Strategy Talk | June 2019
As we pass the winter solstice, things are starting to look up. The days are getting longer, the weather slowly warmer and hopefully our financial position stronger. This month in Strategy Talk we explore why it just got harder to get a home loan, how household debt can be all-consuming, the great financial apps for your phone and the rarely considered topic of social media after death…
WHY IT JUST GOT HARDER TO GET A HOME LOAN
Anyone applying for a home loan these days will find that there are more hurdles to jump than has recently been the case. So why is it harder to get a home loan? And what can you do to improve your chances of getting a loan?
The Royal Commission
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that concluded in early 2019 discovered a number of lax lending practices by some of Australia’s biggest lenders. Of particular concern was that some banks failed to verify the living expenses of home loan applicants. In many cases this lead to people receiving loans that they were unable to repay. The Royal Commission also revealed that one of the bank regulators, ASIC, did little to punish misconduct, so there was little incentive for banks to comply with their legal obligations.
In response to the Royal Commission ASIC promised greater scrutiny of lending practices and lenders began to ask for a lot more information when assessing home loan applications. They now require detailed proof of both income and expenditure at a level that many people may find intrusive.
Bigger deposits
The decline in home prices in Australia’s major cities mean that buyers don’t need to borrow as much for a given property, which should make it easier to get a loan. However, falling prices create a greater risk for the banks, and one way to reduce this risk is to require a higher deposit, extending the time it takes to save that deposit.
Stringent stress testing
Even before the Royal Commission the prudential bank regulator, APRA, introduced a requirement that banks check on their borrowers’ ability to service their loans if there is a significant increase in interest rates. While it might be possible to borrow at an interest rate of less than 4% per annum (pa), the banks need to check that the loan is still affordable at an interest rate 2.5% pa above the proposed rate, thus reducing the amount that can be borrowed.
Being prepared
The main response to this more difficult lending environment is simple, but that doesn’t make it pleasant. Unless you are able to increase your income, you’ll need to save more. Inevitably, that means spending less:
Apps such as TrackMySPEND from MoneySmart can help you track your spending and make it easier to work to a budget.
Keep detailed records of saving and spending. You will be asked for them come loan application time.
Start early. You are more likely to be successful in your home loan quest if you can show a consistent history of saving and responsible spending spanning years rather than months.
It’s always best to shop around. Get in touch and we can assist in finding the best deal for you.
IS HOUSEHOLD DEBT CONSUMING YOU?
By the end of 2018 Australia had, relative to the size of its overall economy, one of the highest levels of household debt in the world. At 127% of gross domestic product (GDP), our household debt, as a percentage of GDP, had nearly doubled over the last 20 years.
So are Australian households groaning under the weight of oppressive levels of debt? For the most part the answer is no. A major reason for the increase in household debt is that interest rates are much lower than they were 20 years ago, so it’s easier to service larger loans. And over 90% of our household debt is owner-occupied home loans and investment loans.
Good debt, bad debt
Home loans and investment property loans are often referred to as ‘good’ debt because, when used responsibly, they (usually) improve wellbeing and build wealth over the long term. That said, poor choices or unfortunate changes in circumstances – borrowing too much, loss of a job or an increase in interest rates for example – can see ‘good’ housing debt turn ‘bad’.
Another type of bad debt is lifestyle debt. This has a negative impact on wealth because the debt is being used to buy things such as cars and clothes, holidays and groceries – that lose value rather than gaining it. In today’s world it’s easy to accumulate bad debt.
Temptation galore
Credit cards, digital wallets on our phones, payday loans and buy-now-pay-later options all make it easier to spend money, even if it’s money we don’t have. Relentless, targeted advertising, the fear of missing out, the increasing level of peer pressure enabled by social media or just paying for daily essentials are all capable of leading us into spiralling debt.
Is debt consuming you?
Some warning signs that you have a debt problem include:
Not paying off your credit card in full each month. This means you will be paying a high rate of interest on the carryover balance.
Your total debt is increasing, along with your interest payments.
You’re experiencing housing stress. This means rent or mortgage repayments consume more than 30% of your pre-tax household income.
You’re using debt to fund basic living costs.
Taking control
How do deal with your particular debt problem depends very much on personal circumstances.
Track your spending. Australians buy huge amounts of clothes they don’t wear, food they don’t eat and gadgets they don’t use. For every purchase ask yourself, “do I really need this?”
Take out a lower interest rate personal loan to pay off high interest debts such as credit cards. Repay the loan as quickly as possible.
If you have a home loan, make sure it has a linked offset account that you use for everyday banking. You only pay interest on the difference between your loan balance and offset account balance so all of your money is working to pay down your loan.
Review your home loan regularly. You may be able to refinance at a lower interest rate. Check for all the fees involved.
Talk to us. We can look at your specific situation and recommend strategies that will put you in control of your debt rather than having debt consume you.
CREATE WEALTH AT THE TIP OF YOUR FINGERS
You’re probably already pretty impressed by what your smart phone can do, but have you thought of it as a wealth builder?
It’s all down to the apps you can install, and there’s an increasing range to help you manage your spending, supercharge savings, complete your tax returns and manage your investments – all at the tip of your fingers.
Track your spending
Most people approach the ‘b’ word – budgeting – with dread, but getting your spending under control is fundamental to any wealth creation plan. For starters, you’ll want to know where the money is going. Several apps take much of the drudgery out of tracking each dollar you spend while also helping you to take control of your money. This includes separating your ‘wants’ from your ‘needs’, further categorising expenses and setting spending limits for each category.
ASIC’s TrackMySPEND covers the basics. Another popular app is Pocketbook, which syncs with many Australian bank accounts and largely automates the task of categorising each transaction. It also tells you exactly what your bank balance is and how much you can safely spend to stay within your budget for each category.
Boosting savings
Remember piggybanks and the pleasure of slipping the day’s loose change into the slot? With electronic transactions now dominating our spending, loose change is a disappearing commodity.
The Raiz app provides a digital solution. It automatically rounds up each purchase you make on a linked debit card to the next dollar and invests this ‘loose change’ into one of six diversified investment portfolios. You can also set up regular contributions or make one-off additions to your portfolio.
Carrott also takes a rounding up approach, with the additional amount going to paying off your mortgage.
Manage your investments
From simple watch lists for shares to mobile apps that give you full access to a stockbroker’s trading platform, a vast range of apps is available to the connected investor. Check out what’s available from your super fund, investment managers and share broker. In many cases you’ll find apps that can do everything that you would normally use your desktop computer for, and often with more convenience. Enjoy lunch in the park while you check up on your super or snap up a few shares.
File your tax return
We know that apps are mainstream when the tax office gets in on the act. The ‘ATO app’ includes the myDeductions tool to help you track expenses. Sole traders can also record income as well as deductions. Come tax time the data can be emailed to a tax agent or you can use your app to prefill your tax return before lodging it yourself.
Pocketbook also has a dedicated tax return app, though a fee applies to lodge the return with the ATO.
Be appy
This is just a brief sampling of the many mobile financial apps that are available. Many are free, but be aware of ‘in-app purchases’. In some cases, functionality may be limited unless you upgrade to a ‘premium’, paid option. Also remember that you may be sharing your financial information with a third party. Make sure you’re happy with the app provider’s privacy policy and security.
Then, when you’ve found the ideal electronic helpers for your financial needs, ‘app up’ and get your mobile phone building your wealth.
MANAGING YOUR ETERNAL LIFE ON SOCIAL MEDIA
Nearly 80% of Australians now use social media, with 60% of us accessing it either daily or most days. Facebook and Instagram have become our photo albums and repositories of family memories, and social media is no longer the province just of the young. People of all ages are sharing their lives with the world.
But have you thought about how your social media assets should be managed when you die? And do you know what to do with the accounts of those close to you if they pass away? While not a legally recognised role, you may find yourself acting as someone’s ‘digital executor’.
Keep or delete?
The first question is whether to keep or delete the social media account.
Many social media platforms allow accounts to be memorialised. This means content can be retained and viewed by those with whom it was initially shared. It can be a nice way for a friend or family member to be remembered or to maintain a family archive.
Many people, however, would prefer that their social media presence disappears once they die. It’s a personal choice, and an important one, so make sure that your loved ones know what your preference is.
Platform-dependent
That said, what you can do with an account will depend on the particular platform. For example, LinkedIn will remove the profile of a deceased member, but does not offer the option for the account to be memorialised.
Facebook, on the other hand, allows you to nominate a legacy contact – someone who can look after your account if it is memorialised. This includes responding to new friend requests and adding a final post to your profile.
Instagram accounts can be memorialised, but such accounts can’t be changed in any way.
Twitter offers account deactivation, but does not provide account access to anyone, regardless of the relationship to the deceased.
Clearly, an important part of managing social media accounts after death is making sure the appropriate people know which sites you are using. Providing them with regularly updated details of your accounts will make life much easier for them.
Access all areas
As an alternative to going through the various processes for each site, and particularly if the aim is to have all of your accounts shut down after death, you can give a trusted person the login details and passwords for all of your accounts.
A number of password management services are available that allow your nominee to request access to all of the passwords you need to share. If, due to your death or incapacity, you don’t block the request within a period of time that you stipulate, access will be granted. With some services you can also store other information, such as details of current insurance policies or social media accounts.
Talk to your significant others
Once you have your own plans in place and, most importantly, discussed them with your nearest and dearest, make sure you encourage all of your family, regardless of age, to provide their own instructions.
At a time of grief, it’s better to know that you are carrying out a loved one’s wishes, rather than trying to guess how they would want their social media legacy to be handled.