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The Fierce Girl's Guide to Finance

Get your shit together with money

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August 2019

Should I move to a fixed rate homeloan? And other questions for a 1% world

There was a big to-do this week about fixed rate home loan rates falling below 3%. And sure, it’s kind of a big deal.

Consider, for example, that our parents were paying up to 20% for their (admittedly, very small) home loans back in the 1990s. (God they talk about it like it was the depression and they had to walk to school in the snow, when they just had to hand over approximately $20 a month on their cheap-as-chips four bedroom home.)

What’s changed in the last few months?

Well obviously there were two interest rate cuts from the Reserve Bank of Australia, bringing the cash rate to 1%. I could go on about the reasons for this, but the too-long-didn’t-read version is that inflation, employment and economic growth is, in the immortal words of Flo Rida, gettin’ low, low, low, low, low.

And since the rest of the world’s rates are low too, and there’s no actual plan to boost growth, it’s kinda like ‘well, this is my life now’. Rates will be lower for longer.

How do I know? Well here’s quick explainer on bond yields (accuracy not guaranteed). Please skip to the photo of shirtless Thor below if you don’t care.

Bonds are a way for governments (or companies) to borrow money. They agree an interest rate on that loan, just the way you would with your bank.

In this case it’s a fixed rate loan – we set it now, and it stays that way (unless it’s a floating rate, but we aren’t discussing that here).

Now, if you’re agreeing a loan for just a couple of years, you’d have a pretty good idea of where rates will be in 2021, so it’s not that big of a deal.

But if you’re agreeing a loan for like 10 (or even 30) years, you’re taking a gamble.

It requires some serious crystal ball gazing. Imagine someone demanding that you predict what style jeans will be in fashion in 2029.

Like, we would all want high-waist to still rule. But what if we have a moment of madness and see the return of Britney-style low-riders, with muffin tops just spilling everywhere like the good ol’ days of the early 2000s?

I know, I don’t even want to consider it. But that’s what the people who issue and buy bonds are doing: making a prediction about what the interest rate will be over that 10 year loan period.

The other aspect is how to price the bond. Once it’s issued, you can buy and sell the bond to someone else (known as a secondary market). The bond will therefore have a price, based on market demand – it might be above or below the price it was issued at, depending on what people are feeling.

I swear to God, a huge part of our economic system is based on people having ‘the feels’ about what’s going to happen. Like sure, they have graphs and shit, but ‘sentiment’ is also key – and that’s a fancy word for a feeling.

Anyway, the things that matter when it comes to bonds are: the interest rate, the length of time and the price. When you add the first two together, you get a ‘yield curve’ – which is meant to be some magical view into the future. You know when Frodo looks into Galadriel’s magical water feature in Lothlorien (Tolkien nerd alert!) and sees what may be the future, but also, may not?

That’s basically the same as a yield curve.

At the moment the US yield curve is inverted, and I’m not going to explain what that means because it hurts my head. Except to say, it’s like a guy with dreadlocks and firesticks, chatting you up at a party: kinda weird and not that great.

The Aussie 10-year yield curve is like that guy’s creepy quiet friend, silently giving you a bad feeling.

According to my boss, who knows about these things, we are in a new and unfamiliar phase of the interest rate, economic and property cycles. While we are ‘late cycle’, that doesn’t mean it’s going to end soon, and in fact we could be hanging around in this low-growth phase for a decade or more.

So, now that we all understand interest rates (right?), let’s talk about our home loans (either real or aspirational).

And here endeth the yield curve lesson.

There is no reason for this picture except general thirst.

chris-hemsworth-shirtless-in-thor-3-trailer-new-poster-01

What’s happening with home loan rates?

Interest Rate Buffer gets a glow-up – Until just over a month ago, banks were forced to assess mortgages with a serviceability buffer of over 7% interest. Meaning they worked out how much you could reasonably borrow if rates went up to 7%.

But in fact, rates haven’t been that high since Beyonce was still part of Destiny’s Child. And in this low-interest-rate world, it’s unlikely they’ll get that high again, at least not before the Destiny’s Child reunion tour (not counting the joyous moment in Homecoming where they have a cameo).

So, the regulator had a rethink, and now the banks get to pick a buffer linked to their current rate. If the rate being offered is 3%, for example, they see what you could afford with another 2.5% on top. It doesn’t sound like a lot, but when you’re dealing with big house price numbers, it can mean a difference of $50,000 or more in terms of how much you can borrow.

Investor loans come in from the cold – A couple of years ago, the regulators were (quite rightly) freaking out about the property market free-for-all that was sending prices through the roof, and encouraging investors to load up on huge piles of debt.

Their solution was to tell the banks they had to put a handbrake on the growth of loans to investors.

Now, if you were a bank, you could do this by, I don’t know, just saying no to more loans, right? Wrong! Don’t you know anything about banks?

Their solution was to make them more expensive! And so, we saw a growing gap between owner-occupier rates and investor rates. Even for people who already had the loans (my old boss called this ‘repricing the back book’ and as an ex-banker, he thought it was dodgy AF).

Anyway, now that property investment is about as cool as last year’s platform sandals (ugh), the investor rates are coming back down.

Fixed rate loans are so hot right now – The banks are falling over themselves to get people locked in to one of these, hence the 3% on offer (by comparison, my variable loan is around 3.4%).

Now before you get all excited and think ‘well of course that sounds awesome, why would I pay over 3%?’, remember what we know about banks.

They never do anything to be nice.

Like the bond issuers discussed above, banks are betting that interest rates are coming down further. So they want to lock you in at today’s rate.

Sorry banks, but I’ll take my chances on a variable rate thanks very much.

Look, some people like fixed rates because they mean more certainty around cashflow. You know exactly what you’re paying for the fixed period. If that’s your thing, you do you, boo.

But fixed loans are normally attractive in a rising rate environment. Quick, lock in before rates go up!

In a falling rate environment, I struggle to see the attraction.

So don’t get all caught up in the breathless media stories. If you have a variable mortgage already, there’s a good chance it will go down further (according to all the smart people who predict these things – not just me).

And I’ve already said a lot now so let’s just end on a shirtless photo of Wolverine. Because, why not?

(God, my search history is messed up – yield curve to shirtless Wolverine).

The-Wolverine-Logan-shirtless-again

Made to measure? Ready to wear? All about off-the-plan apartments

Last week I witnessed the glorious sight of 120 women drinking wine and listening to a seminar on getting started with investing.

Girls Just Wanna Have Funds was a puntastic pleasure. I liked Molly’s description of investment being like the free weights room at the gym: full of men and very intimidating.

(Personally, I am that bitch – the one who struts around the weights room, frowning at men who don’t unrack their weights).

Anyway, the seminar focused a lot on listed investments such as shares and ETFs. This is great, because they can be a wonderful way to get started. (Click here for an explainer).

But I know that when many Australians think of investment, they think of property. And so, I wanted to talk about something in the news recently: buying off-the-plan apartments.

I know people who have done this successfully, so I’m not here to throw shade at the whole idea.

But when a big developer went bust last week, it added to the negative headlines around this sector. Remember the infamous Opal Tower, whose residents were evacuated at Christmas thanks to some big concrete cracks? It was followed by a similar issue in Mascot recently.

As a result, people are scratching their heads about whether purchasing off-the-plan is such a great idea. So, let me give you a quick rundown on the pros and cons of this style of investment.

Why do developers sell off-the-plan?

So they can borrow money to build. Most developers don’t just use their own money for a project; they usually need a loan.

And the lender wants to know that buyers have put their money on the table to provide ‘debt cover’ for the loan. Once the lender feels comfortable that they could be repaid if things go wrong, they’ll stump up the money for construction to start.

Why do people buy off-the-plan?

Lots of different reasons, but here are some:

  • Brand spanking new – nobody else has lived there when you move in. Some people really like that. You can often choose the fixtures and finishes too, so it is like buying a made-to-measure wedding dress  – the design is standard but the details are yours.
  • Lock in a price upfront – this is appealing in a rising market. Say you agree to pay $500K and then the market rises by 5% over the next year – your asset has increased in value by $25K without you doing anything.
  • Have time to save up – the time that the developer spends marketing and building the property is often a couple of years. So, you have that time to keep saving and boost your deposit/reduce your mortgage – all the while knowing you have locked in a price that won’t go up.
  • Depreciation tax benefits – when you buy a property as an investment, you may be able to claim ‘depreciation’ as the property ages. It’s quite complicated, but it can give you some tax benefits.

So, there are definitely upsides to the idea. But there are some risks to consider too:

The project may not go ahead. The developer normally has to wait and sell a good chunk of the units – maybe 75% or more – before building can start. In the market peak, when projects sometimes sold out in days, that wasn’t such an issue. But at this point in the cycle, sales have slowed significantly.

So, it could take months or years to reach the minimum debt cover; and in the worst case scenario, they never get there. That doesn’t mean you lose the deposit – you have just have that cash locked up in some sort of trust account, earning little to no interest. The contract should have a sunset clause that says if the project doesn’t start by X Date, the buyers can have their money back. So, be clear what that date is when you sign up!

The value of the property might fall by the time it’s finished. As explained above, you can make money in a rising market by locking in a price and just waiting. Perhaps that $500K unit is worth $550K the day you move in.

But in a falling market, it can lose value instead, and the unit is now valued (by a professional valuer) at $450K.

It’s only a paper loss at this stage – i.e. you don’t lose the money until you sell it. But where it can cause trouble is if you’re getting a mortgage. The bank will agree to lend a percentage of the VALUE, not the PRICE. So, if they are providing 80%, it’s 80% of that $450K. If they won’t go any higher, you need to find the extra money somewhere else. If you can’t find it, you may have to walk away … and lose the deposit.

The finished building may be poor quality. That’s what happened with the Opal Tower. Most finished buildings end up with some defects, anything from broken tiles to leaking windows. Many only appear over time, and the builder is contractually obliged to fix them within a certain period from completion.

It’s when that period is over, or when the cause of the problem is unclear, that things can escalate.

I should point out that this isn’t unique to new buildings. My own apartment block is 20 years old and had a very expensive water seepage issue a few years ago. That’s why the strata has insurance and collects a sinking fund. Although if that’s not enough, you can get hit with a ‘special levy’. Home ownership can be hard!

The developer could go broke before it’s finished. This is a remote risk, but the key is to be aware of what your contract says. We don’t know all the facts yet, but word on the street is that Ralan, the developer who just collapsed, had convinced its buyers to release their deposit to cover interest costs. This is highly unusual – some are saying it’s even illegal – but the fact is, everyday buyers wouldn’t have realised what they’d signed up to.

And if it’s true (as some have suggested) that the conveyancers they used were recommended by the developer, it’s even fishier.

Life pro tip: whatever big purchase you make, always get your own, independent advice, from mortgage brokers through to lawyers. Don’t use the people your vendor recommends!

So, should you buy off the plan?

It’s totally up to you. Like every single investment, there are risks and rewards. The key is to see them all in advance.

One option is to buy recently completed apartments –  this ‘residual stock’ may be marketed as ‘Final Release’ and is made up of the units that weren’t sold in the pre-sales period. They don’t want to dump them on the market in a fire sale, so they sell them off one by one. These are an option if you want a brand new place, but also want to see it first – like a wedding dress that’s ‘off the rack’.

Overall, any investment comes down to your personal goals and preferences. Buying property for investment creates concentration risk – i.e. putting all your eggs in one basket – but some people like the feeling of being able to see and touch their investment. If you’re buying to live in it, the risks (and benefits) can be different, but they still exist.

Before you make any decision, be sure to have a clear view of your timeframe, risk appetite and lifestyle preferences. And please, if you do go ahead, get decent legal and tax advice. Think of it as part of the cost – you need someone providing you with objective advice and pointing out any red flags.

 

What you need to know about money, explained by Taylor Swift songs

No tricks in that headline. Just legitimately good life advice from T Swift.

Ok maybe you don’t play TayTay every time you need a pick-me-up. (But I do)

Maybe you don’t judge your nieces for only liking her new stuff and not appreciating the country years. (But I do).

And maybe you missed the clever reference to Begin Again in those last two lines. (But I do. And if you didn’t, you’re kind of a loser).

But let me assure you, there is some solid sense to be found in Taylor’s music, and I offer it to you here. You’re welcome.

Taylor Swift I Knew You Were TroubleI Knew You Were Trouble – We all know those people. They come into our lives, sweeping us up in romance and excitement, but in our hearts we know it’s going to end badly.

This is because we don’t listen to our gut: that inner voice telling us that something’s not right.

And if you’re facing a financial decision that feels a little … off, then it’s telling you something.

The people who lose money to financial scams, poor advice or just super risky investments probably had that moment of thinking I knew you were trouble when you walked in.

The key is to school yourself on the basics of money e.g.:

  • The higher the return, the higher the risk. Know your risk appetite and work from there.
  • If it sounds too good to be true, then it is.
  • Always find out who’s getting paid, and how much, when a product is recommended. It explains a lot.

It’s easy to be bamboozled by all the information out there. But trusting your own research, and your own gut, can actually be really empowering.

Read more here: If financial planners are greedy, dishonest or stupid, who should we trust?

bad blood newBad Blood – A classic tale of love/friendship gone wrong. You just never know when things will turn sour and you have to create a secret society of female assassins. Or maybe just leave a dodgy relationship.

The key lesson is that whatever ‘mad love’ you had, be ready in case it turns to ‘bad blood’. Have an emergency fund, keep some of your finances separate, and always know what’s happening with the money going in and out of your accounts.

Read this post for more: The single biggest risk to your money is probably not what you think

Who-Taylor-Swift-I-Did-Something-Bad-AboutI Did Something Bad – We all did, didn’t we? We spent too much on a new dress that wasn’t remotely on sale. We didn’t do our tax return for far too long. We ignored our super for years and paid way too many fees. Whatever your guilty secret – big or small, low-grade or serious stuff-up – it’s ok!

A lot of us get caught up in the guilt and shame spiral, which makes it hard to act. You had a spending blowout, so you think bugger it, I’ll keep going. You didn’t do last year’s tax, so you may as well not do this year’s. You lost track of your super and now you figure it’s too hard to find.

How do I know this? I did it myself. Confession time. My life admin was a mess after my divorce. It started when someone changed the locks on my house and ‘couldn’t find’ a bunch of my paperwork. It ended up with me totally overwhelmed by my tax.

In the end, after much proscrastination and a kind and supportive accountant, I sorted it out, and the relief was amazing.

If you’ve done something bad – or, more likely, not done something good – then take my advice. Just do one thing. Send one email. Call one super fund. Compare one insurance quote. Whatever it is, just getting started is both the hardest and the easiest thing you’ll do.

Read more: Fierce Girl Action Plan: Part II – Super fun!

taylor-swiftShake it Off – The social conditioning of the patriarchy, that is. Yeah, shake off the shit that people might talk about you.

But more importantly, try and catch yourself believing the bullshit that the world teaches young girls and that we drag into adult life. Here I present a random list of beliefs you should shake off, Taylor Swift style:

  • That you’re no good with money – you totally are, in the same way you can be good at winged eyeliner: with time, attention, a lot of practice and strong self-belief. (God I fucking nailed my eyeliner today. I’ve come a long way).
  • That investing is too hard and risky to tackle – you know what’s a risky investment? Waiting for that fuckboy you’re dating to turn into a fully-fledged human person. If you’re willing to invest time into something like that, with little-to-no chance of success, imagine investing some money into something like the sharemarket, which most definitely goes up far more than it goes down.
  • That finance is just too boring to bother with – sure, a lot of the finance information out there is boring. But not all of it. And if you can spend an hour on The Iconic looking for the perfect short-sleeve turtleneck (I didn’t find it btw), then you can read some stuff about money. Check out some women-friendly resources like Financy or Ellevest.

These are just some of the limiting beliefs that we can hold us back. Try and police your own negative thoughts, and see if you can shake them off!

Read more: What if you’re actually smarter with money than you think?

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