With home loan interest rates at record – and expected to stay that way for a few years to come, Mark Bouris of Yellow Brick Road Management is surprised not more Australians are taking advantage of the situation.

I’m more than a little surprised by the results of a survey we recently completed. We reviewed the situation of one thousand Australians who’d obtained a home loan more than two years ago.

This is what we learned: 40 percent of those surveyed said they had never refinanced. Another 19 per cent hadn’t refinanced in over five years, six percent had refinanced four to five years ago, eight percent had three to four years ago and 10 per cent had between two to three years ago.

This is the situation: interest rates are at their lowest in over 50 years, yet 83 percent of Australians with a home loan have not refinanced in the past two years!

I find it hard to believe that so many people are avoiding action. The newspapers are full of stories about the historically low interest rates and the potential savings available to people with home loans.

It’s outrageous that people are still paying high interest when the opportunity to pay less is right under their noses. People take the time to drive to the cheaper grocery store just so they don’t pay an extra dollar for milk, yet when it comes to home loans they stick their head in the sand.

‘In effect, a failure to refinance to the best interest rate means

you’re just handing the banks extra money.’

Reserve Bank of Australia data shows the benchmark 2.0 per cent interest rate is significantly lower than the average of 5.13 per cent that Australians experienced between 1990 and 2015. The all-time peak was at 17.50 per cent in January of 1990.

Because of certain business practices, most bank mortgage rates have not reduced in line with official interest rate reductions. A typical 2010 loan may today be on a current variable rate of around 5.3 per cent, whereas rates are now available at around 4.8 per cent, or better.

Even allowing for fees and transfer costs, it is likely that those on a home loan secured a number of years ago could make monthly savings by switching lender.

For those who took out a home loan five years ago, the average rate after reductions would be 5.3 per cent. The potential savings on an average $350,000 loan with 25 years remaining could be thousands. For example, if you refinanced to a rate of 4.8 per cent, you would save $30,660 in interest over the remaining life of your loan.

There are lenders offering rates as low as 4.1 to 4.2 per cent, so your savings could be greater.
According to our survey, people avoided refinancing because they didn’t believe they’d save enough money, they thought the fees and charges would outweigh the benefits and they perceived the process to be too much of a hassle.

I just don’t buy this. With interest rates dropping to a low that no one in my generation would have thought possible, it’s crazy to not find out if you can save. If you don’t have the time or the expertise, speak to a mortgage broker and let them investigate a refinancing deal for you.

It’s also worth remembering that when interest rates do finally start edging up, those who already have the best home loan deals will have a natural buffer against interest rate rises.

At least our survey found that the younger generation are on the ball: 28 per cent of 25-34 year olds refinanced in the past two years compared with 13 per cent of 45-54 year olds.

Is this because young people are more internet-savvy and accustomed to comparison-shopping for the best price? Perhaps, and good on them.

If you’re in the majority and haven’t refinanced for years, let me leave you with this: a home loan is the largest monthly outgoing for most households, and if you’re paying too much – when interest rates are historically so low – you’re burying your head in the sand.

Mark Bouris is the Chairman of Yellow Brick Road Management.  If you want to contac tCampbell Korff of  Yellow Brick Road Ballina go to: ybr.com.au/Branches/Ballina

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I’m often asked to talk about financial affairs but I’m never asked about the people who avoid their financial future. They’re called The Avoiders. What do we know about them?

• they are approximately a quarter of the population
• 65 per cent of Avoiders are women
• only 7 per cent of Avoiders have an adviser
• they are stressed, anxious and overwhelmed about their finances
• they lack confidence to approach an adviser
• they procrastinate and feel out of control

These people are a big concern not only because of the number of them and their pending vulnerability in retirement, but because their predicament is sustained by their own inaction.

Could we be doing better? Can such a large and predominantly female cohort simply be ignored?

There’s always someone who wants the government to step-in, however the government has already done a lot for retirement savers: your employer has to contribute to your super fund, and there are tax concessions in super to allow your contributions to grow.

Governments can only do so much: Australians have to engage with their own financial futures.

If the description of Avoider fits you, and you’re feeling overwhelmed and stressed about finances, I have a simple message for you: ‘You can take control’. Start with a simple budgeting tool – it helps you understand where you are now. From here you can set goals and make decisions.

Most Avoiders could also benefit from financial advice, for information, direction and structure. Yet one of the elements of the Avoiders is their reluctance to call a financial adviser.

Mark Bouris, Executive Chairman of Yellow Brick Road.

Let’s look at the key myths that stop them from seeing a financial planner.

• “It’s too hard”. No it’s not. Financial planners clarify complex issues, and they can even be accessed through your super fund. Financial advisers specialise in repairing problems and planning for the future.
• “It takes too much time”. It takes a few hours each year. Once you’ve set a plan, the adviser does most of the administrative work.
• “I’ll get to it later”. If you’re procrastinating, you’re avoiding making decisions. The earlier you get started, the better your financial results.
• “I don’t have enough to work with.” Actually, the less you have, the more important it is to get assistance. Financial planning can significantly add value and most financial planning results exceed the costs of it.
• “They won’t be interested in me”. Everyday Australians are the ones who need a financial adviser. Financial advice can propel the average middle class Australian to the next level, with advice on debt management, savings, investments and retirement planning. An adviser can be someone you go to with questions.

One of the things we know about financial security is that the earlier you start and the greater your understanding, the better your outcomes. If you’re an Avoider, chances are you simply don’t want to take the first step. My advice: take a deep breath, pick up the phone and talk to an expert. Taking the first step could change your life.

If you want to contact Yellow Brick Road Ballina go to: ybr.com.au/Branches/Ballina

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It’s a brave person who takes the road of DIY Super writes Campbell Korff from Yellow Brick Road, despite the growth of self-managed super funds.

Lawyers have a saying: “A lawyer who advises himself, has a fool for a client”. This axiom represents a rare sign of humility in a profession reliant on confidence in one’s own skill and knowledge. However, the issue is not so much about skill, but objectivity. Lawyers recognise that no matter how smart they might be, they cannot effectively divorce themselves from the emotion and bias that accompanies personal matters; distorting judgement and weakening decision-making.

Good business managers apply the same logic. That is why we have boards of directors, project committees and executive teams.

Yet, when it comes to our personal wealth, so many of us insist on doing it on our own. The huge growth in Self-Managed Super Funds in Australia in recent years, bears this out. Given the scandal-riddled recent history of the financial planning space, this reluctance to seek professional advice is perhaps understandable.

Despite these scandals, however, a number of independent studies have shown that engaging a financial adviser will help you grow your wealth and recent reforms of the industry have greatly improved those odds. Whether you have an SMSF with $5million or an industry super fund with $50,000, getting professional help should improve your financial decision making.

How to choose your financial planner.

However, if you do not have a finance background, how do you choose a financial adviser? What questions should you ask? Here are my top tips:

• Credentials: there has been a lot of criticism recently of the low level of technical qualifications required of financial planners and rightly so, in my view. On its own, a Diploma of Financial Planning is a basic qualification. A degree in finance/economics and/or relevant industry experience is preferable;
• Experience: in boom times, it’s easy to look good. The test is how advice and strategies hold up under pressure. How did your adviser perform during the Global Financial Crisis?
• Conflicts of Interest: as the banks are finding out, it is very difficult to provide objective advice when the financial planner is employed by the institution selling the product. Consider what financial or other relationships might impact the advice you receive;
• Resources: financial advice requires thorough research and specialist skills in many highly technical areas. Ask about the team and resources backing up your adviser;
• Longevity: forming an effective relationship with an adviser takes time. Consider how long your adviser will be around for;
• Language: there is a lot of technical jargon in finance. Your adviser should be able to explain technical concepts in language you understand;
• Cost: removal of commission based income for financial advice is the best thing to have happened in financial services since super was invented. However, it means that we now pay professional fees for advice. Consider the cost-benefit and what’s at stake, not just the price.

If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina

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The key to managing investment risk, writes Campbell Korff from Yellow Brick Road, is to identify an appropriate investment strategy – and not to tar all mangement funds with the same brush.

Since the global financial crisis, I’ve found many investors in the Northern Rivers very reluctant to consider any investment via a managed fund, regardless of the underlying investment strategy and level of risk. While this is understandable given the difficulties many investors have faced redeeming their investments from mortgage funds, with others forced to freeze redemptions in the aftermath of the Global Financial Crisis, it’s really not rational.

A Managed Investment Trust, to use the technical term, is simply a legal structure used by investment managers to hold assets which they have invested in according to the mandate, or investment strategy, given to them by their investors. So to tar all managed funds with the same brush, is like saying BHP Billiton is a bad company because many companies became bankrupt following the GFC. Obviously, the quality of BHP’s management and business assets got it through the GFC and the same is true of the managed funds that survived.

Many of the funds that didn’t survive may have simply been pursuing high-risk investment strategies to start with, in which case investors got what they paid for; so long as they received proper advice when investing (which, unfortunately, many did not).

Managed funds offer many benefits, such as: greater diversification, professional management, advantages of scale and ease of administration. The sum of which should achieve better long-term net returns than you could investing in the same way yourself. However, this comes at a cost in the form of management and performance fees. These fees should reflect the complexity of the fund’s strategy and long-term performance, which you should always compare net of fees.

They also come with particular risks – principally, manager and liquidity risk. Just like businesses, if management is incompetent or dishonest, funds will fail. Also, redeeming capital from a fund relies on there being sufficient cash available to repay investors. If many investors ask for their money back at once, which is what happened in many cases during the GFC, there may not be enough cash assets available to repay them without damaging the position of all investors, forcing managers to freeze redemptions. This is liquidity risk.

The key to managing these risks is carefully identifying an investment strategy which is appropriate for you, and, if a managed fund is the most efficient way to execute that strategy, finding a fund with a similar investment mandate and, importantly, a manager with a strong long-term track record in successfully executing that strategy. Your financial planner can help you develop your investment strategy and determine if a managed fund is appropriate for you.

If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina

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If you are in or nearing your 50s and unsure of whether you have enough savings to retire on or simply want to accelerate your retirement savings, making use of a Transition to Retirement Pension (TTRP) can be a very effective strategy writes Campbell Korff from Yellow Brick Road Management.

Since 2005, the superannuation rules have allowed people nearing retirement to supplement their income by drawing up to 10% (and a minimum of 4%) as a TTRP. The rationale is to encourage people to work longer by allowing them to reduce their hours and top-up their income from superannuation.

However, for those willing to continue to work full-time through their 50s and 60s, these rules present an opportunity to take advantage of the highly favourable tax concessions applicable to superannuation contributions, earnings and income.

The basic strategy is to salary sacrifice as much as you can into superannuation (up to $35,000 if you are over 50) and draw back out of superannuation only what you need to live on as a TTRP. This strategy can also be used by self- employed persons in a similar manner.

The main benefits of implementing a TTR strategy are:

• Pre-tax income contributed to superannuation (within the Concessional Contributions Cap) is taxed at 15%, instead of your marginal income tax rate if you do not save into superannuation. In many cases, more than halving the income tax rate on the amount contributed;
• Earnings tax paid inside of superannuation can be eliminated by using a TTRP. This effectively adds 15% to the performance of your retirement savings each year;

• Tax friendly income derived from the TTRP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from a TTRP is generally more tax effective than income received from working, especially after age 60. This can open up an ‘arbitrage situation’ where the amount needed to draw from the pension is much less than the amount needed to replace it via salary sacrifice;

• The TTR strategy can result in lower taxable and assessable income. This can enhance the ability to qualify for tax offsets such as Mature Age Tax Offset (MATO) and Low Income Tax Offset (LITO);

• The strategy can be completely unwound (i.e. funds rolled back to superannuation);
• The level of income received can be adjusted between minimum and maximum levels; and
• This is a tax driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.

If you would like more information on preparing for or implementing a TTR strategy, contact your wealth manager.

If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina

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