Jacqueline Barton

After a difficult year of COVID disruptions and uncertainty, the summer holidays can’t come quickly enough. It’s a chance to refresh and reflect on the year that was and hopefully set some goals for the year ahead.

Yet this year more than most, many of us may feel that our personal and financial priorities have shifted depending on our experience of the pandemic.

So now that vaccination levels are rising, borders are reopening and we can all plan with a little more certainty, why not take this opportunity for a financial reset in 2022.

Regrets, we have a few

While many people’s lives were turned upside down by lockdowns, not everyone suffered financially.

If you kept your job or were able to access COVID disaster payments, you may have saved money. Holiday plans were scrapped and restaurants, theatres and leisure activities were shut down.

In a recent survey of 2,000 Australians by the Australian Financial Planning Association of Australia (FPA), 11 per cent said their financial position had strengthened over the past 12 months while a further 46 per cent said nothing much had changed. But 17 per cent said their position had worsened and nearly one in four reported being stressed by their financial position.ⁱ

Worryingly, the survey found one in five Australians didn’t have enough savings to get through the crisis and 23 per cent felt stressed about their finances. Their biggest regrets were not saving enough, spending too much on takeaways and non-essential items and not paying off debt quickly.

While many of us learned some painful lessons during the pandemic, that may be an opportunity to reset our priorities and do better in future.

Lessons learned

The enforced lockdowns made us value simple things like the importance of family and community. But uncertainty about the economy, jobs and our personal finances also encouraged many of us to reassess our approach to money.

According to the FPA survey, 45 per cent of Australians say the pandemic has made them more frugal. Large numbers also say they have increased savings (44 per cent), paid down debt (41 per cent) and created a budget (39 per cent).

Smaller but still significant numbers responded to the pandemic by topping up their super, investing more outside super or increasing health insurance.

The big question now is, can we stick to these good habits and build on them in the year ahead.

Goal setting

When it comes to goals for the next 12 months, the FPA survey found people were split between hitting a savings goal (52 per cent) and going on holiday (44 per cent) as their top priority. Paying off the mortgage and reducing credit card debt were also popular.

Given the recent strong performance of shares and residential property, starting an investment plan is also high on the list of priorities. This is especially so among younger people who are using new digital platforms to take greater control of their investments, in and out of super.ⁱⁱ

As restrictions ease and the economy recovers, hopefully, we can all manage to have a bit more fun next year but get our finances in good shape at the same time.

To get the balance right, it’s important to give your personal and financial goals the attention they deserve and draw up a plan to help you achieve them.

3 tips to help reach your goals

A financial plan doesn’t have to rely on complex financial products or strategies. In fact, getting the simple things right is often best.

• Build a cash buffer to tide you over in an emergency. This was one of the biggest lessons of the pandemic. It’s generally recommended that you have around three months’ living expenses at call. This might be in a savings account or in a mortgage redraw facility.
• Manage your cash flow. Even high-income earners can fall into the trap of spending more than they earn. So, take a financial snapshot, noting your monthly income from all sources and the balances on your savings accounts. Then subtract your monthly expenses, including debt repayments. If there’s a shortfall, look for cost savings.

• Draw up a financial plan. We are here to help you set short and long-term goals, develop strategies to achieve them and provide support to keep you on track.

If you would like us to help you kick some goals in 2022, don’t hesitate to get in touch.

i All statistics in this article (unless otherwise stated) are from the FPA Money & Life Tracker Freedom Edition 2021: A snapshot of how 2,000 Australians have fared since COVID-19, https://fpa.com.au/wp-content/uploads/2021/10/2021_FPA_Money_and_Life_Tracker_Freedom_Edition.pdf
ii https://www.morningstar.com.au/smsf/article/millennials-are-making-the-switch-to-smsfs/216142

Buying your first home is always a big step, but with property prices rising faster than pay packets taking that first step seems more challenging than ever.

National house prices rose 20 per cent in the year to September, the fastest growth since 1989. Higher prices have also fanned out from capital cities to the regions, as city folk discover the country lifestyle and cheaper housing during the pandemic.ⁱ

While this is great news for homeowners and investors, it’s putting home ownership further out of reach for many hopeful first home buyers. The combination of rapid price growth and weak wages growth have pushed up the cost of an average first home deposit from 70 per cent of income to more than 80 per cent.ⁱⁱ

Month-on-month change in dwelling values

Source: Core Logic: Hedonic Home Value Index October 2021

Tighter lending

A recent move by the banking regulator requiring banks to be more cautious in assessing new mortgage customers is unlikely to help.

The Australian Prudential Regulation Authority (APRA) has told lenders to assess whether new borrowers can afford their loan at an interest rate at least 3 percentage points higher than the current rate on their home loan. Previously, banks used a 2.5 per cent buffer.ⁱⁱⁱ

So what strategies are available to help younger Australians get a foot on the property ladder?

Government supports

In recent years, the federal government has launched three schemes to close the deposit gap for first home buyers.

The First Home Loan Deposit Scheme (FHLDS) and the New Home Guarantee (NHG) allow eligible first home buyers to purchase a home with a deposit of as little as 5 per cent. The government guarantees lenders up to 15 per cent of the value of the property, allowing borrowers to avoid paying lenders mortgage insurance (LMI) which can add tens of thousands of dollars to the purchase price.

The Family Home Guarantee helps eligible single parents buy a home with an even lower deposit of at least two per cent. In 2020-21, more than one third of all guarantees were issued to single applicants earning less than $80,000. The schemes have helped almost 33,000 first home buyers since January 2020, bringing forward their purchase by about four years on average.

Another way for first home buyers to build a deposit is to contribute voluntary savings to your super account and withdraw up to $30,000 plus investment earnings when you are ready to buy. The First Home Super Saver scheme takes advantage of the low tax super environment and investment returns that have consistently outpaced bank savings accounts.

Rentvesting

If you can’t afford to buy your dream home in a suburb or location you like, “rentvesting” may be worth exploring.

Rentvesting is where you buy property in a location you can afford with good rental yields and capital growth prospects and lease it out, while renting in an area you prefer. Or live with your parents for minimal rent and pay off the mortgage on your rental property even faster.

You can also claim a tax deduction for allowable expenses, depreciation, and interest on the loan for your investment property. The downside is you will be liable for capital gains tax when you sell.

Alternatively, under the six-year rule if you buy and live in the property for at least six months before you rent it out, you will be exempt from capital gains tax on the growth of your investment for up to six years.

Bank of Mum and Dad

It’s not just younger Australians who worry about housing affordability. Their parents often worry just as much. So much so that recent research found the Bank of Mum and Dad is the nation’s ninth biggest mortgage lender.

According to research by Digital Finance Analytics (DFA), 60 per cent of first home buyers are getting help from their parents.^iv Parents typically do this by giving their children cash towards the deposit or by going guarantor for the loan.

DFA found the average parental contribution was $92,000, indicating parents may be choosing to help with the deposit. Not only are banks reluctant to lend to first time buyers with less than a 20 per cent deposit, but any less means borrowers must pay lenders mortgage insurance.

Going guarantor

Parents without cash to spare sometimes agree to guarantee their child’s loan by using the equity in their own home as security. This can have the advantage of helping children get into the market sooner, but there are risks.

If the borrower can’t make repayments the guarantor is responsible for the debt, putting their home at risk. To limit this risk, you can choose to guarantee a portion of the loan, so you are only liable for that portion if the borrower defaults. You can also arrange to be released from the loan once the borrower builds up the same portion of equity in their home.

Saving for a first home is more of a challenge than ever in the current market, but there are strategies to help make your dream a reality. So get in touch if you would like to discuss your options.

i https://www.corelogic.com.au/sites/default/files/2021-09/211001_CoreLogic_HomeValueIndex_Oct21_FINAL.pdf
ii https://theconversation.com/as-home-prices-soar-beyond-reach-we-have-a-government-inquiry-almost-designed-not-to-tell-us-why-168959
iii https://www.apra.gov.au/strengthening-residential-mortgage-lending-assessments
iv https://www.savings.com.au/home-loans/we-need-to-talk-about-the-rise-of-the-bank-of-mum-and-dad