Australian Private Capital was delighted to bring on the Lighthouse Foundation as our most recent APC Partner just before the COVID pandemic arrived.  One of APC’s corporate values is to Give back as we prosper  and the Lighthouse Foundation is a wonderful way for us to do that.

The Lighthouse Foundation provides homeless young people from backgrounds of long-term neglect and abuse, with a home, a sense of family, and around-the-clock therapeutic care that is individually tailored, trauma informed and proven to work. Through their Lighthouse experience, young people can heal, learn again to relate to others and start to rebuild their lives. APC has recently begun our partnership with Lighthouse Foundation. Here is a short two minute sketch video about Lighhouse.

Here is a message from the Foundation which we wanted to share with you.

A message from the Lighthouse Foundation

Right now, there are hundreds of homeless young parents, babies and pregnant women in Australia that desperately need our support.  We’re talking about girls near you, from Coburg to Richmond, and right through to Bonbeach – this is happening on our very own doorstep.

Many of these young parents were forced to flee violent and abusive homes and have been repeatably told throughout their short painful lives “You don’t belong.  You’re useless.  You’re not good enough”.  Sadly, when a young person hears that over and over again, they begin to feel unworthy and invisible – like lone puzzle pieces that don’t ‘fit in’ or belong anywhere in this world.

The support the Foundation receives allows for us to attend to the immediate needs of these little families and gives us the chance to show them that their dreams, hopes and lives truly matter. This support lets us show girls like Bianca, whose story we reflect on below, that they are capable and worthy of being loved and helps us to stop the next generation of homelessness.

Our young people need help more than ever throughout this difficult time.  Just like a puzzle is put together piece by piece, we wouldn’t be able to rebuild these young lives without the vital contributions we receive from our donors.

Bianca’s Story

Lighthouse’s Young Parents and Babies’ program was devised by our Patron, Vicki Vidor OAM, to fulfil the vision to help vulnerable homeless young women and their babies – giving them the therapeutic care & practical support needed to secure a brighter and more sustainable future.  This is the story our young mum, Bianca, who transitioned into independent living.

Imagine being 20-years-old, 38 weeks pregnant and homeless. It seems unimaginable that a young woman in Australia could find herself in such a vulnerable position, but that was true for Bianca.

After years of struggling with substance abuse, Bianca had completed a rehabilitation program to try and prepare herself for motherhood – but with nowhere to call home or social supports available to her, both of their futures were at serious risk.

Thankfully Bianca was referred to Lighthouse and warmly welcomed into our young parents and babies’ program.  It was tough at first, she admits, “learning to live with structure and allowing someone else to care for me was hard”, but for the first time, in a long time, she was safe.

Bianca slowly adapted to her new life at Lighthouse, and after giving birth to her baby boy, Kaylan, embraced the wraparound support provided by her carers and psychologists.  Every single day, their thoughtful and predictable engagement with Bianca helped to repair her shattered world view – proving that genuine, healthy and trustworthy relationships were possible.

After twelve months at Lighthouse, Bianca had developed a strong attachment with baby Kaylan and learnt the vital parenting skills needed to take care of him and most importantly, herself.  Having now left the program and transitioned into independent living, Bianca is hopeful for the future and has plans to complete her VCAL and enroll in a Bachelor of Nursing.

We couldn’t be more proud of this young Mum and what she has achieved over the past year.  Little Kaylan is lucky to have such a strong role-model in his life and both of them will always have a place to call home here at Lighthouse as a part of our ‘On For Life’ promise.

The next step

In a beautiful collaboration, Lighthouse has teamed up with iconic artists Ken Done & Cassie Byrnes to produce ta deluxe two-in-one Jigsaw Puzzle by Journey of Something.

This gift is the ‘gift that keeps on giving’, with all proceeds helping Lighthouse to support kids impacted by abuse, neglect and homelessness in Australia.  Australian Private Capital will be purchasing one for each member of our team.

If you would like to enquire or make your order so you too can support the Lighthouse Foundation, simply email georgiat@lighthousefoundation.org.au or call 03 9093 7500.

Key points

• Globally, the pace of economic recovery from COVID-19 is uneven, with the US tracking at the optimistic end-of-expectations but economies such as the UK lagging behind fund manager mid-year forecasts.
• Economic growth in the US has returned at a quicker-than-expected rate partly as a result of less-stringent lockdowns helping to boost the near-term economic outlook. Longer-term, many market commentators continue to expect US economic growth won’t return to pre-COVID levels until the end of 2021.
• There are signs international trade is picking-up after the lows of May and June with China as a stand-out in global trade. China’s export position has benefited from its dominance in the global production for COVID-related products such as protective gear, pharmaceuticals and office equipment.
• Global monetary policy is expected to remain loose throughout 2020 and well into 2021, with the risks skewed towards further easing.

Share Market Valuations

Whilst it can be argued that share market valuations are ‘high’ (current PE ratios are at near dotcom levels) relative to Bonds, which have seen officials rates fall significantly, they provide a healthy equities risk premium (the difference between earnings yield and bond yield).  So long as this continues it will underpin the support for shares.

TABLE One: US Share market Equity Premium

Value and Small tilts

The September quarter continued to see the Value (cheap companies) and Size premia under pressure globally as the following table of return (in AUD) attests.  This is largely (but not exclusively) a function of continued low interest rates which supports the current valuation of future cash flows.

TABLE Two: Global Value and Size Premia

Economic growth

Australia

The consensus foresees a return to modest growth in the third and fourth quarters following on from a second quarter which saw the country enter its first recession in 29 years. A sharp pullback in GDP of –7.0% in second quarter was the largest fall in quarterly Australian GDP since records were first kept in 1959. Most commentators continue to forecast a contraction in full-year GDP of around –4% with the possibility of regional lockdowns factored into the baseline scenario.

China

A relatively upbeat growth picture for China was affirmed in August with a monthly gain in retail sales—the first such gain this year. High-frequency data indicators for August paint a relatively upbeat picture for growth in China, making it less likely that policymakers will choose to stimulate the economy, especially as equity and housing prices rise. Retail sales rose by 0.5% in August compared with a year earlier, the first such gain this year, though they’re down by 8.6% for the first eight months of the year. Exports remained resilient, up 9.5% compared with August 2019. A broadening in China’s export goods is expected after a period where exports were concentrated in protective equipment, medical instruments, and work-from-home technology. We’ll watch for whether subdued spending in the developed world may weigh on China’s exports in the months ahead.

United States

A shift-forward in growth expectations is noted for the U.S. economy in 2020 although the longer-term picture hasn’t changed. Despite a second-quarter GDP forecast signalling an economy-wide collapse in activity, areas of the country with less-stringent lockdowns have supported economic activity even as infection trends have worsened in other areas. The overall picture is one of an improved economic growth outlook in 2020, though the long-term picture for U.S. economic growth remains unchanged. GDP returning to pre- COVID levels is not expected until the end of 2021, with the caveat that those forecasts would be subject to change without the fiscal stimulus of around $1 trillion currently forecast.

Japan

Japan’s full-year GDP is expected to contract to a range around –3% to –5% with little near-term economic impact from the resignation of Prime Minister Shinzo Abe. A moderate economic rebound is expected in the neighbourhood of 5%, above consensus, in both the third and fourth quarters as industrial indicators point to a manufacturing recovery.

United Kingdom

The early stages of economic recovery in the United Kingdom were weaker than in the euro area as the trajectory of new virus cases continued high for longer. Only a gradual recovery is expected for the rest of the year. Although most supply is back online, demand is likely to return more slowly as households remain reluctant to engage in highly social activities, especially amid a recent uptick in new cases in some areas. U.K. GDP is expected to be around −11% for the full-year, or somewhere between most baseline and downside cases set out in various mid-year updates available.

Emerging Markets

The International Monetary Fund (IMF) lowered its forecast for growth in emerging markets for both 2020 and 2021 on June 24, owing to a rapid intensification of COVID-19 infection rates in many countries. The IMF foresees emerging markets contracting by 3.0% before rebounding with positive growth of 5.9% in 2021. The IMF outlook for Latin America is particularly pessimistic with an expected contraction of 9.4% for all of 2020, before rebounding to 3.7% in 2021.

Monetary policy

Given our expectations for a slow recovery in demand, monetary policy is expected to remain loose into 2021, with risks skewed toward further easing.

The US Federal Reserve left its key federal funds rate unchanged at 0%–0.25% on September 16. Policymakers also broadly expect the rate to stay at this level through 2023. The European Central Bank left its main deposit rate unchanged at –0.5% on September 10 and said it would keep rates at current negative levels, or lower them further, until it sees the inflation outlook “robustly converge to a level sufficiently close to, but below, 2%.” The Reserve Bank of Australia (RBA) maintained its cash rate and three-year government bond target at 0.25% on September 1, and extended its Term Funding Facility through June 2021.

TABLE Three: G-6 Central Bank balance sheet size

Trade

Leading indices suggest global trade has swung back to an upward trajectory following the steep drops of May and June, with China leading the way thanks to healthy demand for products during COVID lockdowns. China is supported by its position at the centre of global goods products, particularly for those products in demand during COVID lockdowns, and by lower prices for commodity inputs.

Inflation

Inflation in the United States is expected to remain below 2% by the end of 2021. Potential upside risks to forecasts include virus-related supply shocks, fiscal support and/or monetary stimulus and the willingness of the Federal Reserve to tolerate above-target inflation.

The consumer price index in the United States rose by 0.4% in August compared with July on a seasonally adjusted basis, having risen by 0.6% in July. Compared with a year earlier, inflation rose by 1.3%, while core inflation—which excludes volatile food and energy prices—rose by 1.7%.

Headline inflation was –0.2% in the euro area on an annual basis in August, according to preliminary estimates—the first slide below zero in four years. Core inflation—which excludes energy, food, alcohol and tobacco—rose just 0.4% on an annual basis, which is down from 1.2% in July and is an all-time low. The euro’s recent appreciation against other major currencies is expected to continue to exert further disinflationary pressure as less expensive imports and more expensive exports weigh on GDP. Core rate of inflation to not expected to rise close to the European Central Bank’s 2% target over the next 12 months.

In Australia, consumer prices fell 1.9% in the June 2020 quarter compared with the March 2020 quarter, and by 0.3% compared with a year earlier—the first such contraction since 1997. An update on third-quarter inflation data is expected on October 28.

Employment

The unemployment rate in the United States fell for a fourth straight month in August, to 8.4%. Although the pace of job gains has slowed in the last two months, the labour market has surpassed expectations. With growth in the US expected to accelerate over the rest of the year, we believe it will finish 2020 with an unemployment rate of about 7% to 9%, compared with the 8% to 10% previously expected.

Unemployment in the euro area rose to 7.9% in July from a revised 7.7% in June, with the number of unemployed people rising by 344,000. Furlough and other job support schemes have been successful in limiting unemployment rates so far. The recent extension of furlough programmes in Germany and France has been encouraging.

In Australia, unemployment fell for the first time since the start of the pandemic—falling to 6.8% in August from 7.5% in July. An extended virus lockdown in the State of Victoria is expected to result in further job losses in September.

COVID

Whilst infection rates are on the increase globally, it is encouraging that death rates are falling.  Of course various vaccines are also in late stage human trials which is encouraging news and sets the state for 2021 to be about ‘getting on top of’ the virus allowing the global economy to start the recovery in earnest!

TABLE Four: Global COVID-19 infection and death rates

As discussed in our last E-News, APC has introduced an evolution of our investment implementation called our CORE + Satellite approach.

For many years, APC has recommended a suite of low cost portfolios based upon academic research, which are designed to provide efficient access to investment markets together with the capacity to outperform over time.

These portfolios invest in the traditional asset classes: cash, fixed interest, equities and listed property, and into various sub-asset classes such as emerging markets. These are the Classic portfolios and range from the most defensive, Classic 30, to the most growth oriented, Classic 100.

To re-iterate the key tenants of our Classic Portfolio investment philosophy;

• risk and return are related
• diversification is essential
• markets work (that is to say, they are efficient when it comes to interpreting information and translating this in prices)
• structure explains performance

These portfolios and the underlying investment principles they employ, have served our clients well over many years and will continue to do so for many years to come.

Introducing the Core + Satellite Investment Approach

The objective of a ‘core and satellite’ approach is to harness the return provided by the broad market through a low cost ‘core’, and to include where appropriate, opportunities to diversify and achieve specific portfolio objectives or outcomes through selective sources. Examples of these individual portfolio objectives may be to reduce market related volatility, to enhance passive income or increase return opportunity (and risk profile).

The Classic Portfolio Suite

At the Core of this approach is one of the Classic portfolios.

From conservative through to high growth, this suite of portfolios provides a sound investment foundation.  APC reduces risk by applying significant levels of diversification at the asset class, sub-sector asset class and direct security level.  They are low cost, fully liquid (ie easily converted to cash) and aim to limit unnecessary trading costs.  The Classic portfolios are market linked which means they are not immune from market volatility risk and would be highly ‘correlated’ with broad market movement, both up and down.

Their aim is to moderately outperform the market after fees in the long run and for many the Classic portfolio will remain completely appropriate to their needs.

Satellite investments

With one of the Classic portfolios at its core, APC may now consider the addition of other investments.  These investments are viewed in bands which have varying liquidity characteristics (this relates to the ability to cash out an investment if needed) and portfolio objectives;

Band One: Targeted Strategies

Investments of this type tend to be fully liquid and may provide the opportunity to target or ‘tilt’ specific market segments in much the same way as we have tilted our portfolios to small companies and ‘value’ companies for nearly 20 years and continue to do so in the Classic portfolios.

The current investments in this band are;

• ESG: Environmental, Social and Governance (SRI – Socially Responsible Investing)
• Global Healthcare
• Equity Style Diversifiers: Investments that implement an investment style to allow the further diversification of the overall portfolio

There are six specific investments in this band currently however this may evolve and change over time.

Band Two: Low Correlation Strategies

Band two investments may be those with different correlation profiles to the traditional asset classes. Correlation explains the extent that one investment’s performance behaves when compared to another investment’s performance over the same time period. The addition of a less or uncorrelated investment into a portfolio can improve diversification and lower volatility.  Examples may include private or unlisted company funds, or income strategies, which have less reliance on the listed bond market.  Investments in this band may be priced monthly and have monthly accessibility windows (ie be less liquid).

The types of investments that are planned for this band are;

• Income: Higher income focus with less reliance on the listed bond market
• Property: Reliable income and stable capital preservation with no or little exposure to the listed Real Estate Investment Trust (REIT) market
• Shares: growth only investments which provide access to the unlisted companies market

There is currently one investment in this band (Shares) with an additional two (Income and Property) planned for inclusion in November.

Band Three: Opportunistic Strategies

At the outer band of potential ‘satellite‘ investment exposure would include investments which are opportunistic in nature.  By this we mean either they have been able to be purchased at a below market rate or they are performing well however require further capital and expertise to accelerate growth. These types of investments include – for example – exposure to niche unlisted companies (via a professionally managed fund structure).

 Investments of this type are typically priced monthly or quarterly and have no liquidity.  This can mean the investment must be held for a fixed term before investment capital becomes accessible.

Currently there are two types of investments that would be included in this band.

• Property: Assets which are purchased at below market value where a capital improvement program leads to increased rental yield and improved capital value
• Companies: Unlisted companies that are usually #1 or #2 in their niche market and are profitable however require additional capital and operational expertise to accelerate growth and prepare them for either an IPO or trade sale

There is currently one investment (Companies) in this band

Next Step

APC’s Investment Committee regularly considers and reviews high quality investments, which may be considered for inclusion in the above bands, with this an evolutionary and ongoing process.

It is important to note that reducing diversification or access to capital through alternative or ‘satellite’ investments can increase portfolio risk and will not be appropriate for all investors.  As such, it is important to fully understand an investment’s characteristics before a decision is made to include it in your portfolio.  APC would consider various factors with you – including your individual needs and objectives – to determine whether any of these satellite investments would be an appropriate consideration for you.

If you wish to discuss this in relation to your own portfolio please feel free to make contact with any member of the APC Advice team.

Whether considering options for yourself or deciding how best to help someone close to you, residential aged care can be a complex area requiring careful thought. The uncertainty surrounding where to move, how much it will cost and where the money will come from can be overwhelming and stressful.

This guide provides the basics. You will understand the steps you need to take, where to find answers and how a financial adviser, like Australian Private Capital, can help you make an informed decision.

There are typically three steps you need to take before entering residential aged care.

APC can help with the decisions you need to make and which strategies are best suited to your circumstances. They can also help you keep your plan on track with an annual review, in case your circumstances, or external factors such as legislation, change.

How an adviser can help?

To find out more about aged care options, please feel free to talk with any member of the APC Advice Team

The information contained in this guide is provided by Challenger Life Company Limited, ABN 44 072 486 938, AFSL 234670 and is current as at 20 March 2020. This information is not intended as financial product advice, legal advice, taxation advice or social security advice.

It does not take into account the investment objectives, financial position or needs of any person and these matters should be considered

before making any investment decision or a decision about their aged care needs.

With housing affordability at an historic low and with the ever increasing costs of education, many would like to explore ways to give their child or grandchild a future financial head start.

While there are many ways this can be achieved, an investment bond can potentially help you fund these future costs tax effectively¹.

A smart way to save

Assumptions:

• $50,000 initial contribution
• Cash account investment pre-tax return of 3.2% p.a.
• Managed fund and investment bond long term pre-tax return of 9.0% p.a. (5% income, 4% capital growth)
• Investor marginal tax rate of 47%
• $1,000 additional deposits per month
• Investment held for 15 years

Investment returns are for illustrative purposes only and do not represent any actual or future performance expectations.

What is an investment bond & how can it help me save?

An investment bond can be a powerful savings tool. If you’re paying more than 30% tax per annum then investing via an investment bond can be tax effective¹. Investment earnings in a bond pay a maximum tax rate of 30%.  By contrast, as an individual once you start to earn income over $45,000 p.a. you begin to pay 32.5.% for every dollar earned and this tax rate will continue to increase as your income grows. This means, within an investment bond structure, savings can compound tax effectively over time.

Because additional taxation benefits are fully realised after a minimum of 10 years, investment bonds have typically been used as a means of saving for a longer-term objective like a child’s future education costs, for example.

Working in a similar way to a Wrap-style investment account, your money can be invested in assets such as cash, shares and / or property – managed by a broad range of professional fund managers.

What are the tax benefits?

• The maximum tax rate you will pay is 30% however this tax rate can be significantly less than 30% depending on the asset class you invest in due to add backs such as franking credits, making this a potentially attractive savings tool for high income earners. In some cases the effective tax rate has reduced to 12% (Australian equities investment options)
• There is no need to provide your tax file number or declare any earnings in your personal income tax return (unless a withdrawal is made within the first 10 years) making this an administratively simple investment choice.
• After 10 years, a withdrawal won’t attract any personal tax which is known as the 10 year advantage. This is often why investment bonds are seen to be a tool to save for future education costs or provide for a child as they become a young adult– if started early. The structure allows additional contribution each year (subject to a limit) without interrupting the 10 year “start date”.
• Upon death all benefits are paid tax free to recipients regardless if they are dependants, non-dependants or minors.

Control over your investment

• The primary investor can retain ownership and complete control of the investment bond until it is transferred to the nominated beneficiary.
• Funds can be accessed at any time and you retain complete control over how your money is invested and how it will be passed on to future beneficiaries.
• An investment bond can be a non-estate asset, which means that a beneficiary nomination is made and the beneficiary is guaranteed to receive the money you leave behind.

Investment bonds can give access to a broad range of investment managers and strategies, and further fees have become much more competitive over time.

It’s never been a better time to start saving.

As always, the APC team is available to assist you in understanding if this structure is appropriate or beneficial for your objectives and individual circumstances.

1. If income earned is above $45,000 p.a.

“If you don’t know where you are going, any road will get you there” – Lewis Carroll

A sound financial plan is not just about effective financial decision making, but about ensuring your strategy supports your vision and is aligned with your personal goals and objectives.

Fundamental to establishing an effective framework is to gain a deep understanding of your goals and the things that are important to you. We believe part of our role is to facilitate and assist you with articulating your goals, as well as helping you establish a roadmap to realise them. This means working through what is most important to you, what is achievable, establishing actionable steps, tracking progress along the way and importantly, working with you through life’s changes.

Below is a simple tool, which assists us in formulating our most important goals at the infancy.

The ability to meet short, medium and long-term goals is greatly impacted by the ability to manage cash flow and stay within a structured framework. The biggest problem for many people is lack of a clear money or cash flow plan that is centred on the things they can control – earning, spending and saving.  Cash flow management is a fundamental principle for financial wellbeing and as such, requires a dedicated commitment to make it work for the short, medium and long term.

Below is the APC spending plan tool which we use to build our structured cash flow framework.

APC has created a short video to demonstrate the process in which we would undertake with you to ensure your goals are clearly articulated and that a sound cash flow strategy is in place to achieve what is most important to you.

The video is in our new Resources section of our website which can be accessed here.

Please enjoy the video and make contact with the APC team should you wish to find out more.

As many of us are forced into unfamiliar situations during this pandemic we thought we would share some tips provided to APC for working from home and keeping on top of your mental health

Mental Health Wellness Tips for COVID-19

Now the importance of staying in your seat and riding out the ups and downs of investment markets has never been more important.

The impact of missing just a few of the market’s best days can be profound, as shown by this animated look at a hypothetical investment in the stocks that make up the US stock market.

Risk management and personal insurances must be considered as an integral part of the financial planning process. For example, have you thought about how your family or your partner would cope financially if you died? Personal insurances can help to ensure that those who depend on you will not be financially disadvantaged in the event of your death, a medical crisis or your disablement.

Most people purchase house, car, and health insurance without giving it much thought, but it is a well known fact that most people are either underinsured or uninsured for events such as death, trauma or disablement.

This article discusses the main types of personal insurances – those being life insurance, income protection, trauma insurance and total and permanent disablement insurance.

Life Insurance

Life insurance is really fairly simple – the policy owner receives the insurance proceeds if the insured person dies.

A premium is paid for the selected level of cover and is based on the insurance company’s risk, eg. the older the person, the higher the risk, the higher the premium, or, if the person is a smoker or pursues hazardous leisure activities, the higher the risk and the higher the premium.

Life insurance can be taken out inside or outside of superannuation. Premiums are tax deductible inside superannuation, however are generally not deductible outside superannuation. We can help you determine the most appropriate option for you as you need to consider more than just tax outcomes.

Among the reasons why people take out life insurance are to pay out debts, to buy the full share of a business if your business partner dies, to pay for funeral costs and to provide for your family after you have gone.

The sad fact is the majority of Australians are significantly under-insured or do not have any life insurance.After realising you need life insurance, the question then becomes – how much? There are various formulae that can be used and most take into consideration your age and the age of your dependents, your current income and lifestyle and debts, including any mortgage.

Generally, younger people require more life insurance as older people typically have less debt and their dependents may have grown up and become independent.

The question of how much life insurance depends on your own circumstances and should be considered with assistance from the APC team.

Income Protection

Income protection insurance – also referred to as salary continuance – is simply a regular payment made to you should you become disabled or sick and are unable to work for a period of time.

Similar to life insurance, premiums are affected by factors including your age and smoking habits, however with income protection, premiums are also affected by the type of work you do, eg. blue-collar versus white-collar.

Premiums will also be affected by such things as a waiting period and the percentage of salary you want to insure, eg. the shorter the waiting period, the higher the premium – the larger percentage of salary covered, the higher the premium.

The maximum percentage of salary that insurers will cover is often limited to 75%. Waiting periods vary, but generally the shortest is 14 days although it is more common to have waiting periods of one or three months. The waiting period is simply the time during which the insurer won’t pay you. Only when you have been sick or ill for this period can you make a claim.

The length of benefit period is also important and again affects the premium for a policy. The payment periods available include one year, two years or up to age 65.

Trauma insurance

While life insurance is very important to have, in many cases people don’t die quickly from an illness. Instead they are often left with an illness or injury that can last for years. Life insurance may not help in these situations as payment is generally only upon death.

This is where trauma insurance fills the gap. This type of insurance pays a lump sum if you experience one of the specified traumas in the contract. The range of ‘trauma events’ can vary but the vast majority of policies pay out on the main traumas – those being cancer, heart attack, coronary bypass surgery and stroke.

Trauma cover cannot be taken out within superannuation and the premiums are usually not tax deductible. But on the flipside, any claims are received tax free. Premiums again vary according to your own circumstances, similar to life insurance.

So why get trauma insurance? As we mentioned, life insurance is not paid until death (or if a terminal illness is likely to cause death within a specified period). How would you cope if you had cancer and needed to take some time off work to recover? What if you incurred significant expenses to receive the best treatment? It’s not something we like to think about (as is the case for life insurance generally) but that’s exactly the type of situation that trauma insurance provides for.

How much is appropriate and is this type of insurance for you? That’s something that we can discuss with you.

Total and Permanent Disablement Insurance

Total and permanent disablement (TPD) insurance covers you for disability that stops you from ever working again.

It is important to examine the details of the policy, as the definition of TPD can vary markedly from one insurer to another. For example, some provide cover for disablement that prevents you from working in your current job and others cover you where you cannot work in any job. Medical evidence and opinion will be required.

Premiums for TPD insurance are affected again by factors such as age, health, smoking habits and your occupation. This type of insurance can be obtained outside of superannuation. Only certain types of TPD insurance can be obtained inside of super.

You may wonder what the difference is between TPD and trauma insurance. The key difference is the fact that trauma insurance will be paid out if you suffer a specified medical condition, regardless of how well you survive. However, TPD insurance will only be paid if you are unable to ever work again.

These are the main types of personal insurances that are available. It is a good idea to have a check up on how well you are covered and make sure you and your family are protected.

As always the APC team is happy to discuss any questions you may have.

Managing or applying for your first or new home loan can be a daunting task!

As part of our Foundation Client Service, APC can assists clients to obtain a new or first mortgage through its panel of mortgage brokers.

Recent Bank Policy and Process changes, partly in response of the recent Royal Commission into Banking combined with the Banks commitment to responsible lending practices indicates the Banks and lenders have tightened up their Credit Assessment process & Policy when applying for a new loan.

So, its never been more important to prepare your ‘financial world’ for an impending application. We have included some information and handy tips below to consider before a new home loan application.

What information will the bank be after?

The basic premise is that the bank will now ask for more information in order to be satisfied that you have not extended yourself unduly and you are capable of servicing the debt within the agreed loan term as well as continue to meet other ongoing commitments.

With the recent introduction of Complete Credit Reporting, banks are talking to each other behind the scenes.  When an application is raised a comprehensive credit check is completed.  They can now see the following:

1. Home Loans
2. Credit Cards
3. Personal Loans
4. Leasing and Credit Lines you hold
5. The limits of the lines
6. Who the funding is with
7. Directorships you hold with companies as well

They can’t see what is spent but the reporting advises whether you have been in arrears on your repayments or not and the repayment history – so it’s important to avoid these types of scenarios.

Affordability and Assessment

When banks assess a loan application they will assess it at an Affordability/Assessment Rate.  Depending on the bank this can be between 5.5% – 8%.  They will assess your capacity to repay a loan over a 30 Year period on a principal and interest basis at the Affordability/Assessment Rate.  The bank does this as they want to determine that you can comfortably meet your loan repayments in the event there is any future interest rate increases.

Banks do not assess loans at advertised rates.

What about Credits Cards?

Credit cards are a great way of paying for goods and services but it is important to understand how the banks look at these when they assess credit.  The bank will look at the total limit of all your credit cards (not the balance) and assess a minimum monthly payment of 3.8% of the limit. For example, for a credit card with a $20k limit the bank will assess a repayment of $760 per month, regardless of whether it is used or not.  To give you an idea the $20k credit card servicing requirement is the same as a $110k mortgage!

With new finance services such as AfterPay or ZipPay the banks will take into account customer’s obligations to meet these repayments as these are considered debts by the bank.

How do banks now measure expenses?

There has also been a significant focus on Living Expenses and the verification/validation of these.  HEM (Household Expense Measure) is what the banks use to determine what the minimum monthly household spend is.  This varies slightly across the banks, however is based according on factors such as Income, Number of Applicants and Dependent Children and Marital Status.

The banks have now broken this into 16 Categories falling under the banners such as General Living Expenses and Additional Living Expenses.   HEM is only a guideline and it is expected your bank or mortgage broker will have discussions with you to determine what your monthly expenses are and importantly validate these.  They will use what you advise and what is validated regardless of what HEM is used.

If the quoted expenses are less than the Standard HEM your bank or mortgage broker will need to provide significant evidence of spending habits and spending history to justify the lower expense. Some banks ask these be verified and evidenced against your bank statements and credit card statements.

It is most important to note that in the past, living expenses were all bundled into one large category however this no longer the case.  Any expenses that are listed as Additional Living Expenses are essentially in addition to General Living Expenses (HEM)

Now expenses such as Life Insurance, TPD Insurance, Critical Illness, Private Education, Holiday Home Expenses, Body Corporate Fees are classified as an additional expense and are considered over and above the basic General Living Expenses.

An example of the breakdown of expense categories is as follows:

General Living Expenses

Primary Residence: Gas, Water, Electricity, Rates, Property Maintenance

Phones Internet: Mobile Phones, Landlines, Internet, Foxtel, Netflix, Stan

Recreation: Holidays, Memberships, Dining Out, Cigarettes, Alcohol

Clothing/Personal Care: Clothing, Hair & Beauty

Medical & Health: Doctors, Dentists, Physio, Chiropractors, Medicines

Transport: Car Registration, Fuel, Maintenance, Public Transport

Public Education Costs: School Fees, Uniforms, Books Excursions -Public School

Higher Education Costs: Professional Development, Post Tertiary/Online Courses

Childcare: After School Care, Childcare, baby Sitting

General Insurance:  Income Protection, Home & Contents, Car, Boat, Health

Additional Living Expenses

Strata Fees/Body Corp: For Owner Occupied Premises only

Private School Fees: Private school fees, tuition, Sports fees, Uniforms

Child Support: Financial support paid by one parent to another for care

Maintenance:  Finance required for care of Dependents

Life/Accident/Illness Insurances: Life, TPD, Critical illness Insurance

Investment Property: Rates, Land Tax, Body Corp, Maintenance, Insurance, Utilities

Secondary Residence: Rates, Land Tax, Body Corp, Maintenance, Insurance, Utilities

As always, if you wish to discuss this further with us, please feel free to make contact with any member of the APC Advice Team.