News

How fixed interest got its groove back

Looking for higher returns than cash in the bank with less volatility than shares and property? With interest rates generally considered to be at or near their peak, fixed interest investments, such as bonds and other credit investments, may offer an attractive ‘middle ground’.

Interest rates represent the cost of borrowing money. They affect how much you earn from your savings and how much you pay for your debts.  

When interest rates are high, you can earn more income from your savings but it costs more to service your debt. Conversely, when interest rates are low, the cost of servicing debt is lower but so is the income you can earn from your savings. 

Interest rates in Australia followed a generally downward path following the Global Financial Crisis in 2008, reaching historic ultra low levels of 0.10% during the COVID-19 pandemic.  

However, since 2022, Australians have witnessed the most rapid increase in official cash rates of the past 20 years. 

Australian cash rate target

Interest rates likely to stay higher for longer

With inflation in Australia remaining persistently high and ‘sticky’ in recent times, the Reserve Bank of Australia (RBA) is expected to keep interest rates fairly high in the near future. 

For investors holding high levels of cash this has been welcome news, as these savings are now generating higher levels of interest income. Although this is being eroded to some extent by headline inflation that has remained generally above 4% since it peaked at more than 8% in December 2022. 

The potential for higher returns while protecting capital

For those investors looking for less volatility and risk, traditional fixed interest (otherwise known as bonds) and other credit investments can offer an attractive ‘middle ground’ of higher returns than cash with lower volatility than shares, and consistent income. Examples of this include investments in government or company issued debt securities (or bonds), and emerging opportunities in private credit. 

Bond prices move inversely to interest rates, meaning that when interest rates rise, bond prices fall, and vice versa. While this dynamic can cause losses during a rising interest rate environment (as was the case in 2022 and 2023), it is a widely accepted view that the current interest rate cycle in Australia is close to a peak. 

Fixed interest securities (bonds) now offer the advantage of a higher yield, and the potential to protect investor capital if interest rates decline due to a softening economy.  

In contrast, many other credit investments are at a floating rate – meaning their returns follow interest rates, although they may also provide a better return or yield than cash investments. 

New opportunities in credit markets

The current economic and interest rate environment offers some very interesting opportunities in fixed interest and credit markets, both globally and in Australia, and across publicly traded and private markets.  

Private credit, or capital lent to companies by non traditional lenders such as private investment funds, may offer investors attractive, risk adjusted returns.  

These types of investments are higher risk than cash and in some cases less able to be converted to cash quickly, but they may also offer higher interest payments than their cash equivalents. 

Do your homework

The current interest rate environment has revealed and in some cases created some compelling fixed interest and credit opportunities  

However, it is always critical to do your own homework on underlying investments and their creditworthiness, and asset backing and diversification remain important.  

Higher returns usually come with higher risk, so consider consulting a financial adviser to find a balance that suits your individual needs and preferences. 

Source: Colonial First State

A guide to aged care

Moving into residential aged care can be an uncertain and overwhelming experience for everyone involved.

On top of the personal and emotional challenges, there are a number of important decisions to make including which facility is most suitable for your loved one, what fees will they be required to pay and what to do with the family home.

This article outlines the steps to helping someone enter aged care as well as the fees that may apply; and addresses some of the key things to consider when it comes to the family home.

There are generally five steps to follow when it comes to planning for residential aged care.

Step 1 – Get care needs assessed

Before a person can move into a residential aged care facility, they will need to have their lifestyle and health needs assessed by an Aged Care Assessment Team (ACAT) member.

ACAT members are usually doctors, nurses and social workers who specialise in aged care. They will ask a series of questions to determine whether your relative requires full time residential aged care or another type of care.

The assessment is free and can be done at home, a health centre or hospital.

To find your nearest ACAT visit the Government’s My Aged Care website or call 1800 200 422.

Step 2 – Find an aged care home

A list of aged care homes is available on the My Aged Care website. An ACAT member can also assist in finding a suitable aged care home in your area. Local Government Departments or third party placement companies may also be able to assist in locating an appropriate facility.

All facilities are different, so consider visiting a few to determine which is the best for the person’s needs. Not all facilities will have vacancies but it’s worth asking whether you can be placed on a waitlist.

Step 3 – Work out the costs for aged care

While some aged care costs are generally partly funded by the Government, the person affected may need to pay a number of fees, some of which are determined by their income and assets.

These fees may include: 

Accommodation fees

Accommodation payment

• Payable as a refundable lump sum or equivalent daily payment or any combination of both (method of payment determined by resident).
• You may be eligible for Government assistance in paying this fee.

Ongoing care fees

Basic daily fee

• Generally payable by all residents for all days in care.
• 85% of full Basic Single Age Pension (regardless of your actual Age Pension entitlement).

Means-tested fee

• May be payable based on a formula that takes into account your relative’s income and assets.
• Subject to change if circumstances change.
• Annual and lifetime caps apply.

Extra services fee

• Payable if your relative opts to receive extra services and amenities.
• Additional daily amount, set by facility.

Step 4 – Apply for an aged care residence

To apply for an aged care facility, you will need to complete a specific form and decide if you want to disclose your relative’s income and assets.

You aren't required to provide this information to the facility, but if you don't, the person won't qualify for government subsidies, meaning they will have to pay the full cost of care.

If you choose to disclose their financial information, you can send it directly to Centrelink who will determine the fees. Depending on their situation, you may need to fill out a specific form if they receive income support, for example.

Centrelink will then inform you and the facility of the fees, without sharing your personal financial details with the facility.

Step 5 – Move into aged care

Just before the person moves into aged care, you will be provided with an Accommodation Agreement. This is a legal document which sets out the terms of their residency, their rights and responsibilities, and the rights and responsibilities of the aged care facility.

You will need to inform the aged care facility within 28 days of them entering care, whether you will pay a refundable lump sum, daily payments, or a combination of part lump sum and daily payments for their accommodation.

What to do with the family home

When moving into aged care, some important decisions may need to be made regarding the home.

Contrary to what many people believe, you don't have to sell the family home to pay for aged care, as facilities must offer lump sum, daily, or combined payment options. Seek professional financial advice if you lack sufficient funds as there may be ways around it.

If the property has always been the person’s principal place of residence, it is generally exempt from CGT when sold; if retained and not rented, it remains CGT exempt indefinitely, but if rented for more than six years continuously, CGT may apply if it is sold.

Renting their home can provide income to help with aged care costs, but it may require preparation expenses, a trusted person to manage it, and they could pay income tax on the rent.

Any decisions you make regarding the main residence could impact the person’s current or potential social security entitlements.

Their property will not be assessed by Centrelink for the monthly aged care means test if certain eligible people, such as:

• their partner,
• their immediate family member who has lived there for at least five years and receives government support, or
• their carer who has lived there for at least two years and receives government support

continue to live there.

If none of these people occupy the home when the monthly means test is applied, a portion of its value will be included in their assessable assets. Rental income (after deductions) is always assessed for the income test.

If you sell the home, the sale proceeds will generally be assessable under the aged care means test rules.

Age Pension entitlements

When moving into aged care, it’s important to notify Centrelink so they can update benefits, determine eligibility for accommodation subsidies and calculate the means-tested care fee.

Even if the person is not getting the Age Pension now, they may qualify after paying a refundable lump sum for their accommodation, as this payment won't be counted for the social security means test, potentially making them eligible for more benefits.

If they are part of a couple, and one or both of them moves into care, they may get higher Age Pension payments too because they'll each be eligible for the single rate pension based on their combined assets and income. Talk to a financial adviser for more details.

Source: MLC

8 tips to get a harder working home loan

It’s lucky Aussie homeowners are a pretty resilient bunch.

All the interest rate rises over the past couple of years have delivered a serious reality check, leaving variable rate home loans higher than they’ve been for a generation.

So you need to get your home loan working as hard as possible particularly if your fixed rate loan is about to reach the end of its term and you’re facing a sudden increase in repayments.

The good news is there are ways you can set up your home loan to pay less interest in the long run and take years off your mortgage. Here are a few quick tips to get your home loan working harder.

1. Set up an offset account 

If you haven’t already, check if you can link an offset deposit account to your home loan. An offset account operates like a transaction account but it reduces the interest you pay as interest is only charged on the mortgage balance less the offset balance.

You can set up offset accounts for big ticket items like holidays, a car purchase or renovations or even everyday necessities like shopping and bills.

The combined balance of all your offset deposit accounts will reduce the interest payable on your loan. You can also connect a visa debit card to your offset account that operates like an everyday account and makes it easy to withdraw your funds.

2. Take advantage of your redraw facility

Some home loans offer a redraw facility to access extra repayments you might have made. If you have unexpected expenses, it’s worth checking if you have available funds on your home loan that you could request to redraw. You’ll just need to remember this could extend the life of your loan so you end up paying more interest in the long run.

3. Consolidate other debt into your home loan

You’ll generally find the interest rate on your home loan is lower than the interest on your credit cards or personal loans. So if you have any debt, you could transfer this to your home loan so you don’t pay as much overall interest.

4. Change your repayment amount

Creating a budget could help you get across how much income you’ve got coming in, how much you need for the essentials and where the rest of your money might be going. This will help you identify if there’s any room for movement and if you could potentially repay a little extra. 

5. Change your repayment frequency

Paying fortnightly instead of monthly, for example, can make a big difference to the interest you pay in the long run.

6. Change your repayments to principal and interest

Making principal and interest (P&I) repayments can reduce your outstanding loan balance and lower the amount of interest you’ll pay over the life of the loan. But don’t forget switching to P&I can increase your regular repayments.

7. Renegotiate your interest rate

If you see a lower rate with another provider,  contact your current provider for a better deal.

8. Consider whether to refinance

If you’re having cashflow challenges, you could think about refinancing to reduce your repayments but bear in mind this could mean extending your loan term.

Source: AMP

How do Aussie women’s finances stack up?

Planning for retirement is a daunting task and many Australian women lack confidence in financial decision making. Fortunately, there are some small steps women can take today to make a positive difference to their future.

It’s probably no surprise to hear that Australian women often retire with less money than their male peers. New research* by Colonial First State (CFS) confirms that even in 2024, this is still the case. 

There are several reasons for this, including well documented wage gaps and the uneven burden of raising a family which often results in women taking breaks in their careers.

Not only do women end up investing less money through super over their careers but this means they’re also missing out on the compounding effects that future returns will have on their balances. 

And CFS found that while 78% of men have made plans for their financial future, only 67% of women had done similar. Women were also less likely to set financial goals*. 

All is not lost, though. Read on for some simple steps that will help women start to take control of their super and their future. 

Knowledge is power

It’s important to note that women care about their finances just as much as men do. In fact, women are more likely to feel worried about their finances or guilty that they’re not doing enough to manage finances compared to their male peers*. 

So, what’s holding them back? Our research shows one major hurdle is confidence – or more specifically, that women aren’t as confident with money and investing as men*. It’s hard to make good financial decisions when you don’t trust that you know what a ‘good’ decision looks like.

Luckily, financial confidence is strongly linked to knowledge. The more we know about super and investing, the more confident we can be in our decisions. 

What’s more, there are several easy ways for women to brush up on their financial knowledge and be able to back themselves.

Is there good news?

Australian borrowers breathed a sigh of relief with the double rate pause, while the announcement of Michele Bullock taking over as RBA governor was well received. She will become Australia’s first female central bank leader in the RBA’s 63-year history and will serve a 7-year term. 

Some economists are suggesting that interest rates have now reached their peak. Others remain uncertain, however it certainly signals a slowdown in pace and lessening rate hike pressures.

• Regularly check up on your super

Many people approach their super with a ‘set and forget’ mindset but this attitude can leave you in the dark when it really matters.

Aim to regularly check in on your super, making sure your contact details are right (so you’re receiving all the important information and notices) and that you’re happy with the performance of your investment option. 

• Bring it all together

Most Australians have more than one super account and are paying multiple sets of fees as a result. Consolidating all your super into one account can help you save on fees and make your super easier to manage. 

What’s more, you may even have super money that you’ve forgotten about. According to the ATO, there was more than $16 billion in ‘lost’ super as at 30 June 2023 – accounts which have stopped receiving regular deposits, typically after someone has changed their job, name or address. 

• Top up

We know most women have lower super balances than men^ but the power of compounding (where you earn interest on your money and on the interest it has earned), means you can start making a difference today.

Summing up

Taking hold of your financial future is easier than you think. Here’s a summary of our tips to get you started:

• Check your super balance. 
• See if you have any lost super or multiple accounts you might like to consolidate.
• Look at topping up your super. Even a small amount could make a difference.
• Learn more about super.

* Source: CFS commissioned survey of 2,966 Australians and research was completed in March 2023. Findings and statistics in this article are based on this research.   

^ Source: Australian Families Then & Now: Income and wealth (aifs.gov.au)

Source: Colonial First State