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Your top 16 money questions answered by an expert

Your top 16 money questions answered by an expert. Source: Yahoo Finance
Your top 16 money questions answered by an expert. Source: Yahoo Finance

We asked Australians from around the country to send in their mortgage, money and superannuation questions. Here’s what Aussie finance guru Peter Switzer said in reply.

MORTGAGE

Q: I’ve been told an offset account with a home loan can mean you can pay off your loan more quickly and it’s tax effective. Why is this the case? Alice, Erina, NSW.

A: An offset account is a transaction account linked to an eligible home or investment loan. The money you have in this account could offset the amount you owe on that loan, and you’ll only be charged the interest on the difference. With an offset account, you’re offsetting the balance in a linked savings account or even a transaction account against the balance of what’s owed on the linked loan. In the case of a mortgage offset account, the balance of, say, the savings account reduces the balance of the mortgage that incurs interest.

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Also read: Aussie petrol prices are plummeting

Many people pay their wages into this account then draw out what they need for living expenses. What’s left works against the loan to reduce the overall interest paid.

Remember, interest on your home loan is generally calculated daily then charged to your loan account at the end of each month. Your bank will take the outstanding loan amount at the end of each business day and multiply it by the interest rate that applies to your loan, then divide that amount by 365 days (or 366 in a leap year). The more you keep in the offset account, the more days you’ll have where what’s owed to the lender will be smaller. And that means you pay less interest! Over time, you’ll reduce the time needed to pay off the loan.

Also read: Fear of buying too early will send property downturn deeper

Q: I’ve been to three banks that have promised to give me a home loan. I made sure I had lenders in place before shopping for a home but now I’ve found the lenders are all saying “No”. I have a successful small business but I’ve been told lenders prefer people with stable jobs. Do you have any ideas because I go to an auction in two-weeks’ time! Jason, Brighton, VIC.

A: I’d go three or four mortgage brokers because they should have access to alternative lenders. Small business people trying to borrow can be discriminated against because they’re seen as relatively risky compared to say a public servant. However, since the Royal Commission, all banks have been instructed to play hard ball when saying “Yes” to loans. Also, APRA has been telling the banks to be tougher on investment property borrowers. They also have encouraged banks not to lend interest only loans. I’ve heard alternative lenders are coming to the rescue of borrowers who ordinarily would’ve qualified for a loan with a bank but have copped rejections since the bad publicity from the Royal Commission. That’s why mortgage brokers might be your best option, as they often have 20-30 lenders they work with, and many aren’t banks. Best of luck.

Q: I’ve decided to buy an investment property and my mortgage broker says she can get a fixed interest, interest-only loan. I like to pay off the principal but what’s your view?

A: If you think that the property will deliver good capital gain and you plan to flip the property in a few years’ time, then the interest-only, fixed rate loan is something I’d opt for to ensure I don’t have any cash flow problems if interest rates rise. It’s common practice for investors to use interest-only money because only the interest is tax deductible. And this is important when you’re investing in property. Given rates will rise over the next three years or so, your mortgage broker seems to have your best interests at heart. On the other hand, if you plan to keep the property for a long time, then paying down the principal might prove to be an OK strategy but I’ve known many investors who have rolled out of one fixed, interest only loan into another. However that has become harder nowadays because APRA has made it harder for banks to play ball on these types of loans. That said, I hear the banks have been given more scope to make these sorts of loans lately but they are asking for more information about you as a borrower than they did three or four years ago. Your mortgage broker might be the loan assistant you had to have!

Q: I heard that one bank is sweeping their customers’ redraw accounts and it might mean that money I have in the account to reduce my mortgage repayments could be made unavailable to me when I want to travel overseas next year. Is this right and is there anything I could do about this potential problem? Liz, Port Melbourne, VIC.

A: I talked to a banking expert on my radio podcast program (The Switzer Show) recently and this story even surprised me. Apparently, the fine print contract on a redraw facility for at least one bank says if you’re making the minimum repayment on your loans and there are excess funds in the account, under some circumstances the bank is entitled to sweep the account. It will still go to reducing your mortgage, the interest you pay and the time spent paying it off but you could lose access to your dough! The way to avoid this and still be able to reduce your mortgage and the related costs at a rate of knots, while still having the money accessible for your holiday spending, is to link your loan to an offset account, which can’t be swept by a bank. This is worth thinking about.

Q: Could you explain what the deal is with interest only loans? Why would you want one of these? And who goes after them? Jason, Port Melbourne, Victoria.

A: With an interest-only loan, you onlypay the interest on the amount you’ve borrowed. These loansare usually for a set period (for example, five years), after which the loan changes to a principal and interest loan. Interest rates on interest-only loans are often higher than for standard principal and interest loans. Property investors often go for these loans because they want to claim the interest as a tax deduction and it helps their cash flow, if the property is negatively geared. They’re often useful if you have a five-year loan and you buy a property on the basis that you want to sell it within the five-year period. People who buy a beaten up property to renovate or restore to sell for a capital gains tax-free result might go after an interest only loan. Some households have sought one of these loans to reduce their repayments so that they don’t end up with a cash flow crisis. Be careful if your lender makes you go into a principal and interest loan when the time on the interest only loan is up, as it might mean much bigger repayments. By the way, since the Royal Commission and the Murray Inquiry into the Financial System, banks aren’t as happy to do interest only loans. That said, mortgage brokers could be the best for finding out which lenders are good for interest only loans.

Q: Since the Royal Commission, I’ve heard some negative stuff about mortgage brokers. What do you think of them? I’m going to buy a house soon, hopefully, and thought they’d be better than a bank. Eleanor, Essendon, VIC.

A: I think the Royal Commission unfairly painted all brokers with the one brush. There are badly behaving lawyers, accountants and even doctors and I wouldn’t condemn all these respectable professionals because of a few bad apples. A mortgage broker should be able to give you a range of options and it’s up to you to select the best one, based on interest rates and the conditions that go with the loan. Some brokers will be influenced by what lender gives them the biggest payment/commission but if you were offered a loan from your bank at 4.5% and the mortgage broker gets you a 3.89% loan where he gets a slightly bigger kickback, why should you care? He or she has saved you 0.65%!

Some people go to a couple of brokers and then see what they can get from their bank. I have no problem telling you that mortgage brokers have been a plus for borrowers. Anyone who says different can’t remember the bad old days when banks were the only lenders in town!

Q: I want to buy an investment property and have been told an ‘interest only’ loan is the way to go. But my reading of the latest news about these loans says they’ve become hard to get from banks. Is this true? Should I go for a principal and interest loan instead? Allan, Camberwell, VIC.

A: The news stories you have been reading are right — interest only loans have become harder to get. However, this is for borrowers buying a home they live in. Some lenders were making interest only loans so borrowers could have the cash flow to borrow more money to buy expensive properties, especially in Sydney and Melbourne.

After APRA and the Royal Commission criticised these loans, banks have started to say “No” to borrowers wanting ‘interest only’ loans — but that’s for loans for principal properties that the borrower will live in. On the other hand, property investors are still able to get ‘interest only’ loans, especially if they look like very good candidates for an investment loan.

Having good income, low debts and no other properties increases your chances of securing an ‘interest only’ loan for an investment property.

I’d go to a couple of mortgage brokers to see what deals you can crack. The interest rate could be higher than standard variable home loan rates but they still should be pretty competitive. You should be able to get one under 4%. And make sure you check the comparison rate, which also should be under 4%.

MONEY

Q: I’m a new investor but I’m keen to get into buying stocks. I went to a conference recently that showcased listed investment companies and exchange traded funds and it seemed like a good way to get exposure to stocks without me having to do the stock picking. What do you think of these products?

A: I think they’re a great way to get into investing in stocks. Chris Cuffe, who was paid $33 million when he left his Colonial First State in 2003, eventually started a fund of funds, where he selected who he thought were the best 10 fund managers in the country who’d give him diversification and exposure to different investment themes. Using ETFs, you could create a core allocation, say into an ETF that gives you the top 200 companies on the Australian Stock Exchange. This might take 60%-70% of your money and then the other 30% could go into theme-based funds that, say, give you exposure to tech, Asian and European companies. Sure, you pay for these fund managers but ETFs are usually cheap, while fund managers that give you good returns from, say, from tech companies, can be expensive. But these people can deliver strong returns. Do your homework and you should be able to put together a good stable of funds that should prove to be a good investment strategy.

Q: I’m going to the USA at Christmas and I’ve seen stories saying the Australian dollar is due to slide into the 60 US cents region. Do you agree and should I lock in my dollars now to avoid a more expensive holiday because of a weaker dollar? Ed, Liverpool, NSW.

A: I think the Oz dollar will slip and my best guess is that it will be around 68 US cents by Christmas. The reasoning is that the Yanks are expected to raise interest rates two more times this year, while we aren’t expecting the RBA to raise interest rates until 2019. When a country’s interest rates rise compared to others, it leads to a rising currency, so I expect the greenback to go up and our little Aussie bleeder to slip. So should you exchange your money now? If I was certain I was right on the dollar, I’d say “yes” but your saving will depend on how much you plan to spend on your holiday.

If I’m right and the dollar slips from 72 US cents to 68 US cents, then you will find America 5.5% dearer. So if you spend $5,000 on the trip, you’ll be down $277 or so. If you spend $10,000, the dollar loss is about $550! Against that, if you take money out of a deposit that was paying you 2%, then the gain will be reduced. And remember, the dollar could stay where it is or even go higher, if no real trade war happens and the price of coal and iron ore goes up, which could take our dollar higher. As you can see, trying to make money or avoid losing money on foreign exchange is a lot like gambling!

Q: If I decide to start a business, would the initial costs of talking to an accountant, a business planner, a lender, etc. be all tax deductible? Jack, Brighton, NSW.

A: Yes, since July 2015, the expenses for a small business start-up are deductible. However, you have to make sure that they are acceptable and directly relevant expenses.

Looking at the deductible items, they must be related to obtaining advice or services relating to the proposed structure or the proposed operation of the business. They could also be a payment to an Australian government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure. Because tax deductions are really important to a new business, I would advise that you talk to a good accountant or even a business advisory service that could give you some inside tax info. There’s also good info on the Tax Office website. (https://www.ato.gov.au/forms/guide-to-depreciating-assets-2017/?page=19)

Q: How does salary sacrifice work? Robert, Bronte, NSW.

A: You ask your employer to contribute an additional amount into super, out of your pre-tax wages. Although it is then taxed when it hits the super fund at 15%, because it is a pre-tax contribution, you effectively get more into super than if you had made the same contribution from your take home (after tax) pay.

Take an example. Suppose you earn $100,000. On your top dollars, you are paying tax at a rate of 39% (including the Medicare levy). If you take the top or last $10,000 you earn each year as wages, you will pay $3,900 in tax, leaving $6,100 to spend (or put into super as an after tax contribution). But if instead you salary sacrifice this into super, the whole $10,000 will go to the super fund. The super fund will pay $1,500 in tax, and invest the remaining $8,500. All up, you will be $2,400 better off! (That’s $3,900 minus $1,500 = $2,400.)

The most you can get into super in any one year via salary sacrifice is $25,000 minus what your employer puts in under the compulsory super, which is 9.5% of your gross wage or salary. So, if your boss puts in $10,000, you could salary sacrifice $15,000.

Q: I keep being told that ETFs are easy to invest in but what are they? And are they risky? Ellie, Double Bay, NSW.

A: There are all different types of ETFs (exchange traded funds) but let me explain one that I like and that I’m invested in. This is a fund that you can buy units in on the Australian Stock Exchange. You can buy these units via a stockbroker, after you set up an account. Your stockbroker can be a real person, or you can set up online, with Nabtrade or CommSec. Each stock has a ticker code and BHP’s is BHP. ETFs have ticker codes. IOZ and STM are well known ETFs that buy the 200 stocks in the S&P/ASX 200 index. If you buy units in IOZ or STM, you get exposure to all 200 stocks and you collect a dividend, which has been a bit over 4% a year.

At the time of writing, IOZ’s unit price was $24.85. If you bought 1000 units, it would cost you $24,850 plus the broker’s fee. Now if you were driving home a day after buying the ETF units and the stock market was up a huge 10% in a day, which would be weird and wild, you’d be $2,485 richer! If the market rises 2%, your ETF’s value goes up 2%, minus a small annual fee. The company selling the ETF buys the 200 stocks in your ETF and you virtually have the same rights as buying the stock yourself.

Now this is a safe ETF but there are more risky ones that promise to pay bigger returns. But with bigger returns comes greater risks. I like to know the ETF provider actually buys the stocks. There are also ETFs where there’s a fund manager who buys the stocks, rather than relying on, say, the 200 stocks in the S&P/ASX 200 index. My Switzer Dividend Growth Fund (or SWTZ) buys, say, 30 income-paying stocks so the fund hopes to get a bigger dividend return for those who like a steady stream of income. It can make capital gain as well but its prime goal is income.

Q: I’m going overseas to New York at Christmas and I wonder if I should change my Aussie dollars to US dollars now? I’ll be spending about $5,000 on the trip, so what do I stand to lose if I don’t act now? Jason, Gordon, NSW.

A: This is such a hard question because I don’t know where the Oz dollar will be, compared to the US dollar. Economists think it could be around 68 US cents but they could be wrong. However, let’s imagine it does drop to 68 US cents from the 71 US cents it is now. That would mean our dollar is 3 US cents cheaper. That’s a 4.2% drop in the value of the Oz dollar. That means you will be robbed of 4.2% of your potential purchasing power in New York. In dollar terms, 4.2% of $5,000 is a $211 loss to you, which could be one or two night’s accommodation, depending on how ritzy your hotels will be. Of course, all this figuring is based on our dollar falling and while I don’t think it will rise in value between now and Christmas (with oil prices on the rise and other commodity prices holding up) maybe the drop in the dollar might be later in 2019, after the Yanks have completed a few more interest rate rises.

If you’re really worried, you could try a travel card, where you add money to the card and convert it to another currency. You’ll also be able to lock in an exchange rate for your funds. This means you’ll know exactly how much money you’ll be able to spend with the card when you’re overseas. I’d suggest you do a bit of homework on these travel cards and look at all the charges and the fine print!

Q: I’m 27 and have a great job paying $125,000 a year. I’m still living at home and my parents aren’t hard to live with. I was wondering if I’m too young to go to a financial planner? What do you think? Jill, Mosman, NSW.

A: If you have great income, paying a lot of tax and your life expenses are low, it could be an ideal time to get some advice. You probably don’t need advice every year (though you might if you have big plans) but at least you should get someone to objectively assess what tax you pay, what your goals are and how you can create a plan to make all this happen happen.

An adviser will not only look at how you can use tax deductions to, say, buy an investment property, he or she could see some value in you borrowing to go into shares. That said, I’d be careful of that, as we could be getting close to the top of the stock market.

On the other hand, there is bound to be some property bargains in Sydney as house prices fall, so getting guidance on how best to become a property investor might be very timely.

As a young man, I started with a smart accountant, who showed me ‘stuff’ that I hadn’t thought about. On reflection, I wished I’d gone to a trustworthy and smart financial adviser as well.

Work hard to find an honest adviser. It might prove to be one of the smartest things you ever do!

Q: I’ve been having a nightmare experience with a local small business over an expensive home appliance, which only worked for a couple of weeks before it went haywire on me. The store is trying to blame me but I simply followed instructions and it worked perfectly under my usage, until it didn’t. I presumed the manager would take it back and give me a new one but he played hard ball, blaming me. How can I get redress? Winifred, Maroubra NSW.

A: Like other state governments, the NSW Government has a tribunal called the Consumer, Trader and Tenancy Tribunal (CTTT), which is a low-cost and accessible service for the resolution of a wide range of every day disputes between consumers and traders, and disputes about residential property. As the website says: “The CTTT uses alternative dispute resolution methods, such as conciliation, to help parties settle their disputes, by negotiating and reaching an agreement, often without the need for a hearing. CTTT hearings are designed so parties can generally run their case without legal representation. Orders made are final and binding, and are legally enforceable. The CTTT covers areas such as tenancy disputes, consumer issues, builder problems and many areas where small guys and girls are being mistreated by businesses. That said, the conciliator tries to be objective. If a consumer’s claim is frivolous or without basis, he/she will rule in favour of the business. I personally nailed two builders, who were behaving badly, and got compensation, so it’s worth trying, especially if you know you’re in the right and can prove it. By the way, often a business will give compensation before the tribunal to avoid the cost of going to the trouble of showing up and losing! The name of the tribunal can differ state to state but these services are available to help out consumers who are victims of businesses behaving badly.

SUPERANNUATION

Q: On your advice that you gave on one of your TV shows, I took a look at my super fund statement. You said if I was paying more than 1% in fees, then I was over-paying. Well, I am! So how do I find a better and cheaper super fund? And how easy is it to switch? Janice, Lalor Park, NSW.

A: When you’ve finished reading this, go to your search engine and type in “top 10 funds” and a number of super monitoring businesses will give you the answer. The names that will come up will be Australian Super, Rest, Host, Cbus, Sunsuper, UniSuper etc. They tend to be on the cheap front. Unlike before, this time do some homework and make sure the cost is under 1%. If you’re under 55 years of age, I’d go for a balanced super fund option because you have a lot of years of living ahead of you. By the way, don’t look at the fund’s recent performance. Try to find their 3, 5 and 10-year performances. Once you find the fund you want to throw your super in with, the fund will help you with the switch because they want your business! And then promise yourself that you’ll take a lot of interest in the performance of the fund because it really is a great asset, which could easily be the best asset you’ll ever have! Yep, even better than property.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au

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