with your spending should be an important factor too.

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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Australia’s thriving property market has recovered so swiftly since the brief pandemic-induced recession of 2020, that authorities have stepped in to pull the reigns on runaway real estate prices. As a result, lenders have been asked to tighten serviceability criteria.

Nationally, dwelling values are up 20.3% higher over the past 12 months, every capital city experiencing significant growth across the board. Melbourne, despite ongoing lockdowns dampening the market, still increased by 15%.

That’s where the Australian Prudential Regulation Authority (or APRA) comes in. On October 6, it wrote to lenders announcing an increase to the minimum interest rate ‘buffer’ it requires them to use when assessing the serviceability of home loan applications. APRA told lenders that from November 1, they must assess new borrowers’ ability to meet loan repayments at an interest rate at least 3 percentage points above the loan product rate – a 0.5 % increase to the previous 2.5 % buffer.

Month-on-month change in dwelling values

What are macro-prudential measures?

This is a big picture measure taken by one of the regulators [the Council of Financial Regulators includes; APRA, the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and The Treasury] to secure financial stability for both lending institutions and borrowers. If APRA, in this instance, thinks the current lending system is unsustainable then it will step in to protect banks’ profits and the stability of the whole banking system, while also not letting borrowers get in over their heads.

Why did APRA do it?

The early October announcement by APRA was a “targeted and judicious action” designed to reinforce the stability of the financial system according to chairman Wayne Byres. “In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future,” he wrote in a letter to lenders.

“While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” he added.

More than one in five new loans approved in the June quarter were in excess of six times the borrowers’ income and APRA’s fear has clearly been that housing credit growth will run ahead of household income growth. “With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted,” Mr Byres said.

What difference will it make to you?

Overall, such a small tweak will probably not make a huge difference to average borrowers who may not have been borrowing at their full capacity anyway. However, for those who are stretching their borrowing budgets to almost the last dollar, such as first-home buyers struggling to meet rising prices, this move could be significant.

Ultimately, APRA has stated that the change will cut the maximum amount available to a typical borrower by approximately 5 per cent.

• Borrowers who were previously approved for a $500,000 loan would now be able to borrow $475,000
• Anyone with the green light to take out a $1 million mortgage would now be looking at $950,000

The impact this will have on prices or the current sky-high demand throughout most markets is yet to be determined as anyone who obtained a three-month pre-approval towards the very end of October would be under the previous 2.5 % serviceability buffer well into the new year. These changes will affect investors and owner occupiers in differing ways.

The changes are likely to have more of an impact on the investment segment of the market, as investor rates are higher than owner occupier mortgage rates. APRA also highlighted in their announcement that investors tend to borrow at higher levels of leverage and often have other existing debts, which would also be subject to the increased serviceability assessment.

What other changes are on the horizon?

Although APRA’s recent announcement will unlikely make a huge impact on demand for credit or even push down prices, it may well be a sign of future changes. While the announcement may seem like a subtle change to housing lending conditions, there may be more tightening to come as the level of housing credit and household debt are monitored, the high debt-to-income ratios being a focus.

In his letter to lenders, Mr Byres highlighted that if new home loan lending led to high debt-to-income ratios, a statistic expressing a borrower’s pre-tax income divided by their total debt levels, APRA “would consider the need for further macro-prudential measures”.

To find out how the tightened lending criteria will impact your borrowing power, get in touch with us today.

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 markets over the past month.

All eyes were on the September quarter inflation figures in October, as speculation mounted that the Reserve Bank may be forced to raise interest rates sooner than planned. Click here for our November update video.

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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After spending their working life building retirement savings, many retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given that we are living longer than previous generations and may need to pay for aged care and health costs later in life.

But this cautious approach also means many retirees are living more frugally than they need to. This was one of the key messages from the Government’s Retirement Income Review, which found most people die with the bulk of the wealth they had at retirement intact.[1]

One of the benefits of advice is that we can help you plan your retirement income so you know how much you can afford to spend today, secure in the knowledge that your future needs are covered.

Making the most of super

According to the Review: “It appears (most people) see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement.”

The figures back this up. The average super account balance on the death of a member in the year to June 2020 was $102,660.[2] While not a huge amount, it is an indication that retirees may be able to withdraw more than the minimum amount from their super to live more comfortably without breaking the bank.

Minimum super pension withdrawals

Under superannuation legislation, once you retire and transfer your super into a pension account you must withdraw a minimum amount each year. This amount increases from 4 per cent of your account balance for retirees aged under 65 to 14 per cent for those aged 95 and over. (These rates have been halved temporarily for the 2020 and 2021 financial years due to COVID-19.)

One of the common misconceptions about our retirement system, according to the Retirement Income Review, is that these minimum drawdowns are what the Government recommends. Instead, they are there to ensure retirees use their super to fund their retirement, rather than as a store of tax-advantaged wealth to pass down the generations.

In practice, super is unlikely to be your only source of retirement income.

The three pillars

Australia’s retirement income system is built around three potential sources of income, known as the three pillars:

• A means-tested Age Pension
• Compulsory super, and
• Voluntary savings both in and out of super.

The Retirement Income Review, and the government, argue that the family home should be included with voluntary savings or as a fourth pillar, but more on that later.

Most retirees live on a combination of Age Pension topped up with income from super and other investments. Despite compulsory super being around for almost 30 years, over 70 per cent of people aged 66 and over still receive a full or part-Age Pension.

While the Retirement Income Review found most of today’s retirees have adequate retirement income, it argued they could do better. Not by saving more, but by using what they have more efficiently.

Withdrawing more of your super nest egg is one way of improving retirement outcomes, but for those who could still do with extra income the answer could lie in the nest itself.

Unlocking housing wealth

Australian retirees are some of the wealthiest in the world, with median household wealth of around $1.4 million. Yet close to $1 million of this wealth is tied up in the family home.

Studies have also shown that most people use a form of mental accounting which sets aside super for income, other financial assets for emergencies and the family home for future bequests.[3]

That’s a lot of money to leave to the kids, especially when many retirees end up living in homes that are too large while they struggle to afford the retirement lifestyle they had hoped for.

For these reasons there is growing interest in ways that allow retirees to tap into their home equity (see box). Of course, not everyone will want or need to take advantage of these options, but they are available if you would like some extra income.

Here are some options to use your home to generate retirement income:

• Downsizer contributions to your super. If you are aged 65 or older and sell your home, perhaps to buy something smaller, you may be able to put up to $300,000 of the proceeds into super (up to $600,000 for couples). Strict rules apply, so speak to us for more details.
• The Pension Loans Scheme(PLS). Offered by the government via Centrelink, the PLS allows older Australians to receive tax-free fortnightly income by taking out a loan against the equity in their home. The loan plus interest (currently 4.5 per cent per year) is repaid when you sell or after your death.
• Reverse Mortgages (also called equity release or home equity schemes). Similar to the PLS but offered by commercial providers. Unlike the PLS, drawdowns can be taken as a lump sum, income stream or line of credit but this flexibility comes at the cost of higher interest rates.

The big picture

Discussions about retirement in the media and around the kitchen table often focus on how much super you have and whether it’s enough. Super is important, but it’s not the only source of retirement income.

If you would like to discuss your retirement income needs and how to make the most of your assets, give us a call.

Notes

[1] Retirement Income Review, https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf

[2] APRA  data spreadsheet, https://www.apra.gov.au/sites/default/files/2021-01/Annual%20superannuation%20bulletin%20-%20June%202015%20to%20June%202020%20-%20superannuation%20entities_1.xlsx

[3] https://householdcapital.com.au/third-pillar-forum/retirement-insights/prof-hazel-bateman/

Suite 2, 1 Railway Crescent
Croydon, Victoria 3136

Telephone: 03 9723 0522

Email: integrityone@iplan.com.au

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