Tag Archives: Debt

Should you give your teenager a credit card?

By Robert Wright /July 20,2020/

We live in a culture of smartphones, WIFI, home delivery, online shopping and online gaming, where most needs and wants can be met almost instantly. With so much temptation to spend, it’s vital to teach your kids the money skills to help them enjoy financial wellbeing as adults. But should you give your teenager a credit card?

Pre-paid, debit or credit?

You might like to start with a pre-paid card or a debit card, so there’s a limit on what they can spend. Set the rules on what it can be used for and how much they can spend. If they manage the process well, and if you’re confident that they’re responsible enough, you could give them a credit card (which would be a supplementary card connected to your own, as children under 18 cannot have their own card).

Before you give your teen a credit card, take the time to have a conversation about credit card fees, interest rates, and how spending irresponsibly can give you a bad credit rating, which is bad news for their future. Be clear that they will be responsible for all expenditure on the card – if they can’t afford it with cash, they shouldn’t put it on the credit card.

Rules, limits and know-how

Giving a teenager a credit card may seem risky or even irresponsible, but it can be a great teaching tool if the right conversations, rules and limits are put in place.

Before you give your teen a card, be sure to speak to them about how it works, how to be responsible with it and how to avoid financial trouble, including:

How interest works – it’s important that they understand that a credit card is like a loan and if they don’t pay it back on time, they’ll be charged interest.
Paying it off in full every month – show your teen a credit card statement and explain that if they only pay the minimum amount, they’ll still be charged interest.
Paying on time – show them where they can find the due date for payments and help them to set up reminders to pay on time every month to avoid interest.
Avoid overspending – teach your teen to keep track of their spending, and to never spend more than they earn. Use the credit card’s app to keep a tally on spending.
Start with a credit limit lower than they earn – it’s a good idea to start with a credit limit that is not more than what they earn in a month. For example, setting a low limit for a teen may be $500 maximum so they can consistently pay it off at the end of each month.

Understanding ‘buy now, pay later’ services

The growing popularity of ‘buy now, pay later’ services such as Afterpay, Openpay and zipPay means it pays to help your teen understand how they work, and what the risks are.

These services allow shoppers to buy a product, take it home and pay for it in instalments via an online ‘buy now, pay later’ account, which deducts your preferred debit or credit card. Added to that, while the buy now, pay later provider might not charge interest on your purchase, you may still have to pay interest to your credit card provider if you don’t pay the full amount owing on your credit card by the due date.

Leading by example

While knowing the ins and outs of debt is important, one of the most powerful ways to help your kids develop healthy money habits is to lead by example. Our ideas about money are formed in our childhood, so if your kids see you living with healthy financial habits, they’re more likely to form those habits themselves.

Source: AMP

Should I borrow to invest in shares?

By Robert Wright /September 02,2019/

Borrowing, or gearing, can help you accelerate your wealth creation. It can allow you to buy assets such as an investment property, or shares that you may not be able to afford outright. However, borrowing to invest is considered a high risk strategy and can result in you losing more than your invested capital.

Before taking out a share investment loan, you should ensure that you can service the costs associated with the loan, including repayment of the loan principal. You should also seek professional financial and tax advice regarding the potential risks and benefits of geared investing.

How do I borrow to invest in shares?

You can take out a margin loan to invest in shares. A margin loan allows you to buy shares by paying only a fraction of the cost of the shares upfront, and the lender uses your shares as security for the loan.

The prices of shares move frequently and you risk losses if they fall in value. Lenders often express your level of gearing using a loan-to-value ratio (LVR) or gearing ratio. The LVR is the amount of your loan divided by the total value of your shares.

If the value of your shares falls to where LVR exceeds an approved maximum, you may be required to top-up your loan collateral or repay some of the loan. This is known as a margin call. If a margin call is not met within a timeframe set by the lender, your shares may be sold by the lender to satisfy your margin obligations. This may result in you suffering a loss.

How do I manage the risks associated with a margin loan?

There are a few strategies that can help you manage the risks associated with a margin loan:

set a borrowing limit you are able to comfortably repay and stick to it
make regular interest repayments on your loan to keep your loan balance within a manageable limit
check your LVR regularly, because the value of your investments can change quickly
have funds available to deposit if your lender makes a margin call and you do not wish to sell your shares

What are the benefits and risks of borrowing?

Benefits

You can build a larger portfolio than if you were using just your own funds.
Some lenders allow you to borrow using an existing share portfolio as collateral. This allows you to increase the size of your investment without having to deposit additional cash.
Manage concentration risk by diversifying your portfolio. For example, if your share portfolio is overweight in a certain sector and you do not want to sell the shares, you could use the equity in your current portfolio to borrow and invest in companies in other sectors.
Potential tax efficiencies associated with borrowing.

Risks

While a share investment loan can help accelerate the growth of your portfolio, it can also magnify losses if prices move against you and you can lose more than your invested capital
Interest costs associated with your loan may reduce your profits. Interest rates are also subject to change, and can result in an increase in the cost of servicing your loan.
LVRs, or margin rates, are subject to change at the lender’s discretion. This can lead to a requirement for you to deposit additional cash at short notice. In some cases, your shares can be sold by the lender to satisfy your margin obligations. This can result in your shares being sold at a loss and you will still be required to repay the outstanding balance of the loan.

To find out whether gearing may be a suitable strategy for you, please contact us.

Source: Macquarie Group Limited

What financial records do I need to keep?

By Robert Wright /March 02,2017/

Ever feel like you’re drowning in a sea of paper? Tame the paperwork today and reap the rewards tomorrow.

Life can be complicated enough without all the administrative paperwork that often accompanies it. This is particularly true when it comes to your personal finances.

If stacks of old bank statements, utility bills, receipts, insurance and superannuation documents mean you can’t see the trees for the paper, de-clutter, simplify your finances and improve your quality of life today.

Why simplify?

There are many good reasons to pare back on your financial record-keeping, including:

Living in smaller dwellings means we have less space to store documents
Saves time by making it easier to find what you need
Helps your loved ones find relevant documents easily should something happen to you
In the event of a home emergency, you can quickly find important documents you may want to take
Makes your life easier at tax time.

What you need to keep

When it comes to identifying the documents you need to keep, considering your legal obligations is a good place to start.

The first of these is your annual tax return. In order to complete your tax return you’ll need documentary evidence of:

all payments you’ve received, such as wages, interest, dividends and rental income
any expenses related to income received, such as work-related expenses or rental repairs
the sale or purchase of assets, such as property or shares
donations, contributions or gifts to charities
private health insurance cover
medical expenses, both your own and those of any dependents

You need to keep these documents for five years after you lodge your tax return in case you’re asked to substantiate your claims, and it’s also a good idea to keep your notice of tax assessments for five years. However, if you run a small business, the document requirements and timeframes differ – find out more at the Australian Tax Office (ATO).

The second category of documents are those related to property such as:

property deeds
home loan documents
renovation approvals
warranties relating to work undertaken

The Australian housing market – surging unit supply, the economy and what it all means for investors

By Robert Wright /November 23,2016/

Housing matters a lot in Australia. Having a house on a quarter acre block is part of the “Aussie dream”. Housing is a popular investment destination. And the housing cycle is a key component of the economic cycle and closely connected to interest rate movements. But in the last 15 years or so it has taken on a darker side as a surge in house prices that started in the late 1990s has led to poor affordability and gone hand in hand with surging household debt.

Reflecting this, predictions of an imminent property crash bringing down the Australian economy have been repeated ad nauseam since 2003. This note looks at the risks of a property crash, particularly given the rising supply of units, implications from the property cycle for economic growth and how investors should view it.

High house prices and high debt

The big picture view on Australian residential property is well known. First, Australian housing is expensive. According to the 2016 Demographia Housing Affordability Survey the median multiple of house prices in cities over 1 million people to household income is 6.4 times in Australia versus 3.7 in the US and 4.6 in the UK. In Sydney it’s 12.2 times and in Melbourne it’s 9.7 times. The ratios of house price to incomes & rents are at the high end of OECD countries and have been since 2003.

Second, the surge in home prices has gone hand in hand with a surge in household debt, which has taken Australia’s household debt to income ratio from the low end of OECD countries 25 years ago to now around the top.

How did it come to this?

While it’s common to look for scapegoats to blame for high home prices and debt, the basic driver looks to be a combination of the shift from high to low interest rates over the last 20-30 years which has boosted borrowing and buying power and the inadequacy of a supply response (thanks to tight development controls, restrictive land release and lagging infrastructure) to suppress the resultant rise in the ratio of prices to incomes.

A home price crash remains unlikely

The surge in prices and debt has led many to conclude a crash is imminent. But we have heard that lots of times over the last 10-15 years. Several considerations suggest a crash is unlikely.

First, we have not seen a generalised oversupply and at the current rate we won’t go into oversupply until around 2017-18.
Second, despite talk of mortgage stress the reality is that debt interest payments relative to income are around 2004 levels.
Third, Australia has still not seen anything like the deterioration in lending standards seen in other countries prior to the GFC. In fact in recent years there has been a decline in low-doc loans and a reduction in loans with high loan to valuation ratios.
Finally, it is dangerous to generalise. While property prices have surged 60% and 40% over the last four years in Sydney and Melbourne, they have fallen in Perth to 2007 levels and have seen only moderate growth in the other capital cities.

The risks on the unit supply front are a concern

To see a property crash – say a 20% plus average price fall – we probably need to see one or more of the following:

A recession – much higher unemployment could clearly cause debt servicing problems. This looks unlikely though.
A surge in interest rates – but rate hikes are unlikely until 2018 and the RBA knows households are more sensitive to higher rates so it’s very unlikely rates will reach past highs.
Property oversupply – as noted above this would require the current construction boom to continue for several years.

However, the risks on the supply front are clearly rising in relation to apartments where approvals to build more apartments are running at more than double normal levels.

Due to the rising supply of units, vacancy rates are trending up & rents are stalling, making property investment less attractive.

Outlook

Nationwide price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely before 2018 at which point we are likely to see a 5% or so pullback in property prices as was seen in the 2009 & 2011 down cycles. Anything worse would likely require much higher interest rates, or recession, both of which are unlikely. However, it’s dangerous to generalise:

Sydney and Melbourne having seen the biggest gains are more at risk and so could fall 5-10% around 2018.
Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind but this should start to abate next year.
The other capitals are likely to see continued moderate growth and a less severe down cycle in or around 2018.
Units are at much greater risk given surging supply and this could see unit prices in parts of Sydney and Melbourne fall by 15-20% as investor interest fades as rents fall.

The property cycle and the economy

Slowing momentum in building approvals points to a slowdown in the dwelling construction cycle ahead. While this might be delayed into 2017, as the huge pipeline of work yet to be done is worked through, slowing dwelling investment combined with a slowing wealth affect from rising home prices mean that contribution to growth from the housing sector is likely to slow. However, as this is likely to coincide with a fading in the detraction from growth due to falling mining investment and commodity prices it’s unlikely to drive a slowing in the economy.

However, a likely decline in rents (as the supply of units hits) will constrain inflation helping keep interest rates low for longer.

Implications for investors

There are several implications for investors:

Firstly, over the very long term residential property adjusted for costs has provided a similar return to Australian shares. Its low correlation with shares, lower volatility but lower liquidity makes it a good portfolio diversifier with shares. So there is clearly a role for property in investors’ portfolios.
Secondly, there remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.
Thirdly, these comments relate to housing in aggregate and right now it’s dangerous to generalise. Apartments in parts of Sydney & Melbourne are probably least attractive but for those who want to look around there are pockets of value.
Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth it’s nearly 60%. Once allowance is made for exposure via Australian shares it’s even higher.

Source: AMP