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Interest rate changes: what's that all about?
They do this a number of ways, the most prominent being to review the level of interest rates when the Reserve Bank Board meets monthly 11 times a year (they give themselves January off!). The theory is that if prices are going up too fast then that will cause inflation to rise. If inflation is too high (they want it to be less than 3% per annum) the Reserve Bank has to act to try and reduce it. Increasing interest rates is like the brake pedal on your car. When you push down on the brake the car slows down. When interest rates increase the economy’s brake pedal is applied. Because we have less left over to spend, demand is reduced, the economy slows and hopefully the inflation rate falls. On the other hand if the Reserve Bank wants to make the economy go faster they drop interest rates. This time it’s like pushing the accelerator. As we have more left over to spend demand is increased, we create more jobs and push the economy along. All this happens in economic cycles where we go up and down this little roller coaster every 8 to 10 years or so. What will happen to interest rates next? I wish I knew! Lenders Mortgage Insurance makes all the difference
In 1965 in response to this problem, the then Menzies Government established HLIC (Housing Loans Insurance Corporation of Australia) so that Australians could borrow for housing at more affordable rates. By the time HLIC was sold off in 1997 they had insured 1.3 million loans. Over the next few years, other insurance companies came into our market offering this product. Not surprisingly, given our high property prices, the demand for Lenders Mortgage Insurance continues to grow. Originally this insurance was called Mortgage Guarantee Insurance, but because of the confusion that name caused, the product was re-branded Lenders Mortgage Insurance some time ago. So, what is Lenders Mortgage Insurance (LMI) and how does it work? As the name suggests this is an insurance policy that protects the lender as the insured party against loss should the borrowers not be able to pay and the subsequent sale of the security property does not raise enough money to clear the debt. This insurance is specified by the lender when lending an amount close to the value of the property being purchased, for example a home loan where the amount of the loan represents more than 80% of the valuation of the property. As this size loan is a higher risk for the lender, they ask for this additional protection to pay them out should the loan not be paid back. Lenders Mortgage Insurance is usually charged as a one-off premium and is calculated on a sliding scale. So, the greater the percentage of the property value borrowed and the more money involved, the higher the premium payable. The premium is usually paid upfront when the loan is settled. Understand though that this is the only kind of insurance where the borrower pays both the premium and potentially the claim as well. In other words if the lender has a loss of say $2,000 after the forced sale of the property, the lender claims $2,000 against the LMI policy. If the insurer then pays out the lender’s loss, the insurer may then come after the borrowers personally to make good the $2,000 they have paid the lender. The reality is, without this insurance the loan won’t be approved in the first place but people need to understand the consequences if they can’t pay their loan, the house is repossessed and sold, and there is a shortfall for whatever reason. What's your most valuable possession?
Without your salary you probably can’t pay your on-going bills let alone grow your wealth through saving or getting a loan to buy that house or that car. Then, once you’ve borrowed for these things no salary means you can’t necessarily make your repayments. The result is that you don’t usually hang onto the house or the car for very long anyway. The next question is you insure your house and your car don’t you, but do you insure your salary? Most self-employed people know the value of income protection insurance, without it, if they get sick or have a major problem; they are in big trouble because their money stops. But employees who have sick leave paid for can also take out income protection insurance. Otherwise, what happens when your sick leave is all gone but there’s still some time before you get back to work after a serious accident? Check with your accountant, this policy might be tax deductible for you. Like any insurance please make sure you read the policy terms and understand exactly when it does or does not pay out before you buy. A common form of income protection insurance is that offered when you take out a loan. Here, some of these loan protection style policies won’t pay out unless you’re eligible to be on a Government unemployment benefit as a result of losing your job. Sadly, getting that unemployment benefit is not always as easy as it sounds. There are often eligibility issues and it all takes time. For example if your partner is still working when you lose your job, that second person’s money coming into the household might mean you are not eligible for that unemployment benefit. If you’re not eligible for that benefit, then some policies say you can’t make a successful claim even though you’re out of work and thought you had that protection. Can you really afford not to insure your potentially most valuable possession? What about a managed fund?
For other people though it’s different. They wouldn’t take a motor car engine apart and put it back together, nor would they perform surgery on their mum, they’d leave those things to the experts. Perhaps investing money is similar. Also, we’re all time poor so you might not have the time to study the markets and find the best investment products out there. One answer for this group could be to hand that money to a professional fund manager to look after it for them. Usually large fund managers are full-time professional investors who spend time researching the top investments in the market place. Also, because fund managers put lots of different people’s funds together they have bigger parcels of money to invest. Because of the amount they control they might get a better rate of return than you or me alone. Fund managers can also offer you access to different kinds of investment products that invest in a range of investments from property to shares, cash to fixed interest or all of the above. That way you may be able to have a say in the kind of investment that suits you. As with all things you would need to read the fund documents carefully. But hang on, these people charge fees don’t they? Well of course they do, but the trick is that the return to you after they’ve taken out their fees should be better than the kind of return you could get on your own. If not, there are lots of fund managers out there! Please read everything very carefully before you buy to make sure you understand the ins and outs of the proposed investment. Your accountant or professional financial adviser could also be an excellent starting point. |
This issue 
PERTH - MELBOURNE - SYDNEY
Forward This Newsletter Could one of these articles help a friend? Or do you know someone needing a loan in the next three to six months? Please give me a call or forward this newsletter to them. Many thanks. Profile Crown Lending is one of Australia’s fastest growing home loan lenders.
Book Review The One Minute Manager Balances Work and Life This book tells the story of a One Minute Manager who is so much in demand that he eats on the run, doesn’t take time to exercise, and never puts himself, his family or his well-being top of his list of priorities. He soon discovers that his life is out of balance and that success in business is endangering his health. For the millions of readers of Ken Blanchard’s bestselling books, The One Minute Manager Balances Work and Life offers a way to achieve not only a new, healthier style of living but increased productivity as well. Available at all Dymocks for $19.95, HarperCollins Publishers Did You Know? Retirement Statistics According to the Australian Bureau of Statistics, a male born today in Australia can expect to live 78.1 years. If you moved to Hong Kong or Iceland, life expectancy goes up to 79 years. People in Japan and Sweden also live slightly longer. If you’re female and born today you can expect to live 83 years. If you also chose to move to Hong Kong, Spain, France, Iceland, Italy, Switzerland or Japan you’d expect to live to around 85. How much have you saved for retirement? Twenty years on a government pension doesn’t sound too good a prospect to me. 
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Have you ever wondered why our interest rates change? 
Many years ago, if you did not have a big deposit and you needed to borrow more than sixty or seventy percent of the value of your home, the answer was either “No” or you were forced to take an expensive second mortgage to make up the difference.
When asked this particular question, most people reply their home or their car, their term deposits or something else they own. The answer is that your ability to earn money is potentially your most valuable possession.
Getting the most from the money you have to invest is a challenge for everybody these days. Happily, lots of people feel quite comfortable in choosing where and when to invest.