Jacqueline Barton

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

For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want to be assured that their investments align with their values.

Everyone’s values are different but given the choice most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.

Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions.ⁱ

As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing is pretty much what it says on the label. That is, investments that support and benefit the environment and society more broadly, rather than those whose products or way of conducting business have a negative impact on the world.

Millennials driving growth in sustainability

The trend toward responsible investment has grown rapidly in recent times. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020, and we’re not alone.ⁱⁱ The global figure was $47.8 trillion in 2020.ⁱⁱⁱ

The trend has accelerated in recent years, with money flowing into Australian sustainable investment funds up an estimated 66 per cent in the year to June 2021.^iv

Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28 per cent of younger investors had requested more ethical investments.^v

More sustainable investment options

As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.

Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.

According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.^vi

If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments, or ETFs that passively track an index or sector.

There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.^iv

How to screen

But how do you find the ethical investments that best suit your values?

There are several methods used with the most common being negative screening where you exclude investments in companies engaged in unwelcomed activities.

The most common exclusions are companies involved in gambling, tobacco, firearms, animal cruelty, human rights abuses or fossil fuels industries.

Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution to the planet. Some examples might be companies involved in renewable energy, health care or education.

Another criterion is to look at companies that monitor their environmental, social and governance risks as part of their existence. This cuts across all industries and is more about the way the company conducts its business.

Environmentally they may monitor their carbon emissions or pursue clean technology; socially they may be active in ensuring a safe workplace; and on the governance front they may pursue board diversity or anti-corruption policies.

Environmental themes the most common positive screens for investors

Source: RIAA

Climate plays a role

A survey by UBS found that four of the five top themes for responsible investing were related to climate with respondents citing such themes as renewable energy and efficiency, climate change mitigation and pollution prevention.^vii

As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to their promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.

Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.

At the end of the day, each method can be used separately or in a more holistic approach.

Solid returns

While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.

The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. While the top performing ethical ETF turned in an impressive return of almost 37 per cent in the 12 months to March 2021.ⁱ

Clearly responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.

If you would like to discuss your investment options and how they might fit within your overall portfolio, don’t hesitate to get in touch.

i https://www.canstar.com.au/investor-hub/ethical-investing/
ii https://responsibleinvestment.org/resources/benchmark-report/
iii https://probonoaustralia.com.au/news/2021/07/sustainable-investing-thrives-amid-push-for-higher-standards/
iv https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505
v https://www.betashares.com.au/insights/millennials-on-top-betashares-investment-trends-etf-report-2020/
vi https://www.lonsec.com.au/2021/07/21/media-release-stellar-fy21-returns-as-super-funds-deliver-for-their-members/
vii https://www.ubs.com/sg/en/asset-management/insights/sustainable-and-impact-investing/2021/esg-investments-performing-better.html/

Feeling a bit lacklustre as the days roll by? Hitting the snooze button more than usual? It’s a feeling that can be difficult to put your finger on, but it has a name, languishing.

Whether it’s feeling exhausted and unmotivated, or restless and eager to do more, we can be off kilter from time to time. It’s no surprise that many are feeling this way, as we continue to deal with ongoing uncertainty and snap lockdowns due to the pandemic. Knowing this is normal is important, particularly in the current circumstances, but we can also make changes to improve our overall wellbeing.

Flourishing vs languishing

Often, we think of good mental health as the absence of mental health issues, but as the diagram below shows, there is a spectrum between high mental health and low mental health.

While flourishing sits at the top, languishing is at the bottom.

Source: Dual continua model ( Keyes & Lopez , 2002)

You’re kicking goals at work, your relationships with family and friends are harmonious, you’re growing as a person – these are examples of flourishing. On the flipside, languishing can see you struggling to get out of bed in the morning, disengaged from your work, feeling negative about your relationships, or frustrated at not getting to where you want to be.

Called “the dominant emotion of 2021”, languishing has been described as if “you’re muddling through your days, looking at your life through a foggy windshield.”ⁱ

Moving towards flourishing

The pandemic has reminded us of how little control we have over external circumstances. While lockdowns are likely to remain in our near future and the way we work and socialise are impacted as a result, there are ways we can improve our outlook.

Take time out

Working from home and remote schooling has become a reality for many of us, meaning we are busier than ever. Scheduling in some time-out is crucial to being able to switch off and feel more refreshed. Even if it’s just a day spent not checking your email and doing something restorative, you’re prioritising self-care.

Start small

When you’re languishing, it can be difficult to get motivated, it’s not likely to be the time you embark on a new fitness regime, study or career move. However, starting small can make changes in your life while building motivation for you to make further changes.

Whether it is going for a morning walk each day, reading a book the whole way through or getting to one of those tasks on your to-do list, you’re taking a step towards flourishing.

Cut out the noise

Back-to-back Zoom calls, the 24/7 news cycle, pings of social media, the distraction of everyone being at home together – no wonder it’s hard to focus.

Tap into your ‘zone’ or flow, by switching off from external noise where possible to concentrate on one task at a time. When you’re in the state of flow, time flies by as you’re engrossed in an activity that takes your full attention.

Reach out for help

It’s also worth acknowledging when you need a helping hand. It may be delegating at work so you’re not feeling overloaded or having someone to talk to if you’re struggling through the day.

Mental health issues are on the rise due to the pandemic and there is no shame in asking for help – more than ever, Australians are reaching out for mental health support in these turbulent times to help stay on track.ⁱⁱ

i https://www.nytimes.com/2021/04/19/well/mind/covid-mental-health-languishing.html

ii https://www.lifeline.org.au/resources/news-and-media-releases/media-releases/

Buying insurance through super has many advantages, but you need to make sure you are getting the right cover for your individual needs. In some cases, you may be paying for nothing.

Most super funds offer life and total and permanent disability (TPD) insurance to fund members and, in some cases, income protection cover.

But since the introduction of the Protecting your Super reforms in 2019, this cover is no longer automatic.

If you have less than $6000 in your account or it has been inactive, then the insurance component will have been cancelled unless you advised the fund otherwise. An account may be deemed inactive if, for example, it has not received a contribution for more than 16 months.

In addition, insurance cover is no longer offered to new fund members aged under 25.

Is it right for you?

If you do have insurance in your super account, then it’s a good idea to check the cover is right for you. This is particularly the case now that the stapling measure has been introduced as part of the recent Your Future, Your Super legislation.

From November 1, unless you choose a new fund when you change jobs, the first fund you joined will be ‘stapled’ to you throughout your working life. This is where problems can arise; while the fund stays the same, so will the insurance cover.

Say you move from a low-risk job where the insurance offered in your super was more than adequate to a high-risk job such as in construction or mining. Would your insurance now cover you if you were no longer able to work? And if it did, would the cover be sufficient? It may well be that your new occupation is not even covered.

Most TPD policies within super are for “any” occupation rather than “own” occupation. This three-letter definition can make a world of difference. If you still have the capacity to work in some other occupation, then it is likely your insurance will not pay out.ⁱ

Many benefits

Despite this, there are still many benefits from having insurance cover in your super. Firstly, the premiums are generally lower because the fund buys the insurance cover in bulk. In addition, your premium payments are effectively lower as they come out of your pre-tax rather than your post-tax income.

What’s more, you are not having to put your hand in your pocket to pay the premiums as the money automatically comes out of your super. Of course, the flipside is you will have less money working to build your retirement savings.

So, when it comes to taking out insurance, going through your super has lots of positives.

But the downside is that the default level payout may be lower than you might need. You should check if this is the case and maybe consider making additional premium payments to give yourself and your family more appropriate cover. Be aware though that opting for a higher payout could mean you have to undergo a medical.

Also, life insurance cover in super actually reduces over time to the point where your cover reaches zero by the time you are 70. And for TPD cover it ceases at 65.ⁱⁱ

Regular checks

Wherever you get insurance cover, it’s important to remember that its purpose is generally to cover any outstanding debt and ongoing financial obligations should you pass away or become unable to work.

For this reason, it is important to regularly check your insurance within your super to ensure it is sufficient to maintain your lifestyle.

If it falls short, then you might also consider taking out a policy outside super.

While income protection is sometimes available through your super, it may be necessary to look outside. Such policies pay you a regular income for a specified period if you are unable to work through an illness or injury, and premiums are tax-deductible outside super.

When you are leading a busy life with lots of claims on your income, insurance may be seen as an unnecessary expense. But when it comes to the crunch, it can play a valuable role in you and your family’s life when you need it most.

Please call us to discuss your insurance needs and whether your existing cover, both inside super and outside, is sufficient.

i https://moneysmart.gov.au/how-life-insurance-works/total-and-permanent-disability-tpd-insurance

ii https://thenewdaily.com.au/finance/dollars-and-sense/2021/08/02/insurance-life-tpd-superannuation/