Noel News – By Noel Whittaker

We gain the strength of the temptation we resist.
RALPH WALDO EMERSON

Welcome to our seventh newsletter of the year. It’s hard to believe that June 30th is already a memory, and we are now in July speeding towards December. I guess the big surprise since I last wrote to you is the situation in Victoria – all the indications are that it will get worse before it gets better. It is particularly scary when you consider that Victoria is responsible for 40% of Australia’s economic output. This will be a further blow to our budget.

You may recall that many of the stimulus measures were supposed to finish in September but now look like being extended. I’m particularly concerned about homeowners who have taken the six months loan holiday with the result that interest is being capitalised on their mortgage. Unless they have the resources to catch up quickly, this will add years to the term of their loan and force them to pay much more interest.
 
I do know that the government is aware of some of the anomalies with both Jobkeeper and Jobseeker. Expect some tweaking of these programs in the next few weeks.

If you are a senior citizen, keep in mind that the deeming rates were changed on 1 May, and the deeming rates thresholds changed on 1 July. Other changes to the age pension that took effect from 1 July mean that the upper cut off points have been increased slightly. Somebody who was not eligible for a pension at the beginning of the year may now be able to scrape in.
 
If you are on the borderline, you will probably be asset tested so keep in mind that things like cars, caravans, and furniture are valued at wholesale value. This would put a maximum of $5,000 on most people’s furniture. The deeming and age pension calculators on my website have been updated to reflect the new figures.

An ice cream or a bicycle!!

 
Once again, compulsory superannuation is back on the agenda. Recently I debated an economist about this topic and we had radically different views. He took the line that a lower paid worker was much better off having the 9.5% employer superannuation in their pocket to spend now, or possibly put towards buying a house. He made the point that one of the best ways to have security when you retire is to have a paid-off house. I have no argument with that – it’s stating the obvious.
 
Let’s run the numbers using a person aged 40, earning $45,000 a year, with $75,000 in superannuation all paid for by the employer. They would currently be receiving employer superannuation of $4,275, less 15% contributions tax, for a net amount of $3,263 paid to super each year. If that money was paid to them, instead of into super, they would receive an extra $2,961 a year, or $57 a week after tax.

 
So, the argument boils down to whether they are better off to have $57 a week in hand or annual contributions to super of $3,263. First, we need to take into account human nature – the reality is that the majority of Australians spend whatever they get paid, and invest nothing, unless they have compulsory commitments such as loan repayments. To make it worse, 50% of Australians live payday to payday, which was demonstrated by their behaviour when they were allowed to access up to $20,000 from superannuation due to the coronavirus crisis.

Our lowest paid workers have just received a pay rise of $13 a week, which you can bet will be spent in full, and there is little doubt that an additional increase in take-home pay of $57 a week would go the same way. If there was no employer superannuation, they would end up at retirement with nothing.
 
Now let’s run the numbers on superannuation using the Super Contributions Calculator on my website. We’ll use the same assumptions: age 40, superannuation balance $75,000, salary $45,000 a year indexed at 2%, and estimated rate of return on the superannuation fund of 7.5%. Thanks to the magic of compound interest, they would have $770,000 in their superannuation fund at age 65. So a low income couple could retire with $1.5 million. That’s winning the jackpot!

When teaching children about money, we often use the metaphor of the ice cream and the bicycle. Would you rather spend your money on an ice cream today, or save up for a bicycle in the future? It’s the same with compulsory superannuation. Would you rather have $57 a week now, or $770,000 when you retire? I think the figures speak for themselves.

Changing your behaviour?

 
The Hayne Royal Commission heaped buckets of criticism on our banks, and the ramifications are still rippling through the system. Last month, the full Federal Court dismissed ASIC’s appeal against Justice Nye Perram’s decision, which found in favour of Westpac in a responsible lending case.
 
That case was about the bank’s responsibility in assessing the ability of loan applicants to service a loan they apply for. A major focus was on Westpac’s reliance on the Household Expenditure Measure (HEM), which is the standard benchmark most lenders use to estimate a loan applicant’s annual expenses.
 
The decision turned mainly on whether a borrower who, prima facie, did not have the capacity to repay a loan, should be approved if the bank believed the applicant had the ability and the motivation to change their behaviour once the loan was approved.

The basis of ASIC’s case was that Westpac had fallen short of its obligations under the National Consumer Credit Protection Act.
 
The learned judge observed that a loan applicant might regularly dine on wagyu and shiraz, but still have the ability to cut back on their spending if a loan was approved and keeping up the mortgage payments meant the difference between having their house repossessed and getting the loan paid off.
 
It’s been many years since I worked at Westpac, but I doubt if the lending criteria have changed much. We were always taught to use the four Cs: character, capacity, collateral, and conditions. And, of course, there was a fifth – common sense.
 
Think about it. If applicants are of good character, you can assume they will do their best to meet their obligations, provided they have the capacity to pay. Offering sufficient collateral to the lender is a basic proof of the ability to meet a financial goal, and special conditions can be negotiated between the borrower and the lender if necessary. Special conditions could be an undertaking to cancel a credit card or pay off a personal loan.

Now I am sure you have all come across a young person who enjoyed their nights out, and didn’t blink at $15 for a cocktail, but who changed their ways when they bought a home, took out a mortgage, and had family responsibilities to think about
 
This is also a wake-up call to anybody who is thinking of taking out a mortgage in the near future. My mortgage broker friends tell me that bank criteria are becoming increasingly tighter, thanks to all the recent bad publicity, and getting a loan is harder than ever, even though interest rates are at record lows.
 
The application process will be much smoother if they take the time to do their homework, research how their proposed lender would view an application, and adjust their spending habits to fit, if needed.
 
With interest rates low, and likely no increase in sight for years, it’s the perfect time to buy a home, if you shop around and find a bargain. But to make that happen, you need the right loan: one that fits both your budget and your lifestyle. Just be aware of some of the tricks of the trade. For example, there may be a big difference between the rate quoted and the comparison rate, which is the effective rate. Also, if you are considering a fixed rate, carefully check what the rules will be if you wish to make extra payments, transfer the loan to another property, or pay it out before the term is up. Making sure of these aspects of the outset may save you much time and expense in the future.
 
UPDATE: On Monday 13 July, ANZ announced it will tighten its serviceability criteria for mortgage applications by lowering its debt-to-income threshold. From 3 August, mortgage applications with a total value greater than seven times the borrower’s annual gross verified income “may be deemed unacceptable for ANZ mortgage purposes” and would be subject to “stricter credit criteria”.  Expect others to follow.

Commonwealth Seniors Health Card (CSHC)

And Finally

Some anagrams

I hope you have enjoyed the latest edition of Noel News.

Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter. 

And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker. 

Noel Whittaker