Despite interest rates being low, debt stress is at record highs. Banking data shows that on average Principal and Interest repayments currently take up 42% of household income. As a result, banks are becoming concerned about what will happen when rates start to rise?
Increasing pressure from APRA and the Royal Commission, have made the ability to refinance loans considerably harder. Clients that have never had an issue obtaining a loan in the past are being heavily scrutinised and even having their applications declined.
Banks appetite for Interest Only loans have also decreased significantly. Many clients are finding that when they try to extend their Interest Only (I/O) term, that the banks are not accepting their request. If you have an investment property, paying principal and Interest (P&I) payments can have a significant impact on your cashflow and wealth strategies.
To make things worse, most banks have also changed the way they assess applicants ability to afford the loan (Serviceability). Instead of relying on an average living expense formula for couples and families, they are now wanting to see your personal bank statement transactions and a accurate budget.
If you’re like most people, you spend pretty much what comes in and your budget is set based on your bank balance. If interest rates went up you would just adjust your spending. Unfortunately, this type of budgeting is going to make it very tough when you apply for that next loan.
What can you do to prepare?
To ensure a smooth transition to Principal & Interest Repayments or rollover to another Interest Only period the following tips might help;
- Make a budget that proves you can afford P&I repayments with a 2% interest rate rise. Make sure its comprehensive, and don’t forget to include things like your drivers licence renewals and an amount for when your fridge blows or when you need to replace furniture. You might not need it this year, but next year you might.
- Stick to the budget. The banks review 6 months of transactions and if you broke the budget, they will know. An easy way to do this is by opening separate bank accounts for your discretionary spending. For example, Groceries, Gifts, leisure / entertainment, children, etc.
- Don’t leave it to the last minute to renew your Interest Only term. Speak to your broker or your bank, at least 3-6 months before the Interest Only term finishes. This will ensure that you have time to review your options and adjust your budget before you need to apply. It will also give you time to sell if affordability is an issue.
- If you do have to change to P&I, review the viability of your investment strategy. It may no longer be the best option, especially if you still have debt on your principal residence.
Puddle 2 Pond Financial is a Financial planner Nowra and has been in operation since 2012. We see clients at our office in Nowra and provide a mobile service in the Illawarra and Wollongong region. We specialise in helping clients with budgeting and implementing strategies so they stick to it. If you’re a little overwhelmed and would love some help, give us a call on 02 4424 0479 …. We’d love to help.
18 Jan / 2018
Are you earning a respectable income and want more to show for it?
Do you want to feel more confident about what the future has in store for you?
Is 2018 the year that you’re prepared to do something about it?
If you answered yes to any of these questions, then getting a seat at our next Financial Bootcamp workshop is a must.
We will show you
- The importance of understanding what you personally want to achieve in life and how shifting your mindset towards achieving it will impact on your success.
- How different influences in your past can impact on your relationship with money today
- Key principles that will allow you to manage your budget, pay off your debt and build solid financial foundations to set you on the path to achieving your dreams.
Date: Thursday 15th February 2018
Location: Nowra Golf Club
Cost: Completely free. No sales pitch, and there is nothing at all to purchase. We run this workshop because at Puddle 2 Pond Financial we have a passion to help as many people as possible avoid the mistakes and educate them for the best chance of financial success.
Includes drinks and nibbles
This is no ordinary finance workshop. So don’t miss out.
19 Oct / 2016
Government changes to the pension asset test are likely to impact the entitlements of some pensioners. These changes come into effect from 1 January 2017 and will apply to age pensioners as well as those in receipt of Disability Support Pension, Carers Payment and Service Pension.
Assets test thresholds will change
The table below shows the new asset test thresholds that will be effective from 1 January 2017.
Asset threshold full pension Asset threshold part pension
Current 1 Jan 2017 Current 1 Jan 2017
Single – Homeowner $209,000 $250,000 $793,750 $542,500
Single – Non Homeowner $360,500 $450,000 $945,250 $742,500
Couple – Homeowner $296,500 $375,000 $1,178,500 $816,000
Couple – Non Homeowner $448,000 $575,000 $1,330,000 $1,016,000
The lower assets test threshold is the amount of assessable assets pensioners can hold before pension entitlement begins to reduce under the assets test. Once assessable assets exceed the higher threshold, pension entitlement will be nil.
Taper rate to increase
From 1 January 2017, the maximum payment a pensioner can receive will be reduced by $3.00 per fortnight for every $1,000 of assets they hold above the asset test threshold for full pension. This is an increase from the current taper rate of $1.50 per fortnight for each $1,000 of excess assets.
How your pension may be affected
The changes to the asset test thresholds will broadly mean:
- Pensioners with assessable assets below or ‘around’ the lower threshold are likely to maintain their current level of pension or potentially see an increase in their pension entitlement.
- Pensioners with assessable assets above the lower threshold are likely to see a reduction in their pension entitlements – in some cases to nil – as a result of the increased taper rate.
We’re here to help
If you want to know more about how the new changes may affect your pension entitlements or explore strategies to help reduce the impact of the changes, please contact me on 02 4424 0479.
Alternatively come along to our Seminar where we will explain the changes and share some tips we use to maximise your Centrelink entitlements.
When: Thursday 10th November
Time: 10am – 11.20am
Where: Bomaderry Bowling Club
Included: Morning Tea (light refreshments, Tea / Coffee)
Speakers: Amanda Pond -Puddle 2 Pond Financial & Paris Kritikos: – Challenger Limited
RSVP: Tuesday 8th November
Contact our office on 02 4424 0479 to reserve your place.
26 Jun / 2013
Once it was something that only happened to other people, but in these challenging economic times, redundancy is fast becoming something a number of us may experience, so it pays to be prepared.
Redundancy can be a time of confusion. On one side a person is faced with losing a regular income and on the other they may receive a substantial payout – both present problems to be managed and both may present opportunities as well.
Facing redundancy can be an extremely stressful time, but before rushing in and making any decisions, it’s important for people to take stock of their current circumstances, immediate needs and plans for the future. Making the wrong decision can impact a person’s financial situation for years to come.
There are good redundancy stories. We all have a friend who was able to pay off their mortgage with their redundancy package and then land a better job a few weeks later. The loss of an old job may be the jolt a person needs to start a new career or be enough to energise a person to start their own business.
But for every positive experience, there are many that don’t go so smoothly.
Whatever the situation, it’s important to seek financial advice before any major financial decisions are made.
So, what can an employee expect to get? In redundancy, a person is entitled to receive any outstanding holiday pay, long service leave and other entitlements, as well as a payment as compensation. The payment will vary between employers and awards, but for example, could include four weeks pay up front, plus two weeks pay for every year of service.
One of the first questions a person may ask is, “Will I qualify for any Centrelink assistance?” This will depend on a person’s assets and assessable income. There are also waiting periods that need to be served before a person may be eligible for Centrelink assistance. This is one area where advice is crucial.
There are a number of factors to consider if redundancy is looming. One of the first things people should consider is preparing a budget – how much do they have in savings, what are their debt levels and how will they meet living and other major expenses. Answering these questions, will give a person a better idea of what to do with a redundancy payout.
A labyrinth of taxation rules surrounds redundancy payouts.
No matter how much a person receives, some of the money will go in tax. The good news is that redundancy payments are taxed at a lower rate.
It can get complicated, but generally, payments made under redundancy or early retirement schemes will have a tax-free portion (which can’t be rolled into superannuation) and an eligible termination payment (which may, in some circumstances, be able to be rolled into superannuation if certain criteria are met, otherwise must be taken as cash). Currently, $7,350 of the payment will not be taxed, plus $3,676 for each completed year of service.
Eligible termination payments are payments that exceed the tax-free portion discussed above. If certain criteria are met, the payment can be rolled into superannuation, deferring tax so that initially only 15 per cent tax is payable as the money enters the fund. Otherwise, the payment must be taken as cash with tax paid immediately.
The amount of tax a person has to pay also depends on how much of the payment relates to employment prior to 1983, the amount of the payment and a person’s age.
Accrued annual leave and accrued long service leave will generally be taxed at 30 per cent, even if a person is normally on the highest marginal tax rate.
Superannuation payments may have two components, preserved benefits and non-preserved benefits. Preserved benefits must be invested in an approved fund and generally can’t be accessed until 55 years of age. Non-preserved benefits can be taken in cash, with the tax rate dependant on the amount of the withdrawal, a person’s age and financial circumstances. But superannuation funds should only ever be accessed as a last resort.
Also, for those people who have insurance cover under their employer super scheme, it’s important to review arrangements as many insurance benefits could cease on termination.
What to do with a redundancy payout will have a lot to do with what stage of life a person is at.
Someone with a family will need to consider how they will meet all their regular responsibilities until alternative employment is found. While it may be tempting to pay off the mortgage, it may be better to wait and do this when employment has been found, just in case the funds are needed in an emergency.
A person nearing retirement will have to consider whether they can afford to retire. Those aged 55 can access their super funds as a lump sum if they choose to retire. Alternatively, they may be able to access their superannuation without retiring as a non-commutable income stream. A person should also contact Centrelink to find out what social security benefits they may be entitled to.
Even a young person without financial and personal commitments should think twice before spending their payout, as there is always a risk that employment may not be found as soon as expected.
There are many issues surrounding redundancy and each person’s circumstances will be unique, so it’s crucial to seek professional financial advice before making any decisions with what could be one of the largest lump sums a person will ever receive.
Amanda Pond is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.