new home

5 Basic Home Loans Every New Homeowner Should Know About

Purchasing your first home can be exciting but will usually require that you take out a mortgage loan. In your lifetime, a mortgage loan can become your largest debt, so understanding the process is critical. 

If you’re looking to finance a home loan in North Sydney, or purchase a home or a investment property in the North Shore or other parts of Sydney here are the basic kinds of loans you’ll want to consider. 

1. Fixed-Rate Loan

What it is: one of the most straightforward home loans on the market, it offers the same interest rate for a fixed period within the timeframe of your proposed loan. For example, you may have a fixed rate of 3.6% over 5 years. After this period, the mortgage will revert to standard variable rate at the discretion of your lender. 

When you should use it: this home loan is best for budgeting, as you can prepare to pay the same amount every month or fortnight. If interest rates rise above your fixed rate, you will not be affected either. However, take note that these loans may not offer additional repayments or a redraw facility. Conversely, if rates were to drop, you would still have the sae fixed rate.

2. Variable-Rate Loan

What it is: as the Reserve Bank of Australia (RBA) alters its official cash rate, your interest rates with this type of loan may rise and fall along with the market. Variable-rate loans come in two types. 

  • Standard: these carry flexible features such as offsets, redraws, additional payments, and a split loan. They are usually come with an annual 
  • Basic: these come with cheaper rates and lower (or no) fees but without the flexibility that the standard variant offers. 

When you should use it: basic variable-rate loans are ideal for first-time buyers who are most interested in lower rates. If you have room for flexibility, you can also consider a standard variable-rate loan. 

3. Low-Doc Loan

What it is: low documentation loans have higher interest rates than normal and policies can vary from lender to lender. They don’t, however, require borrowers to submit any proof of income. If you’re in need of advice from a mortgage broker in North Sydney, don’t hesitate to give us a call.

When you should use it: these loans are ideal for self-employed borrowers who may have trouble proving their income and assets with set documentation in a timely manner. 

4. Honeymoon-Rate Loan

What it is: known as an introductory rate, the honeymoon-rate loan is available to first-time borrowers with a reduction off the standard variable rate for a certain period of time. Honeymoon rates can either be variably discounted or at a fixed discounted rate. 

When you should use it: a honeymoon-rate loan can help secure your financial capabilities during the early stages of homeownership. 

5. Construction Loan

What it is: this is a progressive loan that is drawn in stages. Lenders may give portions of your loan amount progressively. Here’s what you can expect from a construction loan.

  • Stage 1: this will cover the building of the base of your home, which includes the foundation, ground levelling, and plumbing. It may take up 10% of your contract over the span of about 2 weeks. 
  • Stage 2: 15% of your contract will cover the framing of your property and will take up to a month.
  • Stage 3: this is the bulk of your contract at 35% and will be used to build external walls, doors, and insulation. This takes up to a month to complete.
  • Stage 4: this part of the loan goes towards fixtures and fittings such as shelves, cabinets, internal doors, and tiles. This takes up about 20% of your contract and also covers plumbing and electrical finished. 
  • Stage 5: the remaining 15% of your contract, this stage of the loan covers finishing touches such as painting and polishing. 

When you should use it: the construction loan is perfect for homeowners looking to build from the ground-up. 

Conclusion

When paying off your mortgage, it’s important to structure a financing program that works best for you and your family. 

With us at Brick Hill Financial Solutions, arranging to fund your home is our job. For home loans in North Sydney and surrounding suburbs, give us a call!

The Impact of COVID-19 on the Property Market and Lending Environment

Whether you’re a first home buyer, or planning to upsize, downsize or invest, the COVID-19
coronavirus will have caused some uncertainty over your plans.

The Lending Environment

Whilst there has been some change in the way we inspect and purchase properties on-line,
banks have also amended their lending criteria and are focussing on the stability of a
borrower’s income, choosing to shy away from those employed in ‘high-risk’ industries. Some lenders have also dropped the maximum loan-to-value ratio (LVR) they will consider.


In addition to specific industries perceived to have higher risk (hospitality, retail, tourism) the
lenders are reviewing the type of income borrowers are earning and are far less likely to rely
on unstable income such as temporary, casual, overtime, bonuses or season income.


For self-employed borrowers much more detail is being requested and up to date
management accounts and BAS statements are required and the financial results of the 2019
tax year are taking a secondary position.


In some cases, borrowers whose loans were pre-approved before COVID-19 are being
requested to produce more recent payslips to demonstrate that their income has not been
affected.


For investors, rental income may be discounted if a property lacks a paying tenant.

So, what should buyers do?

Whilst there has been some reduction in prices and the number of properties being offered for
sale, there has not as yet been a dramatic change in the property market, due in part to:

  • The RBA cutting the cash rate twice in March 2020
  • Banks coming up with policies that am to assist with loan payment, including
    mortgage relief, – ‘freezing’ repayments for 6 months, offering fixed rate home loans,
    refinancing, and extending the mortgage term without penalty.
  • Investors opting to invest into the property market, which is currently seen as less
    volatile than the share market.
  • Government financial stimulus packages, which is allowing people to access some
    funds to tie them over in the short term.


Given the current low interest rate environment, and provided your income and job remains
stable, now may be a good time for refinancing or to make a purchase. Rates are at all-time
lows (particularly fixed rates).


Basically, if your income is in any way uncertain you should consider putting your property
buying aspirations on hold, or at the very least talk to your employer before investing.
On the other hand, if your income is assured then the next few months are likely to be one of
the best times to buy.

Property Valuations and COVID-19

The impacts from COVID-19 are yet to be seen in a property market context as transactions generally follow a due diligence process and are less liquid than the public market of the stock exchange. In terms of valuations, we are seeing valuers starting to utilise disclaimers highlighting ‘valuation uncertainty’. Valuers draw upon previous transactions to form opinions of value and these have now occurred in a different market environment to what we are currently experiencing. 

Whilst the consequences of travel bans, isolation, consumer uncertainty, supply chain disruption, stock disruption and job loss are still evolving, we set out below our considerations on the impact the pandemic may have on the property market and valuations throughout 2020.

 What happens to value?

To appreciate what may happen to value, it is worth remembering the definition of value which contemplates a willing buyer and a willing seller and what they are prepared to transact the property for, at the effective date.

What these parties will consider in their disposal / purchase decisions are the various assumptions that feed into valuation analysis, of importance:

  •  Rental and cashflow
  •  Yields and discount rates
  •  Vacancy and prolonged impacts

What happens to rental income?

The government’s reaction to COVID-19 pandemic has been to enforce strict social distancing policies forcing businesses to close, with some property owners being faced with the inability for tenants to continue to pay rent in some cases. This has further been supported by the government encouraging landlords and tenants to ‘talk to each other’ about rent relief. While rent payment is the tenant’s legal obligation, loss of rent and tenant fall over can be anticipated, noting some retailers have publicly announced they will not be paying rent1 .

We suggest an analysis of tenants can be undertaken to establish a revised cashflow for a property, taking into consideration history of tenant arrears, business models of tenants in terms of whether they provide discretionary or essential services, their trading performance since the impact of COVID-19 and their share price, if listed. In terms of retail, turnover rents are likely to dissipate except for the likes of supermarkets. Analysts may consider factoring in periods of loss of income, abatements, deferred rents, increased incentives, tenant fall over and extended periods of vacancy. Vacancy levels of 10-20% could be witnessed as small businesses and retailers already under pressure prior to the impact of COVID-19 fold.

What will cap rates do?

A question a valuer always gets asked! With the above cashflow implications in mind, and having performed some analysis and discussed with clients, worldwide colleagues and auditors, we consider property will be affected on a case by case basis. Prime assets are likely to remain sought after given their more secure cashflows with stronger tenant covenants to banks, government tenants and large corporates with locked in leases and minimal near term capex requirements.

Secondary grade assets of late have had almost divergent yields to prime stock. However if an asset’s tenancy profile is deemed to present cashflow and / or vacancy risk, a softening of cap rates is likely to occur. Similarly this will occur for retail assets, which had already started to be seen, prior to any influence from COVID-19. This will likely particularly apply to those heavily exposed to tenants aimed at discretionary spending. The reletting and vacancy risk will be certainly priced into an investment decision.

What we can expect to see is a greater disparity of yields between prime and secondary stock. This was evident 5-10 years ago where there was 200-300bp difference in yields. That gap narrowed in 2018/19 and there was almost no difference between asset classes due to high demand and the lack of available stock with investors chasing return.

Tourism and education assets are likely to have already experienced the immediate impacts of travel bans and will face a long recovery period. These assets may initially be viewed by some as having more of a cashflow crisis than a significant change in cap rates, however the uncertainty of the duration of the crisis will likely mean risk is priced in and inevitably a rerating of these assets will occur.

Land and development assets are likely to exhibit the most significant value volatility. Unemployment levels and lack of consumer confidence may see these assets to be the most dramatically discounted, akin to the post GFC environment.

Volatility in commercial property markets tends to be less observed as owners (other than distressed owners) tend to hold and liquidity naturally reduces during recessionary times.

Owners of prime assets, especially those in Australia, have modest gearing and so transactions that do occur will tend to relate to poorer quality assets and this can further skew data available within poor market conditions. It is likely that banks will be more careful about their lending decisions, which means cashed up purchasers are more likely to be present in the market who will demand a higher return on equity.

Time will tell whether there are a number of ‘forced sales’, noting that if this type of transaction regularly occurs, these transactions can tend to become the market expectation for pricing.

What will the long term impacts be?

Following the GFC, a flight to quality was observed in the demand for property assets. The COVID-19 crisis could result in structural changes to how the real estate market evaluates tenants in terms of risk, noting that occupiers providing essential services diversify risk under these circumstances and tenants offering essential services may be considered to offer a robust covenant.

Assets with a diversified income, including government and essential services tenants, and a broader spread of tenant type are likely to be sought after. We may see the change of use of some more secondary assets to a higher and better use.

Other decisions around property may include sale and leaseback arrangements becoming more prevalent as businesses seek to improve cashflow, their balance sheet and reinvest capital in their businesses.

Assets with direct exposure to offshore visitors such as tourism will likely reveal, at least for the medium term, structural repricing. In terms of occupier demand, tenants may not necessarily demand lower rents, but will look to be more efficient with their space requirements. Tenants are likely to realize efficiencies in terms of space requirements following adapting to working from home and similar arrangements. A reduction of floor space may occur as tenants who have evolved to utilize digital technology over this hibernation period, look to reduce nonessential spaces that were previously utilised for group gatherings and functions. We may see renegotiating and restructuring of leases and an emphasis on a healthy and hygienic environment in the office sector.

In the industrial market, occupiers involved in key supply chain activity will be more highly sought after, whereas businesses reliant on offshore demand will be less sought after.

Retail is likely to face a challenging recovery period as confidence needs to rebuild amongst households. Job losses, job security and uncertainty may cause more people to save or pay down debt which will further increase the period of recovery. Some retailers may use the hibernation period as an opportunity to permanently shut down underperforming stores and restructure their operations following having to adapt to an online platform. It will be interesting to see how food and beverage retailers recover from social distancing and the impact their struggle has on retail assets as they have represented a large proportion of lettable area within centres.

Overall a challenging reletting market is likely to occur coupled with expectations of incentives. We may see new clauses drafted by the legal profession to cover similar events providing more flexibility for the tenants in times of significant uncertainty.

How are valuers going to approach COVID-19?

Valuers are required to report at a specific date and reflect market conditions at that time. Events such as COVID-19 create valuation uncertainty, because the only inputs and metrics available for the valuation are likely to relate to the market before the event occurred and the impact of the event on prices will not be known until the market has stabilized.

Currently, there is no way of confirming the movement through transaction data as yet and valuers will need to rely on all information available to them when they complete and submit their market value assessments. Valuers can reflect, for example, historical evidence that suggests how property markets might move under differing economic, monetary and fiscal conditions.

Expect valuers completing valuations during the COVID-19 crisis to:

  • caveat their advice, referencing some of the issues outlined above
  • reference the high valuation uncertainty, and that there is more downside than upside value estimation error
  • reserve the right to reconsider their advice as events unfold and if these events are likely to have a material impact on value. This might extend to valuers recommending that they review their advice prior to the next financial reporting date and as market evidence occurs. More regular valuation reporting will likely be needed to keep advice up to date.

Valuers will have to estimate the appropriate discount and/or capitalisation rate to apply for their analysis. When markets are stressed, valuers will need to consider issues such as the need for liquidity premiums and whether it is appropriate to consider additional risk premiums to account for the greater degree of uncertainty in estimating cash flows. Care will need to be taken in deciding on the appropriate level of additional risk premia and significant judgement will be required. We would recommend that the reasoning for any additional premia is documented within valuation reports to provide transparency.

The Australian Property Institute suggested that its members utilise the following disclaimer:

The outbreak of the Novel Coronavirus (COVID-19) was declared as a ‘Global Pandemic’ by the World Health Organisation on 11 March 2020. We have seen global financial markets and travel restrictions and recommendations being implemented by many countries, including Australia. The real estate market is being impacted by the uncertainty that the COVID-19 outbreak has caused. Market conditions are changing daily at present.

As at the date of valuation we consider that there is a significant market uncertainty. This valuation is current at the date of valuation only. The value assessed herein may change significantly and unexpectedly over a relatively short period of time (including as a result of factors that the Valuer could not reasonably have been aware of as at the date of valuation). We do not accept responsibility or liability for any losses arising from such subsequent changes in value. Given the valuation uncertainty noted, we recommend that the user(s) of this report review this valuation periodically.

Meanwhile, The Royal Institute of Chartered Surveyors (RICS), which provides global guidance to valuers, suggests on their website (as at 29 March 2020) that its members consider advising their clients that they:

“… attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.”; and

report their valuations “on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution – should be attached to [our] valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.”

Notwithstanding the above, valuers will need to advance their thinking on how they structure their valuation reports to ensure they communicate their opinions and assumptions in a way that assists their clients with evaluating the valuation advice and presenting it in a meaningful way to their stakeholders.

In Conclusion

Considering the likely impacts on the major assumptions of value, we suggest a softening of capitalisation rates is likely to occur across most asset classes.

We see ‘value add’ properties climbing higher up the risk curve with an emphasis placed on well leased property to secure tenants with fixed growth, such as prime assets, where capital will continue to seek diverse and secure cashflows. Australia has traditionally been favored for its transparent market and strong governance and will likely continue to attract offshore capital.

A short term effect on cashflow from discretionary type tenants and those businesses which can be called non-essential services may eventuate. Pricing in for risk of vacancy and letting up allowances is likely to occur.

The recovery time for tourism and retail assets will depend on the duration of the crisis. The longer it goes on, the longer the recovery time will likely be, as unemployment and uncertainty perpetuate and households move to saving and paying down debt.

Valuers will include new disclaimers and utilise evidence available to them at the time and should ensure to articulate fully their assumptions and opinions. Valuers should be open to having transparent dialogues with clients and their auditors as this crisis evolves. Their advice may require more regular updating, noting as more transactions occur throughout the crisis these will reveal how the market is responding.

-PWC

8 essential steps if your business is in distress

The impact of the last bushfire season and now Covid-19 is causing significant distress to many businesses. For many cash flow has slowed to a trickle or even stopped completely.

Here are eight essential steps to take to deal with this type of crisis in your business:

1. Be honest with yourself

Lots of people in financial distress stop opening bills and stop answering phone calls. The first step to getting through a squeeze is admitting to yourself you’re in a tight spot.

2. Do your accounts

It’s absolutely essential that you find out your financial position. You need to know what you owe, to who, when the major bills are going to fall due and how much they are going to be. Look especially at rent, loans, tax, etc.

You also need to check who owes you money and if they’re going to be able to pay. Making sure your books and records are up to date is also critical in protecting you later if things get worse.

3. Are you already broke?

This is a tough question to face – but you need to. The law says you are insolvent if you can’t pay your debts as and when they fall due. If you can secure more funds from a lender or an investor that will pay those bills, then you are ok.

But, if not and that’s the spot you’re in, you must stop trading and appoint a Registered Liquidator, or else you will face even greater personal liabilities. You might think you can’t get more broke than broke, but there can be serious consequences.

4. Talk to your bank & lenders

Here is where it helps if you’ve got your accounts done. Being able to sit down with your bank and show them you know the situation you’re in and being able to discuss the outlook is the best way to gain their support.

Most banks have made public announcements about their willingness to support their customers in these tough times. Remember, it is absolutely in your bank’s best interest to have you trade through tough times and remain a customer in the long term. They are likely to be firmly on your side.

5. Talk to the Tax Office

Tax bills are one of biggest costs that a business pays. It’s important to remember that GST revenue and income tax withheld for employees isn’t your money. But we also know that it’s quite possible you don’t have what’s required to pay the bills when they fall due.

It’s important that you keep all of your tax declarations up to date and accurate. If so, you will find the ATO is also supportive of trying to get you through a tough period. The ATO has now issued special advice about help that’s available which you can find here.

6. Talk to your suppliers

They are probably facing a tough time as well. And they will certainly know others amongst their customers doing it hard. Have an open discussion with them and work out what you can agree together. Just like banks, it’s in your suppliers’ interests to keep you going and remaining a customer over
the long term. But do understand that they too might be squeezed for cash right now.

7. Get qualified help

Yes, it’s likely to cost you some money that you don’t feel like you have at the moment. But getting qualified help is likely to save you money in the long run.

Most local accountants and lawyers don’t know their way around the complexities of insolvency law. So you need to talk to a specialist.

ARITA Professional Members are fully qualified in this area, are covered by insurance for the advice they provide and are regulated by the Government. Which means you can trust their guidance. They usually offer a free and confidential initial consultation to help you understand your financial position and what options you have available.

ARITA Professional Members include specialised accountants who might be Registered Liquidators (who look after businesses in distress) or Registered Trustees (who look after individuals facing personal bankruptcy), or are specialised lawyers who can give advice about legal options. If you see an ARITA Professional Member who is known as a Fellow or a Life Member, they are even more highly regarded by their peers.

If you think your business can trade through with a little help, then ARITA Professional Members are the very best people to talk to. Indeed, engaging them may give you a ‘safe harbour’ protection to stop further personal claims against you if your business does end up going broke.

8. Look after your mental health

Having your business in financial distress is a crushing experience. It’s likely to be personally hard on you. It’s important to ensure you are aware of, and look after, your mental health, because the most important thing is that you get through these challenges yourself.

Don’t be afraid to ask for help if you need it. Chat to your doctor, check out Beyond Blue or call Lifeline if you are in urgent need of help.


Don’t wait!

It’s really important to realise that a lot of people are in the same boat at the moment, and generally through no fault of their own. So, don’t see this as a personal failure. But do get proper, qualified advice as quickly as you can.


Links

ATO/COVID-19
Arita/Insolvency_help
Arita/Member_lookup


Source – ARITA.com.au

Important Coronavirus Update for Renters

If you are a renter, you may have heard that your landlord can skip their home loan repayments.

Unfortunately, this is not accurate.

Anyone with a mortgage, if they are experiencing financial hardship, can only delay their home loan repayments, but they still have to pay them in full.

In fact, when a property owner delays their home loan repayments, they end up paying more. This is because the lender still charges the full interest and fees over the delayed period, then they charge interest on top of this accrued interest.

The equivalent would be a tenant delaying paying their rent for a few months, but then having to catch up all the missed payments plus compounding interest on the delayed amount, plus pay the new rent at the same time.

As much as we would like it to be true, lenders always still charge interest, and the longer a loan is delayed the more it costs.

This misunderstanding is causing some renters to feel they are unfairly paying rent when their landlord is getting some kind of holiday from their home loan, but this is definitely not the case.

Warren Buffett’s Advice on How Investors Should Respond to a Super-Contagious Disease

If there’s one person investors should listen to during a market correction, it’s Warren Buffett. At age 89, Buffett has lived through quite a few downturns. And he’s made out pretty well: His net worth is in the ballpark of $85 billion. 

Through the years, he has given a lot of great advice in his annual letters to his Berkshire Hathaway shareholders. He has even written about a specific approach for how investors should handle a “super-contagious” disease.

Buffett has been interviewed in recent days about his thoughts about what investors should do in response to the global coronavirus outbreak. His take was that it wasn’t a good idea to buy or sell stocks based on daily headlines. But that’s not the advice I’m referring to.

In early 1987, Buffett wrote to Berkshire Hathaway shareholders about what to do in the face of an epidemic. This was, of course, way before the outbreak of the novel coronavirus that’s causing worldwide concerns today. It was even before the avian flu, Ebola, SARS, or MERS made the news. 

But more than 30 years ago, Buffett addressed two “super-contagious diseases.” He told readers that there are “occasional outbreaks” of these diseases and that they will “forever occur.” Buffett admitted, though, that “the timing of these epidemics will be unpredictable,” cautioning to “never try to anticipate the arrival or departure of either disease.”

What were these two diseases? Fear and greed among investors. Buffett stated that his goal to deal with these “epidemics” was “to be fearful when others are greedy and to be greedy only when others are fearful.” 

Time to be greedy

There’s no question that plenty of investors are fearful right now. The so-called fear index — the CBOE Volatility Index (VIX) — has skyrocketed over the past couple of weeks. When the VIX goes up a lot, it’s a clear sign that many investors are scared. If you think that Warren Buffett was right in 1987, though, that means it’s time to be greedy. 

Gordon Gekko, the fictional character in the 1987 movie Wall Street played by actor Michael Douglas, famously stated that “greed is good.” The line has been slammed through the years as being representative of an unhealthy fixation on making money.

But I think that Buffett’s definition of greed is different than Gordon Gekko’s. When Buffett wrote about being greedy when others are fearful, he was referring to buying stocks at an opportunistic time. A time like now.

The reality is that the market correction has left quite a few stocks valued at very attractive levels.

When Buffett wrote to Berkshire shareholders in 1987, the stock market was soaring. Instead of fear, there was euphoria. He somewhat sarcastically noted, “What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves.”

Now, though, the opposite scenario is taking place for stocks. To paraphrase Buffett, the  share price has become gloriously uncoupled from the great performance of the business itself. There are other stocks for which this is true as well. Buy them. Be greedy in the Warren Buffett way.

What Buffett doesn’t know

There’s one other thing Buffett wrote in 1987 that I think is especially relevant right now. He stated, “We have no idea — and never have had — whether the market is going to go up, down, or sideways in the near- or intermediate-term future.” Amen to that.

Keep that in mind as you contemplate whether you should buy now or wait to see if the stock market will fall even more before scooping up shares. Buffett doesn’t know what’s going to happen next with the stock market, and neither do you. 

What we can all know, though, is that there’s a lot of fear right now. And it’s causing stocks with tremendous growth prospects to be priced more attractively than they’ve been in quite a while. Don’t let this “epidemic” be wasted.

By – Keith Speights

Reserve Bank slashes interest rates to new low of 0.5pc to counter coronavirus hit

The Reserve Bank has slashed interest rates to a record low of just 0.5 per cent as it seeks to contain the economic fallout from the escalating coronavirus crisis.

Key points:

  • The Reserve Bank has slashed interest rates from 0.75 per cent to a fresh record low of 0.5 per cent
  • The RBA has now cut interest rates four times within the past year
  • Coronavirus could wipe anywhere from 0.3 to 7.9 per cent from Australian GDP depending on the outbreak’s severity, analysts warn

Interest rates fell three times last year as the RBA tried to kick-start an already sluggish Australian economy that was in the midst of a housing downturn, with residential construction tumbling after a record building boom.

Following a summer of bushfires, which Treasury expects to knock around 0.2 percentage points from Australia’s economic growth, coronavirus threatens to cause even greater economic fallout.

The Organisation for Economic Cooperation and Development (OECD) has predicted that even a “mild and contained” outbreak of coronavirus would wipe 0.5 percentage points from Australia’s economic growth this year.

However, new research from ANU economics professor and former Reserve Bank board member Warwick McKibbin and PhD student Roshen Fernando warned that GDP loss from the most severe outbreak could be as much as 7.9 per cent, with even a less severe global pandemic possibly taking 2 percentage points off Australian growth in 2020.

Should the serious outbreaks be largely limited to China, the ANU economists estimate a 0.3 to 0.7 per cent loss to GDP — although these scenarios look increasingly optimistic, given the recent global spread of the virus.

Given the potential severity of the economic fallout, the Reserve Bank elected not to wait longer to see how the coronavirus would play out, but to cut interest rates by 25 basis points to 0.5 per cent to boost the economy.

Ahead of the rates decision, Prime Minister Scott Morrison urged Australia’s major banks to pass on any cut in full to support the economy.

“There is no doubt that if the bank were to take a decision today on cash rates that the Government would absolutely expect the four big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus,” he said.

The Australian dollar sank around 0.4 per cent after Mr Morrison’s comments, although the Reserve Bank’s move to cut interest rates was already widely anticipated by financial markets, which had already priced in a 100 per cent chance of a rate cut.

How to cure the Christmas Debt Hangover

The festive season might be a distant memory but many of us will still be paying for it well into the future. According to the Australian Securities and Investment Commission (ASIC), more than a third of us put our Christmas gifts on plastic.

The Christmas splurge adds to our mounting household debt, already among the world’s highest, with $30 million owed on credit cards.

Our penchant for plastic even has the banks taking steps to help curb our habit. In 2017 the Australian Bankers Association proposed a new code of conduct to ban unsolicited credit card limit increases, make it easier for consumers to cancel cards, and improve transparency on interest-free periods.

The reality, however, is the buck stops with each of us when it comes to personal debt. Here are some tips to get on top of credit card debt before it gets on top of you.

Take stock

The first step to crunching debt is knowing how much you owe. It can be easy to lose track of credit card debt, especially if you have more than one card. Take note of what you owe, and the interest rate, on each card.

Now take a look at the bottom of your latest statement where it spells out how long it will take to pay off your credit card and how much interest you will fork out in that time if you just pay the minimum due each month. Warning – the figures might alarm you.

If you just make the minimum monthly payment on a $5,000 balance at 15 per cent (starting at $102 per month and decreasing over time, with an absolute minimum payment of $20), it will take you almost 24 years to rid yourself of the debt and you will end up paying more than $12,000 with interest! Notch the repayments up to $246 per month until the balance is cleared, and you knock the debt over in two years and save more than $6,000 in interest.

The key take-out here is always repay more than the minimum due.

Demolish your debt

Make a plan to crunch your card debt. You may consider putting all your spare cash onto the card with the highest interest rate and pay it off first but remember to pay the minimum due on your other cards. You could also investigate consolidating all your plastic debt to one card with a low rate. Just make sure you take full advantage of any introductory low-rate window by repaying more than the minimum due each month.

Cancel cards as you transfer balances from them, or once paid off, so you are not tempted to rack up debt on them again.

If your cards are getting the better of you, consider speaking with a financial adviser or visit ASIC’s MoneySmart website www.moneysmart.gov.au for further information.

Track your spending

Run through at least six months of card statements to get a handle on your plastic purchases and look for ways to cut discretionary spending, such as entertainment, clothes and holidays. Create a budget and sink leftover funds into your credit card balance to pay it off sooner.

Purge the plastic

Exchange your credit card for a debit card so you can only spend what you have in your savings account. You will avoid deepening your debt and hopefully develop better shopping habits.

Choose the right card

Think about avoiding cards offering rewards such as frequent flyer points as they usually attract a higher rate and require years of high use to accrue decent rewards. It may make more sense to opt instead for a low-rate card with an interest-free period, and make the most of it by paying off any new debt before you accrue interest charges.

Set aside the Christmas savings

Start saving now for next Christmas. If you put aside $10 a week from April 1 until December 1, you will squirrel away $340, enough to cover a few Secret Santas. Add to your stash by dropping your gold coins into a jar at the end of each work week. You won’t miss them, and your little pot of gold will lighten your wallet.

Any small steps you take to save consistently throughout the year can make a big difference come spending season.

Australian Finance Group

RBA announces first cash rate of 2020

The Reserve Bank of Australia has announced its first cash rate decision of the new year.

The rate has been kept on hold at its current record low of 0.75%, where it has sat since October 2019. 

Following the release of the most recent data which showed a lowered unemployment rate and an uptick in the inflation rate, the outcome of today’s meeting was generally expected.

Buy Now Pay Later – the hidden danger potentially stopping you from owning your own home

The Buy Now Pay Later sector is winning-over the youth demographic with the promise of instant gratification, but leading mortgage brokers are warning that with every sugar-high comes the risk of a corresponding low.

‘Buy Now Pay Later’ providers such as AfterPay and Zip Pay have experienced massive growth in popularity, with the number of users jumping from 400,000 to approximately 2 million between 2015 and 2018.

Driven by a simple proposition whereby the Buy Now Pay Later provider pays the merchant on behalf of the customer, allowing the customer to obtain the goods or receive a service immediately while subsequently paying off the debt generally through instalments, Buy Now Pay Later presents a tempting offering.

But as the sector’s breakneck growth continues, mortgage professionals are warning users, particularly in the younger demographic, to be cautious of overdoing it as this could risk effecting their chances of securing a home loan further down the track.

In theory, it makes sense. You get the item or service and pay it off over instalments, so you’re actually putting forward your liability.

This might be ok for someone that manages their money well, if they pay off the item on time and use their mortgage offset account correctly. This way they’re delaying expenses and offsetting more of their savings against their home loan.

Utilising this payment method may potentially send the wrong message to a bank. If a lender sees a ‘buy now pay later’ provider frequently on a client’s bank statements, that can trigger more questions about their spending behaviours and ultimately may mean they choose to decline the application.

It’s important to appropriately manage your expenses well in advance of applying for a home loan, that way you can show the bank that you can save and afford to service a mortgage when the time comes.