Tag Archives: Family

What to do when your fixed rate home loan term is ending

By Robert Wright /May 19,2023/

Many Australians were fortunate to lock in record low interest rates but this may be drawing to an end.

A large portion of mortgages will be approaching the end of their fixed term, leaving many households paying two to three times their current fixed rate.

In this article, we’ll explain what to expect when your fixed interest rate ends and how to prepare for it.

What happens when your fixed rate home loan ends?

When your fixed term is nearing its end, you’ll need to decide whether to re-fix your loan at a new rate, change to a variable rate or consider switching to a new mortgage provider.

If you don’t do anything before the fixed term lapses, on expiry your mortgage provider generally switches your loan to its standard variable rate, which can be much higher than some of the discounted options available to new customers.

The best thing to do is contact your provider and ask them about your options, including what rates they can offer you.

How to prepare

Consider reviewing your mortgage at least 3 months before the fixed rate expires, as this will give you time to implement changes if required.

Here are some steps to go about this:

1. Negotiate with your current mortgage provider

It’s worth speaking to your current provider in advance to find out what variable rate you’ll be paying. This gives you an opportunity to check out other rates available in the market and think about whether switching providers is a better solution.

You can also see if you can negotiate a better rate as this may save you a lot of effort in moving to a new provider.

2. Research what other mortgage providers are offering

Now is a good time to see how your loan stacks up against other loans out there. This will help you determine if you’re getting a competitive interest rate.

If you do find a better offer, switching providers can be a smart move but it’s important to look at the costs involved in switching, borrowing costs and switching fees, as these can often outweigh the benefits.

Before you make any decisions, crunch the numbers with an online mortgage switching calculator.

3. Consider re-fixing your loan

If you like the predictability that comes with a fixed rate loan, you can re-fix your mortgage with an up to date interest rate.

However, you will be locked into the new fixed interest rate for a period of your loan term, unless you choose to end the contract earlier which may result in break costs.

Be sure to also carefully check out the features of a fixed loan too, such as fee-free extra repayments, redraw and linked offset accounts. Many fixed rate loans do not provide these features.

4. Consider a split loan

If you’re struggling to decide between a variable or fixed rate, or if you’re keen on a combination of flexibility plus certainty, you can choose to have part of your mortgage fixed and part of it variable.

For example, you could have 60% of your loan on a fixed rate and 40% on a variable rate.

This approach can provide the best of both worlds. The variable rate component gives you flexibility, while the fixed portion shelters part of your loan from rising interest rates.

5. Get help from an expert

If you can’t decide which option is best for you, a mortgage expert may be able to steer you in the right direction.

Mortgage experts can look at your finances and recommend some of the best home loan options to suit your specific needs. They’ll also be able to guide you through switching to another provider if that’s the path you choose to take.

Get a home loan health check

A home loan health check could help you to:

find ways to fine tune your loan
get more certainty or flexibility on interest rate options
reduce your repayments
pay off your loan sooner.

6. Make extra repayments before your fixed rate ends

If it’s possible for you to do so, consider paying off as much of your mortgage as possible before you’re hit with a higher interest rate.

By reducing your mortgage balance before your interest rate increases, you could save a lot of money on interest payments before it moves to the new rate.

How to manage higher repayments

When your fixed mortgage rate finishes and your repayments start increasing, your finances may need to be reviewed to cope with the new reality of rising interest rates.

There are ways to help you save and potentially earn more money, which may compensate for the rate increase.

1. Review your budget

While it may not be an option for everyone, there are expenses you can cut back on such as:

taking public transport to work to reduce petrol costs and parking
online shopping habits
expensive memberships that you don’t regularly use
taking advantage of government and council rebates to reduce your energy bill
switching to energy efficient appliances and lightbulbs
reviewing your utility and insurance providers – there may be better deals on offer which could save you hundreds of dollars.

2. Increase your income

Looking for ways to increase your income can help you manage higher repayments once your fixed rate expires.

Consider asking your manager for a salary raise or look for a higher paying job.

You could also consider starting a side hustle like dog walking or online tutoring to make extra cash. Another option is to rent out a room or parking space.

3. Consider opening an offset account

An offset account is like a transactional savings account linked to your mortgage balance. The funds in this account can reduce the amount of interest you pay on your mortgage, so holding your savings here can be beneficial.

For example, if you have a $600,000 mortgage balance and $100,000 in your offset account, you’ll only be charged interest on $500,000.

Source: IOOF

Why investing for retirement is different

By Robert Wright /March 07,2023/

When you’re still employed and earning a salary, there’s money coming in you can rely on. In retirement, in the absence of a regular salary you’ll need to find a new way to secure enough income to cover your living costs.

Investing your money is one way to make the most of your savings and provide an income in retirement but if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right.

Why timing matters

When accumulating super for retirement, you can afford to be patient. With years ahead to top up your super, you can stay invested during falls in the share market and wait for markets and your assets to bounce back. For the few years just before and after retirement, it’s a different story. This period, known as the ‘retirement risk zone’, is the time when you have most to lose from a fall in the value of investments. Your super has likely reached its peak in value and you want to make the most of these savings for your future retirement income.

In order to protect your savings and provide you with income throughout your retirement, it’s important to be aware of three key risks:

1. Living longer

Australians are living longer than ever before. Life expectancy has grown by more than 30 years in the last century¹. Living off retirement savings for 20-30 years or more introduces the very real risk of running out of money. So it’s no wonder more than half of Australians aged 50+ are worried about outliving their savings according to a 2019 National Seniors Australia survey.

We’re lucky that we live in a country that if your retirement savings run out; the Age Pension is there as a safety net but these regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, if you should need it. That’s why it’s so important to make a financial plan early in your retirement so that you can help to protect your income now and in the future.

2. Inflation

Inflation measures the change in the cost of living over time and represents an important and often underestimated risk to your financial security in retirement. Given your retirement could last 20 plus years, there’s a good chance your savings and income will be affected by inflation. At an average annual inflation rate of 2.5%², a dollar today is worth roughly half what it was 25 years ago. Even this modest year on year rise in the price of goods and services can put you at risk of having an income that no longer covers your living expenses from year to year.

3. Share market performance

Share market performance is a risk for investors with exposure to investments such as shares, bonds and commodities. If you’re worried about market collapses similar to the Global Financial Crisis (GFC) in 2008, you’re not alone. A 2018 National Seniors Australia survey found that 7 out of 10 older Australians share your concerns.

Falls in the value of investments are impossible to predict and can make a big difference to income and financial security throughout your retirement. When investments earn negative returns, your retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for living expenses, it’s a twofold blow for your overall financial position in retirement. Less savings now means more potential for outliving those savings later in life.

Protecting your income and future in retirement

Diversifying your investments – balancing growth and defensive assets for example can limit the impact of market risks and inflation on your retirement savings. However, even with a well diversified portfolio, your super and Age Pension may not provide you enough income for your entire retirement. If you’d like the peace of mind that comes with a regular income for life, a lifetime annuity might be right for you.

Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular income payments for life. It can act as a safety net ensuring that you will receive income for life, regardless of how long you live.

Talk to an adviser about the benefits of a lifetime annuity and whether it might be right for you.

[1] Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017.

[2] Australian Bureau of Statistics, 70 years of inflation in Australia, Andrew Glasscock, 2017. Fig 2.

Source: Challenger

Can super secure a woman’s future?

By Robert Wright /March 07,2023/

Here are some stark numbers on the difference between men and women at the point when they retire:

80% of women are retiring without the super balance they need to fund a comfortable lifestyle.
On retirement, women’s average superannuation account balance is around $70,000 less than men.

To be balanced, we should remember there are many situations where the shortfall in a woman’s super balance is offset by them sharing their partner’s super but that assumes away a lot of life possibilities – particularly divorce and the early death of a male partner – and also a woman’s sense of financial independence.

Women also live longer than men. A woman who was 45 in 2020 could expect to live till 86 – that’s three years longer than her male counterpart. So female retirees are more exposed to the dreaded FORO – fear of running out.

Why the shortfall?

Why do women have less super than men? There are multiple often intertwined answers.

More women work in low paid fields like hospitality and care services. They’re also more likely to work part time. That’s one reason the lockdowns of the past two years did more damage to female balance sheets.

Many women take time out of the workforce to have children and act as principal caregiver, especially during the early years of their children’s lives. The ASFA (Association of Superannuation Funds of Australia) estimates women accumulate a ‘super baby debt’ of up to $50,000 – they have $50,000 less in their super because they’ve prioritised children. Compulsory super is based on a percentage of your earnings being saved for retirement. So the less you earn over your lifetime the less you save.

Women are also more likely to have time away from work to care for their parents. If Generation X is the ‘squeezed generation,’ looking after the generation before and after, then Generation X women may be the ones squeezed hardest.

Expanding knowledge, shrinking the gap

Closing the knowledge gap is nearly as important as closing the contribution gap.

The first step is understanding where you stand – so checking with your super fund or adviser to understand exactly how much super you have and how much you’ll need to support a comfortable lifestyle.

Many super fund managers have easy to use calculators that answer those questions. For a rule of thumb, ASFA suggests single people need $545,000 in retirement savings to fund a comfortable retirement. Couples need around $640,000. Obviously these numbers are only guides and assume that you fully own your own home at retirement. It’s important you consider your own situation and expectations.

The calculators we discuss above can give you an individual view of the return difference between different investment strategies. Historically, funds that invest more aggressively (i.e. with more in shares and property and less in cash) have tended to outperform over the long term* and that means more money to retire on.

The more you put in…

Women seeking to set themselves up for a truly comfortable retirement need to first get a handle on their super and their retirement objectives, then accustom themselves to taking a little more risk in the investment strategy.

Given that it’s highly tax effective, many would argue that women should be pouring as much money into super as they can afford. Obviously that decision is a highly personal one that must take account of a whole range of factors. Fortunately, Australian governments, left and right, are committed to making super work, so there are some excellent strategies women of all income levels can use to get more gold into their pot. Here’s a very concise look at some of those opportunities.

How you can retire with more

1. Make additional contributions

Simply put, women who are likely to take time out of work should weigh up the benefits of putting more money into super when they can to build up a retirement savings buffer.

Firstly, make sure your employer is contributing in line with their Superannuation Guarantee responsibilities – currently, they need to contribute 10.5% of your income to super on your behalf. (There’s a cap of $27,500 a year on these so called concessional contributions). You can also make salary sacrifice contributions, where you forgo income and direct it into your super. Those contributions also count towards the $27,500 limit.

If you don’t reach the cap in a given year, you can accumulate those unused portions for up to five years. When you have the funds available you can then ‘catch up’ by investing up to your annual $27,500 cap and any unused cap from previous year(s). You can’t use this catch up approach if your super balance is over $500,000 but for many women it’s an excellent way to consider adding to their super even if they’ve had a few years out of the workforce or on part time income.

2. Bring forward contributions

You can also make non-concessional contributions of up to $110,000 a year into your super. These are contributions you make after tax, for example from your savings. For younger women in high paying jobs, putting extra money into super, perhaps by investing a bonus, inheritance or proceeds from a property sale – may be an effective way to load up your super. Or if you do it later in your career, it’s another way to catch up.

The government also allows you to ‘bring forward’ some contributions investing up to three times the annual non-concessional contribution in one year – that’s $330,00. Again, if you have the funds, it may be a good way to make a focused push at increasing your super balance. As of July 2022, this option is available to any women under 75 (previously it was 67). So even women very close to retirement can use this strategy to improve their super situation.

3. Spouse contributions

Couples working together on their super strategies can make up for some of the inherent disadvantages women face when saving for retirement.

Spouse contributions can be part of that approach. They allow one member of a couple to contribute up to $3,000 into the super fund of their spouse and receive a tax offset of up to $540 for doing so. The offset works on a sliding scale depending on the income of the ‘receiving’ spouse. To get the maximum offset the receiving spouse must earn less than $37,000 and there’s no offset once they earn over $40,000, but for many women, beefing up their super via extra contributions may be even more valuable than a tax offset.

Playing as a team

Couples that work together to accumulate the maximum possible super balance can have more flexibility and options in retirement.

One way couples can do this is through managing their individual $1.7 million super balance cap. The cap limits the amount of super you can transfer into a tax-free retirement income stream such as a super pension or annuity.

A twisty path to a beautiful place

As you can see from this list of contribution strategies, there are numerous ways in which women can maximise their super balance and therefore improve their chance of a comfortable retirement lifestyle. But there are also a plethora of limits, caps and complexities to navigate.

*Past performance is not indicative of future performance.

Source: Perpetual

Five ways you can start to bridge the super gender gap today

By Robert Wright /February 18,2022/

In terms of gender equality, we’ve come a long way over the past few decades. Australian homes and workplaces are very different places than they were in previous generations.

But there’s still a long way to go. When it comes to superannuation there isn’t a level playing field for Australian men and women.

Before we look at the gender super gap it’s worth looking at the gender pay gap. In May 2021, women working full-time earned $1,575.50 a week on average while men earned $1,837.00 – a gap of $261.50 or 14.2%

Not only do women tend to be paid less, they’re usually the main caregivers, with a staggering 93.5% of all primary carer leave taken by women. In 2018-19, among parents of children aged five and under, only 64.2% of women were in the labour force, compared with 94.6% of men.

And women can suffer long-term financial effects from starting a family. Women with a child aged two or younger in 2001 experienced an average 77.5% reduction in earnings over the next 15 years, compared with those without children. Men with young children on the other hand faced no significant earnings penalty.

This all adds up to a significant shortfall in retirement savings. The average super balance for a 60-year-old Australian man is $198,482, compared with $165,986 for a woman.

The Federal Government’s Retirement Income Review sums it up: “On average, compared with men, women have lower wages, are more likely to work part-time, take more career breaks, and experience worse financial impacts from divorce. These factors contribute to the gender gap in superannuation balances at retirement.

Different strokes for different folks

Of course, we’re all different and everyone’s situation is Getting your retirement plans back on track unique. There are many households in which the woman earns more and the man takes on the bulk of the domestic responsibilities. And many Australians are happily single or childfree.

But the facts speak for themselves. On average, Australian women tend to earn less, spend more time out of the workforce raising a family and have less retirement savings as a result.

So whatever your personal circumstances – single or partnered, kids or no kids – you could be faced with a challenge when it comes to generating enough income to enjoy a comfortable retirement, particularly if you dipped into your savings to get you through COVID as part of the Federal Government’s early release of super scheme in 2020.

Getting your retirement plans back on track

But all is not lost… here are five ways women – and men – can start to rebuild their super balance.

Search for lost super. You may have a few old super accounts from previous jobs. Now’s the time to find them – and even look at bringing them together into one account if that’s right for you.
Personal contributions. Lockdown has been tough on everyone. And if you’re suffering the financial impact of continuing restrictions, super is probably the last thing on your mind. But if like many of us you’ve given in to the occasional bit of indulgence to help you through – with spending on home improvements, online gambling and food delivery soaring during the pandemic– then there might be ways to save a bit extra. If you’re able to curb your spending a little, even a small contribution to super could make all the difference.
Salary sacrifice. It might not sound too appealing but in the case of super, sacrificing can help you get ahead. Most Aussies will pay less tax on these super contributions than on their income, as well as enjoying the benefits of super’s tax-friendly environment on earnings and eventual withdrawals.
Spouse contributions. If your partner earns more, they could make a contribution to your super fund and claim a tax offset of up to $540, if eligible.
Low income super tax offset. If you earn $37,000 or less a year – like many women who work part time while looking after their children – and your employer makes super contributions on your behalf, the government may refund the tax paid on these contributions back into your super account, up to $500 per year.

Source: AMP