Welcome to Finance and Fury – Today we’ll be looking at some of the pitfalls of the recent financial measures to combat the economic fallout that is going on

Two major ones when it comes to the personal side of this-

  1. Money out of super – Easing the rules of requirements to the access of superannuation funds under the ‘financial hardship requirements’
  2. Mortgage payments – The repayment ‘holidays’ on mortgages

 

Before we get to it – with either of these options – If you are in extreme financial hardship and need to do this – do it – but if not and just want to take money out of super or go on holiday for a mortgage – don’t – work off a strategy of survive now but pay later

 

Mortgages – Banks‌ ‌also‌ ‌come‌ ‌to‌ ‌the‌ ‌party‌ ‌to‌ ‌provide‌ ‌repayment‌ ‌‘holidays’‌ ‌to‌ ‌ease‌ ‌short-term‌ ‌cash‌ ‌flow‌ burden‌ ‌to keep‌ home loan repayments if people have been impacted by the government measures

  1. Under these new rules – borrowers‌ ‌can‌ ‌defer‌ ‌their‌ ‌loan‌ ‌repayments‌ ‌for‌ ‌up‌ ‌to‌ ‌6‌ ‌months –
    1. National Australia Bank, Westpac and ANZ said on Friday that affected home owners could pause repayments for up to six months, pending a three-month review, as part of new support packages for home owners and businesses.
    2. Banks had been offering support to those affected— including up to a three-month deferral of mortgage repayments — under existing financial hardship policies
  2. This sounds like a generous offer – in theory – but it acts like any holiday – if you do it on a loan you have to pay for it when you get back – that is the case with these repayment holidays – the interest still accrues and you are left with a larger debt to repay –
    1. News articles state that Economists have backed plans by the big banks to let home owners impacted by the coronavirus crisis defer mortgage repayments for up to six months – so must be good –
    2. But when a home loan repayment is deferred for six months, interest is calculated and added to the loan balance each month which can result in customers paying interest on interest each month
    3. So when the 6 month holiday is up – the loans kick back in at a higher repayment level-
    4. The‌ ‌problem‌ ‌here‌ ‌is‌ ‌that‌ ‌the‌ ‌interest‌ ‌is‌ ‌simply‌ ‌being‌ ‌added‌ ‌to‌ ‌the‌ ‌loan‌ ‌balance‌ ‌-‌ ‌compounded‌ ‌monthly
  3. What are the costs – lets look at some examples –
    1. If you have a loan of ‌$600,000,‌ ‌payable‌ ‌over‌ ‌30‌ ‌years‌ ‌at‌ ‌a‌ ‌3%‌ ‌interest‌ ‌rate‌ ‌and‌ ‌monthly‌ ‌repayments‌ ‌of‌ ‌$2,529
      1. Not making repayments for 6 months will cost an additional $15,118 – the value of repayments deferred
      2. This will add an additional $22,527 on your loan and add on 15 months in repayments – however
  • The loan is a 30 year loan – so technically it would instead would be $2,593 pm
  1. The saving grace of this is that interest rates are incredibly low at the moment –
  2. But if‌ ‌you’re‌ ‌considering‌ ‌getting‌ ‌a‌ ‌holiday‌ ‌on‌ ‌your‌ ‌home‌ ‌loan – these measures can fall into a ‌privatised‌ ‌debt‌ ‌trap
  1. That is where the hope is that the ‌economy‌ ‌will‌ ‌miraculously‌ ‌bounce-back‌ ‌in‌ ‌6‌ ‌months‌ ‌time‌ ‌when‌ ‌we‌ ‌emerge‌ ‌from‌ ‌social‌ ‌lock-down and government controls ease
    1. I think this may be kicking the can down the road – reminds me of subprime lending a little –
    2. For now – Lower repayments but when the loans kick back in – will people’s incomes be able to afford it? If not, and property prices are lower – may create defaults –
    3. Saving grace in Aus for Property is the recourse on borrowing – the collateral that is required – which wasn’t in place under the loan arrangements pre-2007

 

Superannuation –

  1. Government announced the relaxation of the restrictions to superannuation under the financial hardship requirements
    1. Previously – had to be about to be kicked out of your home and on government welfare to get the $10k out –
    2. Now – anyone who had been affected by coronas can lodge a request through the ATO/MyGov to get money out of their superannuation fund.
    3. Between now and the end of this FY – 30 June 2020 – can get $10k – then for the following three months – a further $10k – in total can withdraw up to $20,000
  2. As I said at the start – if you are about to be ruined financially and have to do it – then consider it – but this will cost a lot in the long term –
    1. The timing of the policy is pretty bad – encouraging people to take money out when the market has just dropped 35% – the $10,000 was maybe worth $14,400 a few weeks ago
    2. Or – if you take the total $20,000
    3. Some people may not even have $20k in super who are the ones most affected – younger casual employees
    4. If they were to take their entire balance out, not only would they effectively need to start again from $0, but they would lose out on the next 30 years of compounding.
  3. Essentially – you’re accepting $20,000 for what was a short time ago – may have been worth $31,000 a few months ago – but could be worth a lot more in the future
  4. Other side- the rebound – have far less in the account to take advantage of the market rebound
  5. Either way – the compounding effects of losses are the same (assuming account fees and insurance costs are nil)
  6. Few Examples – What compounding returns look like over different time frames – until access of funds at 60
  7. Obviously depends on returns over time – 7% or 8% on average – take the full $20k out:
    1. 40yo – 20 years – $84,957
    2. 30yo – 30 years – $175,100
    3. 20yo – 40 years – $360,885
  8. Present value of funds today – with inflation of 2.5%
    1. 40yo – 20 years – $51,847
    2. 30yo – 30 years – $83,500
    3. 20yo – 40 years – $134,400

 

Summary – that is it – just a quick summary of some of the potential downfalls to long term

 

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

5 Game Changing Tips for Building a Property Portfolio

Episode 35 5 Game Changing Tips for Building a Property Portfolio Welcome to Finance and Fury…today we have Jayden Vecchio from Hunter Galloway on the show, talking to us about 5 game changing tips for buying property especially for those who are looking to build a...

Congratulations! You will be able to borrow more money to purchase a property!

Welcome to Finance and Fury Looks like borrowing for property purchase is going to be easier. APRA is looking to make some changes to lending criteria enforced onto the banks. Today: Run through what these changes are Why they are occurring What the lending...

Should I make additional mortgage repayments or start investing?

Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Scott: “Hi Louis, I am currently in my 30s and have recently bought my first home. I would like to get your view if I should take advantage of low interest rates and start to put...

How to be wealthy; Germs, Monopoly, and Competition Vs Cooperation

Episode 2 How to be wealthy; Germs, Monopoly, and Competition Vs Cooperation. Hey guys, and welcome to Finance and Fury. Today the misunderstanding we're going to be tackling is how to be wealthy. There seems to be a lot of “rich-hating” going on around at the moment,...

One of the best places to invest in 2019, is to invest in yourself

Welcome to Finance and Fury! Today’s episode we continue our miniseries which looks at the best places to invest in 2019… Turns out, one of the best places to invest in 2019 might actually be in, Yourself. Today’s episode is the first building block for the next two...

The Financial Curse – When a Financial System does more harm than good

Welcome to Finance and Fury the Furious Friday Edition On the last episode we talked about the City of London Corporation, a mini plutocracy Today we are exploring at what point does a financial sector state to crowd out real economic growth? Referred to as the...

Why are some billionaires in favour of a more socialist state?

Welcome to Finance and Fury, the Furious Friday edition. This episode – be looking at the weird combination between socialism and billionaires that is emerging – especially focusing on why billionaires are increasingly becoming in favour of socialism? Or additional...

Would a one world currency actually work?

Welcome to Finance and Fury, the Furious Friday edition.  In this episode we will look at the concept of a one world currency and if one single currency could actually work for the world? There has been an increased level of discussion around this topic over the past...

How useful is investment theory when it comes to practically investing and calculating an expected return?

Welcome to Finance and Fury. How useful is investment theory when it comes to practically investing and calculating an expected return? Lot of theory when it comes to investing – efficient frontiers, EMH – working out expected returns In this episode – we will look at...

From trading cows to ones and zeros, Pablo Escobar’s money eating rats, and how our money is all debt based currency

Hi everyone and welcome to Finance and Fury! Today we’re going to look at our current monetary system; what is considered money, and also the future of our monetary system. Today’s episode will be a fairly quick episode, and will be an introduction to a series of...

Pin It on Pinterest

Share This