Mortgage vs super
With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?
The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.
What to consider
Some of the things you need to weigh up before committing your hard-earned cash include:
Your age and years to retirement
The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.
Your mortgage interest rate
This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent. i
When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.
Super fund returns
In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.
Tax
Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.
Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.
Personal sense of security
For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.
These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.
Older couple nearing retirement
Tony and Elena, both 60, would like to retire in the next few years. Together they earn $180,000 a year, excluding super, but they still have $100,000 remaining on their mortgage. Tony has a super balance of $600,000 and Elena has $200,000.
They want to be debt free by the time they retire but they are also worried they won’t have enough super to afford the lifestyle they look forward to in retirement.
If they do nothing, at a mortgage interest rate of 4.5 per cent it will take five years to repay their mortgage with monthly mortgage payments of $1,864. At age 65, their combined super balance will be a projected $1,019,395.
Jolted into action, they decide they can afford to put an extra $1,000 a month into their mortgage or super.
- If they increase their mortgage payments by $1,000 a month, the loan will be repaid in three years and two months. But their super will only be a projected $931,665 by then, so they may need to work a little longer to fund a comfortable retirement. From age 63, they might consider salary sacrificing into super with money freed up from early repayment of their mortgage.
- If they salary sacrifice $1,000 a month to super from age 60, their combined super balance will grow to a projected $1,082,225 by the time they are 65 and their home is fully paid for.
These are complex decisions, but whichever option they choose they will probably need to consider working until at least age 65 to be debt free and build their super.
All calculations based on the MoneySmart mortgage and retirement planner calculators.
All things considered
As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.
Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.
i https://www.finder.com.au/the-average-home-loan-interest-rate
ii https://www.chantwest.com.au/resources/super-members-spared-the-worst-in-a-rough-year-for-markets/
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
How to turbocharge your investment returns
If you’d invested $10,000 into the whole Australian share market back in 2002, your initial investment amount would have grown to almost $50,000 by 30 June 2022.
It’s a huge gain. Around 385 per cent to be precise. And, to achieve it, all that you would have needed to do is reinvest all the Australian company dividends you’d received over the last 20 years back into the Australian share market.
You could have achieved similar returns by investing through a managed fund or an exchange traded fund (ETF) that tracks the broad Australian share market.
Yet, as good as that all sounds, you could have done much better if you had added to your initial $10,000 investment by making regular monthly investment contributions.
How much better? Just by adding $250 per month your Australian share market investment would have surged to more than $180,000. That represents a 1,729 per cent total return.
In other words, for $60,000 in total additional contributions over 20 years, your end investment would have been worth over $130,000 more than if you had made no extra contributions.
The numbers obviously get larger if you had made higher regular monthly contributions.
By adding $500 per month to the initial $10,000 amount your investment would have compounded by 3,074 per cent to more than $317,000.
That’s a $130,000 total investment ($10,000 plus $120,000 in other contributions) over 20 years to achieve an investment worth $270,000 more than if you had just left your initial investment to grow on its own.
Here’s how those numbers would have looked based on the actual performance of the All Ordinaries Accumulation Index (which measures the Australian share market) from 1 July 2002 to 30 June 2022.
The benefits of regular contributions
|
Date |
No extra contributions* |
$250 per month |
$500 per month |
|
1 July 2002 |
$10,000 |
$10,000 |
$10,000 |
|
30 June 2007 |
$24,432 |
$52,047 |
$79,661 |
|
30 June 2012 |
$19,832 |
$57,104 |
$94,378 |
|
30 June 2017 |
$34,329 |
$117,332 |
$200,335 |
|
30 June 2022 |
$48,503 |
$182,931 |
$317,359 |
Source: Vanguard. *Assumes the reinvestment of income distributions only.
It’s only when you compare the results side by side that the full picture becomes much clearer.
An initial contribution amount combined with a regular investment savings strategy and the reinvestment of distributions over time will deliver much higher long-term results.
In the example used above, there would have already been a significant gap after just five years (in 2007) between investors who had not made additional contributions versus those that had.
And you can see that gap would have kept on widening over time. After 20 years, any investors who had followed a $250 per month regular contributions plan would have ended up with more than three times the amount of money than investors who had made no additional contributions.
A $500 per month contributions plan would have increased the differential to more than six times.
Understanding dollar-cost averaging
There’s another major advantage in making regular investment contributions, which brings into play a well-known portfolio strategy called dollar-cost averaging.
You may not realise it, but you’re probably already undertaking this strategy (indirectly) if you’re a member of a super fund.
Here’s how dollar-cost averaging works. Every time your employer makes a contribution into your super fund account it’s automatically invested by your fund according to the default investment strategy that you’ve chosen.
Maybe you’ve selected a “high-growth” super option, a “balanced” option, or a “conservative” option.
Behind the scenes your super money is most likely being directed into different managed funds, which invest into shares, bonds, cash, and other types of assets.
While the amount of super your employer pays doesn’t change, your investment purchasing power does change every time you receive a new super contribution.
That’s because the prices of the managed fund units your super fund is investing into does change every day.
If those managed fund unit prices have risen since your last contribution, then your super fund will be purchasing fewer units than last time.
Likewise, if the managed fund unit prices have fallen in value, your super fund will be purchasing more units than last time.
This strategy works in exactly the same way if you make regular contributions at set intervals outside of your super to buy units directly in other managed funds and ETFs.
You’ll automatically buy more units when market prices are lower and fewer units when prices are higher.
Over the total period that you keep investing, your average entry cost into specific assets will potentially be lower than if you’d try to guess the best time to buy in.
As your unit balance grows over time, your corresponding distributions via company dividends and other payments will also keep on growing. That’s the magic of compounding investment returns.
Just like your super contributions, it’s all really about sticking to a disciplined, non-emotional approach to investing that’s not affected by what’s happening on financial markets at any point in time.
Making regular contributions, and taking advantage of dollar-cost averaging, really adds up.
They’re a powerful combination in helping you to focus on achieving your investment goals, ideally through an appropriately diversified portfolio, to give you the best chance of investment success over the long term.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
How to manage rising interest rates
Rising interest rates are almost always portrayed as bad news, by the media and by politicians of all persuasions. But a rise in rates cuts both ways.
Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.
Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.
How high will rates go?
In early May, the Reserve Bank lifted the official cash rate for the first time since November 2010, from its historic low of 0.1 per cent. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.
To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5 per cent.i Inflation is currently running at 5.1 per cent and while unemployment is below 4 per cent, annual wages growth of 2.4 per cent is not keeping pace with rising prices.ii
So what does this mean for household budgets?
Mortgage rates on the rise
The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.
According to CoreLogic, even though price growth is slowing, the median home value rose 16.7 per cent nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.
The table below shows the impact a rate rise of 1-2 per cent rise would have on monthly mortgage repayments in Australia’s capital cities. For example, a 1 per cent rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2 per cent rise.
How much could mortgage repayments rise for a new owner occupier?
| Monthly mortgage repayments | |||||
| Median value | Loan amount (80% LVR) | Current (*) |
Increase with 1% rise |
Increase with 2% rise |
|
| Sydney | $1,127,723 | $902,178 | $3,560 | $486 | $1,006 |
| Melbourne | $806,144 | $644,915 | $2,545 | $348 | $719 |
| Brisbane | $770,808 | $616,646 | $2,433 | $332 | $687 |
| Adelaide | $619,819 | $495,855 | $1,957 | $267 | $553 |
| Perth | $552,128 | $441,702 | $1,743 | $238 | $492 |
| Hobart | $735,425 | $588,340 | $2,322 | $317 | $656 |
| Darwin | $501,182 | $400,945 | $1,582 | $216 | $447 |
| Canberra | $947,309 | $757,847 | $2,990 | $408 | $845 |
Source: CoreLogic. *Assumes current average variable rate of 2.49%, monthly P&I repayments over 30 years.
While the big four banks are not obliged to pass on the cash rate changes, in May they passed on the Reserve Bank’s 0.25 per cent increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8 per cent. The lowest standard variable rates from smaller lenders are below 2 per cent.iii
Still, it’s believed most homeowners should be able to absorb a 2 per cent rise in their repayments.
The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5 per cent prior to October 2021).
But with prices increasing for food, fuel, childcare and other basics, budgets are tight, and households may need to cut back non-essential spending or increase their hours of work.
Before you take drastic measures, it’s worth looking at some painless ways to improve your household budget.
Rate rise action plan
Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.
The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.
If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.
The big four banks’ discount rates are more than 2 per cent below their current headline rates, a potential saving of tens of thousands over dollars over the life of your loan. If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.
The challenge for savers
Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.
The silver lining is that many people will also see increased interest rates on their savings accounts as the cash rate increases. Banks can, however, be slower to pass on the full increase in the cash rate to savings accounts. By mid-May only three of the big four had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6 per cent.iv
High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.
That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call.
i https://www.rba.gov.au/speeches/2022/sp-gov-2022-05-03-q-and-a-transcript.html
iii https://www.canstar.com.au/home-loans/banks-respond-cash-rate-increase/
iv https://www.ratecity.com.au/term-deposits/news/banks-increased-term-deposit-interest-rates
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
The trouble with intuition when investing
Knowing how your mind works can help you avoid the more obvious traps many investors fall into.
Cognitive bias has become a bit of an investing buzz phrase in recent years.
The theory is that the human brain predictably makes errors of judgment that can lead us to be emotional, short term and come to other incorrect conclusions.
Cognitive bias has been of particular interest to the investing community and long lists of biases – confirmation bias, anchoring, the recency effect and dozens of others – are now the stock-in-trade of beginner investors worldwide.
The Nobel-prize winning economist Daniel Kahneman first researched bias in human thinking, distinguishing two ways in which we think: an automatic, instinctive and almost involuntary style contrasted with effortful, considered and logical thought.
That original research has grown into an industry.
Researchers and psychologists have identified endless ways in which the human brain is prone to bias, errors and poor judgment – and the investing community has latched on.
But underlying it all is that original finding that we spontaneously seek an intuitive solution to our problems rather than taking a logical, methodical approach.
Kahneman wrote that when we are confronted with a problem – such as choosing the right chess move or selecting an investment – our desire for a quick, intuitive answer takes over.
Where we have the relevant expertise, this intuition can often be right. A chess master’s intuition when faced with a complicated game position is likely to be pretty good.
But when questions are complex and rely on incomplete information, like investing, our intuition fails us.
The very fact we find the concept of cognitive bias so appealing is simply another example of our innate desire for simple, intuitive answers.
Unfortunately, the world is complicated, and almost everything that happens in investment markets emerges from the combination of a web of unrelated, intricate and multi-faceted events.
Our bias towards simplicity is reinforced by the nightly news and the morning newspapers that persist in providing simple explanations for complex events. Each day, market movements are distilled into ‘this-caused-that’ explanations that obscure the true drivers of change.
It is our intuition that is reacting when we find ourselves excited that markets rose 100 points – and a little nervous when markets ‘wipe off’ billions. We experience these emotional reactions even though the effect on our overall wealth from either event is likely to be tiny.
Our understanding of history is similarly simple, reducing wars, recessions and pandemics into simple cause and effect stories that are easy to remember and teach.
These stories help us understand the past. But they do not help us predict the future.
This explains why investment opportunities that seemed certain at the time we made them so often go awry.
It is not bad luck or circumstances changing against us – it’s the fundamentally simplistic cause and effect model in our minds that doesn’t allow us to understand all the possible outcomes.
So how can we best use the science of cognitive bias to become better at investing?
It is certainly worth learning about the wide and growing range of cognitive biases scientists are identifying that can stand in your way of being more successful.
Knowing how your mind works can help you avoid the more obvious traps many investors fall into.
We can use the basic principles of successful investing to avoid becoming victim to our own cognitive biases. Stick to a plan and don’t react to market noise or your emotions. Stay diversified to reduce the risk of permanent loss. And ensure you do not spend too much money on unnecessary fees.
But it is also a trap to rely too heavily on the science of cognitive bias, thinking that it can provide you with the keys to investing success.
The serious research being done by psychologists has been co-opted to offer you yet another tempting short cut – and in successful investing, there is no such thing.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Six simple ways to protect your passwords
You use passwords to access your bank accounts, social media, email and more every day.
Passwords are the keys to our online identity. That’s why protecting them is so important.
Creating a strong password is the first step to protecting yourself online. This helps reduce the risk of unauthorised access by those willing to put in a bit of guesswork.
To help stay safe online, follow these password tips.
1. Make your passwords strong
Short and simple passwords might be easy for you to remember, but unfortunately they’re also easier for cyber criminals to crack.
Strong passwords have a minimum of 10 characters and a use mix of:
-
uppercase and lowercase letters
-
numbers
-
special characters like !, &, and *.
Use passphrases
You may like to consider using a passphrase instead of a traditional password.
Passphrases are considered more secure than regular passwords, and easier to remember too.
A passphrase is used in the same way as a password, but is a longer collection of words that is meaningful to you, but not to someone else.
For example, the passphrase ‘CloudHandWashJump7’ is 17 characters long and contains a range of different characters. This is more complex than the average password.
Having complex passwords is important to deter ‘brute force’ attacks, in which a computer program cycles through every possible combination of characters to guess a password. These automated attempts at guessing passwords are not slowed down by numbers or capital letters, but depend on how long a password is.
Depending on the systems you access, you may be limited to a defined number of characters.
2. Make passwords hard to guess
Could someone who knows you guess your passwords? For this reason, it’s best to avoid using personal information such as your children, partner or pets name, favourite football team or date of birth as your password.
When trying to hack into an online account, cyber criminals start with commonly found words and number combinations.
So it’s best to avoid using:
-
dictionary words
-
a keyboard pattern like qwerty
-
repeated characters like zzzz
-
personal information like your date of birth or pet’s name.
Security companies publish lists each year of the most common passwords exposed in data breaches. Read the list from 2020. Make sure you’re not using them, because it’s likely criminals will try these passwords first.
3. Create new, unique passwords
If you need to reset a password, don’t just change one part of it.
Instead of changing a number at the beginning or end, create something completely new you’ve never used before.
If your original exposed password had a ‘1’ at the end, an attacker would likely try ‘2’ next. That’s why it’s important to change the whole password.
Get into the practice of changing your password often, ideally every few months.
4. Don’t share passwords, ever.
Never share your password with someone, not even with someone you trust.
What about family and friends?
Regardless of whom you share it with, once you share your passwords you lose control of how it’s stored or how and when it’s used.
What if a business or company I know asks for my password?
Reputable companies won’t ask you to give them your password over the phone or via emails or SMS messages. This might be a warning sign of phishing or a scam; you can read more about phishing on our security alerts page.
NAB will never ask you for your password or PIN, either by email, SMS, over the phone or at a branch. We may ask you to provide a one-time code to verify yourself when you call our contact centre. These messages will clearly state that we will ask you for the code.
You may not be covered for fraud
One of your responsibilities as a NAB account owner and user of internet banking is to protect your password. Sharing your passwords or PINs may affect a claim for any money lost due to fraud.
5. Use different passwords for each of your online accounts
Using different passwords means that if one of your accounts is breached, criminals won’t have access to other accounts that use the same password.
Make each of your passwords for online logins unique. This will help protect you from attacks like ‘credential stuffing’.
Credential stuffing
Credential stuffing is an automated technique used by criminals. They test a user’s known username and password combinations across multiple online accounts.
As many people use the same credentials for multiple sites, it can give criminals easy access to multiple accounts.
This gives criminals an opportunity to gather more information about you, which they might use to impersonate you online to access accounts under your name.
For example, it’s not a good idea to use the same password for an online pizza delivery website and your business email. If the pizza delivery site is compromised, you don’t want someone to also have access to your business email account.
6. Store passwords safely
Writing passwords down is never recommended. You could lose them, or someone else could see them and use them.
Password management tools
There are programs and apps known as password managers that will store all your passwords in a secure vault.
A password manager only needs one strong password to access it and has extremely strong protection to make sure that only you can access it.
This means you only need to remember one password to have access to all your passwords.
Password safes can even generate and store new, complex passwords for you when you create new online accounts.
Don’t allow web browsers to store your NAB password
Some web browsers may display a pop-up message, asking whether you want the browser to remember your login details.
For the protection of your personal information, NAB recommends that you select ‘Never for this site’ if you see this message when using NAB Internet Banking.
For more information, check out the Australian Cyber Security Centre’s guide on creating secure passphrases.
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/about-us/security/online-safety-tips/protect-your-passwords
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
© 2022 National Australia Bank Limited (“NAB”). All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Putting recent returns into perspective
While 2021-2022 may not have been a stellar year for the majority of investors, it’s worth remembering that the worst performing asset class one year can be the best the next, and vice versa. That’s why successful investing benefits from having a good balance.
The last financial year, particularly the first half of 2022, saw a sharp rise in volatility on global investment markets.
It was hardly surprising. Stock markets, bond markets, commodities markets, and currency markets all found themselves caught up in a turbulence, shaped by a series of unsettling events.
They included the ongoing spread of COVID-19, with China forcing many of its major cities and manufacturing hubs back into lockdowns, and the start of the Russia-Ukraine war this year.
Inflation levels were already starting to rise in the second half of 2021, but the combination of these events has intensified the pressure on already strained global supply chains in 2022.
With the prices of goods and services rising at their fastest pace in decades, central banks have quickly begun raising their official interest rates in a bid to dampen demand.
Reflecting the stormy conditions – and the widespread sell-offs on financial markets over recent months – most investment asset classes recorded losses over the 12 months to 30 June.
A turbulent financial year
| Australian share market | -6.8% |
| U.S. share market | -10.7% |
| International shares | -6.5% |
| Australian bonds | -10.5% |
| Australian listed property | -11.4% |
| Cash | 0.1% |
Note: Asset class percentage return calculations are based on market open levels on 1 July 2021 and closing levels on 30 June 2022 for the S&P/ASX All Ordinaries Accumulation Index. MSCI World ex-Australia Net Total Return Index. S&P 500 Total Return Index. Bloomberg AusBond Composite 0+ Yr Index. S&P/ASX 200 A-REIT Accumulation Index. Bloomberg AusBond Bank Bill Index.
Putting 2021-22 into perspective
2021-22 was anything but a stellar financial year for the majority of investors.
That’s especially the case when you compare it with 2020-21, when the Australian share market gained 30.2 per cent, the U.S. share market grew by 29.1 per cent, and international shares recorded a 27.5 per cent return.
But the last financial year wasn’t the first period where returns have been negative across most key asset classes.
Think back to the Global Financial Crisis in 2008 and 2009, when most investors recorded back-to-back negative returns.
The Australian share market fell 12.1 per cent in the 2007-08 financial year, and then by a further 22.1 per cent in 2008-09.
Over the same two-year period the U.S. share market fell 23.2 per cent and 12.4 per cent, while the returns from Australian listed property were negative 28.6 per cent and 31.2 per cent.
Then, as economies around the world emerged from the GFC, financial markets embarked on a growth spurt for the best part of the next decade.
Even in early 2020, when financial markets fell heavily as the spread of COVID sparked widespread investor panic, returns from most asset classes had started to recover by 30 June 2020.
Five years of returns
Another point to keep in mind that asset class returns vary from year to year. The best performing asset class one year can be the worst the next.
The above table has the best performing asset class for each year highlighted in green, and the worst performing in red.
In 2021-22, cash was the only asset class to deliver a positive return – albeit that after inflation, the purchasing value of cash savings declined.
In 2020-21 cash was once again the worst performing asset class.
The bottom line
Returns from asset classes are never consistent. Successful investing benefits from having a good balance.
Rather than trying to pick the winning investment each year, spreading your investments across a wide range of assets can help to reduce the risk of loss over longer periods that could occur if you had all your capital tied to just one asset class.
Investors who are well diversified tend to enjoy a smoother investment ride over the long term.
Long-term returns data also proves that time in the market will deliver consistent growth over longer periods despite periods of short-term volatility.
Making additional contributions and harnessing the power of compounding returns can make an enormous difference over time.
And it’s never too late to start doing this to give yourself the best chance of investment success.
If you would like to discuss your investment portfolio in light of recent market volatility, please call us today.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Six ways to pay off your mortgage faster
Paying off your mortgage early will save you money and take a financial load off your shoulders. Here are some ways to get rid of your mortgage debt faster.
Switch to fortnightly payments
If you’re currently paying monthly, consider switching to fortnightly repayments. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights).
Make extra payments
Extra repayments on your mortgage can cut your loan by years. Putting your tax refund or bonus into your mortgage could save you thousands in interest.
On a typical 25-year principal and interest mortgage, most of your payments during the first five to eight years go towards paying off interest. So anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.
Ask your lender if there’s a fee for making extra repayments.
Smart tip: Making extra repayments now will also give you a buffer if interest rates rise in the future.
Find a lower interest rate
Work out what features of your current loan you want to keep, and compare the interest rates on similar loans. If you find a better rate elsewhere, ask your current lender to match it or offer you a cheaper alternative.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options. See what to keep in mind when using comparison websites.
Switching loans
If you decide to switch to another lender, make sure the benefits outweigh any fees you’ll pay for closing your current loan and applying for another.
Switching home loans has tips on what to consider.
Make higher repayments
Another way to get ahead on your mortgage is to make repayments as if you had a loan with a higher rate of interest. The extra money will help to pay off your mortgage sooner.
If you switch to a loan with a lower interest rate, keep making the same repayments you had at the higher rate.
If interest rates drop, keep repaying your mortgage at the higher rate.
See what you’ll save by making higher loan repayments.
Consider an offset account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means you’re only charged interest on $480,000.
If your offset balance is always low (for example under $10,000), it may not be worth paying for this feature.
Avoid an interest-only loan
Paying both the principal and the interest is the best way to get your mortgage paid off faster.
Most home loans are principal and interest loans. This means repayments reduce the principal (amount borrowed) and cover the interest for the period.
With an interest-only loan, you only pay the interest on the amount you’ve borrowed. These loans are usually for a set period (for example, five years).
Your principal does not reduce during the interest-only period. This means your debt isn’t going down and you’ll pay more interest.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/home-loans/pay-off-your-mortgage-faster
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
Important
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
8 retirement mistakes and how to avoid them
Retirement is a phase of life most of us look forward to. It’s a chance to pursue other interests, travel and maybe do some part-time work or volunteering.
Thanks to more than 30 years of compulsory superannuation, we are also retiring with more savings than previous generations and have higher expectations of the lifestyle we wish to enjoy. But that also brings its challenges.
According to the government’s Retirement Income Review, the average age of retirement in Australia is around the ages of 62 to 65.i At the same time, today’s 65-year-old men and women can expect to live to 85 and 88 respectively, on average, and many will live well into their 90s.
To make the most of your retirement years, it’s important to have confidence that your savings will last the distance. The best way to achieve that is to have a plan that will help you avoid some common and preventable retirement mistakes.
Mistakes people make
While it’s impossible to predict what financial challenges lie ahead, these eight common retirement mistakes remain the same:
1. Not knowing your living costs
When you are receiving a regular income, you may be tempted to focus less on keeping a track of your living costs. When the regular income stops at retirement, you can be unaware of whether your investment income and/or pension payments will support your lifestyle costs.
Knowing what your living costs are before you retire can help manage expectations accordingly.
2. Not looking at your super until just before retiring
What if your super was invested in conservative assets throughout your working life? It could mean that your super would not have grown to the level needed to fund your retirement. What if your super’s insurance premiums and fees consumed the returns?
It is vital to review your super account as early and as regularly as possible to ensure it is appropriate for each stage of your life.
3. Underestimating the impact of inflation
Australia’s rate of inflation hovered around 1 per cent to 3 per cent per year between June 2012 and early 2020. Since the onset of the global pandemic in March 2020, inflation has jumped to more than 7 per cent.ii This along with a disruption to the global supply chain and the Russia-Ukraine war has lifted the cost of living to levels that require you to reassess your retirement planning.
4. Not understanding your government entitlements
If you’re age 66 or older, you may be eligible for a full- or part-Age Pension. However, even if your level of wealth puts you above the pension limits, you may still be eligible for other entitlements.
These can include the Seniors Card, Pensioner Concession Card, income tax offsets or pensioner stamp duty exemption/concession.
5. Letting the noise affect your investment decisions
Negative news grabs headlines, such as talk of billions being wiped off share markets, but you rarely read about the billions made during the rebound. There is no denying that the financial markets face volatility during periods of uncertainty. However, as history has shown, over the long run the market trends upwards.
All this noise makes it difficult to stick your long-term strategy, when in fact such events can present opportunities in the markets too.
6. Trying to time the financial markets
“We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have,” said legendary share investor Warren Buffett. Say you invested $10,000 in the ASX 200 index by trying to time the market and you missed the 40 best days between October 2003 to October 2022, your investment would be worth $9,064, whereas if you remained fully invested it would be worth $46,099.iii
Trying to time the markets is never a good idea, especially with your retirement savings.
7. Being asset rich and cash poor
You may have built up a strong balance sheet of assets, but in retirement it is income you require. For many Australians, their family home could be their biggest asset and its value is sometimes unlocked by downsizing into a smaller home, but many Australians remain living in a family home that has surged in value while they struggle to find enough income to live on.
Are your assets generating enough income to support your lifestyle? This income can include rent from an investment property, share dividends or managed fund distributions. If the income is insufficient, you may have to sell some of your assets to provide that liquidity or tap into the equity in your home by taking out a reverse mortgage-style loan.
8. Not consulting professionals
Financial advisers, accountants and other financial professionals can help set you on the right path by navigating the complexities of superannuation, investments, constant rule changes and other factors that affect your retirement. A good retirement plan, implemented correctly, can set you up for life.
Start Planning
Whether it’s due to lack of time or awareness, too many people tend to make these same mistakes when entering retirement which can lead to unwanted financial surprises.
A phase of life you have looked forward to for so long deserves careful planning. So please get in touch if you would like to review your retirement income needs.
i Retirement Income Review Final Report, July 2020 page 63 Retirement Income Review Final Report (treasury.gov.au)
iii From 31 Oct 2003 to 04 Oct 2022, Fidelity Australia Timing the market | Fidelity Australia
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.