For the majority of families, their home and superannuation will be the two most valuable investments they will own in their lifetime. Here we discuss how the family home might be utilised to potentially assist in wealth and lifestyle creation.
For those that have purchased their family home, a great deal of value is often held within its walls. This value comes in many forms including physical, emotional, financial and more. Specific wealth strategies can be created around anything of financial value and, once in place should be fine-tuned throughout various life stages. So what should property owners consider when it comes to utilising, most effectively, the home in which they live?
I Am Accumulating Wealth
Income potential is high in this age group. If you are not already salary sacrificing into superannuation, this is a good period in which to begin. Alternatively, and particularly in order to take advantage of historically low interest rates, increasing mortgage repayments could make a big difference in the time it takes to pay off the house, and the amount the mortgage eventually costs you.
Too few people review their home loans, instead allowing the mortgage to take care of itself. A mortgage review may mean you discover a better deal elsewhere. But it might also simply lead to a discussion with a representative from your lender, revealing a better way to manage your account. An offset savings account connected to the mortgage account, for instance, can save a considerable amount of interest over time. And a redraw facility that offers essential funds at mortgage interest rates, rather than personal loan or credit card interest rates, can also make a real difference.
It is very important to ensure your investment is protected and to review your insurance levels on an annual basis.
Paying down the mortgage on the family home as quickly as possible is important as interest on this loan is typically not tax deductible. At the same time, the more you pay down the debt, the more equity is held in the house itself – assuming the value of the house is not decreasing.
Finally, during this period it is very important to ensure that your investment is protected. Has your home and contents insurance kept up with the current value of the property? Have any improvements you have made along the way, or valuable items within the house, been added to your insurance policy? Don’t let your most valuable asset go unprotected or under-protected. Review insurance on an annual basis.
- Consider salary sacrificing or increasing mortgage repayments
- Review your home loan
- Check your insurance levels.
I am looking forward to my retirement
The children are older and are perhaps even at the stage where they have moved out, or are at least paying their own way. You are working on maximising your retirement savings and your income is reaching, or is at, its peak. Then why do you feel cash poor? As a home owner it is important to realise that you are also asset rich. So how do you release some of the value in that asset?
Some decide this is a good time to downsize, which achieves several valuable goals. Firstly, it gives you the freedom and the time to downsize at your own pace and on your own terms, rather than suddenly having to do so when health or other issues force a move. This means you can take your time to plan and choose the lifestyle you desire, rather than having to accept whatever is available in your price range at the time that an urgent move is required.
Now is also the time to put in place a solid estate plan, including Wills and enduring Powers of Attorney.
It also frees up a lot of equity for investment elsewhere, money that was previously locked up in the value of the family home. This allows for diversification and different investment strategies to be put in place, such as a balanced mix of income and growth, instead of growth alone. Additionally, the money that is now available could be used to generate an income. However, as with any investment strategy, you should consider the level of risk you are comfortable with, your goals and the investment timeframe.
A family home containing spare bedrooms can itself be utilised to generate additional income. Granny flats can be rented out to long-term tenants or short-term visitors. Other areas of the house can be renovated to create spaces that can also be rented. In the age of property-sharing websites, spare rooms in a house located in a desirable area can provide an impressive income for those that welcome the company of travellers. Such income can continue into the future in order to help fund a retirement.
A third option, if you haven’t done so already and if it fits your risk profile, is to borrow against the equity in your house to boost the value of your investment portfolio in a potentially tax-efficient manner.
Be sure to constantly review your insurances, particularly if you make the choice to take in renters, and to evaluate your home loan arrangements to ensure you are receiving the very best deal. Now is also the time to put in place a solid estate plan, including Wills and enduring Powers of Attorney, to make sure the value in the family home is looked after and is distributed in accordance with your wishes – should anything happen to you.
- Consider downsizing
- Can you create income from your house?
- Borrow against equity to invest
- Review your insurance levels
- Put an estate plan in place.
I Am Enjoying My Retirement
Your home now, most likely, is completely mortgage-free. But requests may come from your children to act as a guarantor over their mortgage. Try to remove any emotion from such a decision and consider it, as you would any other investment, rationally. As with any agreement it brings with it an amount of risk, perhaps this fits your risk profile, perhaps it does not.
If you have not yet put an estate plan in place, it has now become a necessity. The wealth you have created throughout your working life can be looked after and distributed according to your wishes if Wills and enduring powers of attorney are in place. This is important for everybody at this life stage, but even more important for those that own all or part of a business, or have children from another marriage. Clarity around your final wishes is vital.
Perhaps most important at this stage is the bearing of the family home on matter such as aged care and Age Pension.
Downsizing is a popular decision during this life stage, and for good reason. There is an emotional side to moving out of the family home, but once that original hurdle has been negotiated, most retirees feel a sense of release and relief.
They are no longer responsible for the physical and financial demands of the upkeep of a large home. And a move can bring them closer to friends and family, or to an area offering better infrastructure for the elderly.
Perhaps most important at this stage is the bearing of the family home on matters such as aged care and Age Pension, which can be substantial. The issues around this topic are broad and complex. Be aware that expert advice is highly recommended in order to assist with any major decisions regarding your family home.
- Consider guarantor requests very carefully
- Review your estate plan
- Consider lifestyle benefits of downsizing
- Speak with an expert about the family home in relation to benefits.
Those that find themselves starting over in life can face surprisingly difficult financial challenges. Here we investigate five common interruptions that many will have to face throughout their lives.
The breakdown of a relationship can have an extremely damaging effect on a person’s financial state. The issue is greatest for women with dependent children who, the Australian Institute of Family Studies (AIFS) states, even six years after a divorce find it difficult to recover their pre-divorce income1. The same report said the negative effect of divorce on assets and income can last into older age.
Re-partnering can offset the financial effects, but those that remain single often find themselves reliant on Government income support systems, according to AIFS. There is a significant economic advantage associated with living with another person and when this comes to an end, costs increase. Financial planning is vital, as is a thorough understanding of one’s legal rights and responsibilities.
With obesity overtaking smoking as the leading cause of premature death in Australia2 , mental illness affecting one in five adults3 and the number of annual cancer diagnoses more than doubling between 1982 and 20104 , the likelihood of one’s career being interrupted by illness is very real.
The insurance industry has developed products to help look after a person’s financial responsibilities during such an illness, but returning to work after a medical battle can be testing all the same. Research by Macmillan Cancer Support has revealed that some employers fear the expense5 of changes that may be required when a person returns from illness.
At the same time, returning to work is not only important financially for the individual, but also signals a return to normality. One of the secrets to success, they say, is constant and open communication between the individual and the organisation during the absence, and a gradual transition back to work afterwards.
Being made redundant or let go, especially when the event is unexpected, is a blow both financially and in terms of confidence. If it should happen, the worst thing you can do is mope about the house.
Develop a plan that begins with finding out what support you could be offered. Are there any Centrelink benefits you might qualify for? Could your mortgage repayments be covered by insurance? Can your insurance providers waive costs for the period you’re unemployed, or suspend a policy such as Income Protection? Is your ex-employer providing you with all of the redundancy benefits they should be? Are they offering assistance in finding a new role at another organisation? Then move on to applying for new roles, including contacting recruiting agencies. A gap in your CV becomes more difficult to explain the longer it lasts.
Back to Work After Children
Coming back into the workforce after a period in which childcare has been your main role can be difficult emotionally (leaving the children), technically (do you still have the knowledge?) and socially (getting to know a new group of people).
Experts say it is a good idea to conduct a career evaluation that looks backward and highlights your specialist knowledge, talents and achievements, then looks forward and selects certain roles in which you would shine. This way you are basing your decision on solid fact, which will boost confidence levels. Don’t be afraid to turn down jobs you don’t think you’ll enjoy, and never accept a position just for the money. And don’t forget to include in your CV all of the voluntary work you have conducted at your child’s school, or the pro-bono marketing consulting you did for a friend who was launching a new business etc.
Finally, network both online and offline. Positions are filled by people that know people, so make sure you’re top of mind.
If a household’s income at any stage is unexpectedly lowered, this can lead to mortgage stress. Once a person is facing serious financial hardship as a result of a reasonable and unforeseen issue such as illness or job loss, lenders are obliged to make certain hardship provisions available in order to allow the person an opportunity to find a way out of their situation.
Start by speaking with your financial adviser or a not-for-profit financial counsellor, who will help you to figure out exactly where you are financially, whether you might be able to increase your income and what assets you may be able to sell. Importantly, they will also put deadlines in place so a solution doesn’t take so long that the problem compounds.
Tips to stay on track
- Always set deadlines for each goal you set. Without deadlines, many plans never come to fruition.
- Break down your plans into achievable pieces and put each onto a timeline, so you can track your progress.
- Develop a very clear picture of your finances including debt, income, savings, super and other incomings and outgoings.
- Be creative about increasing your income. If there is an adult child living with you, perhaps it is time for them to help cover their costs.
- Seek advice on benefits that may be available to you as you re-build.
1 ‘The financial impact of divorce’, The Australian Institute of Family Studies (AFIS), 24 July 2012.
2 ‘Facts and figures: Obesity in Australia’, Monash Obesity and Diabetes Institute (modi), Monash University.
3 ‘Facts and figures about mental illness’, SANE Australia, 2014.
4 ‘All cancers in Australia’, Cancer Australia statistics.
5 ‘Returning to work after an illness: What support do employees need?’, The Guardian, 30 May 2013.
An economic update from Colonial First State Global Asset Management.
What have been the major economic events of the past few months?
1. United States
The US Federal Open Market Committee of the US Federal Reserve Board (the Fed) met on 28–29 July 2015 and, as widely expected, held the official cash rate at 0% – 0.25%. On employment, there were further positive signs in July with 223,000 jobs added in the month. The unemployment rate held steady at 5.3%, with the total number of jobs added over the past 12 months now 2.935 million.
The first estimate of Q2 2015 GDP was released at 2.3%,on a seasonally adjusted annualised rate, up from a revised 0.6% in Q1 2015 (was –0.2%). Growth in Q2 was driven by improvements in consumer spending while weak business investment and government spending were the laggards.
Inflation also remains subdued. Headline inflation rose 0.3% per month in June to be up 0.1% for 12 months. Core CPI (ex food and energy) is 1.8% per year and the Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, was 1.3% per year stable from May 2015.
2. United Kingdom and Europe
As expected, The Bank of England (BoE) left policy unchanged at 0.5% its 9 July 2015 meeting. Some members of the BoE said that the decision was becoming more finely balanced and that a rate hike near the turn of the year could be appropriate. The advance estimate of Q2 2015 GDP was 0.7% per quarter and 2.6% per year, slightly lower than the 2.9% per year in Q1 2015.
In Europe, The European Central Bank (ECB) met on 16 July 2015 and no policy changes were announced. The focus in the first half of the month were the protracted negotiations with Greece which in the short-term were largely resolved with the release of a Euro Summit statement and as the Greek parliament passed two different legislations through parliament as a precondition to commencing official negotiations for a third bailout package worth €86 billion. As a result the ECB increased
3. Japan and China
The Bank of Japan’s (BoJ) policy board convened on 15 July 2015 and again left its qualitative and quantitative easing program at an annual increase of ¥80 trillion to its monetary base.
Inflation data remained subdued, headline inflation was just 0.4% per year in June, down from 0.5% per year in May. Core CPI (excluding food and energy) was 0.6% for the year to June 2015. This remains substantially below the BoJ target for 2% inflation around September 2016 and continues to raise the possibility of further action by the BoJ. Wages tumbled in June, down 2.4% per year, compared to +0.7% per year in May with a change to the timing of bonus payments the reason.
The Reserve Bank of Australia (RBA) left the official cash rate on hold in July and again in early August at 2%, as was widely anticipated by financial markets. In August, the RBA made a number of slight changes to its view of the Australian economy, once again highlighting its surprise at the strength in the labour market. The statement noted “In Australia, the available information suggests that the economy has continued to grow. While the rate of growth has been somewhat below longer term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year.”
Quarter 2 2015 CPI data was released showing the headline CPI rose 0.7% per quarter and 1.5% per year. This was a small increase from 1.3% per year in Q1 2015 with most of the increase due to petrol prices which rose 12.2% per quarter. Underlying inflation, the RBA’s preferred measure of inflation trends, rose on average 0.55% per quarter to 2.3% per year, slightly down from 2.35% in Q1 2015.
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