Newsletter

August 2023

August 8, 2023

Welcome to the latest edition of our client newsletter,

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want — now and in the future.

In this edition we discuss “Understanding home loans” and provide you with information on “Retirement’ and ‘Debt Consolidation”.

If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us.

In the meantime we hope you enjoy the read.

All the best,
Planet Wealth

Planet Wealth

921, High St Road, Glen Waverley, Vic 3150

• P 1300 004 254
• E info@planetwealth.com.au
• W www.planetwealth.com.au

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Understanding home loans

Chances are, buying a home will be the most expensive and exciting purchase you’ll make during your life. Like most Australians, you’ll need to take out a home loan to help fund your purchase. Here, we explain how different home loans work and what to look out for.

How home loans work

A ‘home loan’ or ‘mortgage’ is a sum of money loaned to you by a financial institution S0 you can buy a property. In return, the lender uses the property you buy as security for the loan. That means if you fail to make your loan repayments, the lender may sell the property to settle your debt.

When deciding which loan is right for you, consider the type of loan or features you need, the interest rates and fees.

Types of home loans

Variable rate loan

If your loan has a variable interest rate, the repayments will change when the lender adjusts its rate – for example, when the Reserve Bank of Australia lowers or raises the cash rate and your lender follows suit.

A variable rate loan allows you to pay off your loan early without paying a penalty. You can also transfer your loan to another lender without loan-break costs. If your variable interest rate falls your repayments will fall. The downside is that if your variable rate goes up, so will your minimum repayments.

Fixed rate loan

This means your regular repayments are “fixed’ for the period of the fixed rate home loan, regardless of changes in the economy and cash rate and your repayments remain the same for the term. Generally, you can fix these types of loans for up to five years.

At the end of the fixed term you can arrange another fixed term or move to a variable loan. Fixed rate loans are generally less flexible than variable rate loans, and you may incur fees if you make extra repayments, change lenders or pay off your home loan during the fixed term.

Split loans

you like the certainty of a fixed interest rate but want the flexibility that comes with a variable rate loan, you can generally incorporate both options with a split home loan. You could pay oft part of your loan sooner while also having some protection against rate increases.

Interest-only loans

These loans can appeal to property investors, as the interest paid can be a tax deduction. This means your repayments only cover the interest on the loan without reducing the principal, meaning, the original amount you borrowed will not reduce over time. Additionally, if the value of the home doesn’t increase, or decreases, you run the risk that you won’t build any equity in your home despite making monthly payments.

Interest rate versus the comparison rate

You may notice two home loan rates displayed – the interest rate and comparison rate.

The interest rate is the annual interest cost for borrowing money, but it doesn’t take into account any fees. The comparison rate incorporates the annual interest rate as well as most upfront and ongoing fees.

The comparison rate is calculated based on a $150,000 principal and interest loan over a 25-year term, so you can compare across providers but it’s not necessarily an accurate rate for your circumstances. Do your research and speak to lenders to see if you can get a better rate.

Understanding fees and charges

When comparing home loans, understand the various fees lenders may charge. Here are some to look out for:

• Application/establishment fee — A one-off fee charged by your lender for setting up your home loan, if this fee isn’t charged, check if you’re paying higher ongoing fees instead!
• Ongoing fees – Also known as administration or service fees, these are charged every month or year for administrating your loan.
• Redraw fee — Some loans provide redraw facilities which allow you to ‘redraw’ any extra repayments you’ve made above the minimum. However, fees can vary from lender to lender.
• Fixed rate ‘break’ fee – If you break your fixed rate home loan, you may have to pay a ‘break fee’. This can be significant, so be sure to speak to your lender to find out.
• Early exit fee — Also referred to as an early termination, deferred establishment, deferred application or early discharge fee, you may have to pay this fee if you pay out your home loan in full within a set period of time (e.g. five years). Note that exit fees were banned on new loans from 1 July 2011.
• Discharge fee – This fee may be charged ‘when you pay out your home loan in full or are refinancing to another lender.
• Settlement fee – This fee is the amount you pay your lender for their work regarding the settlement. Some lenders charge a fixed fee, while others charge based on the value of the transaction.

When house hunting, you can apply for a home loan ‘pre-approval’ (or ‘conditional’ approval) from your bank so you know how much you can borrow. This can help to narrow your search and give you some peace of mind.

The lender will assess your financials, and while getting pre-approval can be a useful step, it is not a guarantee that your home loan application will be approved. They are a guide that your application fits the lender’s criteria, however it’s important to get full, unconditional approval before finalising a property purchase.

Talk to your mortgage broker or us to find out more.

© AWM Services Pty Ltd. Current as at July 2023

How much do you need to retire comfortably in Australia?

Knowing how much money you might need, how long it will last can be tricky. Working out how much is enough for retirement depends on many factors, such as your lifestyle, plans for the future, and the number of years you’ll spend retired. Additionally, estimating how much you’ll have when you plan to retire depends on factors such as your current salary, super balance and assets. With so many factors, it’s easy to see why you might need a retirement calculator to get an idea of your retirement savings needs.

By using retirement calculators you can get an indication of whether there’s a shortfall between how much you are estimated to have and how much you’ll need in retirement, and put a plan in place to address the situation.

How much is enough for retirement?

The Association of Superannuation Funds of Australia (ASFA) estimates that Australians aged around 65 who own their own home and are in relatively good health, will need the following amount of money each week and year in retirement:

Amodest litestyle is considered better than living on the age pension, while a comfortable litestyle means someone can afford a good standard of living, be involved in a broad range of leisure and recreational activities and travel domestically and occasionally internationally’.

For Australians on above-average incomes, another rule of thumb to estimate how much money you’ll need in retirement is to assume you will require 67% (two-thirds) of your pre-retirement income to maintain the same standard of living”.

What are your retirement lifestyle expectations?

Ultimately, how much money you’ll need for your own retirement is very personal, and will depend on your own situation, wants, needs and lifestyle expectations. It may help to factor in your day-to-day spending habits, your recreational activities and hobbies and whether you’ll be entering retirement debt-free.

How long will you work for?

The age at which you retire can have a significant impact on how much money you have and how much money you need in retirement. It can depend on factors such as your health, debts, super balance, age you can access your super, whether you have dependants, and your partner’s retirement plans (if you have one).

How long will you be retired?

Keep in mind that if you’re planning to retire at around age 65, it’s likely you’ll live for another 20 years or so. Men aged 65 can expect to live to 84.6 years, while women can expect to live to 87.3 years”.

How much money will you have in retirement?

The money you use to fund your life in retirement will likely come from a range of different sources including the following:

Superannuation

Knowing your super balance is a crucial part of planning for retirement, as it’s likely to form a substantial part of your retirement savings.

Age pension

Depending on your circumstances and assets, you could be eligible for a full or part age pension, or alternatively, may not be eligible for government assistance at all.

Investments, savings and inheritance

You may be planning to downsize your house, sell shares or an investment property, or use money you’ve saved in a savings account or term deposit to contribute to your retirement. Or perhaps an inheritance or the proceeds from your family’s estate may help you out in your later years.

How retirement calculators can help

Meet Mac. He’s 51, married and planning to retire at age 65.

To work out how much Mac might need in retirement, he uses a retirement calculator. Mac is hoping for a comfortable standard of living in retirement, and the calculator estimates this will cost him $1,154.49 a week – or $60,033 a year. He’s also planning on buying a new car and doing some travelling once retired, and thinks he’ll need $40,000 for these one-off expenses. Based on a life expectancy of 81 years, the retirement needs calculator estimates he’ll need a total of $993,473 to fund his retirement.

So how much might he have in retirement, and how long is his money likely to last, based on his current and expected financial situation?

Mac currently has $172,000 in superannuation invested in a balanced investment option, an annual pre-tax salary of $82,000, shares worth $20,000, and the couple owns their family home. Based on this information, the retirement simulator calculates he’ll retire with savings of $294,944. Based on his expected expenditure in retirement outlined above, the retirement simulator estimates his money will only last until age 71, leaving him with a funding shortfall of 10 years in retirement.

While this news may seem scary, it’s not an uncommon situation. Luckily, finding out about the possible shortfall now means there may still be ways to boost his savings before retirement.

What do you do if you won’t have enough to retire?

If, like Mac, you’re facing a shortfall in retirement, there are several things you can do to get your retirement on track. You could consider boosting your super through additional contributions, delaying your retirement, adjusting your retirement lifestyle expectations, or selling other assets.

Simply by having an idea of your current and projected retirement savings, you could work to improve the situation. The earlier you start, the easier it may be for you to reach your retirement goals.

Contact us to see how we can help.

• i,ii https://www. superannuation.asn.au/resources/ retirement-standard
• iii https://moneysmart gov.au/grow-your-super/howmuch- super-you-need
• iv https://wwuw.aihw.gov.au/reports/ife-expectancydeath/ deaths-in-australia/contents/life-expectancy

Why should I consolidate my debts?

Consolidating your debts could give you a clearer picture of what you owe and potentially save you money, but there’ll still be things to look out for.

If all those small debts you once had, have somehow multiplied and grown into bigger debis, rolling them into one could help reduce what you’re paying in fees and interest.

If you’ve heard about debt consolidation and are wondering whether it’s the right option for you, we look at some of the tips and traps, so you’ve got a bit of info up your sleeve before you decide.

What is debt consolidation?

Debt consolidation is where you take your existing debts (credit card, personal loan, car loan, or all of the above) and consolidate them into a single loan, preferably with a lower interest rate.

Some people choose to use their home loan to consolidate their debt because it often offers a lower interest rate, but it does mean risking your home if you can’t keep up with your repayments.

Other options include rolling your debts. into a new or existing personal loan, or credit card balance transfer.

Different options will have various pros and cons, depending on your circumstances, which is why it’s really important to do your research first.

What are the potential benefits?

• If you can consolidate into a loan with a reduced interest rate and lower fees, you could save a significant amount of money, depending on what you owe
• A consolidated loan can be easier to manage as you’ll potentially only need to make one monthly repayment rather than having to juggle several
• As you’ll only receive statements from one lender, you can reduce the amount of paperwork involved, which could make budgeting each month a lot easier.

What should I be aware of?

• When looking at debt consolidation solutions, make sure your provider is licenced by ASIC and that interest rates, fees and charges are lower than what you’re paying currently
• Providers may knock you back if there are black marks on your credit report, which lets lenders know whether you’ve been paying your bills on time
• If you extend the term of your loan and don’t focus on paying off the principal, be aware that you could end up paying more in interest over time
• Look into whether there are any application fees or penalties for paying off any existing debts early. After all, you want to ensure the potential savings outweigh any costs.
• Interest rates can go up and down and this could affect your ability to make repayments.

How do I do it?

1. Get up to speed with your current debts

• How much do you owe on each debt and what do they all add up to?
• How much interest are you paying on each debt?
• How long have you got to pay your debts off?
• What extra fees and charges are you paying because you have multiple debts?

2. Think about the best way to consolidate

Depending on your situation, one approach could be to roll all your existing debts and any savings you might have into your home loan, if you have one. This could potentially help reduce your short-term debt burden, because:

• most credit cards charge higher interest rates
• most personal loans charge higher interest rates
• any money sitting in transaction or savings accounts is likely to be earning lower interest rates than those being charged on your home loan.
• If you’re leaning toward consolidating your debt into your home loan, do keep in mind:
• your home loan balance will increase as you’ll be adding your existing debt amounts to it
• any equity you may have gained in your property will therefore decrease
• you may also need to pay lender’s mortgage insurance, depending on how much you increase your home loan by.

3. Focus on clearing debt

• Debt consolidation will only be effective if you’re disciplined about making repayments
• While you’re paying off the consolidated debit, try to avoid taking on any new debt
• Once the debt is paid off, try to maintain good debt management habits.

Speak to us about which type of debt consolidation strategy might suit your needs.

© AWM Services Pty Ltd.