Clinton & Jen & the FCA Team
BUY SHARES OR PAY DOWN MY HOME LOAN - WHICH IS BETTER?
It’s a common dilemma - if you have the opportunity, should you buy shares or should you continue to focus on paying down your mortgage?
Ultimately, the decision of whether to invest in shares or pay down your mortgage will boil down to a few considerations – your personal goals, interest rates, investment returns, taxes, your age and risk tolerance.
The main reason people choose to throw more money at their mortgage is two-fold. First, making additional mortgage repayments can save you thousands of dollars in interest. And second, it can help you repay your loan faster.
There’s also financial security associated with paying down your mortgage, especially during volatile times. Paying off your mortgage faster means you’ll have full equity in your property which provides peace of mind and eliminates the regular expense of those pesky mortgage repayments. Finally, investing more in your property means you have greater flexibility in borrowing against your equity to diversify your portfolio.
Of course, there are disadvantages. By focusing on your mortgage, your wealth is concentrated in one asset which can leave you vulnerable to a downturn in the market. Also, while generally we anticipate that a property will appreciate in value over time, there is a chance that the property value will decrease, meaning the amount of equity you have will depreciate too. Finally, focusing on your mortgage may mean losing out on the potential high investment returns from shares.
Investing in shares
It can be a good strategy to diversify your wealth across property and shares, however there are risks involved in investing in shares.
Advantages of investing in shares include the potential investment return which may be higher than what you’d save by paying off your mortgage. Also, investing in shares may mean your money is more accessible than if you put that same amount of money into your property.
However, investments in the share market are exposed to market fluctuations meaning you absolutely need to take a long-term approach. Also, the unpredictability of the share market means any investments can be deemed risky. Finally, shares are subject to income tax and when you sell the assets, capital gains tax may apply.
Deciding whether to invest in shares or pay down your mortgage will also be dependent on what lifestyle stage you’re at and how tolerant your portfolio is to risk.
Deciding how to utilise your money to its fullest potential is a personal decision and it largely depends on your lifestyle and financial goals. If you need assistance, it’s best to speak to the experts. Give us a call today and we’ll guide you through the decision-making process.
A WILL TO GIVE
As baby boomers shift into retirement, Australia is on the brink of the nation’s biggest ever intergenerational wealth transfer. Yet estate or inheritance planning is rarely discussed by families.
Talking openly about how you want your assets to be passed on can help avoid family disputes that take a toll both financially and emotionally. It provides a certain peace of mind for you – that your intentions will be met – and for your family and friends.
Certainly the stakes have never been higher, with growing house prices and healthy superannuation balances contributing to a considerable increase in the wealth of many older Australians in the past two decades.
Around $1.5 trillion was transferred in gifts or inheritances between 2002 and 2018. In 2018 alone, some $107 billion dollars was inherited while $14 billion was handed out in gifts.i
The importance of planning
With so much at stake, having an estate plan in place helps to protect the interests of those you care about and to fulfil your wishes. It takes careful thought and professional advice, but that is no excuse for putting the task aside for later. If something happens to you in the meantime, your assets may not be distributed as you would like and there could be tax implications for your beneficiaries.
An estate plan includes a Will and, in some cases, funeral arrangements and instructions for the care of children and animals. Without a Will, your assets will be distributed according to state inheritance laws which may not be what you intended.
A plan may also include instructions for a testamentary trust to hold assets that are then distributed in a tax-effective way to your beneficiaries. And don’t forget your ‘digital will’, a list of any online accounts and passwords that may be important.
Meanwhile, to protect your interests in case you are incapacitated in some way, an enduring power of attorney and a medical power of attorney nominate the people you would like to handle your affairs until you are better.
Estate planning is even more important in the case of blended families or for those with complex family relationships, especially where the emotional issue of the family home is concerned.
Disputes often centre around who gets the house when there are children from a previous marriage, but your new spouse is living in the family home. You could allocate other assets to the children and leave the home to your spouse or require that the house be sold and the proceeds distributed to all. Alternatively, your Will could grant lifetime tenure in the home for your spouse with it passing to your children after your spouse dies. Having conversations early about your intentions, can help alleviate possible conflict.
If you are concerned about protecting the interests of a family member with mental health or addiction issues, a testamentary trust can help to look after your assets and distribute funds in a controlled way. A testamentary trust is also often used to provide for young children, holding the assets until they reach adulthood.
Dividing it up
When it comes to deciding how best to allocate assets among children, some prefer to hand out equal shares no matter their individual financial circumstances, while others prefer to give extra to one who may be struggling. Given that Wills are frequently challenged by family members or others who believe they are owed a share or an even bigger share, it’s wise to make your intentions clear in your Will including reasons and documentation.
While people who receive inheritances are usually well into middle age - on average 50-years-oldii - and perhaps comfortably well-off, you could choose to bypass the next generation. Instead, you might consider leaving your estate to grandchildren, to help set them up with a deposit for a home or covering school fees.
Another option is to begin distributing your estate while you are alive and can share the enjoyment of the benefits the extra financial help might bring.
What’s not covered?
It is important to note that some assets are not covered by your Will. These include assets jointly held with someone else (such as a bank account or a house), super benefits and life insurance.
In the case of jointly held assets, ownership generally passes to the surviving partner and life insurance is paid to the beneficiary named in the policy. For super, it’s vital to complete a binding death benefit nomination to ensure the funds are paid to the person you choose.
Wealth Transfers and their Economic Effects - Commission Research Paper - Productivity Commission (pc.gov.au)
EXCHANGE TRADED FUNDS
Important things you need to know about ETFs.
The popularity of exchange traded funds (ETFs) has certainly soared in the past few years. With so many investment options, it may be time to understand them a bit better.
Bought and sold via a stock exchange, ETFs diversify your investment dollars into a portfolio of stocks, rather than focusing on one single asset or share. When it comes to fixed-interest ETFs, the aim of the fund is to match the performance, in terms of price and yield, of the underlying index.
Generally though, a fixed-interest option provides investors with a more reliable income stream and less price volatility than asset classes such as shares, by distributing the income earned on a quarterly basis. Other benefits include:
1. Diversification - risk is reduced because the ETF tracks the performance of the portfolio, spreading your money across a number of companies that form the index rather than a single company.
2. Cost-effectiveness - ETFs are designed to be low cost so a greater proportion of your money will earn an income. Some also have lower management fees.
3. Flexibility - because ETFs trade on the stock market, you can buy and sell at any time, as opposed to waiting until a term deposit has reached maturity to avoid penalty.
Of course, there are also some disadvantages including the fact that an ETF will never exactly match the index, meaning your buy and sell prices may vary, reducing your return. If your ETF of choice is an overseas investment, currency risk and fluctuations of the Australian dollar can also be a disadvantage. Finally, like all investments, ETFs are not immune to market volatility.
1. Credit risk - the issuer of the bonds may fail to pay interest and principal which is why government bonds traditionally tend to be classified as lower credit risk.
2. Distribution risk - ETFs are reliant on the income from underlying holdings which means there’s no guarantee a distribution will be paid.
3. Tax risk - always investigate what the tax implications are.
Interest rate movements - falling interest rates may lead to a decline in income, however, a rise in interest rates may mean the price of the bonds falls.
Why the sudden interest?
While ETFs have long been a staple, they’re increasingly starting to take their place on the investment stage. Why? Because they’re transparent, easy to use and a one-stop-shop for investors of any age.
More than this though, there have been global events that have caused investment fret about slowing global growth, especially in the bonds market. This includes US-China trade tensions and interest rate cuts. Fixed-interest ETFs such as the Vanguard Australian and the iShares Core Composite Bond ETF have seen higher returns in the past year than many have seen since inception. The question is, will this continue?
While ETFs are enjoying their time in the spotlight, any investor, no matter how experienced needs to do their research. Investigate the ETF carefully and give us a call when you’re ready to take the plunge. We’ll walk you through the process step-by-step.
LIFE INSURANCE AND FINANCIAL SECURITY FOR SINGLES
If you’re single, you might not see the value in life insurance.
However, you might now know that life insurance not only refers to a specific type of cover that provides financial support for your loved ones if you pass away, but it also refers to a range of products that cover you when you’re seriously ill or injured.
These products can include trauma insurance, total and permanent disability cover and income protection, as well as life insurance. These other products can provide you with a different type of cover (either a lump sum or monthly benefit payment) if you became seriously ill or injured and, and in most situations, unable to earn an income.
If you’re single or living without any dependents, here are some of the ways a life insurance product can help provide financial security when you’re ill or injured and off work for an extended period of time.
Income protection can provide you with up to 75% of your income if you become sick or injured and unable to work for an extended period of time. This can help you continue to cover everyday living expenses such as bills, groceries or loan repayments.
Debts and loans
If you have any loans, credit card debt or a mortgage, there is comfort in knowing that you would still be able to cover these expenses if you were ill or injured and unable to work for a long time.
Income protection can provide you with the confidence that you would be able to cover many of your expenses until you can recover and get back to work.
Although many people have health insurance to assist with the medical costs that come with being seriously ill, it’s important to know that depending on your level of cover, you may still need to cover some of your treatment costs.
Trauma cover provides a lump sum payment if you are diagnosed with a condition covered under your policy. The range of conditions covered by trauma cover will depend on what product you purchase but can include conditions such as cancer, heart attack or stroke. With this type of cover in place, you would have financial support when facing a serious illness or injury, which can be used to cover ongoing living expenses or any costs associated with your medical treatment.