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Mortgage and inflation pain to ease, but only slowly: how 31 top economists see 2024

<a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a> A panel of 31 leading economists assembled by The Conversation sees no cut in interest rates before the middle of this year, and only a slight cut by December, enough to trim just $55 per month off the cost of servicing a $600,000 variable-rate mortgage. The <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">panel</a> draws on the expertise of leading forecasters at 28 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board. Its forecasts paint a picture of weak economic growth, stagnant consumer spending, and a continuing per-capita recession. The average forecast is for the Reserve Bank to delay cutting its cash rate, keeping it near its present 4.35% until at least the middle of the year, and then cutting it to <a href="https://cdn.theconversation.com/static_files/files/3028/The_Conversation_AU_February_2024_Economic_Survey.pdf">4.2%</a> by December 2024, 3.6% by December 2025 and 3.4% by December 2026. <hr /> <iframe id="xV821" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/xV821/4/" width="100%" height="400px" frameborder="0"></iframe> <hr /> The gentle descent would deliver only three interest rate cuts by the end of next year, cutting $274 from the monthly cost of servicing a $600,000 mortgage and leaving the cost around $1,100 higher than it was before rates began climbing. Six of the experts surveyed expect the Reserve Bank to increase rates further in the first half of the year, while 20 expect no change and three expect a cut. Former head of the NSW treasury Percy Allan said while the Reserve Bank would push up rates in the first half of the year to make sure inflation comes down, it would be forced to relent in the second half of the year as unemployment grows and the economy heads towards recession. Warwick McKibbin, a former member of the Reserve Bank board, said the board would push up rates once more in the first half of the year as insurance against inflation before leaving them on hold. Former Reserve Bank of Australia chief economist Luci Ellis, who is now chief economist at Westpac, expects the first cut no sooner than September, believing the board will wait to see clear evidence of further falls in inflation and economic weakening before it moves. <hr /> <iframe id="ZQgno" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/ZQgno/7/" width="100%" height="400px" frameborder="0"></iframe> <hr /> <h2>Inflation to keep falling, but more gradually</h2> Today’s <a href="https://www.rba.gov.au/">Reserve Bank board meeting</a> will consider an inflation rate that has come down <a href="https://theconversation.com/the-7-new-graphs-that-show-inflation-falling-back-to-earth-220670">faster than it expected</a>, diving from 7.8% to 4.1% in the space of a year. The newer more experimental monthly measure of inflation was just <a href="https://theconversation.com/the-7-new-graphs-that-show-inflation-falling-back-to-earth-220670">3.4%</a> in the year to December, only points away from the Reserve Bank’s target of 2–3%. But the panel expects the descent to slow from here on, with the standard measure taking the rest of the year to fall from 4.1% to 3.5% and not getting below 3% until <a href="https://cdn.theconversation.com/static_files/files/3027/The_Conversation_AU_2024_economic_survey.pdf">late 2025</a>. Economists Chris Richardson and Saul Eslake say while inflation will keep heading down, the decline might be slowed by supply chain pressures from the conflict in the Middle East and the boost to incomes from the <a href="https://theconversation.com/albanese-tax-plan-will-give-average-earner-1500-tax-cut-more-than-double-morrisons-stage-3-221875">tax cuts</a> due in July. <hr /> <iframe id="buC9f" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/buC9f/6/" width="100%" height="400px" frameborder="0"></iframe> <hr /> <h2>Slower wage growth, higher unemployment</h2> While the panel expects wages to grow faster than the consumer price index, it expects wages growth to slip from around <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">4%</a> in 2023 to 3.8% in 2004 and 3.4% in 2025 as higher unemployment blunts workers’ bargaining power. But the panel doesn’t expect much of an increase in unemployment. It expects the unemployment rate to climb from its present <a href="https://www.datawrapper.de/_/w9h9f/">3.9%</a> (which is almost a long-term low) to 4.3% throughout 2024, and then to stay at about that level through 2025. All but two of the panel expect the unemployment rate to remain below the range of 5–6% that was typical in the decade before COVID. Economic modeller Janine Dixon said the “new normal” between 4% and 5% was likely to become permanent as workers embraced flexible arrangements that allow them to stay in jobs in a way they couldn’t before. Cassandra Winzar, chief economist at the Committee for the Economic Development of Australia, said the government’s commitment to full employment was one of the things likely to keep unemployment low, along with Australia’s demographic transition as older workers leave the workforce. <hr /> <iframe id="pAioo" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/pAioo/2/" width="100%" height="400px" frameborder="0"></iframe> <hr /> <h2>Slower economic growth, per-capita recession</h2> The panel expects very low economic growth of just 1.7% in 2024, climbing to 2.3% in 2025. Both are well below the 2.75% the treasury believes the economy is <a href="https://treasury.gov.au/speech/the-economic-and-fiscal-context-and-the-role-of-longitudinal-data-in-policy-advice">capable of</a>. All but one of the forecasts are for economic growth below the present population growth rate of 2.4%, suggesting that the panel expects population growth to exceed economic growth for the second year running, extending Australia’s so-called <a href="https://theconversation.com/were-in-a-per-capita-recession-as-chalmers-says-gdp-steady-in-the-face-of-pressure-212642">per capita recession</a>. <hr /> <iframe id="TO8bP" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/TO8bP/4/" width="100%" height="400px" frameborder="0"></iframe> <hr /> The lacklustre forecasts raise the possibility of what is commonly defined as a “technical recession”, which is two consecutive quarters of negative economic somewhere within a year of mediocre growth. Taken together, the forecasters assign a 20% probability to such a recession in the next two years, which is lower than in <a href="https://theconversation.com/two-more-rba-rate-hikes-tumbling-inflation-and-a-high-chance-of-recession-how-our-forecasting-panel-sees-2023-24-208477">previous surveys</a>. But some of the individual estimates are high. Percy Allen and Stephen Anthony assign a 75% and 70% chance to such a recession, and Warren Hogan a 50% chance. Hogan said when the economic growth figures for the present quarter get released, they are likely to show Australia is in such a recession at the moment. The economy barely grew at all in the September quarter, expanding just <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">0.2%</a> and was likely to have shrunk in the December quarter and to shrink further in this quarter. The panel expects the US economy to grow by 2.1% in the year ahead in line with the <a href="https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024">International Monetary Fund</a> forecast, and China’s economy to grow 5.4%, which is lower than the International Monetary Fund’s forecast. <h2>Weaker spending, weak investment</h2> The panel expects weak real household spending growth of just 1.2% in 2014, supported by an ultra-low household saving ratio of close to zero, down from a recent peak of 19% in September 2021. Mala Raghavan of The University of Tasmania said previous gains in income, rising asset prices and accumulated savings were being overwhelmed by high inflation and rising interest rates. Luci Ellis expected the squeeze to continue until tax and interest rate cuts in the second half of the year, accompanied by declining inflation. The panel expects non-mining investment to grow by only 5.1% in the year ahead, down from 15%, and mining investment to grow by 10.2%, down from 22%. Johnathan McMenamin from Barrenjoey said private and public investment had been responsible for the lion’s share of economic growth over the past year and was set to plateau and fade as a driver of growth. <h2>Home prices to climb, but more slowly</h2> The panel expects home price growth of 4.6% in Sydney during 2024 (down from 11.4% in 2024) and 3.1% in Melbourne, down from 3.9% in 2024. ANZ economist Adam Boyton said decade-low building approvals and very strong population growth should keep demand for housing high, outweighing a drag on prices from high interest rates. While high interest rates have been restraining demand, they are likely to ease later in the year. <hr /> <iframe id="syk8x" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/syk8x/6/" width="100%" height="400px" frameborder="0"></iframe> <hr /> In other forecasts, the panel expects the Australian dollar to stay below US$0.70, closing the year at US$0.69, it expects the ASX 200 share market index to climb just 3% in 2024 after climbing 7.8% in 2023, and it expects a small budget surplus of A$3.8 billion in 2023-24, followed by a deficit of A$13 billion in 2024-25. The budget surplus should be supported by a forecast iron ore price of US$114 per tonne in December 2024, down from the present US$130, but well up on the <a href="https://budget.gov.au/content/myefo/index.htm">US$105</a> assumed in the government’s December budget update. <a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a> Image credits: Getty Images This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/mortgage-and-inflation-pain-to-ease-but-only-slowly-how-31-top-economists-see-2024-218927">original article</a>.

Money & Banking

Homeowners often feel better about life than renters, but not always – whether you are mortgaged matters

<a href="https://theconversation.com/profiles/rachel-ong-viforj-113482">Rachel Ong ViforJ</a>, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a>; <a href="https://theconversation.com/profiles/hiroaki-suenaga-1477343">Hiroaki Suenaga</a>, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a>, and <a href="https://theconversation.com/profiles/ryan-brierty-1477346">Ryan Brierty</a>, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a> Homeownership has long been thought of as the <a href="https://www.abc.net.au/news/2017-08-23/why-australians-are-obsessed-with-owning-property/8830976">great Australian dream</a>. For individuals, it’s seen as the path to adulthood and prosperity. For the nation, it’s seen as a cornerstone of economic and social policy. Implicit in this is the assumption that owning a home rather than renting one makes people better off. It’s an assumption we are now able to examine using data from the government-funded <a href="https://melbourneinstitute.unimelb.edu.au/hilda">Household, Income and Labour Dynamics in Australia</a> (HILDA) survey, which for two decades has asked questions both about homeownership and satisfaction with life. The <a href="https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0007/4694137/ContinuingPersonQuestionnaireW23M.pdf">overarching question</a> asks "all things considered, how satisfied are you with your life? Pick a number between 0 and 10 to indicate how satisfied you are". We also looked at people’s satisfaction with their financial situation, their home and the neighbourhood in which they live. In a study published in the journal <a href="https://journals.sagepub.com/doi/10.1177/00420980231190479">Urban Studies</a>, we linked those answers to home ownership and characteristics including age and income. As expected, we found homeowners were generally more satisfied with their lives than renters. But we also find the extent to which they were more satisfied depended on whether or not they were still paying off a mortgage. <h2>Mortgaged homeowners about as satisfied as renters</h2> Outright home owners were 1.5 times as likely to report high overall satisfaction as renters. But home owners still paying off a mortgage were only a little more likely to feel high overall satisfaction. Similarly, outright owners were 2.3 times as likely to report high financial satisfaction as renters – but mortgaged owners were only 1.1 times as likely. When it comes to satisfaction with their home and neighbourhood, the differences were less extreme. Outright home owners were 3.1 times as likely to report high satisfaction with their home as renters, while mortgaged owners were 2.8 times as likely. Outright owners were 1.6 times as likely to report high satisfaction with their neighbourhood as renters, and mortgaged owners 1.4 times as likely. The results also varied with age and income. <hr /> <iframe id="hK9Ua" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/hK9Ua/3/" width="100%" height="400px" frameborder="0"></iframe> <hr /> As shown in the graph above, outright owners were more likely to report high financial satisfaction than renters across almost the entire age range. But mortgaged owners only showed a demonstrably greater financial satisfaction than renters between the ages of 25 and 50. Beyond age 50, the existence of a mortgage debt burden appeared to cancel out any boost to financial satisfaction from homeownership. This potentially reflects the growing financial stress of making mortgage payments as retirement approaches. <hr /> <iframe id="f2GSl" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/f2GSl/3/" width="100%" height="400px" frameborder="0"></iframe> <hr /> By income, mortgaged owners reported experiencing more financial satisfaction compared to renters the more they earned between A$80,000 and A$240,000. Outright owners experienced more financial satisfaction than renters up to A$320,000. Beyond these income levels, owners did not have greater financial satisfaction than renters, perhaps because high-earning renters have other sources of financial satisfaction. <h2>How satisfied people feel beyond 60</h2> In other respects, outright owners and mortgaged homeowners showed similar patterns, becoming more satisfied with their homes relative to renters the more they age up – until the age of 60. That’s when their satisfaction relative to renters declined, as illustrated below. This decline might reflect the growing physical burden of maintaining an owned home as people age. <hr /> <iframe id="oLrHz" class="tc-infographic-datawrapper" style="border: none;" src="https://datawrapper.dwcdn.net/oLrHz/2/" width="100%" height="400px" frameborder="0"></iframe> <hr /> Our study has important implications. One is that age matters. Although older people consistently express a desire to <a href="https://www.ahuri.edu.au/analysis/brief/whats-needed-make-ageing-place-work-older-australians">age in place</a>, we found satisfaction among those who owned vs rented their home declined beyond age 60. This suggests better integration between housing and care is critical to support people ageing in place. Another implication is that as low-income owners are more reliant on their homes as a source of relative financial satisfaction than high earners, they are <a href="https://www.cambridge.org/core/journals/journal-of-social-policy/article/housing-equity-withdrawal-perceptions-of-obstacles-among-older-australian-home-owners-and-associated-service-providers/268F54A8EAA1E9ECA118E243505AA9FD">more exposed</a> in times of crisis. They may face the risk of being forced to sell suddenly with little time to consider the consequences. And another implication is as the relative financial satisfaction of mortgage holders disappears after the age of 50, and as more of us approach retirement with mortgages intact, more of us will either <a href="https://journals.sagepub.com/doi/10.1177/00420980211026578">postpone retirement</a> or become dissatisfied. Our findings suggest the extension of mortgage debt into later life should be discouraged if the benefits of the Australian dream are to be preserved.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/215147/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/rachel-ong-viforj-113482">Rachel Ong ViforJ</a>, ARC Future Fellow & Professor of Economics, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a>; <a href="https://theconversation.com/profiles/hiroaki-suenaga-1477343">Hiroaki Suenaga</a>, Senior Lecturer School of Accounting, Economics and Finance, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a>, and <a href="https://theconversation.com/profiles/ryan-brierty-1477346">Ryan Brierty</a>, PhD candidate, School of Accounting, Economics and Finance, <a href="https://theconversation.com/institutions/curtin-university-873">Curtin University</a> Image credits: Getty Images This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/homeowners-often-feel-better-about-life-than-renters-but-not-always-whether-you-are-mortgaged-matters-215147">original article</a>.

Home & Garden

Why you’re probably paying more interest on your mortgage than you think

<a href="https://theconversation.com/profiles/sander-de-groote-1472267">Sander De Groote</a>, <a href="https://theconversation.com/institutions/unsw-sydney-1414">UNSW Sydney</a> and <a href="https://theconversation.com/profiles/kevin-li-892606">Kevin Li</a>, <a href="https://theconversation.com/institutions/unsw-sydney-1414">UNSW Sydney</a> For most things we buy, the price we are quoted is the price we pay. That’s supposed to be the case even where taxes and fees are involved. Australian law requires anyone selling anything to display a <a href="https://www.accc.gov.au/business/pricing/price-displays">total price</a> that includes all “taxes, duties and all unavoidable or pre-selected extra fees”. But our investigations, which compare the interest rate quoted on our mortgages with the fine print in our own mortgage documents, shows this is hardly ever the case for home loans. Even though we are both trained as accountants, until recently we hadn’t bothered to check – even as interest rates climbed. We assumed the rates we were being told we were being charged (say 5% per year) were the rates we were actually paying. This would be easy enough, and in our view the right thing, for banks to do. <h2>The price quoted usually isn’t the price paid</h2> Mortgage interest is usually charged monthly, but the rates are yearly. This means that each time interest is charged, the outstanding amount <a href="https://www.investopedia.com/terms/c/compoundinterest.asp">compounds</a> as interest is applied to interest. That sounds bad enough. But this isn’t our main complaint. It’s that there are two possible ways to calculate the amount of interest. Banks calcualte interest on a daily basis. The most reasonable would be to calculate the daily amount in a way that adds up to an annual amount that matches what was quoted. That way, a 5% rate would really be 5%. Although there’s a bit of <a href="https://cdn.theconversation.com/static_files/files/2814/compound_example.pdf">calculation</a> involved, it’s easy enough for banks to do. <h2>How banks calculate mortgage interest</h2> The other, arguably less reasonable, way is what’s called the “<a href="https://www.investopedia.com/articles/investing/020614/learn-simple-and-compound-interest.asp">simple</a>” method. Our investigations show that this technique is used by all the big four banks, and probably many others too. It’s called the simple method because it involves simply dividing the annual rate (say 5%) by 365 to determine the daily rate. This seems to not be important, but because of compounding it means the amount charged over a year is more than the rate quoted. Say you borrow $100,000 for one year at an annual rate of 5%, repaying the whole amount at the end of the year. You might expect to pay back $105,000. Instead, the banks’ method of calculating interest results in a total repayment of $105,116. This is because the daily interest rate (5% divided by 365) is applied to the outstanding balance each day and added to your balance once a month. These regular increases mean your interest compounds costing you more. <h2>Over decades, the difference matters</h2> In July 2023, the average size of a new mortgage in New South Wales was about A$750,000, with an average interest rate of about 5.95%. The method of calculation used by the banks and in the fine print of their mortgage contracts requires a monthly payment of $4,473 including the repayment of the amount originally borrowed over the life of a 30-year loan. But if 5.95% were actually charged each year, the monthly payment would be $4,398 – a difference of $900 per year. In this typical example, the difference over the life of the loan amounts to about $27,000. It means these borrowers will end up paying an effective interest rate of 6.11%. <h2>We had to read the fine print</h2> We checked the terms and conditions of each of the big four banks – Westpac, the Commonwealth, the National Australia Bank and the ANZ – as well as their biggest subsidiaries which include St George, The Bank of Melbourne, Bank SA and Bankwest. They all charge interest using the “simple” method. Mutual banks – the old credit unions and building societies owned by their members – have different reporting requirements, and we were unable to check the terms and conditions used by each one. But where we could, we found they used the same method as the big four. You can find this small print yourself, usually in the middle of your mortgage document. It’s a formula, accompanied by a paragraph of explanation. But you have to look carefully. Or you could call customer service, as we did, and ask the bank to explain the calculation. You shouldn’t have to. <h2>The price quoted ought to be the price paid</h2> We think the price quoted for a product should be the price that’s actually charged, as the law <a href="https://www.accc.gov.au/business/pricing/price-displays">generally requires</a> for products other than mortgages. This means if you are told you’ll be charged 5.95% interest per year, you should pay 5.95% per year – not 6.11% because of a quirk in the formula. Mortgages are a larger financial commitment than most purchases. This means that honesty and clear communication are even more important. It’s worth knowing what you are letting yourself in for when signing up for a mortgage. That way, when the bank or broker explains it to you and it’s not what was advertised, you can ask for a discount.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/213862/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/sander-de-groote-1472267">Sander De Groote</a>, Lecturer, School of Accounting, Auditing and Taxation, <a href="https://theconversation.com/institutions/unsw-sydney-1414">UNSW Sydney</a> and <a href="https://theconversation.com/profiles/kevin-li-892606">Kevin Li</a>, Senior Lecturer, School of Accounting, Auditing and Taxation, <a href="https://theconversation.com/institutions/unsw-sydney-1414">UNSW Sydney</a> Image credits: Getty Images This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/why-youre-probably-paying-more-interest-on-your-mortgage-than-you-think-213862">original article</a>.

Money & Banking

Balmain Private: A decade of trust and success

Having celebrated its 10th anniversary in 2022, Balmain Private has firmly established itself as one of Australia's most reliable investment options. Since its inception in 2012, the company has consistently delivered impressive results, making it a trusted choice for individuals and advisers alike. With a track record of $244 million in interest paid to investors – and with an even more impressive capital loss of zero dollars – Balmain Private has demonstrated its commitment to delivering solid returns. Over the past decade, investors have enjoyed an average annual return of 7.56%*, with the highest reaching an outstanding 11.25% net return*. What sets Balmain Private apart is its unique approach to investment. The company empowers investors by allowing them to build, select, and manage their own portfolio of first mortgage loans. This flexibility appeals to a wide range of investors, including Retail, High Net Worth and Self-Managed Superannuation Fund investors, who seek alternative income sources beyond traditional options. At Balmain Private, the approval process for investment offerings is highly meticulous. Only the best loans make it to the investors, ensuring a carefully curated selection that prioritises quality and performance. Remarkably, more than 20% of loans repaid have exceeded the target return rate, while the rest have consistently met their target rate of return. Investing with Balmain Private is not only rewarding but also convenient. The entire process can be completed online, allowing investors to transact at their leisure. Whether on a PC, tablet or smartphone, investors have easy access to their portfolio. Additionally, Balmain Private offers a Mobile App that enables investors and advisers to manage, invest and review their portfolio on the go. The app allows for seamless depositing or redeeming of funds and provides downloadable reports right on your mobile device. To further enhance transparency and control, investors or their advisers can manage their portfolio through an intuitive online investor portal. This portal provides comprehensive details on current investments, capital movements, income distributions and transactions, ensuring that investors stay well-informed every step of the way. If you're ready to explore the opportunities offered by Balmain Private, you can download their complimentary <a href="https://info.balmain.com.au/rs/929-AKB-976/images/BPD%205727%20Target%20Market%20Determination.pdf" target="_blank" rel="noopener">Target Market Determination</a> (TMD), their <a href="https://info.balmain.com.au/FactSheetOrder-Over60_01LandingHomepage.html?utm_source=Over60&utm_medium=Editorial&utm_campaign=June&utm_content=Editorial_TextLink" target="_blank" rel="noopener">Investor Fact Sheet</a>, or get in touch with their Investments Team at 02 9232 8888. For more detailed information, you can also visit their library of materials at <a href="https://linktr.ee/balmainprivate" target="_blank" rel="noopener">https://linktr.ee/balmainprivate</a>. Balmain Fund Administration Limited, with ABN 98 134 526 604 and AFSL No: 333213, serves as the issuer of units in the Balmain Discrete Mortgage Income Trusts ARSN 155 909 176. Before making any investment decision, it is crucial to read the Product Disclosure Statement (PDS) and the Target Market Determination (TMD) available on the company's website or by calling 02 9232 8888. It's important to carefully consider whether investing in the Trust aligns with your financial goals, as rates of return are not guaranteed and are subject to future revenue, which may be lower than expected. As with any investment, there is a risk of losing some or all of the principal investment. However, Balmain Private's exceptional track record and commitment to investor satisfaction provide a solid foundation for a successful investment journey. Choose Balmain Private for your chance to embark on another decade of trust and prosperity. Image: Shutterstock This is a sponsored article produced in partnership with Balmain Private. *Since inception. Past performance is not indicative of future performance. Investors should consider the risk associated with any Loan as set out in the PDS and any relevant Supplementary PDS (SPDS) pertaining to that Loan.

Money & Banking

A brief history of the mortgage, from its roots in ancient Rome to the English ‘dead pledge’ and its rebirth in America

The average interest rate for a new U.S. <a href="https://www.cbsnews.com/news/home-loan-mortgage-interest-rate-7-percent-highest-since-2001/">30-year fixed-rate mortgage topped 7% in late October 2022</a> for the first time in more than two decades. It’s a sharp increase from one year earlier, when <a href="https://www.valuepenguin.com/mortgages/historical-mortgage-rates">lenders were charging homebuyers only 3.09%</a> for the same kind of loan. Several factors, including <a href="https://www.nerdwallet.com/article/mortgages/fed-mortgage-rates">inflation rates and the general economic outlook</a>, influence mortgage rates. A primary driver of the ongoing upward spiral is the <a href="https://abc7chicago.com/fed-interest-rate-decision-today-hike-federal-reserve-meeting-november/12408055/">Federal Reserve’s series of interest rate hikes</a> intended to tame inflation. Its decision to increase the benchmark rate by <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20221102a.htm">0.75 percentage points on Nov. 2, 2022</a>, to as much as 4% will propel the cost of mortgage borrowing even higher. Even if you have had mortgage debt for years, you might be unfamiliar with the history of these loans – a subject I cover <a href="https://scholar.google.com/citations?user=KVv47noAAAAJ&hl=en&oi=ao">in my mortgage financing course</a> for undergraduate business students at Mississippi State University. The term dates back to <a href="https://www.english-heritage.org.uk/learn/story-of-england/medieval/">medieval England</a>. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years. <h2>Ancient roots</h2> Historians trace the <a href="https://www.kingjamesbibleonline.org/Nehemiah-5-3/">origins of mortgage contracts</a> to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan. Often using the <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">forum and temples as their base of operations</a>, mensarii, which is derived from the word mensa or “bank” in Latin, would set up loans and charge <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">borrowers interest</a>. These government-appointed public bankers required the borrower to put up collateral, whether real estate or personal property, and their agreement regarding the use of the collateral would be handled in one of three ways. First, the <a href="https://www.merriam-webster.com/dictionary/fiducia">Fiducia</a>, Latin for “trust” or “confidence,” required the transfer of both ownership and possession to lenders until the debt was repaid in full. Ironically, this arrangement involved no trust at all. Second, the <a href="https://www.merriam-webster.com/dictionary/pignus">Pignus</a>, Latin for “pawn,” allowed borrowers to retain ownership while <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1684&context=penn_law_review">sacrificing possession and use</a> until they repaid their debts. Finally, the <a href="https://legaldictionary.lawin.org/hypotheca/">Hypotheca</a>, Latin for “pledge,” let borrowers retain both ownership and possession while repaying debts. <h2>The living-versus-dead pledge</h2> <a href="https://www.britannica.com/biography/Claudius-Roman-emperor">Emperor Claudius</a> brought Roman law and customs to Britain in A.D. 43. Over the next <a href="https://www.english-heritage.org.uk/learn/story-of-england/romans/">four centuries of Roman rule</a> and the <a href="https://www.english-heritage.org.uk/learn/story-of-england/early-medieval/">subsequent 600 years known as the Dark Ages</a>, the British adopted another Latin term for a pledge of security or collateral for loans: <a href="https://worldofdictionary.com/dict/latin-english/meaning/vadium">Vadium</a>. If given as collateral for a loan, real estate could be offered as “<a href="https://www.merriam-webster.com/dictionary/vadium%20vivum">Vivum Vadium</a>.” The literal translation of this term is “living pledge.” Land would be temporarily pledged to the lender who used it to generate income to pay off the debt. Once the lender had collected enough income to cover the debt and some interest, the land would revert back to the borrower. With the alternative, the “<a href="https://www.merriam-webster.com/dictionary/mortuum%20vadium">Mortuum Vadium</a>” or “dead pledge,” land was pledged to the lender until the borrower could fully repay the debt. It was, essentially, an interest-only loan with full principal payment from the borrower required at a future date. When the lender demanded repayment, the borrower had to pay off the loan or lose the land. Lenders would keep proceeds from the land, be it income from farming, selling timber or renting the property for housing. In effect, the land was <a href="https://www.jstor.org/stable/pdf/1321129.pdf">dead to the debtor</a> during the term of the loan because it provided no benefit to the borrower. Following <a href="https://www.royal.uk/william-the-conqueror">William the Conqueror’s victory</a> at the Battle of Hastings in 1066, the English language was heavily influenced by <a href="https://blocs.mesvilaweb.cat/subirats/the-norman-conquest-the-influence-of-french-on-the-english-language-loans-and-calques/">Norman French</a> – William’s language. That is how the Latin term “Mortuum Vadium” morphed into “Mort Gage,” Norman French for “dead” and “pledge.” “<a href="https://www.etymonline.com/word/mortgage">Mortgage</a>,” a <a href="https://ia600201.us.archive.org/1/items/cu31924021674399/cu31924021674399.pdf">mashup of the two words</a>, then entered the English vocabulary. <h2>Establishing rights of borrowers</h2> Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. <a href="https://www.jstor.org/stable/pdf/1323192.pdf">Lenders could demand repayment</a> at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender. Unhappy borrowers could <a href="https://www.law.cornell.edu/wex/chancery">petition the king</a> regarding their predicament. He could refer the case to the lord chancellor, who could <a href="https://www.britannica.com/topic/Chancery-Division">rule as he saw fit</a>. <a href="https://www.britannica.com/biography/Francis-Bacon-Viscount-Saint-Alban">Sir Francis Bacon</a>, England’s lord chancellor from 1618 to 1621, <a href="https://www.jstor.org/stable/752041">established</a> the <a href="https://www.law.cornell.edu/wex/equity_of_redemption">Equitable Right of Redemption</a>. This new right allowed borrowers to pay off debts, even after default. The official end of the period to redeem the property was called <a href="https://www.law.cornell.edu/wex/foreclosure">foreclosure</a>, which is derived from an Old French word that means “<a href="https://www.etymonline.com/word/foreclose">to shut out</a>.” Today, foreclosure is a legal process in which lenders to take possession of property used as collateral for a loan. <h2>Early US housing history</h2> The <a href="https://www.loc.gov/classroom-materials/united-states-history-primary-source-timeline/colonial-settlement-1600-1763/overview/">English colonization</a> of what’s now <a href="https://themayflowersociety.org/history/the-mayflower-compact/">the United States</a> didn’t immediately transplant mortgages across the pond. But eventually, U.S. financial institutions were offering mortgages. <a href="https://www.huduser.gov/publications/pdf/us_evolution.pdf">Before 1930, they were small</a> – generally amounting to at most half of a home’s market value. These loans were generally short-term, maturing in under 10 years, with payments due only twice a year. Borrowers either paid nothing toward the principal at all or made a few such payments before maturity. Borrowers would have to refinance loans if they couldn’t pay them off. <h2>Rescuing the housing market</h2> Once America fell into the <a href="https://www.history.com/topics/great-depression">Great Depression</a>, the <a href="https://www.stlouisfed.org/news-releases/2008/05/02/does-the-great-depression-hold-the-answers-for-the-current-mortgage-distress">banking system collapsed</a>. With most homeowners unable to pay off or refinance their mortgages, the <a href="https://www.federalreservehistory.org/essays/great-depression">housing market crumbled</a>. The number of <a href="https://www.encyclopedia.com/education/news-and-education-magazines/housing-1929-1941">foreclosures grew to over 1,000 per day by 1933</a>, and housing prices fell precipitously. The <a href="https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf">federal government responded by establishing</a> new agencies to stabilize the housing market. They included the <a href="https://www.hud.gov/program_offices/housing/fhahistory">Federal Housing Administration</a>. It provides <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/">mortgage insurance</a> – borrowers pay a small fee to protect lenders in the case of default. Another new agency, the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">Home Owners’ Loan Corp.</a>, established in 1933, bought defaulted short-term, semiannual, interest-only mortgages and transformed them into new long-term loans lasting 15 years. Payments were monthly and self-amortizing – covering both principal and interest. They were also fixed-rate, remaining steady for the life of the mortgage. Initially they skewed more heavily toward interest and later defrayed more principal. The corporation made new loans for three years, tending to them until it <a href="https://content.time.com/time/subscriber/article/0,33009,858135,00.html">closed in 1951</a>. It pioneered long-term mortgages in the U.S. In 1938 Congress established the Federal National Mortgage Association, better known as <a href="https://www.fanniemae.com/about-us/who-we-are/history">Fannie Mae</a>. This <a href="https://www.financial-dictionary.info/terms/government-sponsored-enterprise/">government-sponsored enterprise</a> made fixed-rate long-term mortgage loans viable <a href="https://www.investopedia.com/terms/s/securitization.asp">through a process called securitization</a> – selling debt to investors and using the proceeds to purchase these long-term mortgage loans from banks. This process reduced risks for banks and encouraged long-term mortgage lending. <h2>Fixed- versus adjustable-rate mortgages</h2> After World War II, Congress authorized the Federal Housing Administration to insure <a href="https://www.govinfo.gov/content/pkg/CPRT-108HPRT92629/html/CPRT-108HPRT92629.htm">30-year loans on new construction</a> and, a few years later, purchases of existing homes. But then, the <a href="https://files.stlouisfed.org/files/htdocs/publications/review/69/09/Historical_Sep1969.pdf">credit crunch of 1966</a> and the years of high inflation that followed made adjustable-rate mortgages more popular. Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15- or 30-year fixed-rate mortgages. Once that initial period ends, <a href="https://www.investopedia.com/terms/a/arm.asp">interest rates on ARMs</a> get adjusted up or down annually – along with monthly payments to lenders. Unlike the rest of the world, where ARMs prevail, Americans still prefer the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">30-year fixed-rate mortgage</a>. About <a href="https://data.census.gov/cedsci/table?q=DP04&t=Housing">61% of American homeowners</a> have mortgages today – with <a href="https://doi.org/10.1080/15214842.2020.1757357">fixed rates the dominant type</a>. But as interest rates rise, demand for <a href="https://www.corelogic.com/intelligence/interest-rates-are-up-but-arm-backed-home-purchases-are-way-up/">ARMs is growing</a> again. If the Federal Reserve fails to slow inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “dead pledge” may live up to its name. Image credits: Getty Images This article originally appeared on <a href="https://theconversation.com/a-brief-history-of-the-mortgage-from-its-roots-in-ancient-rome-to-the-english-dead-pledge-and-its-rebirth-in-america-193005" target="_blank" rel="noopener">The Conversation</a>.

Real Estate

Money guru's generous home loan offer for struggling Aussies

Finance guru Mark Bouris has offered to help five homeowners pay off their mortgages amid continuously rising interest rates. A vocal critic of the Reserve Bank of Australia’s dramatic hiking of interest rates, Bouris is determined to help struggling Aussies get ahead. The executive chairman of Yellow Brick Road Home Loans is lending a helping hand to homeowners hit hard by massive increases in their month mortgage payments with a generous cash injection of $12,000. “All Australians deserve a fair go on their home loans and right now you’re not getting one,” Mr Bouris said on Today. “I know many Australians are doing it tough out there right now. Through no fault of their own, homeowners are having to manage skyrocketing mortgage repayments." <blockquote class="instagram-media" style="background: #FFF; border: 0; border-radius: 3px; box-shadow: 0 0 1px 0 rgba(0,0,0,0.5),0 1px 10px 0 rgba(0,0,0,0.15); margin: 1px; max-width: 540px; min-width: 326px; padding: 0; width: calc(100% - 2px);" data-instgrm-permalink="https://www.instagram.com/reel/CpjyXECgnNr/?utm_source=ig_embed&utm_campaign=loading" data-instgrm-version="14"> <div style="padding: 16px;"> <div style="display: flex; flex-direction: row; align-items: center;"> <div style="background-color: #f4f4f4; border-radius: 50%; flex-grow: 0; height: 40px; margin-right: 14px; width: 40px;"> </div> <div style="display: flex; flex-direction: column; flex-grow: 1; justify-content: center;"> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; margin-bottom: 6px; width: 100px;"> </div> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; width: 60px;"> </div> </div> </div> <div style="padding: 19% 0;"> </div> <div style="display: block; height: 50px; margin: 0 auto 12px; width: 50px;"> </div> <div style="padding-top: 8px;"> <div style="color: #3897f0; font-family: Arial,sans-serif; font-size: 14px; font-style: normal; font-weight: 550; line-height: 18px;">View this post on Instagram</div> </div> <div style="padding: 12.5% 0;"> </div> <div style="display: flex; flex-direction: row; margin-bottom: 14px; align-items: center;"> <div> <div style="background-color: #f4f4f4; border-radius: 50%; height: 12.5px; width: 12.5px; transform: translateX(0px) translateY(7px);"> </div> <div style="background-color: #f4f4f4; height: 12.5px; transform: rotate(-45deg) translateX(3px) translateY(1px); width: 12.5px; flex-grow: 0; margin-right: 14px; margin-left: 2px;"> </div> <div style="background-color: #f4f4f4; border-radius: 50%; height: 12.5px; width: 12.5px; transform: translateX(9px) translateY(-18px);"> </div> </div> <div style="margin-left: 8px;"> <div style="background-color: #f4f4f4; border-radius: 50%; flex-grow: 0; height: 20px; width: 20px;"> </div> <div style="width: 0; height: 0; border-top: 2px solid transparent; border-left: 6px solid #f4f4f4; border-bottom: 2px solid transparent; transform: translateX(16px) translateY(-4px) rotate(30deg);"> </div> </div> <div style="margin-left: auto;"> <div style="width: 0px; border-top: 8px solid #F4F4F4; border-right: 8px solid transparent; transform: translateY(16px);"> </div> <div style="background-color: #f4f4f4; flex-grow: 0; height: 12px; width: 16px; transform: translateY(-4px);"> </div> <div style="width: 0; height: 0; border-top: 8px solid #F4F4F4; border-left: 8px solid transparent; transform: translateY(-4px) translateX(8px);"> </div> </div> </div> <div style="display: flex; flex-direction: column; flex-grow: 1; justify-content: center; margin-bottom: 24px;"> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; margin-bottom: 6px; width: 224px;"> </div> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; width: 144px;"> </div> </div> <p style="color: #c9c8cd; font-family: Arial,sans-serif; font-size: 14px; line-height: 17px; margin-bottom: 0; margin-top: 8px; overflow: hidden; padding: 8px 0 7px; text-align: center; text-overflow: ellipsis; white-space: nowrap;"><a style="color: #c9c8cd; font-family: Arial,sans-serif; font-size: 14px; font-style: normal; font-weight: normal; line-height: 17px; text-decoration: none;" href="https://www.instagram.com/reel/CpjyXECgnNr/?utm_source=ig_embed&utm_campaign=loading" target="_blank" rel="noopener">A post shared by Yellow Brick Road (@ybrhomeloans)</a> </div> </blockquote> “The Reserve Bank of Australia’s decision to increase the official cash rate for the past 10 consecutive meetings has left nearly 800,000 Australians at risk of mortgage default. At YBR Home Loans, we’re on a mission to hear the voices of those impacted most by this aggressive increase in interest rates." “We want to hear from you: your story, your struggles and particularly, if you’re worried about your ability to meet your mortgage repayments.” Mr Bouris and his team at YBR Home Loans will randomly select five lucky winners who are having trouble meeting their home loan repayments and give $12,000 to each winner “in order to help ease the strain of rapidly increasing interest rates”. “If you’re going to struggle to meet your mortgage repayments as you come off your fixed interest rate, or if you’re already struggling to meet your repayments, please fill out your details and outline your circumstances,” Mr Bouris said. Homeowners can write to Mr Bouris and Yellow Brick Road at <a href="https://ybr.com.au/fairgo" target="_blank" rel="noopener">ybr.com.au/fairgo</a> to be entered into the competition. Image credits: Instagram

Real Estate

What happens if I can’t pay my mortgage and what are my options?

With rising costs of living, including interest rate rises, many people are really worried about their mortgage. So, what actually happens if you can’t pay your mortgage – and what are your options? Here’s what you need to know. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>It’s not particularly rare for a borrower to face a period of temporary financial hardship. Photo by Tierra Mallorca on Unsplash, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> Payment deferrals, payment plans or getting fees waived It’s not particularly rare for a borrower to face a period of temporary financial hardship, often due to circumstances beyond their control. <a href="https://www.rba.gov.au/publications/bulletin/2021/sep/the-financial-cost-of-job-loss-in-australia.html" target="_blank" rel="noopener">Job loss</a>, relationship breakdowns, natural disasters, injuries and illnesses all affect the capacity of householders to repay their loan, especially given mortgages tend to run over many years, if not decades. Banks have “hardship” processes to deal with borrowers who are temporarily unable to repay their loan. The <a href="https://www.ausbanking.org.au/" target="_blank" rel="noopener">Banking Code of Practice</a>, to which most banks subscribe, provides guidelines for lenders to help consumers through financial difficulties. One form of relief is a payment deferral or “holiday”. That’s where a customer is able to postpone repayments until the issue causing hardship is resolved. Many people used this option during COVID lockdowns. However, a payment holiday sometimes simply “kicks the can down the road” and the customer is still in financial trouble when their temporary payment holiday ends. Other options include payment plans. This is where you pay back less per month but the mortgage lasts longer overall. Or, the bank may simply offer advice on how to handle finances until you’re back on your feet. It is also possible for banks to waive discretionary fees (such as those related to overdue payments). Banks don’t really want you to default Banks typically do not want their customers to default on property. They’re usually protected against losses themselves through lender’s mortgage insurance, but banks see mortgage holders as particularly valuable customers. They have shown they can obtain finance and repay loans. Usually, it’s easier for the bank to make hardship arrangements with a customer - and build trust along the way - than it is to wind up a mortgage, seize the property and then have to deal with trying to sell it in a flagging market. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>Mortgagee-in-possession can lead to lower sale price. Photo by RODNAE Productions/Pexels, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> What about my credit score? Recent <a href="https://www.creditsmart.org.au/financial-hardship/changes-to-credit-reporting-from-july-2022/" target="_blank" rel="noopener">changes</a> to the credit legislation make it easier to apply for a payment plan without affecting your credit score. From July 1, 2022, under the terms of a financial hardship arrangement, a customer’s credit report will show they have made on time repayments for the period of the arrangement – providing they have followed the terms of the hardship agreement. Credit reports will also indicate whether (but not why) a customer is in a financial hardship arrangement. This information stays on a credit report for one year, then disappears. Importantly, though, hardship information will be visible to other credit providers, and may affect a customer’s ability to get other loans during the period. I’m struggling. So what should I do? Contact your financial institution as early as you can. Your bank may be able to offer payment relief in the form of reduced payments or a holiday from repayments – or a combination of both. You usually need to provide evidence for the reason for financial hardship, and there’s an expectation you’ll be able to resume repayments when the temporary issue is resolved. Not every application for hardship will be successful, particularly if you have made promises to repay in the past and not followed through. <a href="https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance" target="_blank" rel="noopener">Income protection insurance</a> (for those who plan for uncertainties) may help prevent the need for hardship arrangements in the first place. If you see the issue as ongoing, rather than temporary, consider a different approach. If you’re ahead on your mortgage (as many Australians were during the pandemic), or you have significant equity in your house, consider refinancing. That’s where you take out a new mortgage to repay an existing loan. You may be able to get a lower monthly repayment, especially if you have built an equity stake greater than 30%. It won’t always be an option, especially if you are a recent borrower facing rising interest rates, stagnant or falling house prices, and have limited equity. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>A growing number of Australians are worried about their home loan. Photo by mentatdgt/Pexels, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> In dire circumstances, you may be able to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-your-super/" target="_blank" rel="noopener">access your superannuation early</a> (which means you may have a lot less to retire on). If you really do need to sell, it is better to sell the property of your own volition, rather than having a forced sale. Mortgagee-in-possession (which is where the bank sells the house) can often lead to a lower sales price than a vendor-led campaign, and the time frame may not suit you. Free help is available. The <a href="https://www.arca.asn.au/" target="_blank" rel="noopener">Australian Retail Credit Association</a> provides information on how hardship processes are reported, while the <a href="https://financialrights.org.au/factsheets/mortgage-stress/" target="_blank" rel="noopener">Financial Rights Legal Centre</a> helps advocate for consumers through the mortgage stress process. The government’s <a href="https://moneysmart.gov.au/managing-debt/financial-hardship" target="_blank" rel="noopener">Moneysmart</a> site also provides information on how to navigate the hardship process.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/188891/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/andrew-grant-442581" target="_blank" rel="noopener">Andrew Grant</a>, Senior Lecturer in Finance, <a href="https://theconversation.com/institutions/university-of-sydney-841" target="_blank" rel="noopener">University of Sydney</a> This article is republished from <a href="https://theconversation.com" target="_blank" rel="noopener">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/what-happens-if-i-cant-pay-my-mortgage-and-what-are-my-options-188891" target="_blank" rel="noopener">original article</a>. Image: Getty Images

Money & Banking

I’m considering an interest-only home loan. What do I need to know?

An <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans" target="_blank" rel="noopener">interest-only home loan</a>, as the name suggests, is where you only pay the interest on a loan and not the principal (the original amount you borrowed). While authorities such as the Reserve Bank often <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html" target="_blank" rel="noopener">see</a> them as risky, interest-only loans can be helpful in some circumstances. If you’re considering an interest-only loan, here’s what you need to know. How long do they go for? These loans are typically last for five years at most, before reverting back to principal and interest (where you have to pay back, through regular payments, both interest and the initial sum you borrowed). You could potentially apply for another interest-only loan after your first one winds up, perhaps by refinancing (where you take a new mortgage to repay an existing loan). But you might not get it – and you’d still have to pay off the principal eventually. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>Interest-only loans can cost you a lot more in interest over time than a regular principal and interest loan. Photo by Andrew Mead on Unsplash, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> What are the upsides of an interest-only loan? An interest-only loan means you’ll have more cash available to cover other costs, or invest elsewhere. You can use a <a href="https://moneysmart.gov.au/home-loans/mortgage-calculator" target="_blank" rel="noopener">mortgage calculator</a> to work out how much extra cash you’d have if you switched from a principal and interest loan to an interest-only loan. It’s typically hundreds of dollars per week. This may get you a bit more wriggle room for daily expenses. Or, some people use the extra cash to invest in other things – such as shares – in the hope they can make more money overall and pick up some tax benefits along the way. That’s why interest-only loans are often popular among <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans" target="_blank" rel="noopener">investors</a>. Of course, this strategy comes with risk. An interest-only loan may also have a redraw facility, allowing you to add extra payments into the loan (above and beyond the interest) if you want, and withdraw money later when you need cash. This can allow people to avoid a personal loan, which usually has a much higher interest rate. Regular principal and interest loans may also have a redraw facility but the regular payments of principal are unavailable for redraw. That means less flexibility for the borrower. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>What’s right for one borrower won’t be for the next. Image by Pfüderi from Pixabay, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> What are the downsides? The interest rates on interest-only loans are generally higher than principal and interest loans. For example, the RBA July 2022 <a href="https://www.rba.gov.au/statistics/tables/xls/f05hist.xls" target="_blank" rel="noopener">indicator rate</a> for owner-occupier interest-only rates is 6.31%. But the equivalent variable rate for principal and interest loans is 5.77% (the indicator rate is just a guide; the actual difference varies from bank to bank). Interest-only loans can cost you a lot more over time than a regular principal and interest loan. This means a borrower needs to manage their finances well to ensure they can cover the interest payments now and still have enough to pay down the principal eventually. So you’ll need a plan for how you’re going to do that when the interest-only loan ends. There is also a risk of a shock – such as job loss, personal crisis or housing crash – causing the borrower to default on the loan altogether. If the borrower defaults on an interest-only loan, they may lose the house and the bank is left with a debt that was not substantially repaid (because the borrower had not yet made a dent in the principal). It’s a lose-lose situation. Are interest-only loans common? Interest-only loans represent <a href="https://www.apra.gov.au/news-and-publications/apra-releases-quarterly-authorised-deposit-taking-institution-statistics-11" target="_blank" rel="noopener">11.3% of all home loans</a> in Australia. This figure has been <a href="https://www.rba.gov.au/publications/fsr/2017/apr/box-b.html" target="_blank" rel="noopener">trending down</a> over the past five years, due in part to tighter <a href="https://www.apra.gov.au/news-and-publications/apra-to-remove-interest-only-benchmark-for-residential-mortgage-lending" target="_blank" rel="noopener">lending restrictions</a> and the fact low interest rates have made principal and interest loans relatively cheap recently. <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" alt="" /></a><figcaption>Interest-only loans represent 11.3% of all home loans in Australia. Image by sandid from Pixabay, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></figcaption></figure> What does the research say? One Dutch <a href="https://link.springer.com/article/10.1007/s11146-013-9453-9" target="_blank" rel="noopener">study</a> found “households that are more risk-averse and less literate are significantly less likely to choose an interest-only mortgage”. This partly due to lower initial repayments and wealthy households preferring the financial flexibility. Interest-only borrowing has also been found to <a href="https://www.sciencedirect.com/journal/journal-of-housing-economics" target="_blank" rel="noopener">fuel</a> <a href="https://doi.org/10.1016/j.regsciurbeco.2018.06.004" target="_blank" rel="noopener">housing</a> <a href="https://www.sciencedirect.com/science/article/pii/S1094202520300776?via%3Dihub" target="_blank" rel="noopener">speculation</a> and reduce housing affordability. A US study found borrowers also tend to <a href="https://doi.org/10.1093/rof/rfy016" target="_blank" rel="noopener">default</a> more. A Danish <a href="https://doi.org/10.1162/rest_a_01146" target="_blank" rel="noopener">study</a> found that once the interest-only lower repayment period is over and the loan reverts to principal and interest, those who didn’t make principal repayments suffered a large drop in disposable income. Financial flexibility comes with a catch With rates rising, interest-only loans may sound like an appealing way to have more cash available to cover other costs in life. But just remember financial flexibility comes with a catch. An interest-only loan could be more expensive in the long run. For some people, that cost will be worth it if it allows them to hold onto the house during a brief tough period or make more money investing elsewhere. But it’s a risk. And when the interest-only loan ends, you’re still stuck with the task of paying off the money you borrowed from the bank in the first place (with interest).<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/188817/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/adrian-lee-94688" target="_blank" rel="noopener">Adrian Lee</a>, Associate Professor in Property and Real Estate, <a href="https://theconversation.com/institutions/deakin-university-757" target="_blank" rel="noopener">Deakin University</a> This article is republished from <a href="https://theconversation.com" target="_blank" rel="noopener">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/im-considering-an-interest-only-home-loan-what-do-i-need-to-know-188817" target="_blank" rel="noopener">original article</a>. Image: Getty Images

Money & Banking

What to consider when downsizing

It’s the great Australian dream: to own a house in the suburbs with a big backyard for the kids. But, with the kids gone and you reaching retirement (if you’re not already retired), is it time to downsize? Moving out of the family home to cheaper and smaller accommodation isn’t an easy decision, but in many cases one that has to be made, due to either costs in the upkeep of the home or for health reasons. A study by the Australian Housing and Urban Research Institute found that 43 per cent of survey respondents who had relocated had downsized, with around half downsizing or moving only once since turning 50. It also revealed that out of its respondents, 91 per cent of downsizers reported being either mostly satisfied or very satisfied. Now, that’s good news. While the motivation for downsizing is different for everyone, the most common reasons for relocating was a change in lifestyle, being closer to family and financial gain. By moving into smaller and more affordable housing, insurance premiums may be reduced and for those who haven’t finished paying off their mortgage, it could mean a lower mortgage repayment or paying it off outright. If downsizing is starting to sound appealing, here’s what you need to know. What’s best for you? Talk to your partner and your family to gauge your motivations for wanting to move. Is it financial? Would you like to be closer to your grandchildren? Or, would you like to live by the coast? Whatever your reasons, be mindful of why you want to downsize. That way, if you experience challenges along the way, you’ll always have that picture in the back of your mind of why you’re making the move. Make the tough calls The family home carries within its walls a lifetime of memories so it can be difficult to say goodbye to it. In many cases, you’ll need to sell or give away some of your belongings because a smaller home means limited space. However, take this opportunity to look at what you have and what you really need. This can be a great way to finally say goodbye to those old lawnmowers in the garage that no longer work. Ask for help from your family, friends and neighbours since this should be a time of celebrating the old and embracing the new. Do your homework The internet has made it much easier to find housing anywhere in Australia. While many suburbs are dominated by large family homes, there are growing pockets in all capital cities and large regional areas, particularly those towns popular with retirees, which have medium-density housing suitable for older couples. Write down what you’re looking for in terms of location, property and price to narrow down your search and then keep on top of available listings, either online or with a real estate agent in the area you want to move into. Will downsizing affect my pension? Selling the family home is one way to free up cash for retirement, which can then be reinvested into shares, term deposits or superannuation. However, if you’re receiving any kind of government pension, then this is going to be affected. While the family home is exempt from the assets test, if you sell your home and come up ahead with a profit of say $300,000, the money will need to be included in the assets test. As the age pension depends on what your assets are worth in this test, it’s best to speak to a Department of Human Services Financial Information Service officer. Whatever your reason for downsizing, make sure you’re fully aware of what you want, what’s best for you and how moving may impact your current circumstances. If in doubt, speak to family and friends or seek professional advice from a financial planner. Image credits: Getty Images

Money & Banking

"Paid off my mortgage" party sparks heated online debate

A heated online debate has been sparked after a woman has been left questioning whether or not she should attend a friends party celebratory “paid off her mortgage” party. The unnamed woman took to the British parenting forum ‘Mumsnet’ to reveal that one of her close friends, who allegedly had help from her family, is celebrating paying off her mortgage. She revealed she “doesn't want to begrudge anyone” but the party “feels a bit fake” to her. She was met with mixed reactions as some agreed that it looks “crass” and “lacks self awareness”, especially during the ongoing global cost of living and housing crisis. However, others made the point that some people want to celebrate milestones that are not linked back to traditional family set ups for example: weddings, christenings and children's birthdays. The mother explained: “A friend of mine is having a party to celebrate paying her mortgage off, I don't begrudge anyone paying off their mortgage as it's a fantastic achievement, but she has had sooo much help from her family etc..” “She's been gifted at least £300,000 over the life of her mortgage. How would you feel about attending such a party ?? It feels a bit fake to me. She went on to say "My husband laughed his socks off when I told him about the party invite he said "Bank of Mum and Dad" paid mortgage off.” One Mumsnet user replied: “I think it's probably an "any excuse for a party" sort of thing - but it's a bit crass/tactless/lacking in self awareness”. However, others thought it was no more “crass” than “any other celebration.” Another valid point made by some users was people celebrate birthdays and their baby's gender reveals so why not celebrate being mortgage free. Image: Getty

Home & Garden

RBA increases interest rates again

The Reserve Bank of Australia has increased interest rates by 0.5 per cent for the third month in a row. Interest rates are now 1.35 per cent with treasurer Jim Chalmers saying that inflation will only “get worse before it gets better”. "That's the brutal reality, unfortunately," he said. "A lot of people that I talk to around Australia are facing that same diabolical set of circumstances, where prices for everything are going up, people's wages aren't keeping up, it's harder and harder for small businesses to operate. "The government is doing what it can but really the only solution to this in the medium term is to try and build a budget and an economy which is as resilient as the Australian people themselves, and that's what we're working on." Mr Chalmers said it's expected that the interest rate will continue to go up and this will put a lot of pressure on people with mortgages. “Mortgage repayments are now eating up a bigger part of already stretched budgets,” he said. “Average homeowners owing $330,000 will now have to find another $90 a month at the same time as they try to keep up with the costs of petrol, electricity, groceries and other essentials.” RBA Governor Philip Lowe says Australians should expect further hikes to help with inflation. “Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity,” he said. “Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries.” Images: Shutterstock

Money & Banking

Woman’s monthly spend sends shockwaves

A woman who earns a $100,000 salary has shocked people with how she budgets her generous pay cheque. The video shared to <a href="https://www.tiktok.com/@smartwomensociety/video/7077849611360062721">TikTok</a> by Smart Women Society breaks down the 28-year-old Sydney project manager’s spending. After taxes, compulsory student loan payments (HECS) and superannuation, the woman was left with $5,297 a month. The woman’s financial goal is to “top up emergency fund” as well as go on a lavish holiday at the expense of $3,000. A list of all her expenses amount to $4,215 a month, with that pay going toward her mortgage, bills, transport, phone, groceries, health, insurance, internet, subscriptions and charity. Broken down, the woman spends $2,200 on her mortgage, $400 on bills, $30 on her phone, $250 on transport and $140 on her health. She also spends $500 in groceries, $500 in insurance, $70 for internet and $25 for subscriptions, and $100 given to charity. The video noted that the woman only had her HECS debt of $32,000 which is already taken out of her pay. This then leaves the woman with only $1,082 after paying all her expenses. Smart Women Society suggested, based on her goals, that the woman put $300 toward her emergency fund, $400 for her end-of-year holiday, and $382 for “fun spending”. Viewers were left shocked and confused at the anonymous woman’s spending habits, with many questioning why she is paying so much in charity and insurance. “$382 for ‘fun’ in Sydney, is this a joke?” someone wrote. “You’re young…$500 on insurance seems excessive,” another wrote. “$300 spending? For the entire month? Good luck. Cost of fun in Sydney she’s going to need at least $300 a week,” a viewer pointed out. “How is someone on $100k a year only left with $85 a week for personal spending? That's not even a night out in Sydney,” another joked. “She should move out of Sydney,” someone suggested. Images: TikTok

Money & Banking

Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself

At a certain point in life, many wonder what’s better: to pay off the home loan ASAP or top up your superannuation? If your emergency cash buffer looks OK and you have enough to cover you for around three to six months if you lost your job, the super versus mortgage question is a good one to ponder. There’s no one-size-fits-all answer. On the face of it, there’s a compelling case for building up your super; you can take advantage of the <a href="https://moneysmart.gov.au/budgeting/compound-interest-calculator">magic of compound interest</a> (and, potentially, some <a href="https://moneysmart.gov.au/grow-your-super/super-contributions">tax breaks</a> as well) – all while interest rates on mortgages are low. If you’re getting <a href="https://www.superannuation.asn.au/media/media-releases/2021/media-release-29-june-2021">8% compound interest on super</a> and paying only 3% on your mortgage, building up super might seem a good option. But financial decisions are about psychology as well as numbers. Much depends on your debt comfort zone. It’s best to seek professional assistance from a <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">financial counsellor</a> or adviser. But here are some questions to consider along the way. <h2>1. Am I ‘on track’ to have enough super upon retirement?</h2> Use the government’s Moneysmart <a href="https://moneysmart.gov.au/retirement-income/retirement-planner">retirement planners</a> or your super fund’s calculator to check. If it’s looking sparse – perhaps due to career breaks or part-time work – you might consider <a href="https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/salary-sacrificing-super/">salary sacrificing</a> extra into your super (on top of what your employer already puts in there). An additional A$50 a week, for example – even just for a few years – can help remedy your meagre super projections. According to <a href="https://moneysmart.gov.au/grow-your-super/super-contributions">Moneysmart</a>: <blockquote> The payments, called concessional contributions, are taxed at 15%. For most people, this will be lower than their marginal tax rate. You benefit because you pay less tax while you boost your retirement savings […] The combined total of your employer and salary sacrificed concessional contributions must not be more than $27,500 per financial year. </blockquote> Try the <a href="https://www.industrysuper.com/understand-super/salary-sacrifice-calculator/">Industry Super</a> or <a href="https://moneysmart.gov.au/grow-your-super/super-contributions-optimiser">Moneysmart</a> calculators to see how much extra you’d have at retirement if you salary sacrificed into super for a few years. Consider seeking advice from your super fund on your super investment options and Age Pension entitlements. You might also consider an after-tax <a href="https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/personal-super-contributions/">personal super contribution</a> (that is, putting extra money from savings or from your take-home pay into super). The contributions may be <a href="https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/claiming-deductions-for-personal-super-contributions/">tax deductible</a>, but even if not, the returns in super are tax friendly. <a href="https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/430652/original/file-20211107-9872-q6fqib.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="A middle aged couple do financial planning together on a laptop." /></a> Are you ‘on track’ to have enough super upon retirement? Use online calculators to find out. Shutterstock <h2>2. What about the pension?</h2> Are you expecting a full Age Pension? To find out if you’re likely to qualify for one, use an <a href="https://www.superguide.com.au/in-retirement/age-pension-calculator">online calculator</a> or ask your super fund. People with “too much super” don’t get the pension (although most retirees get some part pension). For some, the more you put into super, the <a href="https://grattan.edu.au/wp-content/uploads/2020/03/Grattan-Institute-sub-balancing-act-retirement-income-review.pdf">less you get in Age Pension payments</a>. For single homeowners, the total asset threshold for a full Age Pension is $270,500 (including super but excluding your main residence), while the part-Age Pension threshold is $593,000. For couple homeowners, the combined total asset threshold for a part-Age Pension is $891,500 (also including super but excluding the main residence). If you’re on a median income and your super balance is predicted to land between the lower and upper asset thresholds for the pension, <a href="https://grattan.edu.au/wp-content/uploads/2020/03/Grattan-Institute-sub-balancing-act-retirement-income-review.pdf">some models predict</a> that for every extra $1,000 put into super at age 40, you would only be around $25 per year better off in terms of retirement income (due to the tapering off in eligible Age Pension income). For people on low incomes, extra super contributions may not be the answer at all if the result is more financial stress during your working life and immediate housing security risk. <h2>3. If I retired with a mortgage, could I cope?</h2> Many people end up retiring earlier than planned, due to health or other issues. If you were still paying off your mortgage at retirement, would you feel comfortable about that? Or would it be a source of worry? Traditionally, most people enter retirement having paid off their home loan but now <a href="https://theconversation.com/more-people-are-retiring-with-high-mortgage-debts-the-implications-are-huge-115134">more are approaching retirement</a> with some mortgage remaining. It might not be the end of the world if you had $100,000 left on the mortgage when you stop working. After all, you can draw out up to <a href="https://moneysmart.gov.au/retirement-income/super-lump-sum">$215,000 of your super tax free at retirement</a> to pay off debt. Doing so can also increase your Age Pension entitlement (as your primary residence is exempt from pension assets tests while super is not). The wealth accumulation in superannuation is going to outpace the interest on a mortgage in most cases for some time, even after you retire. Even so, you might feel it’s worth making the last vestiges of your debt go away in retirement so you can stop worrying about it. <img src="https://images.theconversation.com/files/430653/original/file-20211107-10121-1tkhmjc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="An older same sex couple laugh together in the garden." /> If you and your partner retired with a mortgage debt, would you feel OK about that or would it be a source of worry? Shutterstock <h2>4. Will the choices I make today cost me later – and am I OK with that?</h2> Australian property values have skyrocketed and many have borrowed more to pay for renovations. The full “cost” of a renovation may not be apparent at first. The true cost of a $150,000 renovation over the next 20 years could be more like $700,000. How? Well, if that $150,000 was put into a balanced allocation in super for a couple of decades, it would likely grow to be about $700,000. That’s compound interest for you. You’d hope to get that in capital gains from the renovation. But it’s never just about the finances. The extra mortgage might be worth it because it paid for a home that brings comfort and joy (as well as the capital gains). Likewise, paying off your mortgage ASAP might mean forgoing the extra you’d get if you’d put it in super. But for some, wiping out a mortgage will be worth it to be debt-free. Perhaps after the mortgage is gone, you can maximise salary sacrificing into super until retirement, while also reducing your tax bill. <h2>At least do the sums</h2> There’s always more than one solution. To know what’s right for you, you’ll need to get advice for your personal circumstances. But it’s good to look at where your super is now and where it’s heading, and <a href="https://www.canstar.com.au/home-loans/debt-income-ratio/">calculate your debt-to-income ratio</a> (debt divided by income). It’s often used to guage how serious (or not) your debt is. Lenders and regulators might consider a debt-to-income ratio over <a href="https://www.apra.gov.au/sites/default/files/2021-09/Quarterly%20authorised%20deposit-taking%20institution%20property%20exposure%20statistics%20-%20Highlights%20June%202021.pdf">six times your income to be “high”</a>, but your personal debt comfort zone might be much lower. Emotions play a bigger part in financial planning than many like to admit. Desire to pay off a mortgage quickly can be influenced by how you were raised, feelings of anxiety and stigma that often come with debt, and Australia’s cultural bias toward debt-free home ownership. Depending on circumstances though, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. At least do the sums, so you can make an informed choice.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/170470/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/di-johnson-1265246">Di Johnson</a>, Lecturer in Finance, <a href="https://theconversation.com/institutions/griffith-university-828">Griffith University</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">original article</a>. Image: Shutterstock

Retirement Income

That reverse mortgage scheme the government is about to re-announce, how does it work?

Many Australians have never heard of the <a href="https://www.servicesaustralia.gov.au/pension-loans-scheme">Pension Loans Scheme</a>, and many more assume it’s just for pensioners, which is understandable given its name. That’s why the government is poised to rename it the Home Equity Access Scheme and make the interest rate it charges more reasonable, in the mid-year budget update on Thursday. The soon to be renamed scheme is best thought of as a <a href="https://www.investopedia.com/mortgage/reverse-mortgage/">reverse mortgage</a> where instead of paying down a home loan each month, the homeowner borrows more against the home each month, paying off what’s borrowed when the home is eventually sold. Although reverse mortgages have been provided commercially for some time, the number of providers has shrunk as large banks have <a href="https://download.asic.gov.au/media/4851420/rep-586-published-28-august-2018.pdf">left the field</a> in the face of increased scrutiny and compliance costs. The government version is misleadingly named the Pension Loans Scheme (PLS), even though it is available to all retirees with homes and not just pensioners. It was introduced by the Hawke government in <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2015/February/The_Pension_Loans_Scheme">1985</a>. The maximum amount that can be made available under the scheme and the age pension combined is <a href="https://www.servicesaustralia.gov.au/how-much-you-can-get-under-pension-loans-scheme?context=22546">150% of the full pension.</a> This means a retiree who is on the pension can get extra fortnightly payments from the scheme to bring their total payment up to 150% of the full pension. If the retiree is not on the pension they can get the entire amount of 150% of the pension via the PLS. The payments stop when the loan balance reaches a <a href="https://www.servicesaustralia.gov.au/maximum-loan-amount-under-pension-loans-scheme?context=22546">ceiling</a> which climbs each year the retiree gets older and climbs with increases in the value of the home. The ceiling for a 70-year old with a home worth $1,000,000 is $308,000. The key difference between the PLS and commercial reverse mortgages is that the size of its lump sum payments is limited. Payments under the PLS have no impact on the pension, whereas commercial reverse mortgages can trigger the means test. <a href="https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Colin Zhang, Macquarie Business School As attractive as the PLS might appear, hardly any of the four million or so Australians aged 65 and over have taken it up, perhaps as few as <a href="https://newsroom.unsw.edu.au/news/business-law/budget-changes-make-pension-loans-scheme-more-attractive-senior-homeowners">5,000</a> – one in every 800. So in this year’s May budget the government announced two changes to make it more attractive. One was a “<a href="https://cdn.theconversation.com/static_files/files/1902/PLS_2021-22-budget-16_%281%29.pdf">no negative equity guarantee</a>”. Users would never be asked repay more than the value of their property, even if the property fell in value. The other was the ability to take out up to <a href="https://cdn.theconversation.com/static_files/files/1902/PLS_2021-22-budget-16_%281%29.pdf">two lump sums per year</a> totalling up to 50% of the full pension in addition to fortnightly payments. Total government payments would remain capped at 150% of the pension. <h2>New brand, same scheme</h2> That second change won’t begin until July 1, 2022 and is likely to be re-announced in Thursday’s mid-year budget update. Also announced in the budget was a decision to raise awareness of the scheme “through improved public messaging and branding” something which is also likely to be re-announced on Thursday along with the new name. The other change expected on Thursday is a lower interest rate charged on the sums borrowed. In January 2020, the rate was cut from 5.25% to 4.5% in accordance with cuts in other rates. From January next year it should reduce further to <a href="https://www.theaustralian.com.au/nation/politics/scott-morrison-opens-up-mortgage-loan-scheme-to-help-elderly-fund-their-own-retirements/news-story/9f8c56fbba899f6b76c72ce51ceb9331">3.95%</a>. <h2>Attractive, but not riskless</h2> There remain risks associated with taking advantage of the scheme. One is that if you live long enough you are likely to eventually hit the ceiling and be unable to take out any more money, suffering a loss of income. If you chose to sell your home and move to an aged care service, you need to use a big part of your sale proceedings to pay what’s owed. Other risks are that neither the interest rate nor home prices are fixed. Just as the government has cut the rate charged in line with cuts to lower general interest rates, it might well lift it when interest rates climb. And home prices can go down as well as up, meaning that, at worst, all of the value of your home (although no more) can be gobbled up in repayments.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/171671/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/colin-zhang-1234147">Colin Zhang</a>, Lecturer, Department of Actuarial Studies and Business Analytics, <a href="https://theconversation.com/institutions/macquarie-university-1174">Macquarie University</a> and <a href="https://theconversation.com/profiles/ning-wang-1297929">Ning Wang</a>, Associate Research Fellow, <a href="https://theconversation.com/institutions/university-of-wollongong-711">University of Wollongong</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/that-reverse-mortgage-scheme-the-government-is-about-to-re-announce-how-does-it-work-171671">original article</a>. Image: Shutterstock

Real Estate

Paying off a home loan used to be easier than it looked. It’s now harder. Here’s why

So you think it’s the right time to dive in and buy a home. I can’t tell you you’re wrong. I can tell you it would have been better to do it before prices began soaring, and that if they keep soaring it will get worse still. When the year began, the typical Sydney price was <a href="https://www.corelogic.com.au/news/corelogic-december-home-value-indices">$872,000</a>. Five months later at the start of June it is <a href="https://www.corelogic.com.au/news/australias-housing-boom-rolls-national-home-values-lifting-another-22-may">$970,000</a>. That’s a jump of almost $100,000 in a matter of months — an awfully big price for procrastinating. In Melbourne the typical price has climbed from $682,000 to $740,500. In Perth it has climbed from $471,000 to $521,500, and so on. And banks are beginning to withdraw the cheapest of their still-very-cheap mortgage rates, at this stage mainly the fixed four-year rates which had been below <a href="https://www.domain.com.au/news/house-hunters-facing-rising-fixed-mortgage-rates-with-further-hikes-expected-1054965/">2%</a>. So why on earth wouldn’t you dive in, cut your living expenses to the bare minimum and try and buy a home while it’s the least bit possible? One (slight) reason to relax is mortgage rates. Despite the increases in fixed four-year rates, three-year rates have barely moved. That’s because the Reserve Bank has promised to hold the three-year bond rate <a href="https://www.rba.gov.au/media-releases/2021/mr-21-09.html">constant</a> at 0.1%. <h2>Buying has become a bigger commitment</h2> The three-year bond rate determines the cost to banks of their three-year fixed rate mortgages. The Reserve Bank has said it does not expect to lift its 0.1% cash rate until “2024 at the earliest”. Movements in the cash rate determine movements in variable mortgage rates. But there is another reason for proceeding with caution and taking stock. For our parents, buying a home was an exceptionally good deal, not only because homes were cheaper — until the end of the 1990s homes typically cost between two and three times household after-tax income, they now cost closer to five — but also because over time the loan became easier to pay off. Housing prices as proportion of household disposable income <a href="https://images.theconversation.com/files/394394/original/file-20210411-15-8ofvv7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/394394/original/file-20210411-15-8ofvv7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Household disposable income after tax, before the deduction of interest payments, including income of unincorporated enterprises. <a href="https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf" class="source">Core Logic, ABS, RBA</a> <hr /> That isn’t because mortgage rates were coming down — at times they were going up — it’s because during our parents’ times wages (and prices) were climbing. It meant that even if someone of our parents’ generation just squeaked through one of the bank’s tests about their ability to make payments on a mortgage, a few years and lots of inflation and several big wage rises down the track those mortgage payments shrank compared to everything else. <h2>Once, wage rises took care of repayments</h2> Many of our parents paid off their mortgages early. One way to look at this is that the bank’s ability-to-repay calculators were set too harshly. They failed to account for future hefty wage rises and inflation. It’s probably also true that they were set more generously than they might have been in an implicit acknowledgement of what the assistant governor in charge of the Reserve Bank’s economic branch Luci Ellis calls “<a href="https://www.rba.gov.au/publications/rdp/2006/2006-12/global-trends.html">mortgage tilt</a>”. The former governor, Glenn Stevens, used another term, “<a href="https://www.rba.gov.au/speeches/1997/sp-ag-081097.html">front-end loading</a>”. <h2>Mortgages were ‘front-end loaded’</h2> When inflation was high, and as a consequence interest rates were high, wages that climbed rapidly with high inflation made the servicing burden “most acute in the very early phase of a loan, falling over time”. <a href="https://images.theconversation.com/files/403719/original/file-20210601-21-11ru9r3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/403719/original/file-20210601-21-11ru9r3.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" alt="" /></a> <a href="https://www.rba.gov.au/publications/bulletin/1997/oct/pdf/bu-1097-6.pdf" class="source">Reserve Bank of Australia, October 1997</a> On a graph (and the former governor presented a graph) the line showing payments as a portion of income tilts down over time. In a world of lower inflation and interest rates, the tilt becomes flatter. By now (Stevens published the graph in 1997) the line must be near horizontal. If wage growth remains near the <a href="https://twitter.com/1petermartin/status/1399520798734389250/photo/1">record lows</a> the treasury is forecasting it will become scarcely any easier to make payments on a home loan over time. Yet the banks are still handing out loans using the sort of formulas they used to. If you get a loan you’ll be assessed as being able to (just) make the payments as always, but you’ll be denied the near certainty of being able to more easily meet the payments as time goes on. <h2>Now, we retire mortgaged</h2> This is a different from the risk you’ll also run of today’s ultra-low mortgage rates climbing (which banks do take into account in deciding whether to give you a loan). The proportion of homeowners reaching retirement age while still paying off their mortgage has doubled in 20 years. Which might be why some banks ask for details of your super before granting you a loan. It isn’t an idle inquiry. Might things get better? Maybe, if we can get wages moving again. Evidence given to Tuesday’s post-budget Senate estimate hearing provides cause for hope, and despair. <h2>Super hikes will make things worse</h2> The budget forecasts for wage growth over the next four financial years are incredibly low — 1.5%, 2.25%, 2.5% and 2.75% On Tuesday Treasury Secretary Steven Kennedy revealed that each would have been higher — 0.4 points higher — had the government not persisted with the five scheduled annual increases in compulsory superannuation contributions of 0.5% of salary starting in July. The treasury believes each increase will slice 0.4 percentage points from wage growth, on the basis that employers, who are legally required to pay the contributions, will have to find the money somewhere. <a href="https://images.theconversation.com/files/403717/original/file-20210601-17-qwhi6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/403717/original/file-20210601-17-qwhi6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> <a href="https://budget.gov.au/2021-22/content/bp1/download/bp1_bs1.pdf" class="source">Commonwealth budget, 2021-22</a> It’s the same conclusion reached by the government’s <a href="https://theconversation.com/that-extra-youre-about-to-get-in-super-most-of-it-will-come-from-you-but-dont-expect-the-ads-to-tell-you-that-154723">retirement incomes review</a>. It’s cause for hope because it means that when those five increases stop (in mid-2026, or sooner if the government stops them mid-track) wages might be able to grow more strongly. It’s cause for despair because if the treasury is right, we are denying ourselves wage rises we could use in return for super we will increasingly use to pay down our mortgages.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/161873/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/paying-off-a-home-loan-used-to-be-easier-than-it-looked-its-now-harder-heres-why-161873">original article</a>. Image: Shutterstock

Real Estate

Mortgage deferral, rent relief and bankruptcy: What you need to know if you have coronavirus money problems

The coronavirus pandemic has wreaked havoc on the Australian economy, and the financial effects for many are deeply personal. Sadly, there’s no shortage of terrible advice online when it comes to personal finance. And as September 30 looms - the date by which JobKeeper, the increased JobSeeker and many negotiated rent and mortgage deferrals end - it’s important to be fully informed before you make potentially life-changing financial decisions. As a former financial counsellor and former consumer credit educator for the Australian Securities and Investments Commission (ASIC), here’s what I think you need to know if you’re considering mortgage deferral, rent relief or bankruptcy. Mortgage deferral Residential mortgages are covered by <a href="https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-209-credit-licensing-responsible-lending-conduct/">federal legislation</a>, under which lenders can assist when borrowers can’t afford their usual repayments due to changed circumstances — such as losing hours or employment. For example, you can ask your lender put on hold payments from June to September. It’s up to you and the creditor to establish clearly what happens to those payments. Are they pushed to the end of the contract, thereby extending the life of your loan? Or will you repay extra when you can afford repayments again? Make sure you understand how much more it will cost you in additional interest if you extend the life of your loan by deferring these payments to the end of the contract. Depending on the details of your loan, you could be adding thousands of dollars to the amount you need to repay. Most mortgage lenders don’t really want to repossess your house. It’s costly, time-consuming and stressful. But before asking for mortgage relief, you need to have a plan for the post-deferral period. What happens if you still can’t make your usual repayments? Any licensed financial professional should be able to help negotiate a deferral on your mortgage or other consumer debts such as credit cards, but you should first consider seeing a free financial counsellor who is independent of any lenders. They can be contacted on 1800 007 007 or through the <a href="https://ndh.org.au/">National Debt Helpline.</a> Rent relief If you can’t pay your rent due to changed circumstances, you can ask your landlord to reduce or defer your rent. They can, of course, say no. Unlike mortgage deferral, the implementation and process is inconsistent across states and territories. It can be difficult to navigate. There are <a href="https://www.sbs.com.au/news/regulator-to-crack-down-on-real-estate-agents-pressuring-tenants-to-use-super">reports</a> of some landlords asking for comprehensive financial statements to support claims, or for their tenants to access the early release of up to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/Early-access-to-your-super/#Compassionategrounds">A$10,000 in superannuation</a> to pay the rent. Ausralia’s corporate watchdog, the Australian Securities and Investments Commission (ASIC), has <a href="https://download.asic.gov.au/media/5546344/asic-letter-response-to-early-release-of-super-state-rei-3-april-2020.pdf">warned real estate agents</a> that advising tenants to take money from their superannuation may constitute giving unlicensed financial advice and/or be against people’s best interests, attracting possible fines and jail time. If you’re talking with your landlord about rent relief, be clear on whether you’re talking about rent payments being reduced, deferred or permanently waived, and whether these payments would need to be made up by a certain date. Renters can seek help from <a href="https://ndh.org.au/">free financial counsellors</a> or a <a href="https://www.tenants.org.au/covid19/guide">tenants’ union</a>. State and territory governments have established various schemes to help renters work out agreements with their landlord (see this <a href="https://www.commerce.wa.gov.au/consumer-protection/covid-19-residential-tenancies-mandatory-conciliation-service">Western Australian</a> scheme as an example). Bankruptcy Bankruptcy should be a last resort. Many creditors have shown they’re willing to provide short-term delays (for about 90 days, for example) if people need more time to pay a debt. Consumer credit contracts are written on the basis that life has its ups and downs and if a debtor genuinely can’t pay, the creditor can help by reducing payments, stopping interest charges, deferring payments and/or restructuring loans. In almost all consumer bankruptcies, there is no return to creditors so they generally don’t want debtors to go bankrupt. It’s in their interest to help debtors through a difficult period so they can return to making payments. Of great concern to consumer advocates is that searching “bankruptcy” or “help with debts” on the internet will often generate results for companies with a vested interest in placing you in what’s called a “debt agreement”. These should be approached with caution. It basically means you pay for a company to help you declare bankruptcy - but this is unnecessary. A debt agreement is an act of bankruptcy that directs fees to those companies and quite often places consumers in unmanageable and unsustainable long-term repayment plans. Instead, try to find free financial counsellors, some of whom work for charities. They are professional, unbiased and expert at informing people of their options when in debt. They can be found via the government’s <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">MoneySmart</a> site. If you can’t pay your debts, there are many <a href="https://www.afsa.gov.au/debtrelief">options available</a>. The key is contacting the right person or organisation - and knowing whatever comes up first in a Google search is not necessarily the best or most impartial place to get help in a financial crisis.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/141274/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/gregory-mowle-296811">Gregory Mowle</a>, Lecturer in Finance, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/mortgage-deferral-rent-relief-and-bankruptcy-what-you-need-to-know-if-you-have-coronavirus-money-problems-141274">original article</a>.

Retirement Income

Westpac to pay one year off mortgages for fire-affected customers

Westpac has announced that it will pay one year off the mortgages for customers who lost their homes this bushfire season. Customers who took out mortgages through the bank will have their repayments paid for up to $1,200 per month over a period of one year, acting chief executive Peter King said. “These initiatives are designed to provide practical, on the ground support for our customers, our people and for those who are caring for affected communities,” King said in a statement. “In times of such unprecedented devastation, we want customers and communities to know we’re here to help alleviate financial concerns so they can rebuild their lives, homes and businesses.” Customers who need to rebuild their place of residence will also be eligible for interest free home loans through the Bushfire Recovery Support Package, while businesses may access low-interest loans. The initiative is Westpac’s latest effort to support bushfire-affected communities. Last week, the bank announced a $1.5 million Bushfire Fund, including emergency grants of up to $2,000 for temporary accommodation, food and clothing. There have been 10,550 insurance claims valued at $939 million lodged with Westpac as of Friday, the bank said. All four major banks have announced disaster relief packages. Commonwealth Bank and NAB each established a $1 million bushfire relief fund, while ANZ pledged $500,000 to support affected home loan customers and local community services. Westpac estimated that the bushfire crisis will cost Australia <a href="https://indaily.com.au/news/business/2020/01/13/bushfires-to-cost-nation-5b-westpac/">$5 billion in direct losses</a> and chip the country’s economic growth by 0.2 to 0.5 per cent.

Money & Banking

More people are retiring with high mortgage debts

The number of mature age Australians carrying mortgage debt into retirement is soaring. And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago. Microdata from the Bureau of Statistics <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6541.0.30.001Main+Features12013-14">survey of income and housing</a> shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement. More mortgaged for longer For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14 to 47 per cent. Among home owners aged 45 to 54 years, it has doubled. <hr /> <a href="https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6503.0Main+Features12015-16" class="source">Source: Authors’ own calculations from the Surveys of Income and Housing</a> <hr /> Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group. In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82 per cent to 169 per cent. For those aged 55-64 it has blown out from 72 per cent to 132 per cent. <hr /> <a href="https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Source: Authors’ own calculations from the Surveys of Income and Housing <hr /> 3 reasons why The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors. First, property prices have surged ahead of incomes. Since 1970 the national dwelling price to income ratio <a href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf">has doubled</a>. <hr /> <a href="https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Prices and wages in 1970 are assigned an index of 100. <a href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf" class="source">Sources: Treasury, ABS, Committee for Economic Development of Australia</a> <hr /> Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/4130.0%7E2015-16%7EMain%20Features%7EAcross%20the%20Generations:%20Twenty%20years%20of%20housing%7E10003">potentially shortening</a> the the remaining working life available to repay the loan. Second, today’s home owners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five home owners aged 45-64 years increased their mortgage debt <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0013/2191/AHURI_Final_Report_No217_Housing-equity-withdrawal-uses,-risks,-and-barriers-to-alternative-mechanisms-in-later-life.pdf">even though they did not move house</a>. Third, older home owners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances. Super could be changing our behaviour For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0008/12023/AHURI_Final_Report_No275_A-new-look-at-the-channels-from-housing-to-employment-decisions.pdf">prolong working lives</a>. In 2017 around <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0">29 per cent</a> of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from <a href="https://www.pc.gov.au/research/completed/superannuation-post-retirement/super-post-retirement-volume1.pdf">25 per cent</a> four years earlier. In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, <a href="https://opendata.cbs.nl/statline/#/CBS/nl/dataset/81702NED/table?ts=1539244705047">over one-half</a> of home owners aged 65 and over are still paying off mortgages. <hr /> <a href="https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> The base is the total number of uses of lump sums rather than the number of people taking lump sums. <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0" class="source">ABS 6238.0 Retirement and Retirement Intentions</a> <hr /> The implications are huge Internationally, studies have found that indebtedness <a href="https://www.sciencedirect.com/science/article/abs/pii/S0277953615001203?via%3Dihub">adds to psychological distress</a>. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks. Debt-free home ownership in old age used to be known as the <a href="https://www.ceda.com.au/CEDA/media/ResearchCatalogueDocuments/PDFs/27922-CEDATheSuperChallengeofRetirementIncomePolicySept2015FINAL.pdf">fourth pillar of the retirement incomes system</a> because of its role in <a href="https://link.springer.com/article/10.1007/s10901-010-9187-4">reducing poverty in old age</a>. It allowed the Australian government to set the <a href="https://melbourneinstitute.unimelb.edu.au/assets/documents/hilda-bibliography/conference-papers-lectures/2013/Haffner-Ong-Wood-ENHR2013-Paper.pdf">age pension at relatively low levels</a>. Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0022/2857/AHURI_Positioning_Paper_No153_Assets,-debt-and-the-drawdown-of-housing-equity-by-an-ageing-population.pdf">boost the age pension</a>. Mortgage debt burdens late in working life will also expose home owners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages. During the first decade of this century, around <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0007/2104/AHURI_Final_Report_No187_Sustaining_home_ownership_in_the_21st_century_emerging_policy_concerns.pdf">half a million</a> Australians aged 50 years and over lost their homes. Taxpayers will be under pressure to help Those losing home ownership are often forced to rely <a href="https://journals.sagepub.com/doi/abs/10.1177/0042098014550955">on rental housing assistance</a>. Moreover, as older tenants they are <a href="https://journals.sagepub.com/doi/abs/10.1177/0042098014550955">unlikely to ever leave housing assistance</a>. This will put pressure on the government to boost spending on housing assistance, which is likely to further boost <a href="https://theconversation.com/when-falling-home-ownership-and-ageing-baby-boomers-collide-102846">demand for housing assistance</a>. Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages. It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the <a href="https://www.afr.com/news/policy/tax/retirement-incomes-face-review-20190524-p51qsi">inquiry into the retirement incomes system</a> announced by Treasurer Josh Frydenberg. It is a change we’ll have to come to grips with.  Written by Rachel Ong ViforJ, Professor of Economics, School of Economics, Finance and Property, Curtin University and Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University. Republished with permission of <a href="https://theconversation.com/more-people-are-retiring-with-high-mortgage-debts-the-implications-are-huge-115134">The Conversation</a>.

Retirement Income

How to find a pain-free mortgage

Buying property can be daunting as well as exciting. After all, it’s probably the biggest investment you’ll ever make and paying off a mortgage is a responsibility you’re likely to be tied to for many years. On the plus side, home ownership has been steady at about 70% in Australia for decades, so most of us are taking the plunge. And although interest rates may rise, competition between lenders remains heated, making it a good time to get a foothold on the property ladder. ‘It’s a great time to be applying for a loan. There are offers out there that I haven’t seen in all my years of being a broker,’ says Melbourne-based Mortgage Choice broker Neil Gorman. ‘It’s no harder to get a loan than it was pre-GFC. In fact, because we’re now seeing some big lenders returning to lending 95% of the value of the property, it’s become a lot easier for first homebuyers than it was previously. Avoid credit risk We’ve all missed a payment deadline for a utility bill or credit card, but if late payments are a regular thing or you’ve got a default recorded on your credit file, look out. ‘One late payment won’t be such an issue but if you’re regularly making late payments, it may reflect on your ability to repay your mortgage,’ says Neil. Lodging too many credit applications, whether for a loan or a new credit card, can also work against you, he warns. ‘The more applications you’ve lodged, the lower your credit score is. As a result your loan application may never see the light of day.’ It can take just four to six credit applications within the past six months to leave you tarred with the ‘bad credit risk’ brush. Broker or bank? According to the Mortgage Choice 2011 Recent First Homeowner Survey, 40% of respondents preferred to see a mortgage broker for loan advice, while 19% opted for a lender. Using a broker minimises research time because brokers have access to hundreds of loans, can suggest ones that suit your needs and budget, and will secure the loan on your behalf. Most brokers don’t charge fees and although some may get paid different commissions depending on which lender you choose, many receive the same commission regardless of who you sign up with. Sticking with the bank is easier if you have an existing relationship with them, already hold a mortgage there, or want to release equity in one property in order to buy another. Purchase for investment Scott, a senior analyst, lives in Sydney and bought his second property, an investment flat in Queensland, five years ago. He obtained the mortgage through his bank. ‘Getting the mortgage was relatively easy but I needed quick approval, as I’d already found the property and wanted to use the equity in another property I had,’ says Scott. ‘I wanted the flexibility of several smaller loans that could be paid off at different periods, without the need to refinance or pay early discharge fees. 'I also wanted a fixed interest rate and the option to repay more. ‘I’d been with this bank for a few years and had built up a relationship with my personal banker. Their solution gave me confidence that I didn’t need to research other options. ‘The initial approval was verbally provided in the first meeting and I signed the mortgage papers a week later,’ says Scott. The mortgage toolkit Arm yourself with as much information as possible before you hit the For Sale ads. Do the sums. You’ll find a dizzying array of mortgage calculators online, which can help you work out everything from your borrowing limit down to what your basic loan repayments might be. Visit mortgagechoice.com.au or yourmortgage.com.au/calculators. Check your rating. Head online to My Credit File (mycreditfile.com.au) to request a copy of your credit file, which is used by lenders to determine your credit worthiness. The report costs $50 and will outline loans you’ve previously applied for, bad credit or defaults that may be lodged against you. Get a grant. The First Home Owner’s Grant (firsthome.gov.au) is a one-off payment of up to $15000 available to first homebuyers who satisfy the criteria. There is also a range of different concessions depending on which Australian state you live in. Boost your savings. A First Home Saver Account (FHSA) makes saving for a deposit easier for eligible applicants because the government will pay up to 17% of your personal contributions for the financial year, up to a yearly maximum. Parents and other family members can also contribute to your FHSA. Visit ato.gov.au for more info. Choose the loan. Should you go with fixed to protect against interest rate rises, or would you be better off with a part fixed, part variable loan? The Fixed vs Variable Interest Rates factsheet from Mortgage Choice can help you understand the difference. The assessment process Securing a mortgage is dependent on a number of factors and when you apply for a loan you give a lender approval to dig into your finances and credit history. Generally, lenders tend to focus on what are known as the four Cs of lending: Character is a measure of your stability, so if you bounce from job to job you may be viewed as high risk. If you’re thinking of changing jobs, it’s best to apply for a loan before you leave the old one. ‘The lender looks at whether the applicant has been with the same employer for 6 to 12 months and in the same occupation for a couple of years,’ says Neil. ‘And you’ll need to have been self-employed for two years before a lender will consider your income.’ Credit is the ‘big black box’ between you and the potential lender. It’s an automatic system that scores you before an actual physical assessor even looks at your application, according to Neil. ‘The black box has a load of equations and predictable questions in it which are asked. ‘These questions include the number of credit enquiries or loan applications you’ve made, as well as the loan to value ratio, your income and so on,’ says Neil. Capacity refers to whether you have the means to make the repayments and your lender will make sure of it before they give you the mortgage nod. ‘Lenders look at your income and expenses and work out if there’s enough left over to repay the debt,’ says Neil. The number of kids is taken into account as well as high credit card limits. Collateral refers to a measure of the value, condition and marketability of the property you’re intending to buy. ‘Banks only lend 90 to 95% of the value of the property so you need a deposit plus extra money to cover costs,’ says Neil. Republished with permission of <a href="http://www.handyman.net.au/find-pain-free-mortgage">Handyman.net.au.</a>

Legal

Why you should get a home loan health check

Your home loan should change as your needs do. How has your life changed since you got your home loan? Have you received a promotion, started a new job or taken extended leave? Have you gotten married? Started a family? Or made any other significant financial decisions? Are you planning a renovation or a big holiday? If you’ve answered yes to any of these questions, now is a good time to check if your home loan is still the right one for your needs. Here are some reasons why it’s important to do a home loan health check: To secure a more competitive interest rate Interest rates can change significantly over time. A recent survey conducted by Mortgage Choice found that almost 40% of Australians did not know the interest rate on their home loan. A mortgage is easily the most significant financial decision households make and if you’re not on top of yours, you may not know that you’re paying more than you have to. To pay off your loan faster You might have committed to a 30 year loan but it doesn’t have to take that long to pay it off. A home loan health check could show you viable options to paying off your loan faster and getting out of debt sooner. You can also learn how you can build equity in your home to access down the track. To refinance Like many borrowers, you might be coming to the end of a fixed rate term or interest only period. It’s important to take the time to have a look at what home loan offers are available to make sure you don’t roll over onto an interest rate that costs you more than it should. To renovate or upgrade your home A health check will help you determine how much equity you have in your property. You may have accrued equity if your property has increased in value, or you’ve paid down a significant amount of your loan. You can leverage the equity you’ve built to finance a renovation, buy an investment property and more. To access home loan features There are a variety of home loan features and facilities available to borrowers. For example, an offset account can help reduce the interest you pay on your mortgage each month. A redraw facility will allow you to access any additional repayments you make on your loan. It is important to note that some features will often come at a cost to the borrower but the flexibility could be worth it in the long run. To simply get on top of your mortgage see how you’re tracking It’s fair to say that your financial goals may have changed since you got your home loan. A home loan health check is a great way to check that your loan still aligns with your short and long-term financial goals and make changes if it doesn’t. Your local Mortgage Choice broker can do a health check for you in no time at all. They’ll search through hundreds of loans from over 20 lenders to make sure you’re getting a good deal for your individual circumstances. And if they find a better option for you, they will do all of the legwork to refinance your loan. Republished with permission of <a href="http://www.handyman.net.au/why-you-should-get-home-loan-health-check">Handyman.net.au.</a>

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