We are very pleased to announce the formation of Financial Keys Mortgage Services headed up by Mat Carpenter. This is a significant enhancement to our service offering. We can now offer you home loans and investment loans from over 30 key lenders, lease finance and deposit bonds. Mat holds a Bachelor of Business from UTS in Accounting and Finance, and a Graduate Diploma of Applied Finance, bringing a level of professionalism and technical knowledge which is not always encountered in the mortgage broking industry. He has over four years experience as a mortgage broker and was previously a private client adviser with J B Were Stockbroking. Financial Keys has had a working relationship with Mat for several years and we are delighted he has now joined our team. Expect to see a regular contribution to our newsletter from Mat, discussing mortgage lending strategies, mortgage product comparisons and other aspects of the mortgage and lending industry. If you currently have a mortgage and feel it may be worth a quick review or if you are thinking of buying a property give Mat a call now. Andrew Condell

The Reserve Bank’s move to increase interest rates in May will have many of our clients considering whether a fixed rate loan is worth
considering.

A fixed rate loan simply means you can be assured that the repayments on your loan won’t change for a certain period (the most common choice is three years), regardless of what rates do. This is great for those who are on a set-budget and simply cannot afford an increase in repayments, or for those who simply like to “set and forget”.

There are various pros and cons with taking a fixed rate option:

Pros

• You are protected from rising rates, at least for the fixed rate period.

Cons

• The fixed rate is normally higher than what you could achieve on a variable rate.
• You are normally restricted in the amount of additional repayments you can make on top of the normal monthly payments. If you like to deposit lump sums (eg bonuses) into your loan, you need to be mindful of this restriction.
• Any additional payments you are able to make are normally not able to be redrawn during the fixed rate period.
• Normally lenders don’t offer any offset account facilities on fixed rate loans.
• Exit fees, if you discharge the loan early, can be much higher than for a variable rate loan.
• You give up any benefit if rates fall (at least until the end of the fixed rate period).
  
  

It’s important to know that it’s not an all-or-nothing decision. Many people, nervous about the current outlook, have been deciding to fix approximately 50% of their mortgage, and leaving the balance variable. Another common strategy is to fix all except an amount that could be paid off within, say, the three year period. A typical client might fix $350,000 of a $400,000 loan, leaving $50,000 variable. They then concentrate on paying off the $50,000 over the three years. It’s usually easier to be motivated to pay off the small loan over three years, than face the daunting $400,000 loan over 30 years!

If you are considering a fixed rate option, there are several questions to ask:

• Is the rate fixed at time of application/switch, and if so, is it free or is there a “rate lock” fee? Fixed rates can move quickly and independently of variable rates, so you need to make sure you will actually get the rate you’ve been quoted.
• Can the fixed rate loan be combined with a variable rate loan?
• Can you make additional repayments, and if so, what is the limit?
• When can you redraw those additional repayments?
• Can you have an offset account linked to the fixed rate loan?

The fixed rate loan market has evolved rapidly over the last 12 months, with some lenders offering fixed rate loans that have almost as many features as variable loans. For example, there are now fixed rates loans with 100% offset facilities, maximising your potential interest savings whilst still giving the security of a fixed rate.

I look forward to speaking with you to discuss your lending needs.

Mat Carpenter

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Peter Costello has delivered a budget that will provide more dollars in the pocket of retired Australians and tax cuts favouring middle and high income earners.

Wholesale changes to superannuation have been proposed. Gone are all taxes for superannuation benefits paid after age 60 for most Australians. Gone also is the complex system of Reasonable Benefit Limits (RBL’s) and the need to cash your benefits once you finish work and are over 65.

These changes will greatly simplify retirement planning, removing the desire to “beat the rules”. By removing the complexity the focus will now firmly rest on savings strategies and portfolio management.

Retirement Income Streams
For those over 60 this means:-

• No more lump sum tax.
• No limitations on amounts to be withdrawn.
• No new excessive benefits.
• Removal of the work test; this means you can keep your money in the super accumulation phase until age 75.
• Members who had previously reached their RBL limit can now resume contributions tax-effectively to their super account.
• Members may defer paying off mortgage debt until age 60 and then fund the repayment from a tax free withdrawal from superannuation.

There will be a big incentive to retire, or change jobs, and commence income streams at age 60. By moving into the pension phase the 15% tax on fund earnings ceases. Also because the pension payment is tax exempt this will not push retirees in receipt of other income into higher marginal tax rates.

Should a retiree recommence work at a future date they could salary sacrifice $50,000 into their superannuation account and supplement the reduced income by drawing a tax free pension.

If they are under age 65, they need only withdraw 4% of the account balance (calculated at the beginning of the financial year). If they don’t need the money, they can simply withdraw it (tax-free) and put it back into their accumulation account as an undeducted contribution. They can then transfer the amount from their accumulation account into their pension account so earnings on it become tax-free!

Three types of accounts are expected to remain for the over 60’s:

• Lifetime Annuities
• Pension Account
• Accumulation (Superannuation) Account

Lifetime annuities will still be available to those retirees who prefer a stable income guaranteed for life.

Centrelink
From a Centrelink Aged and DVA Pension
perspective the 50% assets test exemption, which applies for complying income streams, will be removed for those income streams commenced after September 2007. This provides a window of opportunity for those retiring before that date planning to acquire a complying income stream.

Contributions
Other important proposed changes relate to contributions into superannuation. The current aged based deductible contribution limits will be scrapped from July 2007 in favour of a flat $50,000 deductible contribution limit. This will also apply to the self employed who will now receive a 100% deduction for contributions up to $50,000.

In addition there is now a $150,000 cap on the amount of undeducted contributions that can be made in one year. However this still allows a couple to contribute up to $200,000 per annum each. This will encourage many people to grow their superannuation benefit well before retirement.

The government has indicated that they will discuss these proposed new rules with superannuation industry representatives. In particular they will discuss how transition rules could apply to the proposed contribution limits.

There are quite a number of areas that require clarification particularly in relation to existing complying pensions, excessive benefits and transitional contribution rules. Overall however, the proposed changes to the superannuation rules provide for a simpler, more attractive system.

This is a very positive step for retirees and for Australia as it goes a long way towards addressing our historical low levels of personal savings. For us your advisers this allows us to focus more on strategic planning and portfolio management; areas where we can add real value to the outcomes you can achieve.

Brendan Gallagher


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The Australian sharemarket has continued its upward climb to record levels but in mid May commodity prices retreated after attaining dizzy heights.

Australia wasn’t the only sharemarket to retreat in May with most markets reacting to both inflationary and economic slowdown fears and speculators moving out of resources and into safer stocks.

The US economy has continued to grow recently. This growth is spurred by consumer and business spending. The US Federal Reserve has been active though, increasing interest rates to 5.0% in early May. This is their highest level in five years.

Inflation appears to be the Fed’s biggest concern, with energy costs and other commodity prices increasing substantially. The other concern is housing prices, as the US housing bubble continues to expand. Any slowdown in housing growth is expected to have a negative affect on consumer spending and therefore general economic growth.

The US sharemarket has been buoyed by recent economic growth. However interest rate rises and the fear of more to come have started to bite, bringing the market back in mid May.

In Europe, business confidence has improved and share markets have enjoyed steady growth tempered by a retreat in May.

Japan and other parts of Asia continue to demonstrate economic growth. Inflation does not appear to be an issue at this stage although oil price concerns have lead to a recent pull back in the Nikkei.

In Australia, the Reserve Bank increased interest rates on the back of rising inflation. The government’s budget was good news for taxpayers and in particular retirees. Tax reform, especially in relation to superannuation was welcomed warmly by most Australians. Removal of tax on all superannuation benefits after age 60 surprised most experts with its generosity and the sharemarket reacted positively.

With central banks around the world raising interest rates and energy prices continuing to increase, there is likely to be a slowdown in consumer spending over the coming months. To balance this, employment growth remains strong in most labour markets.

Sharemarkets in Asia and Europe in particular continue to look attractive relative to the US. In Australia, the recent correction in commodity prices is viewed by some as a necessary and welcome relief. Views are mixed on whether there is more to come.

Brendan Gallagher

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ENTERING AN Aged Care Facility?
A LITTLE Planning CAN GO A LONG WAY

Entering an aged care facility can be complicated. The amount that a resident pays varies dramatically depending on how their assets and income are assessed.

It comes as a surprise to most potential residents that the amount they pay to enter and remain in a hostel or nursing home is dependant on a Centrelink assessment of their assets and income. Some investments such as term annuities are assessed more favourably under Centrelink’s income and assets test. This can result in lower daily care fees and larger age or DVA pensions.

Residents of hostels and nursing homes can be asked to pay up to three types of fees:

• A Basic Daily Care Fee;
• A Daily Income Tested fee and
• An Accommodation Bond (hostels) or Accommodation Charge (nursing homes).

The basic daily care fee is paid at either a lower ‘pensioner’ or higher ‘non-pensioner’ rate. When working out whether you pay the pensioner or non-pensioner rate, you are usually treated as a pensioner if you receive a means tested pension or benefit from Centrelink, or the Department of Veterans’ Affairs (DVA).

A daily income tested fee is payable by residents who receive a part age or DVA pension (‘a part pensioner’) and non-pensioners and is calculated based on a resident’s income as assessed by Centrelink’s incomes test.

There are two key factors which determine how much a resident pays in daily care fees:

1. Whether a resident is a part- pensioner or a non-pensioner. Centrelink uses an income and assets test to assess pension entitlements; and

2. The amount of income assessed by Centrelink under the incomes test. The lower the income assessed by Centrelink, the lower the daily care fees charged;

Some investments such as term annuities are assessed more favourably under Centrelink’s income and assets test. As a result, moving funds into more favourably treated investments can result in larger age or DVA pensions and lower daily care fees. This is particularly relevant when the family home is to be sold prior to the resident entering the home or hostel. This is demonstrated in the case study below:

Betty and Tom, 83 and 81 respectively, have recently sold their home and are moving into a hostel. After paying an accommodation bond of $400,000, Betty and Tom have $410,000 remaining after the sale of their home. This money is currently invested in a term deposit.

If the money remains invested in a term deposit, Betty and Tom, will receive the age pension and pay the daily care fees shown in scenario 1 in the table above. If Betty and Tom invest $300,000 in an 8 year complying term annuity, they will receive the age pension and pay the daily care fees shown in scenario 2:

The table above shows that Betty and Tom can increase their age pension by $4,967 per year and reduce their daily care fees by $2,916 per year by investing in a term annuity. This is because term annuities are treated more favourably than term deposits under Centrelink’s income and assets tests even though they are similar types of investments.

Like term deposits, term annuities pay a guaranteed return for a fixed term. However, term annuities pay back capital and income over the term of the investment.

One drawback of term annuities is that the capital invested is locked away for the chosen term and cannot be withdrawn. For this reason, professional financial advice should be sought before investing in a term annuity.

Patrick Hegarty

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