The personal financial pitfalls from stimulus measures

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

4. 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

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