GET T H AT HOME DEPOSIT
GET T H AT
HOME DEPOSIT AN ACTION PLAN FOR BUYING YOUR OWN HOME FAST
PETER CEREXHE
First published in 2003 Copyright © Peter Cerexhe 2003 Every effort has been made to provide accurate and authoritative information in this book. Neither the publisher nor the author is engaged in rendering professional financial advice and neither the publisher nor the author accepts any liability for injury, loss or damage caused to any person acting as a result of information in this book nor for any errors or omissions. Readers are advised to obtain advice from a licensed financial planner before acting on the information contained in this book. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email:
[email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Cerexhe, Peter. Get that home deposit: an action plan for buying your own home fast. Bibliography. Includes index. ISBN 1 86508 742 4. 1. Finance, Personal—Australia. 2. House buying— Australia. I. Title. 332.02400994 Set in 10/13.5 pt Sabon by Midland Typesetters, Maryborough, Victoria Printed by Griffin Press, South Australia. 10 9 8 7 6 5 4 3 2 1
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CONTENTS
Acknowledgments and Disclaimer
ix
INTRODUCTION: YOU CAN GET THERE
1
Saving money . . . like dieting? The rent escalator A great savings plan The investment foundation stone is your home equity Where the renter is ahead The renter versus the buyer A method . . . and a reward
3 6 7 8 8 9 11
PART ONE: WORKING TO A METHOD
15
1: Some principles that will work for you
First principle: Keep it short Second principle: Know today that you can achieve your goal Third principle: Accept that we’re not all the same Fourth principle: Allow for failure Fifth principle: Put it away as you go Sixth principle: Put it in the right place How much do I need to borrow? Monthly repayments guide Summary 2: Introducing the home deposit worksheet
Looking forward, not back The home deposit worksheet
17
19 20 22 22 23 24 26 28 31 32
33 34 v
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3: Put together a stash of cash
Get your money breeding Summary 4: Where should my savings go?
What to do with debt The cost of borrowing Where to put my money? The core issues Can the bank help me to save faster? Should I be putting more money into superannuation? A lifetime financial plan What can I save now? Summary 5: Get a job, secure a job
40
42 45 47
48 49 55 60 66 67 68 73 74 75
Feeling secure at work in times of change Finding the value to your employer Training for more Summary
77 81 83 84
PART TWO: THE MODULES
85
6: Increasing your income
What type of job? Where are the jobs? How much could I earn? The part-time work module The holiday of your life The holiday job Update your social security entitlements Summary 7: Life’s little luxuries
A drink or an event? What are your luxuries? Summary
vi
87
89 94 97 99 101 104 108 109 110
111 114 115
CONTENTS
8: The theory of relatives
A pause on presents Gift giving—reorganised The subsidy approach Moving in together Saving rent Anything . . . but not my parents! Summary 9: How essential are the ‘essentials’?
Preparing a budget Rent Energy Loans Transport Communication Insurance Memberships and subscriptions Superannuation Preservation ages Average life expectancies Waste Summary 10: The price of vice
What your vices are costing you Summary PART THREE: PUTTING IT TOGETHER 11: Bumps in the road
Falling off the savings wagon Summary 12: Knowing the costs ahead
Conveyancing fees
116
120 121 122 126 127 129 132 134
136 146 146 146 147 150 151 152 152 153 154 155 157 158
159 164 165
167
171 172 174
175
vii
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Search enquiries and sundries Expert reports Moving expenses Lender’s mortgage insurance Getting out of your lease Government taxes and charges Stamp duty Are you eligible for stamp duty concessions? Other government assistance Property prices Deposit required Summary
178 178 181 181 186 186 187 191 200 201 203 204
13: The last 26 weeks
206
Finding your mortgage Mortgage questionnaire Last-ditch lenders Making comparisons Fixed and variable interest rates Choosing a property Danger zones for buyers Buying off the plan Building your dream home Buying at auction Summary
207 208 210 211 214 216 218 218 224 225 230
14: Some worked examples
The The The The
single person couple who won’t sacrifice lifestyle couple with great motivation lower income couple
End note Resources, reading and contacts Glossary Index
viii
232
232 238 243 249 255 257 267 279
04
ACKNOWLEDGMENTS AND DISCLAIMER
In writing this book I have relied extensively on my experience as a lawyer working with many people on their way to home ownership. What tales could be told! People can be very daring when it comes to getting a home. When it comes to matters of precise detail, including tables, I would like to acknowledge specifically the personal assistance and resources of the Australian Taxation Office, the Australian Bureau of Statistics, State and Territory revenue offices, and the Real Estate Institute of Australia, without which this book would not have been possible. My heartfelt thanks go to Hans Kunnen, to the subjects and sources of the various case studies and other anecdotes, and to Katie. Out of concern for the privacy of those who helped me with their case studies I have changed the names of all involved—it is unfair to talk about people and their money and then potentially to identify them. The subject matter of this book traverses a huge range of facts, figures and opinion. Government regulation and industry practice are changing constantly and in important ways. While care has been taken to ensure accuracy, readers must seek up-to-date information and expert personal advice before acting or refraining from acting on anything contained herein. In particular you are encouraged to discuss your plans with a licensed financial planner; the author is not a licensed financial planner and intends by this book to provide information of a general nature only, not financial advice. I hope this book inspires you to get a home of your own. Peter Cerexhe
ix
INTRODUCTION
YOU CAN GET THERE A pile of money, a simple pile of money. Many of us have never put together in the one place at the one time even one thousand dollars. As a nation we are lousy savers. The average Australian saves a mere 2.5 per cent of their disposable income after tax. In the year 2000 Australia was ranked sixteenth among the developed nations for savings. The average household in South Korea saves at nine times our rate (ABS, OECD data). And our savings rate now is less than one-fifth what it was in the 1970s. There must be someone we can blame. I once worked with a woman in her early twenties who had the world at her feet. Linda was well educated and secure in her employment and career. Her partner also had a stable job. Between them they earned over $100 000 in annual salary (in today’s money values). He earned a bit more than she did, but her better education meant her income had greater potential to rise over time. They had no children to support, took no exotic overseas holidays, spent little money on homewares for their rented unit and had almost nothing in the bank. Linda told me she would never own a home. ‘We can’t afford it,’ she said. So where did all their cash go? It went like this, on: i i i
rent loan repayments on a new car alcohol 1
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i i i i i i i
takeaway food recreational drugs movies minor gambling compact discs clothes mobile phones
When I asked Linda why she wasn’t saving for a home, her reply floored me. ‘Why bother?’ she said. ‘Home prices keep going up and up—we can’t catch up.’ It’s now some years further down the track. Linda and her husband still don’t own their home, they have another fairly new car (with higher loan repayments), but now they have two children to support. Living costs have gone up and they have ongoing expenses for things they never thought they would need—things like health insurance, kids’ shoes and vet bills for the family pets. Their wages have increased by 40 per cent, but the rent they must pay has nearly doubled over the same period. They still get by and they still save nothing. Years ago they set their financial target and they have certainly hit it: zero assets of value. Why worry? As long as they continue to work hard, they will be OK. As long as they don’t get seriously sick or injured, they will be OK. As long as their employers don’t retrench them, they will be OK. As long as they stay together in their relationship, they will be OK. But do you want something different? Do you want more than this? The financial target you set will be the one you hit . . . provided everything goes well for you! If there are mishaps you will fall below your target. Here’s the lesson for you and me: Linda and her husband keep on hitting their target. But it’s important to realise they have had no serious mishaps along the way. They still have a lot to lose. At the moment they can choose what type of accommodation to rent, they 2
INTRODUCTION
can afford a nice car, their children have the medicines they need, and there is always food on the table. They have never had to line up at The Smith Family or Salvation Army. They have a long way to fall if for some reason they can’t maintain their current pace. It’s just that their target is set so low to the ground a snake could leap over it. The theme of the book is this: no matter what your age, your income or your debt burden, you can improve your financial position. Then you can go shopping for a home of your own. You don’t need a lucky break, you don’t need a handout, you don’t need an iron will.
SAVING MONEY . . . LIKE DIETING? Every now and then we try to save some money. But the process is a bit like dieting. We go through all sorts of deprivations and agonies. We cancel our favourite magazines, we stop going to the movies, takeaway will be ‘only once every two weeks’, we tear ourselves away from the clothing shops. We suffer. Gradually we see nothing but a bleak tunnel ahead of us. It is sad and depressing—the life we loved is over. Soon we crack. We return to old ways. Often the sense of release and relief is so strong we go on a binge. Just like dieting, we can find we are worse off than before we started. Maybe we also loathe our slackness or feel guilty. Traditionally the way we save for a home is through personal discipline. You put your head down and plough on. But it’s not good enough any longer. Times have changed and we have changed with them. Thanks to McDonald’s, when I go to a café or restaurant I get impatient if the food is not on the table within five minutes of ordering. If I want to speak to a friend and I’m out and about somewhere I just pull out my mobile phone and make the call straight away. It doesn’t cross my mind to wait until I get home. When I’m in a shop and I see something I want, and it’s on special, I’ll pull out the plastic and buy it on credit. 3
GET THAT HOME DEPOSIT
Life is busy—fast and getting faster. I’m amazed at how much my attitudes and expectations have changed over the last few years. I can’t believe how impatient I’ve become. The idea of plugging away at saving for years on end is just not on. The key thing here is that you don’t have to enter that savings ‘black hole’ in order to fulfil your dream of owning a home. This book is not about an endless, indeterminate timeline of hard work and giving up all the things you love about life. If you’ve got a fulltime job, or are prepared to get one, then I reckon 104 weeks is all it will take, from day one to the day you lay down your deposit cheque, to get a home. And this book shows you how to do it. The hard work is not forever—if you do it right, it does end. And life returns in all its glory. Only more so—you’ll own your home. Why do I care? I’ve seen too many people miss out on the security that owning a home can give. The more I learn about the way money works in Australian society, the more I understand how central is the role of home ownership in delivering long-term financial security. Governments of all political parties and persuasions design their policies around this fact. Our homes may receive special financial treatment in a whole range of ways. Here are some: i i i i i i
land tax capital gains tax social security and pensions concessions and discounts for council rates, water rates (conditions may apply, such as age or means testing) security for personal loans at reduced interest rates concessional rates of stamp duty (conditions apply in different States)
In Australia, if you own your home and have paid it off during your working life, you can look forward to a secure retirement, even if the only regular cash you get comes from the age pension. Sure, the pension on its own won’t deliver a lavish lifestyle. But you will still be master or mistress of your domain. You’ll have a roof over your 4
INTRODUCTION
head and won’t have to face the trauma of rising rents or the landlord who wants you out of the place so his or her child can move in. You’ve got two major elements of security: financial security and security of place. In the past the message got through. Around 70 per cent of Australian households live in a home they own, although a decade ago it was 74 per cent of households. Yet the most challenging trend is noticed among the young—they’re delaying buying a home, choosing to live with mum, friends or become long-term renters. In the under35 age group the rate of home ownership fell from 70.4 per cent to 62 per cent over the decade 1988–1997. More recent government incentives—in particular the First Home Owner Grant—can be expected to have put a ‘blip’ in most housing trends, improving the picture. Increasingly it seems many retirees won’t put up with being asset rich (they own a home) but cash poor (their only income is a government pension). They sell the home and buy a cheaper one, pocketing the leftover cash to finance their lifestyle. If you’re prepared to sell up and move down, you might be able to buy a new car, travel overseas or widely within Australia, finance a child’s education, look after a sick family member or fulfil a dream of another sort. But if you remain a renter it’s against the odds you will ever have this opportunity to convert a significant asset to cash for an important purpose—just like pulling a rabbit out of a hat at the right moment. The table on page 6 shows how the renter gets squeezed over time, riding the Rent Escalator. Over a ten-year period in a location where property values escalate consistently, your rent could double. Ask yourself this: will my wage increase by 100 per cent over the next ten years too? Every time you try to get ahead—you put a little money aside somewhere—you’ll find your rent creeping up to take those savings away. If you’ve worked all your life you will have some superannuation, it’s true. For years your employer will have been putting money into a retirement fund in your name. But, sadly, unless you have been 5
GET THAT HOME DEPOSIT
The Rent Escalator Year
Value of property*
Your weekly rent**
1
$250 000
$240
2
$270 000
$260
3
$291 600
$280
4
$314 928
$303
5
$340 122
$327
6
$367 332
$353
7
$396 719
$381
8
$428 456
$412
9
$462 733
$445
10
$499 751
$481
Notes * This assumes an annual increase in property values of 8 per cent. Some areas improve much faster or slower than this but it’s a fair figure for this illustration (RBA Bulletin). ** As a rule of thumb, rent tends to even out at around 5 per cent of the value of the property being rented. When property prices surge it can take some time for rents to catch up. In some suburbs—such as the wealthiest parts of Sydney—rents can be stuck below 2 per cent of the value of the property. In the ‘landlord crisis’ of 2001–02 in Sydney and Melbourne the rental return in many cases dipped to or below 4 per cent across wide areas of the cities. Property prices were soaring while rents were declining. In times where tenants are plentiful rents can exceed this return. But 5 per cent is a good average for present purposes.
regularly adding to the compulsory super contribution with some of your own money, year after year, you’ll find your super won’t stretch very far in retirement. Once you take out the taxes and convert the future payout to today’s money values, you’ll find your ‘lump sum’ is not much more than the equivalent of a few years’ wages. According to the Association of Superannuation Funds of Australia, the 9 per cent superannuation guarantee paid by employers and accumulating for a 30-year working life will deliver an annual income of only $19 000 for someone on average earnings. Slim pickings. 6
INTRODUCTION
A GREAT SAVINGS PLAN I believe owning a home is the best way of saving money in Australia. Generations have proven it. It’s the one field of investment where revenue-hungry politicians fear to tread. It’s our great financial haven. It’s also the starting point for ongoing wealth creation. Once you own some real estate you have the basis for starting other investments. When property prices rise you may be able to borrow more money and use this to fund a host of investment opportunities. You could: i i i i i
start your own business purchase a franchise buy an investment property buy shares buy units in managed funds
Let’s assume you buy a home today for $250 000. This sum will get you a palace in many parts of Australia, a nice house in Perth or Brisbane, a small house in Melbourne or a unit in Sydney. It’s not an unrealistic starting point. Let’s assume you borrow 90 per cent of this—$225 000. The table on page 8 shows how the figures might go, again using an annual 8 per cent capital growth as an average for property prices. Can you see how owning a home becomes the foundation stone for future financial planning and investment opportunities? If you buy a home in an area blessed with regular capital growth you will be laying down now the bedrock on which you can build much more than just your accommodation. Over the first five years of the 25-year mortgage you won’t have paid off much principal, but, if prices have increased, you will be in a position to borrow a further substantial sum of money to finance other plans. Bear in mind that many parts of Australia do not enjoy regular capital growth. In some rural areas you can’t give away a house, let alone sell it. Other areas experience lumpy capital growth—prices 7
GET THAT HOME DEPOSIT
The investment foundation stone is your home equity Year
Home value
Your mortgage*
Your equity**
Extra borrowings available to you***
Start
$250 000
$225 000
$25 000
$0
1
$270 000
$221 558
$48 442
$21 442
2
$291 600
$217 868
$73 732
$44 572
3
$314 928
$213 908
$101 020
$69 527
4
$340 122
$209 655
$130 467
$96 455
Notes * These figures are based on a mortgage principal of $225 000 taken out over a 25-year term at an interest rate of 7 per cent per year with monthly repayments. The mortgage principal sum reduces over time. ** Your equity is the part you own after deducting what you owe on the property. That is, it is the value of the property minus the outstanding mortgage. *** If you can afford the repayments, a lender could extend your mortgage. These figures are based on borrowing 90 per cent of the value of the property as it changes over time.
might remain stable for a number of years before a sudden rise in value. Or prices might fall. It’s not hard to find places where the rent hasn’t gone up for five years. Property growth relies upon careful selection—there are no guarantees.
WHERE THE RENTER IS AHEAD Let’s be under no illusion: you can generally rent a place more cheaply than you can buy that same property. If you demand a certain level or quality of home you will find it more affordable to rent than to borrow the money necessary to buy it (provided, of course, you have to borrow most of the purchase price—you don’t have a large pile of money just sitting in an account somewhere doing little or nothing!). 8
INTRODUCTION
The renter versus the buyer Year
The Renter:
The Buyer: your
The home owner’s
your weekly
weekly mortgage
rent*
repayment**
renter (per week)
1
$240
$367
– $127
2
$260
$367
– $107
3
$280
$367
– $87
4
$303
$367
– $64
5
$327
$367
– $40
6
$353
$367
– $14
7
$381
$367
+ $14
8
$412
$367
+ $45
position relative to the
9
$445
$367
+ $78
10
$481
$367
+ $114
Notes * As before, this table uses a ratio of the rent to property value averaged at 5 per cent. The property is assumed to be increasing by an average 8 per cent per year. ** This mortgage repayment is based on a 25-year term for a mortgage principal of $225 000 borrowed at an interest rate of 7 per cent per year with monthly repayments. The principal reduces over the term of the loan. This assumes no rises or falls in interest rates.
But, after six or so years in that home, you might start to wish you had borrowed the necessary money to buy it. Using the scenario as before, here’s what happens to the relative positions of the renter versus the buyer. As interest rates rise, ownership becomes harder; as rates fall it gets easier. There are many ways of presenting this information—the Renter versus the Buyer—but the end result is the same. At some point in the Buyer’s life you wave goodbye to the Renter in the rearview mirror. We’re not talking Ice Ages here. The crossover point is not far down the track of home ownership (provided, of course, the home is 9
GET THAT HOME DEPOSIT
in an area of ongoing capital gain). Temporary pain makes for longterm gain. It’s not always the case. As noted, if you buy your home in an area where prices stay put then so could rents. Another exception is the financially experienced renter. I know one of these financially experienced renters. William has sussed the situation out. He knows his own mind and the lifestyle he wants. And it’s a lifestyle where he wants it all and he wants it now! William is not prepared to wait for anything. As a previous generation liked to put it, he has champagne tastes on a beer budget. William lives in a Sydney apartment with a view of the ocean. Everything is clean, modern and in working order. ‘It is a home of style and refinement,’ he says. ‘As soon as you walk in the door you are struck by the grandeur of the ocean spread out before you. Light floods the room. The sound of the surf is like soothing music. A fiveminute walk takes you down a track to the sand. It’s heaven.’ It’s also around one million dollars if William wants to buy it. But William, who loves all the luxuries and pleasures this world can provide, does not have one million dollars. He doesn’t even have one-tenth of this. On his wage he couldn’t really afford to buy this apartment. ‘I can’t buy the home I would want but I can certainly afford to live there,’ argues William. ‘The rent takes an enormous chunk out of my take-home pay, but it’s worth it. Even after rent I still have some cash left over. This is what I actively invest for the future. I have a regular savings plan organised through a managed fund. I believe, at the end of the day, I will still retire with a fair amount of money behind me thanks to this strategy. I may not own my own home, but I’ll always be able to rent a place somewhere nice.’ If William chose to work harder or rearrange his existing income he might just be able to buy a place like this. Not as modern or pristine or stylish but nevertheless somewhere near the ocean. Perhaps a few blocks further back from the beach or maybe in the next suburb—a mere two minutes’ drive from the beachfront. The choice is yours. Will it be ‘lifestyle always comes first’ or ‘secure that home!’? 10
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INTRODUCTION
If you’re reading this book it’s a fair assumption you are inclined towards the second option (although possibly struggling with a deeply ingrained attraction to the first option). Which is the best way ahead? Both options sound good and reasonable. Yet William’s story—as exotic as it is—hides a fundamental truth about money and how we can get it to work for us. William is more financially ‘savvy’ and has more self-discipline than most of us. He is on the ball when it comes to money. He is a big-time saver. Renting is cheaper than buying (at least in the short term). Do you know the biggest mistake renters make? It’s in not saving the money differential. If you keep an eye on the market and hold on to the savings between paying rent and paying a large mortgage you can maintain that edge for many more years. But what do most of us do when we see a few hundred dollars lying around in the bank account? We find a way to liberate it from those musty confines. There are always worthy things to spend our savings on. Always have been, always will be. By contrast the home buyer can be as lazy as a dog on a hot summer’s day. Once you’ve made the leap to saving a deposit and buying that first home you can put the brain into neutral. There are no more tricky decisions to be made, no more investment strategies which must be created. If you keep working, the mortgage will gradually get paid off and you’ll be left with a home free of debt. Home ownership is ‘set and forget’. Anyone can do it. You don’t have to be financially astute, you don’t have to be particularly selfdisciplined. The mortgage repayments come out of your account automatically. Home ownership is the best, laziest and simplest savings plan you can have in this country.
A METHOD . . . AND A REWARD Do you want to put together a home deposit? If you’ve tried before and failed or simply lost heart you probably realise that merely setting a household budget and stopping spending is not a successful approach. What’s more, it’s demoralising. 11
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What we need is a method for achieving our goal, and a reward to inspire us now. It can’t just be pie in the sky—owning a home in the distant, obscure future. In 104 weeks, and even less in some situations, you can put together that home deposit. You don’t have to be a genius or have the discipline of a saint. You don’t have to act like some kind of Genghis Khan and crush the lifestyle you currently enjoy. The following chapters set out a method for building a home deposit. You can see now how you will get there, what you have to do to reach your target and how much you could save. This book is all about short-term tips, methods and decisions which will pay lifelong rewards. Using this method you can construct the means by which you will build your home deposit. You will find out what to do with the money as you gather it, so that savings multiply upon savings. Importantly, the method is filled with alternatives. There are plenty of ways to save money but not all of them are suited to everyone. We are all different. Some can’t give up daily pleasures but can work harder or longer. Others are not very good at earning money but are ready to make lifestyle sacrifices to reach their goal. As we go through the chapters ahead you are free to choose the parts that best suit who you are and what you know about yourself. (Up-front I apologise if you find the language too simple and some of the explanations unnecessary—just skip the parts you already understand. My concern is to ensure that anyone who has missed a few financial lessons on their way through life can understand how the pieces work and fit together in our economy.) By the end of this book you will know what target deposit is achievable and how to get there within 104 weeks. It will be harder for singles and easier—in theory—for couples. Be under no illusions: if you have to do it all on your own it will be more difficult (but, probably, you are used to that challenge). There’s much about our Australian financial system which works in favour of couples—income splitting, superannuation, discretionary trusts and more. Couples have it easier. But singles can often be more determined and less easily distracted. 12
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INTRODUCTION
Couples or singles with children will also find their own set of challenges and opportunities. Can you spare 104 weeks? It’s almost nothing out of your life, yet it can make your life. Have you paid off finance on a car loan before? This is less time than that. Have you had a baby? We’re talking about a period of time similar to that from birth until the baby stops being, well, baby-like. Parents know that special time is over so fast. Your ultimate reward—owning a home—is not somewhere vaguely around the corner, up the hill, into the valley, up another hill, and so on. If you get the idea of this book you’ll find your home is waiting for you just down the street a little way. It’s so close you can see the curtains flapping in the breeze and smell the pizza in the oven. It’s time to relax on the verandah and survey your domain. Keep hold of that image, your home! Turn the page, start at chapter 1. Get a home! P.S. Don’t keep telling yourself how it can’t be done—start planning how you will do it!
13
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CHAPTER
1
SOME PRINCIPLES THAT WILL WORK FOR YOU I’ve played tennis for most of my life. And I’ve never been much good at it. I had lessons as a kid, but they were pretty much a joke. The teachers took the money and delivered what amounted to a babysitting service. I ran around and got hot, that’s all I really learned about playing competitive tennis. As an adult I found I was making no progress with the game even though I knew the rules, what the shots were, how to score. I asked better tennis players what to do. ‘Find time for more practice,’ said one. I did some occasional practice, and my serves improved a little, but the effect on the overall game was marginal. ‘You’ve got to go after the ball and make every point count,’ counselled another player. Yet I could run around after the ball forever and still not win a match because my serves let me down badly. I just couldn’t clear the net with the ball. Or I would hit it straight over the net and into the back fence. Something was wrong but I didn’t know what. I looked at tennis games on TV and scrutinised the way the best players in the world did their serves. I tried to imitate them but the clue was evading me. Eventually someone provided the piece of information that made all the difference. ‘When serving, you don’t just hit the ball,’ he said. ‘You slice the ball. Unless you put spin on that ball you will 17
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not get it to clear the net then curve down to the ground where you want it.’ I finally found some control by not hitting the ball straight. It was something I couldn’t see when I watched how others did it. All along, it had been something simple. You don’t have to be a genius or sporting whiz to play a good game of tennis. It wasn’t about doing lots of practice. It wasn’t about buying the right racquet. It wasn’t about knowing the rules of the game. It wasn’t about watching what other people did. It wasn’t about effort or endurance. The difference in my service game came down to one thing: knowing the method. This book is about a method—a method for one thing and one thing alone: putting together your home deposit. When you look around you it can be depressing how many people seem to get their first home effortlessly. Don’t fool yourself into thinking they are doing something you can’t do. People get to their first home in a number of ways. i i i i i i
Some get the deposit money from an inheritance. Some get it as a gift or loan from their parents. Some win the lottery or a competition and get a head start. Some work all the time and don’t have a life. Some have access to low-interest loans arranged through their employer. Some marry or find a partner who has already done the hard work and saved enough money. Or they combine extensive savings.
These people don’t need much help. The rest need to know the tricks to saving not just a few hundred or a couple of thousand dollars but how to tuck away a few tens of thousands of dollars. There are tricks to this and a method lies at the heart of it. Just like finding out how to serve the tennis ball. Here are the elements of the method to get that home deposit. 18
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SOME PRINCIPLES THAT WILL WORK FOR YOU
You can be in a relationship or single, you can be on a large salary, a modest wage or reliant on social security. You can be just out of school or about to retire. You must be prepared to change.
FIRST PRINCIPLE: KEEP IT SHORT Let’s start with a target: 104 weeks. Many diets fail because they seem to go on forever. Students often drop out when they can see no end in sight for their hard slog and financial deprivation. Many of us look at saving as if we are signing a blank cheque. It seems the demands are limitless. No wonder we give up or defer buying a home. Really, 104 weeks is nothing. You might be thinking, ‘Well, it’s still two years, isn’t it? That’s a long time!’ Let me challenge that thought: have you ever looked the wrong way down a pair of binoculars? Hold them back-to-front and they don’t make things look closer, they make them move further away. In fact nothing has moved anywhere. Your future home lies just down the road. Hold the binoculars differently and the distant objective draws close. These 104 weeks are not all of equal duration. Yes, they are weeks made up of seven days each of 24 hours, each hour of 60 minutes. But to our minds they don’t have to burden us in that way. You see, in the first six months of saving for a home deposit you can probably do anything and put up with everything. Your motivation is at its highest. You’ve set a goal and rush headlong to embrace it. It’s the period when you still tell yourself: ‘I can live without Thai takeaway on Friday evenings’ or ‘I don’t need a beer or two after work every day to calm down’. I’m not suggesting you give up takeaway food or beer if they are important to you. But no matter how fundamental such things are to your daily wellbeing you are probably prepared to put them aside for a period if they are eating into your money when there is something you really want. So, I’m not asking you to be strong for 104 unrelenting weeks of pain—the first six months you’ll be willing to walk over hot coals. 19
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And the last six months, if you’ve followed the method to that point, will be different too. If you’re on track for your goal—even allowing for some inevitable failures along the way—you will have to start looking at the property market and going through the process of selecting a suburb and inspecting homes. Now that’s a pretty motivating time! The hard part of the journey is those 52 weeks in the middle. For the first quarter you’re hot to trot and in the last quarter you’ve got the excitement of property hunting. A busy day moves faster than a day without purpose. Days with motivation will pass quicker than days drifting with vague financial hopes. In 104 weeks from when you start, you’ll be ready to buy. Not all weeks are created equal. These 104 weeks are really something quite special. And if you are good at saving or making money, you can get there in a shorter period, by following this method. SECOND PRINCIPLE: KNOW TODAY THAT YOU CAN ACHIEVE YOUR GOAL It’s one thing to be motivated by something you’ve read but it’s quite a different thing to actually possess motivation. All diets, exercise programs and inspirational books (if you are receptive to the particular message) take you to a higher plane. I doubt that anyone who starts a yoga course, for example, will escape uninspired. Many of us experience a sense of wonder and the thrill of speed when we first get the knack of pedalling a bicycle. Few of us convert to bicycle commuters. Saving for a home suffers from the same problem. It becomes tiring and the pressures and expenses of daily living make persistent claims on us. Too often the goal—though truly, madly, deeply wonderful—falls out of focus as the sweat rolls off our forehead. A friend of mine is going to need heart surgery. It will be almost 30 years before he’ll be lying unconscious on the operating table, but he feels he can almost pencil in the date on the calendar. He knows it will happen because it happened to his father in his early sixties 20
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and to his grandfather at about the same age. The doctors who advised his father have told him his day will come too. It doesn’t even appear that exercise or diet will save him from this appointment. The men in his family just have substandard components in the circulatory system. My friend has motivation today because the situation affects him as a present certainty. And while diet and exercise might not prevent the need for surgery, it will enable him to meet the challenge in the best possible condition. He will be fit and well nourished when his time comes. How can you know today, as a present certainty, that you will reach your goal of creating a home deposit in 104 weeks’ time (or sooner)? It comes down to having a method which shows you the result—in financial terms—now. i Start with a method
Here’s how the method works. There are a number of ways of improving your savings and increasing your income—the two parts of the equation. Putting a deposit together is a double act involving hunting out extra income and, simultaneously, holding on to as much as you can of the money you make. Getting to your goal fast—and 104 weeks is pretty rapid—takes more than just the age old advice of ‘prepare a budget and stick to it’. Well, I don’t know anyone who sticks to their budget. In fact, I know few people who actually attempt to follow a budget. You’ve either got money or you haven’t. In both camps there is the daily struggle to live within our means. In Part Two of this book you’ll find a number of modules. These are stand-alone suggestions for ways to hold on to more of your income or to increase your earnings. There are more than enough modules to get you to a home deposit. Each module is expressed in dollar terms—you can put a figure today on how much you expect to save or earn. Your task is to find the modules you believe you can handle, add the dollar figures together, and see what deposit you can realistically achieve. For some this might only be $10 000, while others can reach $40 000 or more. 21
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1. 2. 3. 4.
You choose the modules. Take the dollar figures to the home deposit worksheet (you’ll find it in chapter 2). Add up the total. Know today where you will be in 104 weeks’ time.
I don’t want to encourage you to embark on a vague, endless course of mad savings. The great thing about this method is that you can feel confident about affording a home soon. If the figures work for you, then go ahead and do it. THIRD PRINCIPLE: ACCEPT THAT WE’RE NOT ALL THE SAME There are a lot of variables at play here: your income, whether you have a partner contributing, your lifestyle, where you live now, your expectations out of life, your degree of self-discipline, the nature of your relationships with your partner and wider family, whether you have kids who are dependent on you and so on. The beauty, however, is that you can build these factors into your choice of modules. You will decide while reading each chapter whether or not a particular module of saving or earning is likely to work for you. Many modules won’t stand a snowflake’s chance in hell of getting up for you. Others will be easy, and some will provide harder but definite possibilities. Discuss the modules with your partner or friends and family as you go through the book. In some cases you might want to talk about particular modules with individual family members. Be in agreement about the task ahead and the reality of what is genuinely achievable. And be prepared to surprise yourself. FOURTH PRINCIPLE: ALLOW FOR FAILURE Right from the start let’s get this clear: you’re only human. If you don’t have an inheritance or low interest rate loan from an employer 22
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it will be hard work to amass a sizeable sum of money. You can expect to fail to meet some of your targets. So what! Just make sure you choose some extra modules now to cover the shortfall.
FIFTH PRINCIPLE: PUT IT AWAY AS YOU GO When I got my first full-time job it didn’t take long for the heartache to set in. It was drudgery. Daily drudgery. With a big dollop of stress thrown on top too. Each day, every day began to look the same. There was no light at the end of the tunnel. Indeed there wasn’t even a blessed tunnel. Just a brick wall in my face which represented my future. And that was only my first week. Very soon I sensed (rather than saw) the oasis of relief called annual leave. It was a long way off, but I sure needed it. Yet how, in a lowly paid job, could I ever afford a holiday? I mean a real holiday—the kind where you go somewhere extra pleasurable rather than lying around the house in nothing but shorts and T-shirt, with a drink in one hand and the TV remote in the other. I was determined to save for a holiday. Quickly I realised that buying lunch each workday was costing me a lot of money. When I did the simple maths—eight dollars a day, five days a week, 48 weeks of the year—I was shocked by the total. One thousand nine hundred and twenty dollars! Now that would amount to a real holiday. So I started making my lunch and bringing it from home. It still cost a bit but I knew at the end of the year there would be plenty of cash to get a good holiday happening. Religiously I continued with my sandwiches from home. I knew it was hard work—buying lunch was a real treat, a moment of light in my dreary working day—but I could also calculate how far ahead I was getting. Come the end of the year, it’s Christmas time, and I had no money in the bank. I basically spent the Christmas holidays walking 23
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around the house in my shorts and holding a drink in one hand and the TV remote in the other. What went wrong? I actually wasn’t saving. I was performing the effort or task which produced the saving but not converting that saving into money and putting it away somewhere. Somehow— goodness knows precisely what I did with the money I thought I was saving—the lunchtime cash was spent elsewhere. How often do you wander through a department store, see something you need—an umbrella, swimming costume, new shoes for work, fluffy towels—and realise its price has been reduced? You buy it and are pleased with yourself for making a saving. The other day I saw a tailored vest on sale. I’d been looking for one for about a year. And there was a really great-looking one, right in front of me. It was $75 down from $150—a 50 per cent discount! So I bought it, knowing I had saved myself $75. That’s the trap. I hadn’t saved anything. I had saved myself money which I might otherwise, in some other situation, have spent. But that is not saving. These types of ‘savings’ should be recorded on the Mickey Mouse ledger. What I really had done, in buying that vest, was lose money. I perceived it as a saving but the money was gone forever. When you determine to save money or earn money for any of the modules you set before you now, you must follow through in this way: put the ‘saved’ money into an account. Quantify the amount you are saving then bank it. Daily, weekly, monthly. You choose. Put it away—otherwise the saving won’t exist. The money won’t be there when it’s holiday time. The money won’t be there when you should be ready to go house hunting. Chapter 4 will look at how to do this. The important point for the moment is simply to understand the principle: put it away as you go.
SIXTH PRINCIPLE: PUT IT IN THE RIGHT PLACE You’re going to be making some pretty substantial savings over the next 104 weeks. Your everyday bank account is not up to the job. 24
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Term deposits? Shares? Managed funds? Under the mattress? You need to know where to place your savings and income so as to meet these criteria: i i i i
i
Easy to add to—you will be depositing money probably on a weekly basis. Low fees—if you’re not careful the financial institution will take a big slug out of your savings. Good security—you don’t want to put your money in jeopardy. Good return—your savings shouldn’t just sit still growing old gracefully: put the money out to work for you. You want to earn money on your money. Good access—you can get your money out when you meet your target or earlier if necessary.
These matters also are discussed in chapter 4.
The Three Bears Two students, Carl and his girlfriend Angela, had just graduated and were about to start their first jobs. The jobs were quite a distance apart, so where should they live? Close to one but distant from the other? Democratically, they decided to plant themselves midway. This put them in the far-northern suburbs of Sydney. They had been renting a succession of flats for some time now and were quite experienced in the game. It didn’t take them long to find a house which fitted their criteria. It had several bedrooms, a nice big backyard with a good garden and was centrally located for their jobs. One would take the train to North Sydney while the other took the car further west. About half an hour each way for both of them. ‘The owners of the house had taken a job in Darwin for a couple of years,’ said Carl. ‘This was the first time they had rented out the property and they intended returning to it as their home. 25
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‘The day we moved in we pulled up outside with the removals van. We went inside and were amazed to see things looked like the owners had just gone outside for a short stroll. We knew we were getting the house “furnished” , but what we found was ridiculous. ‘The cereal bowls were dirty in the sink; there was toast sitting in the toaster; the washing machine was full of clean, wet clothes; there were filing cabinets of personal papers; the wardrobes were full of their clothes; the dirty sheets were still on the beds. It was like something out of The Three Bears—would they walk in any minute and say, “Who’s been sleeping in my bed?” ‘We contacted the renting agent who said we could pack up the owners’ stuff. However, shortly afterwards we got a call saying the owners didn’t want us moving all their things. The agent threw up his hands and would not solve the problem. We were just starting our new jobs—we didn’t have the time or energy to battle on over this! We spent a year or more in that house living on top of the absent owners. We pushed piles of their belongings into one bedroom and closed the door. ‘It was this sort of experience that motivated us to save for our own home—somewhere where we weren’t living with the ghosts of the owners.’ ‘We were highly motivated,’ adds Angela. ‘From the start of our working life together we decided to live off one wage and bank the other one. This wasn’t easy—there were times when we had no money to spend or pay the bills. But it paid off for us and we bought a house.’
HOW MUCH DO I NEED TO BORROW? As you may know, when you borrow money to assist you to buy a home this is called getting a mortgage. The money you borrow is lent to you by a financial institution such as a bank, credit union, building society or finance company. Sometimes people borrow money from family or friends. 26
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Wherever it comes from, it is likely to be lent against the value of the property. A mortgage document will set out the terms of the loan (when the money is to be paid back, how much, what will happen if you stop paying, and so on) and generally be registered on a public database administered by the government. Each financial institution will have its own rules about mortgage lending. The loans officer will ask you about: i i i i
i i i
your income your expenses (current rent, loan repayments, living expenses, other debts) your age whether you (and your partner, where relevant) are looking to stop work for some reason or other (such as an extended holiday, education purposes or to raise a family) the value of the property you wish to buy how much money you have saved (superannuation and otherwise) your assets and their value (car, furniture, jewellery, shares, etc.)
The lender wants to make sure you can afford the mortgage repayments. It also wants you to contribute part of the purchase price and it will lend you the rest. Generally you should aim to have saved at least 10 per cent of the purchase price (plus the purchase expenses— see chapter 12) and it will lend you the other 90 per cent. So, for example, if you want to buy a property selling for $250 000 you should have saved over $25 000 and will seek to borrow the remaining $225 000. If the home is worth $120 000 you should be able to put up $12 000 and aim to borrow $108 000. Some lenders will offer to loan you more—even 95 per cent is possible and 100 per cent (for certain individuals) does occur in special circumstances. Realistically most of us should aim to save at least 10 per cent and, preferably, 20 per cent or more if we can. Of course no one will lend you the remaining 80–90 per cent 27
921
1075
1228
1382
1535
1689
1842
1996
2149
2303
2456
2610
2764
$200 000
$225 000
$250 000
$275 000
$300 000
$325 000
$350 000
$375 000
$400 000
$425 000
$450 000
768
$125 000
$175 000
614
$100 000
$150 000
461
2831
2674
2516
2359
2202
2045
1887
1730
1573
1416
1258
1101
944
786
629
472
2899
2738
2577
2416
2255
2094
1933
1771
1610
1449
1288
1127
966
805
644
483
5.50% 5.75% 6.0%
$ 75 000
borrowed
Amount
Interest rate
2969
2804
2639
2474
2309
2144
1979
1814
1649
1485
1320
1155
990
825
660
495
3038
2869
2701
2532
2363
2194
2025
1856
1688
1519
1350
1181
1012
844
675
506
3109
2936
2763
2591
2418
2245
2073
1900
1727
1554
1382
1209
1036
863
691
518
3181
3004
2827
2650
2474
2297
2120
1944
1767
1590
1414
1237
1060
883
707
530
6.25% 6.50% 6.75% 7.0%
3253
3072
2891
2711
2530
2349
2169
1988
1807
1626
1446
1265
1084
904
723
542
3326
3141
2956
2771
2587
2402
2217
2032
1848
1663
1478
1293
1109
924
739
554
3399
3210
3021
2833
2644
2455
2266
2077
1888
1700
1511
1322
1133
944
755
567
3474
3281
3088
2895
2702
2509
2316
2123
1930
1737
1544
1351
1158
965
772
579
7.25% 7.50% 7.75% 8.0%
Monthly repayments on a 25-year mortgage
3548
3351
3154
2957
2760
2563
2365
2168
1971
1774
1577
1380
1183
986
788
591
3624
3422
3221
3020
2818
2617
2416
2214
2013
1812
1610
1409
1208
1007
805
604
3700
3494
3289
3083
2878
2672
2466
2261
2055
1850
1644
1439
1233
1028
822
617
3776
3567
3357
3147
2937
2727
2518
2308
2098
1888
1678
1469
1259
1049
839
629
8.25% 8.50% 8.75% 9.0%
Home Deposit PAGES Chap 1-end 16/1/03 9:33 AM Page 28
3224
3378
3531
3685
$525 000
$550 000
$575 000
$600 000
3775
3617
3460
3303
3146
3866
3704
3543
3382
3221
3958
3793
3628
3464
3299
4051
3882
3713
3545
3376
4145
3973
3800
3627
3454
4241
4064
3887
3711
3534
4337
4156
3976
3795
3614
4434
4249
4065
3880
3695
4532
4343
4154
3966
3777
4632
4439
4246
4053
3860
4731
4534
4337
4140
3942
4831
4630
4429
4228
4026
4933
4727
4522
4316
4111
exposure to rising interest rates.
You can get a 30-year mortgage but I’ve chosen to use 25-year figures as it is wise to leave a little fat in the equation to cover the risk and
Repayments of principal and interest, variable interest rate loan. Interest rates are per annum.
Notes
3071
$500 000
5035
4825
4616
4406
4196
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unless you can afford the repayments. It’s not purely a matter of saving the deposit. And the more you can contribute the less your risk will be. If you default on making loan repayments—the monthly or fortnightly instalments you pay to the lender in accordance with the mortgage— the lender will have the legal right to set in train a process by which the property is taken from you and sold. Any money left over after paying out the mortgage and expenses (which can be considerable) should flow back to the poor owner—but don’t expect much. The monthly repayments table on pages 28–9 will give you an idea of what it will cost you to borrow certain amounts of money. Look at this when setting your deposit target. Aim to do better than 10 per cent if you can. Particularly in times of rising interest rates it is sensible to minimise your total borrowings by having a deposit of 20 per cent or more. The lender will also look at your income. Each institution has its own rules but you can work on the assumption that you should be able to pay your way on your debt—all interest and principal repayments—with no more than 30–35 per cent of your gross household monthly income. (It’s impossible to be precise as so much depends on your personal situation.) That’s your pre-tax income. This covers all your loans, including personal loans and ongoing credit card debt for example. If you work for yourself it might be difficult to establish your true income from your tax return, so take the time to get your documents in order to substantiate your income. While writing this chapter I checked with three financial websites to see what amount of money they would lend a fictional couple of home buyers. The details were the same: one gross annual income of $50 000 and a partner’s income of $30 000, borrowing for 25 years on a standard variable interest home loan. According to the Wizard online calculator the couple could borrow up to $330 000, the Commonwealth Bank said $421 449 and the ANZ site came up with $506 093.92. By trying to make things quick and easy the online calculators can lead you astray. Speak to your bank or financial institution and get a feel for what they will lend you. 30
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SUMMARY The method for putting together your home deposit involves six principles. i i i i i i
First principle: keep it short. Second principle: know today that you can achieve your goal. Third principle: allow for the fact that we’re not all the same. Fourth principle: allow for failure. Fifth principle: put it away as you go. Sixth principle: put it in the right place.
How much money do you need for a home deposit? Choose the modules that suit you, do the sums, allow for failure and then make a realistic assessment of where you will be in 104 weeks’ time (or whatever time period you choose). Don’t be tempted to blow out the deadline or attempt too many modules. Keep it real.
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104
CHAPTER
2
INTRODUCING THE HOME DEPOSIT WORKSHEET This is the place where you will record the dollar figures showing how you will get your home deposit together. On this worksheet you will add the four elements: i i i i
assets which are cash or can be turned into cash income savings government assistance
The worksheet is based on a period of 104 weeks because it is simple, definite and achievable. It is a target date, an end date. You may wish to use a longer or shorter time frame; just adjust the worksheet accordingly. As you read through this book you choose the modules and the dollar amounts which you believe you can contribute towards your home deposit. Take all monetary values across to the right-hand column of the worksheet after first adjusting any weekly or monthly amounts to show their total value over the 104-week period. Calculations for many of these items will be found in their relevant chapters. In other cases just multiply any weekly amount by 104 (or by a lesser amount if you do not believe you will be able to make this contribution every week), or a monthly amount by 24.
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LOOKING FORWARD, NOT BACK This worksheet starts from where you are now. If you are currently paying your way and your income is paying your living expenses then it is not important to record here any ongoing debts or liabilities—such as rent, personal loan or credit card payments. This worksheet looks to the future—specifically where you can be in 104 weeks’ time. You must read the book before you can fill in the worksheet. As you read each chapter you must make a decision about the items to include in the worksheet and the items you do not want to include. Don’t worry if you leave a lot of areas blank. You’re not superhuman, you’re not a machine and life is for living. The important thing is to analyse your situation and marshal your resources for the task—and what a life-changing task it is. You might only fill in three or four areas in the worksheet—and that could be enough to get your home. You might consider trading off one big sacrifice so as to keep hold of a number of small areas of sacrifice such as personal luxuries. Take a look at chapter 14 where there are a number of examples of filled-in worksheets. Use a pencil and eraser so you can play with the figures. See how they look in different patterns. Above all, discuss them with your partner or family (even if they won’t actually sit down next to you and give their undivided attention). Transfer area totals to the Worksheet Summary at the end of the worksheet (see page 39). The ‘104 weeks’ method relies upon several factors: i i i i
Making a fairly accurate assessment of what you can earn and what you can save. A heart-felt desire to get your own home quickly. A realistic approach—you won’t be 100 per cent reliable. Make allowances for slip-ups. You must bank your savings each and every week and put them where you won’t be tempted to withdraw the money before 104 weeks is up.
Now read the book, choose the modules that suit you, and fill in the gaps in this worksheet as you proceed. By the end of the 33
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book you should know how much money you believe you can raise in 104 weeks. You’ll have taken the first steps towards achieving your home deposit! THE HOME DEPOSIT WORKSHEET ASSETS Cash value
Existing savings
See chapter 3
Money in bank accounts now
$..........
Money in term deposits now
$..........
Value of shares now
$..........
Value of units in managed funds now
$……….
Money owed to me (from friends, family, etc.) now or in a trust fund
$..........
Money in property (e.g. shared ownership, where the property will be sold) now
Total savings now
$..........
$..........
(take this figure to the worksheet summary)
Cash value after sale
Assets
See chapter 3
Garage sale (estimate)
$..........
Specific items of value which can be sold ………….$……...... (estimate) e.g. car, sports equipment,
………….$……......
jewellery, furniture, collectables
………….$............
Total asset sales
$..........
(take this figure to the worksheet summary)
34
$..........
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INTRODUCING THE HOME DEPOSIT WORKSHEET
Value after 104 weeks
Gifts and support
See chapter 8
From parents and family Per birthday, Christmas and other special occasions $….…. Subsidy
$..........
Description of subsidy scheme (estimated value) …………....... …………………...................... …………………......................
Total gifts and support
$..........
$..........
(take this figure to the worksheet summary)
INCOME (Use ‘net’ figures for income—after tax has been deducted)
Value after 104 weeks
New income to be saved
See chapter 4
My income
[$………… per week net]
Partner’s income (if relevant)
[$………… per week net]
What I/we could save now from my/our income(s) each week
$………. per week net
Part-time job #1
See chapter 6
$………. per week net
$...........
$...........
Part-time job #2
$………. per week net
$...........
Part-time job #3
$………. per week net
$………..
Existing job #1–overtime
$………. per week net
$………..
Existing job #2–overtime
$………. per week net
$………..
$………. per week net
$………..
$………. per week net
$………..
Annual leave—additional work for me Annual leave—additional work for my partner
Total new income to be saved
$..........
(take this figure to the worksheet summary)
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EXPENSES Value after 104 weeks I/we can cut back in these areas
Transport
See chapter 9
What I/we can save by not using or owning a car
$………. per week
$……….
$………. per week
$……….
Cycling/walking—saving on public transport fares
Total transport saving
Communications
$..........
See chapter 9
Mobile phone
$………. per month
$……….
Fixed-line phone
$………. per month
$……….
Total saving on communications$……….
Loans
See chapter 9
Loans reassessment
$………. interest saved per year
Total saving on loans
Insurance
$……….
See chapter 9
Policies reassessment—am I paying too much?
$………. per year
Total saving on insurance
$……...
Waste
See chapter 9
Food
$………. per week
$……….
Energy
$………. per week
$……….
Total saving on waste
$……….
Regular fees
See chapter 9
Memberships
$………. per year
Subscriptions
$………. per year
Other
$………. per year
Total saving on regular fees
$……….
36
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Value after 104 weeks
Luxuries
See chapter 7
Luxury #1
$………. per week
$……….
Luxury #2
$………. per week
$……….
Luxury #3
$………. per week
$……….
Luxury #4
$………. per week
$……….
Luxury #5
$………. per week
$……….
Luxury #6
$………. per week
$……….
Luxury #7
$………. per week
$……….
Total luxuries saving
Rent
$……….
See chapter 8
[current rent or board
$……….per week]
Moving to cheaper premises $………. per week for .... weeks Living with parent(s)
$……….
$………. per week for .... weeks
(after deducting any board I/we will pay)
$……….
Living with friends
$……….
$………. per week for .... weeks
Total rent saving
Presents
$……….
See chapter 8
To my partner from me
$………. per birthday, Christmas
and/or other special occasions To me from my partner
and/or other special occasions To my family
$……….
$………. per birthday, Christmas
and/or other special occasions
Total presents saving
Superannuation
$……….
$………. per birthday, Christmas
and/or other special occasions To my partner’s family
$……….
$………. per birthday, Christmas
$……….
$……….
See chapter 9
Amount ‘saved’ if I/we stop paying voluntary superannuation contributions (e.g. self-employed or employee ‘salary sacrifice’)* $………….per week, or $………….per year
Total superannuation saving
$……….
Note * This is not the superannuation payments made to your account by your employer as part of the superannuation guarantee scheme. If you don’t make any other contributions to superannuation then you have nothing to add to the worksheet.
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Value after 104 weeks
Vices
See chapter 10
Smoking
$………. per week
Alcohol
$………. per week
$……….
Recreational drugs
$………. per week
$……….
Gambling
$………. per week
Total vices saving
$……….
$……….
$……….
(add up all your expenses savings subtotals) Now add up all sub-totals from pages 36, 37 and above on this page
Total saving on expenses $………. (take this figure to the worksheet summary)
GOVERNMENT HELP WITH YOUR DEPOSIT Value after 104 weeks
Government assistance First Home Owner Grant
See chapter 12
One-off payment
Other scheme?
$………. $……….
Total government assistance
$……….
(take this figure to the worksheet summary)
Notes 1. The First Home Owner Grant is just that—it must be the first property owned by you and your partner, either jointly or separately. For details about the grant see chapter 12. 2. You may be entitled to concessions on the payment of government stamp duty taxes.
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WORKSHEET SUMMARY
Where the money is coming from
Total Total Total Total Total Total
Value after 104 weeks
savings now (from page 34) asset sales (from page 34) gifts and support (from page 35) new income to be saved (from page 35) saving on expenses (from page 38) government assistance (from page 38)
HOME DEPOSIT GRAND TOTAL
$................. $................. $................. $................. $................. $................. $................
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CHAPTER
3
PUT TOGETHER A STASH OF CASH Enough of estimates! Let’s start putting it into practice with some money-making. Capital is what it’s all about. Capital here really means your money—not just a handful of dollars but dollars in really large lumps. When money gathers in lumps it becomes powerful. It can be life-changing. If you possess money in lumps you face the marketplace differently. Put simply, you can get a privileged price or make a saving on most of what you buy, whether goods or services. If you only have $5 you can buy one pair of socks, but search the shelves and you’ll find ‘three pairs for $10’ somewhere. If you’re hungry you can go to the chicken shop and buy a quarter chicken and chips for $4.50. But if you’ve got $12 in your purse or pocket you can buy a whole chicken and a large chips—four times the food. You can pig out or put three meals’ worth in the fridge back home. At $3 per meal you’re saving one-third of the cost. (Provided you can handle eating takeaway chicken for a few days, of course!) Everyone knows that. But it gets better the more capital you have. There are certain Australian cars which will set you back around $30 000 when new. If you scrape together the money (by savings and/or loan) to buy one then try to resell it a year later you’ll be lucky 40
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to get $18 000 to $20 000 for it. And that’s in perfect condition. After three years you’ll gratefully accept $10 000 to $14 000. From then on you’ll need a front lawn and a cardboard sign if you hope to get any money for the thing. Economically speaking, it’s a fossil. There are certain models of European car which cost more to buy initially but which retain their value over time. In fact there are some cars which appreciate in value. If you want to sell such a car three years down the track you might actually get more than you initially paid for it. But you’ll need $80 000+ to buy the car in the first place (and you’ll have to do the necessary research to get the right makes and models). The expensive car will cost more to buy than the cheaper one, and could be expected to give more years of service. But it will cost more to run from year to year. Still, if you’ve got the cash behind you—the capital—you can drive a bargain over the long term. Capital is one life-changer, credit is another. With access to credit, whether a MasterCard, Visa card, American Express or revolving line of credit, you have a tool to buy things more cheaply. However, unlike capital, you have to repay it. You are using someone else’s money and they will want it back. All of it. Plus an outrageous amount of interest (unless your credit card gives you some interestfree days). Plus fees if you are late in making the necessary minimum payment. Credit is the malevolent brother of capital. Powerful when under control but ready to bite you. Like capital, credit cards are a useful tool when you head into the marketplace: i i i
You can buy things more cheaply now—specials or bulk discounts, for example. You can buy more expensive things now which will end up saving you money in the long run. You can manage your cash flow—capital and credit can cover for times when you have no cash but still want or need to buy things (like food or to pay the electricity bill, for example).
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These are great benefits. Capital and credit are what separate subsistence living (where you spend everything you earn every week or fortnight, with nothing left over to the next week) from secure living (where you can manage your way through the highs and lows of cash availability). But if you don’t keep on top of your credit payments, the interest rate and fees will tear into you and drag you down as if you have a tiger on your back. For this reason many people recommend that a person cuts up their credit cards if they are getting into financial trouble. Clear the slate and force yourself into a position where you can’t buy something unless you actually have the cash for it. This is a drastic tactic and it works for some. Access to simple credit, however, is a great stress reliever. If you have difficulty controlling your use of credit, go and see a financial counsellor to discuss what can be done. Local councils and welfare organisations can usually put you in touch with a financial counsellor. Their expertise is worth seeking if credit is strangling you.
GET YOUR MONEY BREEDING It’s a simple truth about money that savings breed other savings. Before you start the life-changing process of working towards a home deposit it’s a good idea to put together the biggest lump of money (capital) you can. Whereas this book’s method is all about ongoing effort—either to make more money or to hang on to what you are making—a little bit of capital up front will kick-start the enterprise. It’s time for the garage sale of your life. And I mean a ruthless garage sale. If you can put together a few hundred dollars—even a thousand or two—now, it will stand you in good stead and will start the breeding process. Look at your assets. What have you got that is of value? I don’t mean sentimental value, I mean capable of being turned into cash (though the one item might fall into both camps—a piece of jewellery, for example). 42
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It will hurt. When I was in my twenties I was working as a musician. Over a number of years I had graduated from pretty awful guitars and amplifiers to stuff that was truly professional in quality. I had a couple of USA Fender guitars and amplifiers and a whole lot of PA speakers. It had taken a long, long time to get it all together. When I got married we did not have a home of our own. I knew it would be wise to get into an independent situation quickly. We sold a number of our possessions to raise cash towards a home deposit. As I looked at the anonymous black boxes of speakers and amplifiers I knew I could sell them, with a bit of effort, and start saving for a home. But could I part with my wonderful guitars? They had brought me a lot of fun, income and thrills. They were packed with sentimental value, though they weren’t family heirloom material. In the end, one by one, I sold them all. I clearly remember getting the princely sum of $500 for one Fender Stratocaster. That guitar went towards my first home. Now friends point out that I would have to pay $2500 to purchase the same guitar—‘You were mad to sell that one!’ they say. Certainly. I was ‘madly’ in pursuit of my dream of owning a home. Did I need that $500 to get a home? You bet. Can I afford to buy that guitar now, at the inflated cost of $2500? Are you kidding? After fifteen years of home ownership I have the assets behind me which mean I can afford to buy that thing five times over between dinner and dessert. Fifteen years ago my wife and I had to scratch our way towards our first home. The sacrifices we made—converting favourite things into assets and then into cash—were hard. But that ‘cashing up’ process set the ball rolling for us. If you’ve never been a successful saver, getting that first $1000 together is a wonderful feeling. It is the breakthrough to a new way of living and investing for your future. If you are used to having $1000 or so lying around in a bank account, aim for five times this amount from your asset clearing sale. Understand this: your possessions are mostly worth far less than you believe. If you can get even half of what you paid for them you are doing very well. But don’t let that put you off. A few years down 43
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the track, sitting in the lounge room of your home, you can buy a lot of these things once again. And you’ll have your own cupboards in which to place them. By no means am I suggesting you sell items of serious sentimental value. No way should you be getting rid of your mother’s rings or your father’s watch. In any event, many of the things we think hold real monetary value are actually fairly valueless out in the marketplace. Old family silver, small diamond rings, old furniture and the like, will generally raise little cash. Even genuine antiques will often fetch only one-quarter of what you will see them priced at in a shop. For a guide check newspaper classified ads (or on the web) or go to any second-hand-goods or pawn shop. They are filled with the sorts of things that are worth selling: i i i i i i i i i
DVDs and CDs entertainment equipment computer and console games tools sporting equipment cameras and lenses musical instruments leather jackets collectables (sports memorabilia, china, etc.)
There are several ways of turning such assets into cash: i
i i
i
44
Furniture, computers, musical instruments, fridges and motor vehicles/motorbikes can be sold through newspapers and websites such as the Trading Post and eBay. Books are hard to sell in any number—try local shops. Old clothing and costume jewellery—if they have real character—might be purchased by junk shops or shops specialising in old things. Your wider family and friends might be interested to buy certain items. Do you know anyone setting up their first
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home or expanding to a larger home? They might want your furniture, baby gear or a bargain-price camera. Run a garage sale from your current home or the home of a friend. Alternatively, in many suburbs there are schoolgrounds or church properties with weekly trading days which are basically giant garage sales. You pay a fee for your spot for the day and a crowd generally appears. This is a good place to sell books, interesting clothes, old stereo speakers and all sorts of things that, elsewhere, are valueless. It doesn’t even matter if the stuff is broken. Take it along and someone might offer you a few dollars for it.
In some cases you should seek expert valuations of items before simply placing them in the garage sale or on the shop counter. If in doubt check with someone—for example, piano valuer, jeweller, antiques shop proprietor, art auctioneer. Occasionally, we end up with things which have established themselves as of particular value—as a collectable, for example. Apart from the sale, look to other possibilities. Are you owed any money? Call it in. Get in touch with mates or family and see if they can repay you now (or soon). Is there any other ‘windfall’ money to which you are entitled? Check your pay slips about holiday pay or any bonuses which might be due to you. Employees might also have long service leave accruing on their behalf—this could be worth thousands of dollars if you have met the eligibility criteria. Now hold that cash until you’ve read chapter 4. That’s where we’ll look at where to put it so it will do you the most good.
SUMMARY
i i
Capital is a lump of money in the one place that’s yours to use. When you’ve got some capital you can bargain in the 45
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i
i
46
marketplace to get things cheaper now or to save money in the long run. Credit cards offer some of the same benefits as capital but can also hurt you. They are a good servant but a dangerous master. Get some capital together—see your possessions as assets. Convert some assets to cash. Check employment payments which might be due and call in any money owed to you.
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4
WHERE SHOULD MY SAVINGS GO? No, no, no! If there is one thing I can say to you with absolute passion, with almost violent intensity it is this: don’t leave your savings in your everyday bank account. The money will disappear as though taken by magic. There are a number of mystical money rules: i i i i i
When you put your car in for repairs the bill will always be more than the quote. When the bank says its fees won’t be going up it will find other ways to charge you. When your son or daughter says ‘All I need is $50’ it will not be all they need. Junk food costs more than good food and takes longer to get. When a restaurant bill is divided in equal proportions around the table, you will end up paying for more than you ate.
And of particular relevance here: i Your bank account does not build savings, it devours them. When I say ‘bank’ I’m really including most financial institutions, not just banks. And I’m not blaming them. These everyday transaction 47
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accounts give you, the customer, great freedom of action while keeping your money safe from robbers or from simply falling down the back of the couch. You can ask for your money at any time. Just go to an automatic teller or the branch; log on at the institution’s website or use phone banking to pay bills and transfer money. Such freedom of access comes at a cost. I don’t expect an everyday bank account to actually make money for me. And you can forget about the interest they pay you on your savings—it is almost nothing at present. Placing money in a daily banking account is not ‘saving’ it. It is the first step towards losing it. In all probability the money will be spent on worthwhile, even important things like paying household bills or buying the heater you need with winter coming on. I can see a worthwhile purchase every time I cross a shop floor. Indeed there have been many times when I have bought things at such great discounts that I have saved literally hundreds of dollars through astute shopping. But I’ve nearly gone broke saving money like this. A dollar spent is a dollar gone. Forever. When I put money into my bank account I know I must get it out and invest it somewhere else fast or it will disappear (see Chapter 4).
WHAT TO DO WITH DEBT Many of us carry a degree of debt around like a heavy suitcase. Debt can help us get to our destination sooner or it can drag us down. It might be a personal loan used to purchase a car, or an unpaid balance on a credit card. You could have a tertiary education (HECS) amount outstanding from your days as a student. Some of us owe money to parents or friends for helping us out once upon a time. You could be paying off a divorce. As part of your preparation for saving a home deposit it is vital to take a good look at your debt situation. Debt is money you owe. And it costs you money, often on a regular basis, which you must repay. The interest rate you are paying on your debt could be as low 48
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as 4 or 5 per cent or as high as almost 30 per cent in current market conditions. As a guide, here is what debt interest rates look like, from the cheapest cost to the highest. The cost of borrowing Type of loan
Annual interest rate you are paying
Home mortgage (variable rate)
5.70% to 6.75%
Investment property mortgage (variable rate)
5.65% to 7.32%
Home mortgage (fixed rate, one to five years)
5.89% to 7.35%
Line of credit (home loan attached)
6.05% to 7.39%
Home mortgage (non-conforming)
6.55% to 8.04%
Business overdraft
5.60% to 9.50%
Personal loan (secured)
6.55% to 13.95%
Personal loan (unsecured)
8.50% to 15.95%
Credit card
6.49% to 18.00%
Store credit card
up to 22%
Store finance with long ‘pay no interest’ period up front 20% to 27%* Source: Cannex. Figures at October 2002. Note * Applies if you fail to pay off the debt by the end of the ‘interest-free’ period.
Are you paying too much interest? Consider these five strategies for bringing debt under better control. i 1 Beware credit cards issued by shops
The cards issued by clothing shops, department stores, etc., are at the highest end of the debt spectrum. Do you really need them? A MasterCard or Visa will do essentially the same job. You might enjoy the special offers you receive from the shop—catalogues, home shopping, discounts on purchases, bonuses and so on—so you have to weigh up the total cost to you. It’s great to enjoy a 5 per cent discount on your purchases, for example, but this benefit soon fades away if you don’t pay off the card in full and high rates of interest kick in. 49
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i 2 Cut up your credit cards or store them for emergency use only
Credit cards are a trap—albeit a honey-scented one. Having said that, I use them all the time. They are convenient, you don’t have to walk around carrying large amounts of cash, and you are always ready to make a spontaneous purchase when you finally see that piece of furniture or gift you’ve been hunting for ages. When you bump into an old friend you can head off for lunch without hesitating to see if you’ve got any money on you. But credit cards shield us from the full impact of our purchasing. Would you act the same way if you had to pull cash out of your wallet or purse? As the coloured banknotes pass over the shop counter we are confronted starkly with the reality that these savings are gone forever. And our purse or wallet isn’t bottomless. Comparatively, credit cards can seem limitless, even though part of our mind knows this is not the case. We have found ways of shutting up that tiny voice of reason. Long after the cash you’re carrying has run out, the credit card is still hungry. Paying cash or writing out a cheque offers a unique moment of reflection on our financial situation. Credit card balances, on the other hand, are taboo—a little like the topic of death. We push the realities into the background and bury them under the veneer of the joy of consumption. Retail therapy with no immediate consequences. Generally, I’m not a fan of the idea of cutting up the cards. As mentioned in chapter 3, credit cards offer the user great control over cash flow limitations. But there are some people who never live comfortably with their credit cards. If you have a tendency to pay just the specified minimum repayment amount, or can’t ever reduce the outstanding balance to nothing, it might be a sign that you should put away the cards for now. They won’t be gone forever, and you can still leave them at home for emergencies, but pull them out of your purse or wallet. If they’re not in the shops with you then maybe you will avoid spontaneous, unplanned buying. Have you got the right credit card? Essentially there are two types. 50
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Those with an interest-free period: i i i
Up to 55 days’ free credit from date of using card to make a purchase. Often have an annual fee or higher annual fee than other cards. Charge a higher interest rate—typically around 1 or 2 per cent more—on balances carried forward (not paid off in full by the due date each month) or on cash advances (which incur interest immediately).
Those without an interest-free period: i i i
No free credit—interest is charged as soon as you make your purchases or make a cash withdrawal. Lower interest rate than for a card with interest-free days. May have a lower annual fee than other cards or no fee at all.
Which card suits you best? Many people run one of each type. Here are the common tricks and traps: i
i i
i
If you regularly seek a cash advance—that is, you borrow money on the card—get the card with the lowest interest rate. Check the fees for the advance. If you mostly pay off the full outstanding balance by the due date each month, get the card with the interest-free days. Cash advances play by unexpected rules. For example, if you owe $200 on your credit card for purchases, then take out a cash advance of $80 and pay it back the next day, your overall debt goes down but interest might still be charged on your $80 cash advance until there is no outstanding balance. This weird thing happens because the bank says the cash advance is the last thing to be repaid. You can lose the benefit of your interest-free days if you don’t pay the full outstanding amount by the due date each 51
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month. If the debt is not repaid, interest might be backdated to when you made the purchases. If you only pay off the ‘minimum required payment’ each month you might never pay off the debt. You have to pay more than the minimum or accruing interest will keep you in the red.
Many Australians are clumsy users of credit cards for cash advances. In August 2002, according to the Reserve Bank of Australia, we had outstanding cash advances of $734 million on cards with an interest-free period, compared with cash advances of only $144 million on the cheaper interest rate cards. We were paying $7 million to $14 million in interest unnecessarily over the course of a year, simply because we were using the wrong card for the job. And we keep digging that hole deeper all the time. According to statistics compiled by the Reserve Bank, Australians are taking more and more money by way of cash advances from the wrong cards— those with interest-free periods—each year. i 3 Consider a personal loan
Personal loans attract a much lower interest rate than credit cards. However, they are more cumbersome and less flexible. You can’t just pay for a meal or a new dress and add the expense to your personal loan. If you need to buy something expensive and know now that you won’t be able to pay it off quickly, you should consider getting a personal loan to cover the situation. A car loan is a good example. Even a necessary holiday or a flight to attend a family wedding or funeral might be better handled with a personal loan than a credit card. i 4 Consider consolidating your debt
Debt consolidation is a budgeting trick we should all be aware of. This is the idea of taking debt from high-interest situations—shop cards, credit cards, car finance—and tacking it onto lower-interest arrangements such as a property mortgage or personal loan. Now, at the moment you mightn’t have a mortgage, but it’s important to understand what’s going on here. 52
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Say you’re paying $38 per month interest on a credit card balance of $3000 at 15.25 per cent, $73 per month on an unsecured personal loan of $8000 for your car at 11 per cent, and $17 per month on a department store card balance of $1000 at 20 per cent interest. That’s a total of $128 per month for your debt in interest alone. If you rolled all these debts into a mortgage (when you get one) your monthly repayment of $128 in interest would reduce to $65—a saving of $63 per month or just over $1500 after 104 weeks. Debt consolidation enables you to save cash throughout the year. It sounds such a wonderful strategy for getting on top of debt and for saving money. And it works. But, just like loving chocolate, owning a car, being in a relationship and pretty well all good things in life, there is a dark side. Debt consolidation runs the risk of turning a short-term debt into a long-term debt. For example, your personal loan might be timed to repay most of the amount you have borrowed—the principal—by the end of four years. When you roll this debt into a mortgage the repayments run for the term of the contract, which might be 25 or even 30 years (or earlier if you sell the property and discharge the mortgage). If this happens, and you don’t take special steps to pay down the outstanding principal of the mortgage, you will end up paying more interest for that car than if you had kept with the higher interest rate of the personal loan all along. If you do consolidate your debt you must bank the weekly savings you’ll make. If not, the effect of the whole exercise will be a net zero gain. In other words, you won’t get ahead. To roll a credit card debt into a mortgage and then continue to use the credit card without paying it off each month is the way to true madness. Debt consolidation is a wonderful solution to a financial life which has run out of control, except that it then requires you to enforce strict discipline over your spending and use of money. In other words, the leopard must change its spots. It’s not impossible, but it isn’t easy either. Speak to an independent financial counsellor, not just the bank staff, if you feel that debt consolidation could work for you.
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i 5 Watch out for fees and charges
Interest is not the only cost when it comes to debt. All lenders impose fees or charges of one sort of another. There can be: i i i i i i i i
i
fees for joining annual membership fees charges for failing to pay off the debt in full on time charges for failing to pay a minimum set amount by the due date fees for paying off a loan too early monthly account-keeping fees fees for getting printed statements about your debt charges incurred when an automatic direct debit repayment system fails (for example, when there is insufficient money in your account to pay the instalment in full) fees on making further withdrawals
Do the sums before you sign. A monthly account-keeping fee of a mere $4, on a debt of $1000, is the equivalent of almost 5 per cent interest over the course of a year. It is common for financial institutions to prop up their low advertised interest rates with a higher list of fees and charges. Alternatively there might be restrictions on how you can operate the ‘cheaper’ loan. It is my sad experience that the heavily promoted offers of lowinterest loans are generally not the ones I’ve proceeded with. The advertising gets you in the door but you soon realise you can’t live with the deal being offered. It’s a case of liking the swings but not the roundabouts. Why should we expect the marketing of money to be different from everything else? The luscious, quick and easy TV dinner has been photographed for the advertisement on a small plate to make it look like a real, satisfying meal.
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WHERE TO PUT MY MONEY? The costs of having money—debt, interest, fees, charges—is one side of the story. The other is how to earn more money from the little money you have saved. This used to be fairly straightforward to answer, but recently it has become less simple. Let’s run through the options. OK, you’ve saved $1000—now where should you put it? You’ve probably got an everyday ‘transaction’ account with a bank or credit union. What will your $1000 do for you there? i Money in the bank
If you place $1000 in an everyday transaction account you will earn next to nothing—or what’s worse, a jot more than nothing— over the course of a year. The first column in the table below names the Big Four banks, the second the interest rate applicable to $1000 deposited mid-2002, the third turns this into dollars earned, the fourth applies a low income tax at the rate of 30 per cent plus the 1.5 per cent Medicare Levy. Everyday accounts—what you’ll earn Financial institution
Interest rate
Amount of gross
Amount of net
earned on $1000
interest you will
income after
deposit over one
earn in a year
deducting income
year
tax at 31.5%
ANZ Bank
0.00%
0
0
Commonwealth Bank
0.01%
10 cents
6.85 cents
National Australia Bank
0.01%
10 cents
6.85 cents
Westpac
0.00%
0
0
It is not a pretty sight. When you include fees and charges you might actually be losing money to have it in these accounts. However, let’s not ignore the other benefits: ready access to your money on demand, and security from thieves and other hazards. You are possibly better off financially to have $1000 under the mattress than in a basic transaction account—but will you rest as comfortably? 55
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It is a key part of the home deposit method to have a helpful place to stockpile your savings as they grow. If transaction accounts are out of the picture, that is no great loss. There are other more useful places to park your cash for this project. i Term deposit
Banks and other financial institutions borrow money from all sorts of places. They offer a deposit situation where you agree to loan them your money for a set period of time at an advertised interest rate. The income you will earn from the term deposit will be paid to you in accordance with the contract: monthly, quarterly, once a year or at the expiry of the term. You can start with $1000. Earnings: 1.50% to 6.40% per annum (pa). Term: 30, 90, 180, 365 days up to five years. Examples: ANZ, Commonwealth Bank, CPS Credit Union, Westpac. i Cash management trust
These products pool the money of many investors, hold it on trust for them, and place it in wholesale cash investments like short-term bank bills and the overnight money market. The impact is that a cash management trust can offer you a higher interest rate than the bank account but you lose a little flexibility and incur a raised level of risk. Importantly, you can withdraw your money fairly easily—usually after giving one day’s notice to the company. They will give you a cheque or pay the money direct into your nominated account. Earnings: 3.67% to 4.02% pa on $5000 deposited. Term: at call (about one day after you request a withdrawal). Examples: Commonwealth Financial Services, Education Credit Union, HSBC, Suncorp Metway. i Internet savings accounts
These savings accounts have recently shot to prominence. They offer interest rates comparable to (and sometimes better than) cash management accounts, but without the hassle of paperwork on deposits. There are no branches—the whole thing takes place online. You set 56
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up an account with the online bank and connect it to an existing account you have with another financial institution (such as a bank). You make deposits into your Internet account via your existing account (over the Internet) or by cheque in the mail. You make withdrawals by phone or Internet, with funds available the next day. Your Internet bank makes the arrangements with your existing financial institution. Interest is calculated daily and paid monthly. There is no minimum balance required, and no minimum amounts for deposits or withdrawals. All fees are incorporated in the way the deposit interest rate is calculated—they are not added on at the end. Earnings: 4.75% to 5.0% pa. Term: no fixed term. Examples: ING Direct, dragondirect (from St George), Easy Street Financial Services. i Bonus saver accounts
Banks and many other financial institutions now offer accounts which bring the promise of higher interest rates. There is a catch, however: generally you must make no withdrawals and must make at least one deposit in the account each month if you are to earn the bonus rate of interest. For example, one such account pays you nothing on your account balance (below $20 000) if you fail to meet these two conditions; but if you comply, your money earns 3 per cent interest. Interest is calculated daily and paid monthly. And that’s not a bad return for an account which lets you withdraw your money at will. Earnings: nil unless you comply with the terms of the bonus; then 3% to 4.15% pa. Term: no minimum term (although money must be in the account for one full month to earn any interest). Examples: Westpac Bonus Saver, ANZ Bonus Saver, Commonwealth AwardSaver. i Debentures
Banks and finance companies often raise capital from the public. Generally they will pay more interest than you will earn from term deposits, cash management trusts and government securities (bonds) 57
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because debentures carry a higher level of risk for the lender (you). Much depends on the borrowing company—its financial strength and the reason it wants your money. Just because a large, wellknown company is behind the debenture it is no reason to assume your money will be totally safe. In the event of a collapse of the company it might take years to recover your money, in whole or part. Still, debentures generally carry on without any fuss. But you will need guidance before putting your money in one. The attraction is the fixed rate of return they pay over a defined period of time. Earnings: 4.25% to 7.70% pa. Term: 3 months, 1, 2, 3, 4, 5 years. Examples: Esanda, AGC, Bridgecorp. i Shares
When the share market is booming it seems everyone but you is making serious money out of shares. There is an almost overwhelming pressure applied through the media for all of us to jump on the gravy train before it disappears down the track to easy wealth. Now shares (or equities as they are often called) are a major part of our financial system. Companies issue shares—selling ownership of part of the business—in order to raise money from the public so they can expand or improve. If you’ve got superannuation through your employment then you are a share owner already as the super funds invest in company shares. Maybe you picked up a few shares in the popular floats of the 1990s—such as Telstra—or through a membership in an organisation like the NRMA in New South Wales. Because they are actively traded on the Stock Exchange, shares can rise or fall in value, according to demand for them. They are called a ‘volatile’ investment because of their potential to rise rapidly in value or to fall equally fast. If the company goes broke they can even become worthless. Generally speaking, for the current purpose of saving for a home deposit, experts say that shares are unsuitable. Ignore the pressure from friends, family and the media to ‘get into shares’. There will be other, more appropriate times for this. Because of the 58
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volatile nature of the share market, shares are generally seen as a long-term investment of five or more years’ duration. You need to allow this time period so that you can ride out any plunge in values. We’re looking at spending your savings on a home in 104 weeks’ time (or less). Clearly, although it might be possible to enjoy a rapid improvement in share prices, it is a risky strategy over the short term. Any money you make on selling the shares (above what you have paid) is subject to capital gains tax. This tax is at its most severe if you sell the shares within twelve months of having purchased them. Earnings: these vary widely. Term: you can sell at any time (provided there is a buyer) but you should be prepared to leave your money in the shares for up to five years in order to ride out any low periods. Of course, some companies will go broke and the shares will be worth nothing. Examples: Commonwealth Bank, CSR, Telstra, BHP Billiton. i Managed funds or unit trusts
There are many purposes for which investors might usefully pool their money—to buy a wide range of shares (Australian or overseas), to buy shopping centres or office blocks, to buy government bonds and other expensive securities. Investors sign up to a prospectus which sets out the deal, including how to buy ‘units’ in the fund and how to get your money out by selling units. Some funds are designed to maximise income to the investor while others aim at capital growth or a mix of the two. The three great benefits of managed funds are: i i i
You spread the risk—by buying across a range of investments. Someone ‘expert’ manages the whole thing for you and gives you written reports. You can get into the ‘big league’ of investing—huge shopping malls and multimillion-dollar share portfolios, for example— with just $1000.
Again, allow for capital gains tax where relevant. 59
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Earnings: these vary widely, from double-digit positive returns to double-digit negative returns (you’re going backwards). Some trusts are designed to work for capital gains, others for income or a mix of the two. Term: apart from cash management trusts (see above) managed funds are generally a long-term investment—think 5+ years. Examples: Colonial First State, Perpetual, Tyndall. i Mortgage trusts
These managed unit trusts are sometimes recommended as a place for keeping your savings if you’re only looking for a 2- or 3-year period. The trust pools investors’ money and lends it out on secured mortgages. The return can be slightly higher than many other types of shorter investment and the security (real estate) should be solid. Generally there is no entry fee to pay, but there may be an exit fee for getting out within 18 to 36 months (depending on the fund). Find out about this before investing. Earnings: 5.7% to 6.2% pa. Term: 18 months, 3, 5 or more years. Examples: Challenger Howard Mortgage Trust.
THE CORE ISSUES Wherever you invest your savings the issues boil down to these: What you will earn—there’s little satisfaction in placing your hard-earned savings into an account where they will earn nothing, almost nothing, or actually cost you more than you earn (thanks to fees and charges). You can do better. What the account will cost you to run—always ask about the fees and charges. Get an estimate of what they will, or could, amount to over a two-year period. Convert this to a percentage of the money you are investing, then reflect on what this means to the advertised interest rate. Risk—risk and return (earnings) are partners on the seesaw. When one goes up the other usually is on the way down. In my 60
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experience this money rule rarely finds an exception. In fact some of the most spectacular finance sector collapses have been signalled in advance by institutions offering a higher interest rate (better earnings) than their competitors—they were in desperate need of getting more cash in the door. Be suspicious. Unless you have a huge amount of money to invest, I find it pays to place your money not with the company offering the highest return but with one slightly back in the leading pack. Don’t pay too much attention to how well an investment performed ‘last year’. And don’t just respond to an advertisement for any financial product. You need to find out something about the company and its investment products before you give them your trust and money. A few years ago, when bank interest rates were higher than now, a friend came up to me while I was sitting at my desk eating sandwiches (and wishing I was working somewhere else). He had a Cheshire Cat smile on his face. ‘I’ve just kicked some serious butt over at the bank,’ he said gleefully (we all stuck our money in the bank across the road, so there was a sort of common bond between us based on a shared experience of standing in long queues over lunchtime and general dissatisfaction with low interest rates). ‘What’s the story?’ I replied, fiddling with bits of lettuce which refused to go inside the two slices of bread in my hand. ‘I’ve had enough of our bank and have pulled all my money out!’ I must have shown some basic level of recognition, for he continued with enthusiasm. ‘Like you, I was earning nothing over there. It was just a rip-off. So I’ve taken my money elsewhere . . . where the rates are much better. Now I’ll be able to afford to go to Thailand with my mates over January.’ ‘What were your savings earning at the bank?’ I inquired. ‘Half a per cent or less?’ He nodded. ‘Down at [name of finance company] my money is earning four times the interest. Four times!’ ‘Sounds good,’ I replied. ‘Let me get this clear. How much money have you got?’ He hesitated for second, but nevertheless told me he had saved 61
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about $1500. ‘Now, down at the bank across the road they were paying you half a per cent on this. That’s about $7.50 you were earning per year. Not much is it? At the new place—where is it?’ ‘On the other side of the city—about eight or ten blocks from here.’ ‘At the new place,’ I continued, ‘your money will earn you $30. If you keep it there for a whole year. But you’re planning to spend the money on your holiday, in six months’ time. So you’ll only earn half this—fifteen dollars. And income tax will want to take around 31.5 per cent of this interest too.’ He thought about this and added, ‘So, when I’m lying on the beach, I’ll have an extra ten dollars to spend? Cool!’ And, until that glorious point was reached, he had placed his money in an inconvenient location—a long lunchtime walk from the office. Still, maybe this was part of his strategy to put those savings out of reach. The message is painful but revealing once you’ve grasped it: an extra per cent or so of interest means nothing unless you have tens of thousands of dollars to invest. One per cent of $1000 is just $10 (or around $6–$8 after tax). One per cent of $10 000 is $100—I’d walk a little further to earn that. It is generally not worth the increased risk to our savings of shifting them to less well-known financial institutions just for the sake of earning an extra 1 per cent or so. Access for withdrawals—all savings plans suffer from hiccups. Life cannot be contained so simply. Accordingly, the general wisdom is that it is not prudent to put all of your savings in an investment product that won’t let you get at the money before the expiry of the term. Be aware that in cases of true hardship—serious illness or loss of employment, for example—many banks and other financial institutions may let a depositor get their money out early. But there is no guarantee this will happen. It can be a good idea to split any savings into at least a couple of different locations and terms. Some can be locked away until ready to buy a home, but other savings should be accessible without having to jump through fiery hoops. Access for further deposits—if you follow the plan in this book 62
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you will understand the necessity of turning your savings into actual deposits in a financial institution. If you get a large enough lump of money together—say, $5000—you might consider placing it in a term deposit for six months or a year. But you won’t be able to add to it with fresh weekly sums. A cash management account, Internet savings account or ‘bonus’ savings account will be a better home for weekly deposits. You might put part of your money into a term deposit and part elsewhere to take weekly additions. Ease of use—the paperwork involved in making your money work a little bit harder for you can be off-putting. Debentures and other corporate borrowings require the filling in of various forms initially and when making further deposits. This can be bothersome (although in part designed to protect you and to try to ensure all lenders know what they are getting themselves into) if you want to make frequent deposits. When choosing your accounts ask about the things which will make life easier for you: Internet or phone banking, can you give instructions over the telephone to an operator, are there local branch offices near your workplace or home? Only you can weigh up the factors to determine which sort of account will suit your savings objectives. You may wish to use a blend—for example, use a cash management trust account for your weekly deposits and, when they build up to $5000, look around for a good term deposit timed to expire when you are ready to buy your home (a six-month or twelve-month term, for example). Or you might wish to keep your finances within the local branch of your bank, credit union or building society, where you know the people and enjoy the convenience—perhaps a bonus saver account. If you’re comfortable with Internet banking, check out the online savings accounts offering higher interest rates. Discuss the choice of accounts and savings vehicles with your bank or other financial instituion. In a low interest rate environment there is little expectation that any savings account will dramatically add to your wealth. Our highest deposit interest rates are only just above the inflation rate, and income tax bites into the meagre amount you will earn. Nevertheless, if you don’t act now and choose a better-performing account than the basic bank transaction accounts your savings will be going 63
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backwards, devoured by inflation, fees and tax. You should at least be able to keep your nose ahead on what you’ve saved.
Down the aisle and the garden path ‘My tip for anyone saving for their first home is this: start early! It’s later than you think!’ Miranda is only 25 but she knows what a struggle it is to put a home deposit together. With her fiancé, Michael (also aged 25) she travelled to Sydney from Brisbane following an important job offer. ‘Rent is the big killer,’ says Miranda. ‘It’s costing us $300 per week for a tiny flat. This is a lot more than back in Brisbane.’ One thing is sure: Miranda and Michael are not planning on staying in Sydney. ‘If we buy a home in Sydney I can see we’d still be paying off the mortgage when we’re 60. So we’ll move back to Brisbane—that’s where Michael and I met, so it feels like home there. ‘The price of property is a big factor in our plans. A modest house in Brisbane will cost us around $150 000 to $160 000. OK, it will be a real “first home”, but we’ll stay there a few years, do it up, then sell it and make a little profit. Eventually we’ll move into a real family home.’ But a home is not all that is on the shopping list. ‘Our problem is that we are trying to save for a home and our wedding at the same time. We’ve set the date for the wedding and I’m concerned we’ll be left short of cash.’ Here’s what’s happening financially for Miranda and Michael. Miranda started her savings with a small inheritance—just a few thousand dollars—which she received on turning eighteen. Despite many financial demands she has managed to hang on to this money, rolling it over from year to year in a savings account which pays bonus interest if you make no withdrawals. ‘The fact that the account has no passbook or access card helps keep the money out of reach (you have to phone the bank to make arrangements for any withdrawal). That system, along with the 64
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bonus interest, has worked well for us and we have basically doubled our money over time. ‘However, on coming to Sydney we bought a new car and this has slowed us down on the savings front,’ she laments. Other parts of their savings scheme include:
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‘We try to save money every fortnight. Michael and I get around $2000 per fortnight net between us from our jobs. We aim to bank $900 of this each fortnight.’ ‘We feel more in control of our expenses by putting most of our bills on the credit card. This way we pay them off just once a month.’ ‘I have found part-time work in a café for one day each weekend. This pays me about $120 net a week. I call this my “play money”—it’s my own to do with as I like. But I might have to start saving some more of this now.’ Michael has also started some part-time work. He and a friend have a casual job delivering mattresses and beds for a retailer. They might move four beds a day on the weekend. Between them they make $50 per bed. ‘And it helps keep him fit,’ says Miranda. ‘The next thing we’re going to do is to organise with our bank for the regular automatic debit of savings from out of our working account. It will be just like having a mortgage—we won’t have to think about it. The money will go into a savings account automatically every fortnight. When I was single I had an arrangement like this with the bank and it worked very well for me. Now that we have a clear goal it is time to get back to this type of regular savings scheme.’ ‘We are planning to be ready to make our purchase while the government grant for first home buyers is still available.’
Miranda and Michael will combine the government grant with their own savings to give them a 10 per cent deposit on a home in Brisbane. They are planning to borrow around $145 000 to complete the purchase. To reach their target deposit and target
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date—within the next twelve months—they know they must triple their current savings. However, even today they can see what they must do to get there on time and on budget. It’s a stretch but they are prepared to work to make it happen. ‘I wish we had started saving earlier,’ says Miranda. ‘I’m 25 and I realise I could have had a house by now. Moving around a lot certainly hasn’t helped!’
CAN THE BANK HELP ME TO SAVE FASTER? You don’t have to look on your bank or financial institution as the enemy. True, they have an image problem associated with rising fees and charges, herding customers towards less face-to-face use of services, and local branch closures. But there has been a positive side to banking deregulation. First and foremost are the low interest rates we pay on home loans and investment loans, and the ease with which we can now borrow money. And if you find a helpful person at the branch you can tap into a little assistance with meeting your savings goal. Earlier in this chapter we looked at bonus saver accounts. These deliver a fair return provided you meet the twin conditions: make a monthly deposit and don’t take any money out of the account. Many people will find this a true incentive. Second, ask about ways of reducing the fees and charges you are paying. Staff should direct you towards accounts and methods of doing your banking which minimise costs in your particular situation. For example, should you be using a credit card with an annual fee and lower interest charges or a card with no annual fee but interest charges which start applying more quickly? Do you make the most of any ‘interest-free’ period on the account? Third, find out where your salary should go. When you get your home and start a mortgage it may be in your best interests to get your wages paid straight into the mortgage, provided you can redraw the money you need for paying the bills and general living expenses. 66
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Even if your wage is spent over the course of a week or two, the net effect will still be a saving on interest you might otherwise have to pay. The days are gone—or should be gone!—where people put their wage into their daily transaction account then placed any leftover money into reducing the mortgage. Similarly, before you get that mortgage, there may be places to put your wage straight from the employer’s hands. For example, you might be able to get your wage paid into a savings account rather than a transaction or cheque account. Then it goes straight to work for you. Further, with many types of account you can arrange for money to be withdrawn automatically each month to go into a savings account of some kind. In this way without specifically having to take action or remember to do something, savings are extracted from your ordinary account and placed into a savings account. Apart from making life easier and less complicated for you, the use of an automatic ‘direct debit’ imposes a discipline on your spending. After all, the money won’t be sitting in your daily account—it will have been ‘spent’ already (on savings).
SHOULD I BE PUTTING MORE MONEY INTO SUPERANNUATION? Superannuation has been a real dog’s breakfast in this country. It is no wonder that many people have a distrust of it. Various Commonwealth governments keep changing the rules or threatening to do so. It is a realm for expert advice yet we’re all virtually compelled to use it. Most employees are required to be involved in superannuation thanks to the superannuation guarantee charge. Your employer puts money into superannuation for you, and you will reap the benefit when you retire from the workforce, or your dependants will get it should you die earlier. Unless you are earning very little money you must be part of the scheme. And that’s a good thing—although it is money that is locked away until you are almost too old to do anything productive with it. Be that as it may. I’m a supporter of the 67
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idea, even though a lot of financial institutions are growing wealthy on the back of a compulsory program. We are so generous to them with our money. And if you’re self-employed there is a kind of compelling force towards superannuation too. No one is paying any on your behalf, but the taxation concessions make super contributions one of the most effective ways of saving money for retirement. Experts say that all of us, at some time in our lives, should consider ploughing more money into our superannuation. There are financial benefits for saving in this way. Even as an employee you can ask your employer to put extra money out of your wage into super on your behalf (called ‘salary sacrifice’). Or you can pay it into your superannuation account yourself. But the question for the moment is this: should I make voluntary superannuation contributions while saving for my home? The answer, in many cases, is ‘no—not yet’. Superannuation is a good thing, but if you are young or middle aged and struggling to make up for lost time, getting a home is possibly a higher priority now than superannuation in twenty or even 40 years’ time. Remember your super is locked away until you retire. And that’s not the easiest or best time to try and get a home loan. Once you’ve got your home and have maybe paid off part of the mortgage through extra payments, then it’s a good time to work out your superannuation strategy. In any event, seek expert advice about the issue of superannuation and the appropriate retirement planning strategy for your life.
A LIFETIME FINANCIAL PLAN Getting that home deposit is one of the true primary aims of securing our financial future in this country. But it is not everything. We all need a broad plan which guides us towards our financial goals over the long term. Apart from buying a home, should you be considering other ways of saving and multiplying your money? Perhaps you are 68
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thinking of a share portfolio or some units in managed funds. Many Australians continue their love affair with property by aiming to own an investment property. As mentioned earlier, superannuation is a good investment vehicle particularly as you get older—the government tax concessions are valuable to us. It need not be complicated. Even a basic plan will give you the confidence to know what to do with any dollar you can afford to save, or where to place a tax refund cheque. Without a plan there is a temptation to spend. Desirable things in the shops are usually more real and concrete than a vague idea about saving for a dimly seen future in retirement. In its most basic form your financial plan should involve a number of elements: property, superannuation, shares, cash, insurance and legal affairs. Here are some points to consider for each: i Property
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Owning a home is a prime objective, of course. Paying off the mortgage as fast as you can is also a good strategy as it reduces debt which enjoys no tax deductibility; it also increases your equity.
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Ensure your employer is putting the superannuation guarantee into a well-performing fund on your behalf. At some point contemplate adding to your superannuation.
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Early in life it is sensible to gain some familiarity with the stockmarket and how shares work. Many superannuation funds allow you to choose the proportions of your super spread among a number of types of investments, including Australian shares and overseas shares. With some experience and education on the subject you may wish to fine-tune your super to pursue higher levels of growth. Read the publications and get to understand shares. 69
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Managed funds are another way of investing in shares, property and other types of assets. You can start into a fund with an initial $1000 then commence a savings plan which will automatically add to this from your bank account (at a minimum $100 per month).
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It’s very expensive (and slow) to sell property; you don’t really want to sell your shares or units if their price is down at the time. That’s why we all need to plan for ready access to cash. Consider using a bonus saver or term deposit and perhaps a cash management or Internet direct savings account as your family ‘cash float’, remembering to transfer whatever you can out of the transaction account which receives your wage. Plan to save for holidays. Some people set up a special holiday bank account and put in a few dollars each week. If you just whack the total cost of a holiday on your credit card you are asking for a serious holiday hangover when you return.
i Insurance
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I have learned to like the idea of losing money on insurance. This means going through a year paying the premiums but not making any claims. I reckon I’ve come out ahead because I am old enough to realise that ill health, having a car stolen or enduring a fire or break-in at home are not easy things to compensate purely in money terms. When you gain an asset you must make sure you do not fall back. This means insuring your possessions (contents insurance) and your home when you get it (building insurance); keep your car insured (unless it is worthless, although you should always cover your liability to others) and take out life insurance if you have anyone depending on you
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financially (a partner or child, for example). Others, such as income protection insurance, will let you continue with your lifestyle, with cash to pay the rent/mortgage and other bills, should you have to give up work or reduce your working hours through injury or illness. Insurance is expensive, but consider how hard you have worked to get where you are today. Once you have suffered a serious injury or illness it can be difficult or impossible to find life or income protection insurances. You don’t have to pay the premiums forever. It’s a matter of looking coolly at the risk. For example, you might only really need life insurance while you have children who are financially dependent on you—let’s say, a 20-year window of your life. Income protection insurance premiums are usually tax deductible.
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Around half of all Australians die without a valid will. This can leave a pack of troubles behind for those left to pick up the pieces. A will is a document which sets out who is to get your possessions and who is to look after your dependants (if any). It is fairly quick and easy to do, using either a do-it-yourself will kit from a newsagency or bookshop or by going to a solicitor. If you own a home or a goodly amount of shares and other assets, or you have a dependant with special needs, you should certainly get a solicitor to prepare your will. A will lets you maximise the possibility of passing your financial assets—everything you’ve worked hard for—to whomever you choose. It gives a real boost to their own financial security. If you mess it up, or don’t leave a will, your family could end up blowing the lot on lawyers and litigation. You should also speak to a solicitor, at the same time, about preparing a power of attorney. This is a document which authorises another person or persons of your choice to 71
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handle your financial affairs if you can’t be contacted (such as when travelling) or if you are too ill to do it (for example, while undergoing medical treatment). A special type of power of attorney can also operate if you are of unsound mind—suffering from dementia, for example, or brain injury resulting from a car accident. You attorney will have authority to pay your bills, run your bank accounts, collect your pay and so on. You can cancel or place limits on the power of attorney whenever you like. An up-to-date will and power of attorney are part of good management of your financial affairs.
There are so many options to choose from and they can become daunting until you get used to them. If you have little experience with saving large amounts of money it is wise to discuss the choices with a licensed financial planner, and everything in this book is predicated on this recommendation. You don’t have to go to someone expensive but at the least you should make an appointment to see one of the planners with your bank or credit union. While they would like you to invest in their institution’s deposit accounts and products—or others where they might receive a commission—you are under no such obligation. As a customer of that financial institution you should avail yourself of the opportunity to get information and advice about where to put your savings. Moreover, the planner should try to gain an understanding of the wider context of your life and plans. They should discuss issues like risk and security, superannuation and so on. They might not go into too much detail until you take some further step (which usually involves payment of some kind or another), but if they are friendly and value your loyalty to the institution they will see the importance of getting you onto the right footing. After all, your financial success is likely to reap future dividends for them and the bank. Unfortunately, some advisers are only in it for the bucks. Quickly they will size up the customer and find out if you have much money to give them now. This has been a great disappointment to me in my own experience. Nevertheless, it’s important to have a go. 72
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Make an appointment and see if you can strike up a rapport. At some point you should consider discussing your situation with a financial planner who is remunerated not from commissions on products sold but who is paid by the hour for their time. As a rough guide, a planner charging commission on the products you buy will earn 1.5 per cent to 2.5 per cent of the money you spend up-front. He or she might also receive a small percentage every year back from those investments (called a trailing commission). A planner who charges a flat fee or by the hour will cost you something like $500 to $2000 for a modest plan; more where there are complications. When you first call, see if the appointment is free of charge and ask about how the fees will be calculated. Confirm that the adviser is licensed. As you advance in financial matters you will need expert advice at various times. It’s no different to the time and effort needed to find a sympathetic doctor, a dentist who doesn’t scare you and a greengrocer who doesn’t offload all the tired fruit onto you. More thoughts on financial planners can be found in CHOICE magazine and on various websites. Try <www.choice.com.au>, <www.money.ninemsn.com.au>, <www.investorweb.com.au>, the Financial Planning Association of Australia <www.fpa.asn.au> and the government investment watchdog, the Australian Securities and Investments Commission <www.asic.gov.au> (which has a special site for consumers to check licences and any banned advisers at <www.fido.asic.gov.au>).
WHAT CAN I SAVE NOW ? As you start your planning, consider whether you already know you could save a few dollars each week almost without having to think about it. Maybe you have some spare cash at the end of each pay period, even if it is only $10 weekly. Here I’m talking about money you don’t need to save from somewhere else—for example, by giving up going to the movies or having a big eat-out lunch. This is ‘no effort’ saving money. 73
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It might be money you are already consciously saving regularly, perhaps through an automatic deduction from your bank account— or into a jar at home. Look at the table and move any simple savings like this straight into the home deposit worksheet on page 34. Saving now Amount you can save each week without effort $10
$20
$25
$30
$35
$40
$50
$75
$100
Value after $1040 $2080 $2600 $3120 $3640 $4160 $5200 $7800 $10 400 104 weeks
If you can save more than shown here just add or multiply the relevant columns together. SUMMARY i
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If your savings are held in daily transaction accounts they are not working hard for you—and may be costing you more than you know. A key step is to sort out any debt you are carrying. Evaluate the way you use personal loans and credit cards—they may not be working well for you. Consider debt consolidation into a lower interest rate position. Work out where you will place your savings: bonus saver accounts, cash management trusts, Internet direct savings accounts, term deposits, shares, managed funds, debentures and more. Balance the factors: what you will earn; what the account will cost you to run; risk and security; access for withdrawals; access for further deposits; ease of use. Create a financial plan to guide you. In its most basic form your financial plan should involve a number of elements: property, superannuation, shares, cash, insurance and legal affairs. Consult a licensed financial planner.
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GET A JOB, SECURE A JOB Nerida was one of the lucky minority of people who love their job. She ran one of the technical departments of her boss’s business and, on the side, handled the marketing of its products and services. It was a tough job but she had really found her niche there. She was single, in her early forties, no partner, no children. A number of things hadn’t worked out in her personal life but she had finally found fulfilment and a kind of contentment in the workplace. And she was there twelve hours a day. It had become Nerida’s life. But that was fine because her boss appreciated all her hard work. Her pay rose, she got a company car, she enjoyed occasional travel staying in fine hotels around the world. When some traditional customers switched allegiance to competitors’ products it became more and more important to focus on getting the right advertising and promotion for the business. Sensibly, Nerida ensured that one of her staff was trained in running the department for her, now that she was frequently out of the office meeting with advertising companies and chasing up promotion opportunities. It was all go, go, go! Suddenly one day she was retrenched. Her boss, who thought the world of her abilities and devotion, came into her office and said the marketing wasn’t working. If something wasn’t done quickly the company could go broke. The boss felt the company had to tighten its belt and find a marketing specialist with experience in turning 75
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around a fading company. And Nerida was not that person. After all, Nerida had learned her skills on the job and had worked for the same company for the last ten years. All good experience, but too limited for the task ahead. And as marketing had expanded to become most of her job, the company could not afford to carry her as well as the new marketing ‘guru’. So, sadly, it would have to be goodbye. ‘I’m sure you understand,’ said the boss. ‘%**%** you!’ said Nerida and walked out the door. Two days later, after the initial shock had settled somewhat, Nerida took a look at her financial position. ‘I’m in my forties, I have loads of experience at managerial level but no formal qualifications, I’ve got a large mortgage, a car loan, money owing on my credit card, an end of year holiday booked and only partly paid for, some shares which have fallen in value for the moment (and which I don’t want to have to sell now), and a little cash in the bank. ‘My assets have become my liabilities,’ she pondered. ‘It had better just be a temporary situation or I’m wrecked!’ Cost cutting and business restructuring have led to massive retrenchments in recent years. Early retirement—for a host of reasons—is a real phenomenon of the times. According to Australian Bureau of Statistics data there is a downward trend in active participation in the workforce. Looking at the period from 1979 to 2000, the participation rate for men aged 45–54 fell from 92 per cent to 88 per cent, while for men aged 55–59 the participation rate dropped from 81 per cent to 73 per cent, and from 67 per cent to 48 per cent for those aged 60–64. Retrenched middle-aged workers will tell you it’s hard to get back into the workforce once you’ve been pushed out. In December 2001 the Governor of the Reserve Bank of Australia issued a warning to business leaders that the common practice of initiating programs of large-scale retrenchment—designed to improve the profitability of a business by cutting staffing costs and thereby appealing to shareholders—was a dead end, a short-term solution at best. It no longer worked as well as it used to—investors were not fooled by the notion that sacking large numbers of employees would somehow help a business compete more effectively. 76
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In the end all that was achieved by large numbers of retrenchments was a blow to market confidence. If one company did it, it was simply bad news for those people directly affected. But when many companies followed the same strategy it became bad news for the entire economy. All those people out of work! All those families who couldn’t afford to buy lots of goods and services! All that loss of consumer confidence. Nerida’s story shocked me at the time. It still upsets me how easy it is to lose a job where you are not just doing it well but actually (and a much rarer thing) appreciated by the boss! And once we are retrenched our financial plans, simple as they might be—a home, a car, a holiday—move from the ‘comfortably under control’ column in our balance sheet to the ‘haemorrhaging money’ column. The debt associated with our assets becomes a weight chained to our legs, dragging us down and hindering our ability to move quickly and take risks in life. There are two reasons for including Nerida’s story in a book about getting a home deposit. Saving money is much more than giving yourself a budget, taking lunch from home and drinking less alcohol. The two points are: 1. If you are to save you must take action to secure your job and income. 2. Even a star employee is vulnerable. You can’t have a major savings plan without a workplace plan. None of us should embark on a course of increasing our debt—borrowing money to buy a home, for example—if our income is not as certain as life allows.
FEELING SECURE AT WORK IN TIMES OF CHANGE There are no guarantees in life and certainly none at the workplace. Those days are gone. Loyalty from our employer? How can we expect that when we, as consumers, rapidly abandon one shop, 77
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product or service provider for almost anyone who will sell the same thing a little cheaper? Case in point: talk to any Australian about which airline they would fly to Europe and Qantas is one of the names at the top of their list. People cite Qantas for safety—‘And safety is the main priority,’ they say. Singapore Airlines also figures highly in our choices—‘Great service, they know how to look after their customers.’ Discuss the matter of flying, and safety and service appear to be our top criteria of choice. But when we go to the travel agent what happens? We often settle on the cheapest air ticket to our destination. The medical student investing five or six years of his life and tens of thousands of dollars in his education (in the hope of future rewards measured in the millions of dollars over a lifetime) will fly to Europe on BasketCase Airlines to save a hundred dollars. Safety? Service? They’re the first things out the window when someone cuts the price. I can’t lecture others on this—many times I’ve done the same. Are you still with the bank you had when, as a child, you duly deposited your twenty cents each week at school banking? What does it take to make you switch allegiances in the marketplace? Employers are placed in a hard position if they can’t rely on customer loyalty. How can they know that they can afford in twelve months’ time to keep all the employees they have today? We’ve all learned to live in ‘uncertain times’. But if a star employee can’t guarantee their job security, what hope do most of us have? I have a clue to pass on. It’s not how hard you work. It’s not what long hours you put into the job. It’s not whether the boss likes you. It’s not about how healthy the economy is. Let’s get these factors out of the way. They may be helpful but, in themselves, offer no leap in job security. If we are to improve our job security the first thing is to understand the nature of value as seen by an employer. When I first started full-time work I had a university degree and sat in my own office. But, in reality, I was ill prepared for the actual 78
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work I was employed to do. This came as a surprise to me, but not to my employer—he knew he would have to train me as he had trained many before. But he knew he had me for a year or two at a low rate of pay. I was the cheapest labour in what was a large office employing 80 people. In fact the secretaries rated above me, a university graduate. If someone had to get the lunches it was me. I spent my first week, dressed in a suit, assembling metal shelving. That brings your understanding of your own value down to earth. My first couple of years were largely spent doing work that no one else wanted to do. It was the sort of work which was time consuming for little obvious cash return in terms of sales. I did bits and pieces of other, more senior employees’ projects. After a while I realised these were the bits which didn’t show. My work left no trail. I worked hard, I worked long hours, my work was stressful, I shouldered a lot of responsibility. But as far as my employer was concerned I was the Invisible Man. Eventually there was a breakthrough and I got to complete some small projects on my own. (Maybe someone more senior was away that day!) The bills to the clients carried my reference number. And the boss started to know my name. But everyone senior to me—and that was most people—had got quite used to the fact that they had me around to do the scrappy hack work. Files would arrive on my desk with a note telling me to head across town to some ignominious backwater where I was to carry out a task they could have trained a cocker spaniel to perform. I knew this was going to go on forever unless I cut off the flow. I got out of my seat and walked into the boss’s office brandishing one such inglorious file. ‘I’m working with a few clients and want to finish their jobs and get the accounts out the door,’ I boldly said. ‘If I have to run around town all day on errands like this one I won’t finish those accounts!’ The boss grabbed the file out of my hand and said, ‘Get back to those accounts.’ And my job changed fundamentally at that moment. When senior staff tried to send me more ‘invisible’ work, I just took it back and dropped it on their desks. ‘I’m not the one 79
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to do this any more.’ Soon they got the message and I was left alone. I completed work under my own name and sent invoices with my reference number. The boss liked me more and more. Now he knew who I was. My value to my employer had been established: I was the type of employee who knew the importance to the business of sending the final account. Since that time I’ve seen the opposite sort of employee time and time again. This is the person who works hard but never understands the element of their job which establishes their value in the eyes of the boss. This is value as the boss sees it, which is not necessarily the same as what the employee believes it to be. When you understand the boss’s view of value you are on your way to greatly enhancing your security in your job. Are you familiar with any of these people? i i
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The salesperson who knows how to ‘close the sale’ and then takes a month to post the invoice to the customer. The person who is so concerned about maintaining the quality of the product or service which the business produces that nothing ever gets finished on time. The data recorder who has an enviable reputation for 100 per cent accuracy but who takes twice as long as everyone else to get through a task. The waiter who is friendly and knowledgeable but who walks backwards and forwards to the kitchen for every glass, every single meal, every request. (Last week my family and another family went for coffee after a movie. The nine people at our table ordered drinks and cake. Three different waiters delivered our order in sixteen separate trips from the kitchen/bar. Such inefficiency costs the business dearly.)
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FINDING THE VALUE TO YOUR EMPLOYER If you are about to embark on a savings plan you should find where the value lies in your job—as seen from the employer’s perspective. Rarely, in my experience, does this value centre on the brilliance with which a person performs a technical task, whether a musician, lawyer, checkout operator, tele-salesperson or typist. Where to look? Generally you find the value point when you understand the money trail for that business. How does the money flow? What slows it down? Where are the key points of the process where the money is really made? Don’t confuse this with trying to please the boss. Two people are doing the same job; one sees that the boss has a difficult task ahead where something unpalatable must be presented to staff or to the board of directors, and decides to make a very public show of support; the boss appreciates that support, shines his or her favour upon the employee and elevates them to a more senior position; everyone else in the building forms an instant dislike of the sycophantic employee now rewarded by being promoted above their competence; that lack of skill eventually becomes apparent to the boss and, albeit with regret, the beloved employee’s fall from grace is usually utter and humiliating. While finding your optimum value is, I believe, the main ingredient to lasting job security, all the other stuff is still important to some degree as there are a lot of things which, if ignored, can derail your career. So do still consider these tried and true career tips: i i i i i i
work hard improve your competence and undertake training whenever available move out of your comfort zone and try new tasks handle money or budgets turn up early and go home late dress smartly and be well groomed 81
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stop animosity festering: patch up any misunderstandings promptly
You can probably add to the list. But their importance pales beside the primary task of knowing where your value lies and then maximising it.
‘I love you . . . now take this!’ Gabriella met Lee at a dance party when they were both travelling abroad from their own countries. They fell in love … but wondered if this was just a foreign fling or would they be able to spend the rest of their lives together? Soon it became apparent that this was the real thing and they would get married. But where would they live? His country or her country? After much soul searching they decided to set up home in Australia. Lee had the better job and, at the heart of matter, Gabriella was ultimately a more adventurous person than her boyfriend. Plans were made, immigration details sorted out and the time came for Gabriella to leave the family home for her new life on the other side of the world. ‘I love you … now take this!’ said Gabriella’s father. And with that he handed her a cheque for an amount worth many thousands of dollars in Australian money. It was sufficient in itself to buy a small (but squalid) flat in outer Sydney. Gabriella said, ‘Wow! Thanks a lot, Dad,’ or something to that effect. ‘Now you’re moving to a foreign country,’ said the old man, ‘I will not be there to look after you. Something might go wrong with your marriage and you need money of your own. This money will set you up so you can be truly independent. Use it to buy a home, even a small one, in your own name.’ Gabriella duly emigrated to Australia and married her sweetheart. Instead of buying a small flat she combined the money with their own modest savings and borrowed big from the bank. They 82
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purchased a slightly wonky house in a suburb which, though a little out of the way, was still within an hour’s drive of the city centre. That suburb has since become much more fashionable. It was a clever choice of location, being near major roads but with a quiet, idyllic nature of its own. Their risk in taking out a large mortgage—and buying a house, not a unit—has paid off for them handsomely in the long run. It was a much better, though riskier, plan than Gabriella’s father had determined for the young couple. You can’t rely on it or take it for granted but family can sometimes surprise us with their generosity. In the end, however, it’s what you do with this that counts.
TRAINING FOR MORE It used to be said of engineering students that their skills were already out of date at the moment they graduated. In many fields of technology brand new students in year one are learning not just details but whole approaches which are less than twelve months old. So your four or five-year degree is filled with stuff which is outmoded. Even in so-called ‘unskilled’ jobs there are plenty of things you can do, by appropriate training, which will add to your value. It may be something directly flowing out of what you do now—such as learning new techniques or how to use new materials—or you might want to think laterally. Learn how to manage a budget or bookkeeping, acquire a special vehicle driver’s licence, undertake personal development through courses on improving your time-efficiency, and so on. We are at risk if we sit still. It might look like our job is not changing much but maybe we are slowly becoming dinosaurs. And that’s the path to extinction. How can you proceed to get into the biggest debt of your life if you haven’t first secured your income stream? Give it the attention it deserves. 83
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SUMMARY
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A key part of any savings plan is to secure your income. Take a look at your job and your employer’s financial health. Put effort into establishing good job security. This means finding out how you can be of maximum value to your employer. To do this you must look at the business through your employer’s eyes. Understand the money trail as it winds through your business. Hard work is not enough to secure your job these days. Even a star employee is vulnerable to job loss. Consider undertaking some new training to keep your skills advancing. If you are not moving ahead you are in danger of being left behind.
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PART TWO
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INCREASING YOUR INCOME One of the outstanding options for reaching your goal is to earn extra money. Many times, when thinking about saving for something important to us, the focus falls solely on ‘doing without’—budgeting and cutting costs (the ‘demand’ part of the equation). As vital as that is, it is only one side of the coin. To reach our goal fast we must also look at increasing the ‘supply’ side of our home economy. There are several tried and proven ways of increasing our income. In this chapter we’ll consider the real value of casual or parttime work. If you’ve got a full-time job it is almost a foregone conclusion that, at the end of the day or your shift, you will be tired. By the time you get home—driving through traffic, standing up in the bus or being coughed upon in the train—you won’t just be tired, you’ll be exhausted. Make the dinner, help with the kids’ homework or play with the toddler, and you’ll be flat. For years I was like that. I couldn’t even contemplate the idea of taking on some part-time work. Yet in the past when I was more motivated and had fewer obligations I thought nothing of signing on for extra shifts. Working twelve hours a day in a sheet-metal factory was not fun. In winter it was dark when I entered the place and dark when I came out again. It was some of the hardest physical work I’ve ever done—and certainly the most dangerous work—but I got through it. How? 87
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i I had a clear savings goal in mind. i I had nothing to lose and everything to gain. i I had few obligations to others. I wasn’t married, I had no children, I was younger and freer. Maybe you’re in that position too. Well, now is your golden hour to put in the extra shift. But if you are weighed down by responsibilities do not try to hold it all together on your own! Look for some help along the way. Part of your planning might usefully involve getting assistance with your responsibilities. i i i i i
Have you got a mum or dad who can look after your children once a week? Will they prepare meals for your family or can you go around there for dinner more regularly? Can you share the driving, to and from school or sport (or wherever you need to be), with other parents? Can you teach an older child to take responsibility for some tasks around the home? Can you get home earlier from work?
Life is running faster now than it was even just a few years ago. Every year or two we seem to have managed to squeeze more into daily living. Can you do it again? If you can find even one evening each week, or a shift on Saturday and/or Sunday, where you can do additional work you will make a substantial move towards owning your home. Remember: it’s only for 104 weeks (or less). Then it can stop. If you don’t want to consider part-time or casual work, then move to the next chapter. But you can do it! You can add thousands of dollars to your home deposit. If you have a partner who can do it too you will really start moving ahead. And, if it’s any comfort, you won’t be doing it alone. Almost 5 per cent of Australian workers have more than one job.
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WHAT TYPE OF JOB? If you’ve got this far then you’re prepared to consider the possibility of part-time work. These are your options: i 1 Work more hours or extra shifts at your current job
This is the easiest route to go. You know the boss, you know the system, you know the tasks you have to do. It’s just a matter of geting your head down and keeping on going. Most importantly you make impressive savings of time and money: i i i i
There is no extra travel time involved—every extra minute away from home counts towards income. There are no additional travel expenses—petrol or fares. You don’t have to change clothes or tidy yourself up (as you would for a second job, starting fresh). You can start earning immediately. There is no need for a trial period, a probation period or a training period at reduced wages.
If your current job won’t pay you for extra hours worked, move to option two. i 2 Same job, extra responsibilities
It has become expected that we must put in more time at the workplace above and beyond the call of duty. Employers sometimes don’t believe they should pay you more. But they are often wrong about this and can be shown to be shortchanging themselves. As discussed in the previous chapter, can you think of a way to make yourself more valuable to your employer? Analyse the business and see if there is a way you can make a real difference to your boss and his or her quality of life. You can bet that the boss is more stressed than most of the employees. I’m not asking you to have sympathy for the boss (that’s up to you), but I am suggesting there will be tasks 89
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which are of economic value to the boss if only he or she can find someone trustworthy to perform them. Take a good look at the tasks which the boss clearly does not enjoy doing. Here are some ideas: i i i i i i i i i i i i i i i i
bookkeeping banking preparing mail-order sales packaging staying behind to do paperwork office cleaning and taking out the garbage training new or junior staff loading new software or updates on the computers ordering the stationery stocktaking chasing up debtors and persuading them to pay holding off the creditors hand-delivering orders to customers out of normal business hours working public holidays or Sundays being the first to arrive—opening up being the last to leave—locking up
You know your job, you can find the tasks which the boss finds tedious. It might be that the boss just wants to get home earlier or sleep in a little longer in the mornings. There will be things which the boss knows—or can be led to realise—he or she is not good at. Take chasing debtors for example. It’s not an easy task and the occasional phone call will be unpleasant. I’ve known many employers who continually put this task off, day after day, until the bank calls and there is a cash crisis about to hit. The boss is never good at everything. That’s your opening. Even a small task, if repeated over a week—such as staying back an extra hour to ensure couriers have picked up outgoing parcels or looking after the switchboard first thing in the morning—will add up. What’s 90
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it likely to be worth to your employer to be relieved of a little pain? Twenty dollars per week? Thirty? More? As mentioned earlier, you can also train for a new task. Once trained you could ask for a higher rate of pay—even just an extra $1 an hour—or get a small weekly loading to your pay. There may be shifts which are more highly paid than the one you’re on now. Here’s my tip: don’t be afraid to discuss it with your boss. Any half-smart employer will have a lot of plans floating in their mind just waiting for the time to develop them. Sow the seed that you are ready, willing and capable of doing something outside your current job boundaries. You might be aware that a workplace under pressure and understaffed is lethargic and demoralised. Your boss will be surprised if you step forward out of the pack as someone with motivation and enthusiasm for the business. Oh, and don’t forget to suggest you want to be paid extra for these new responsibilities. Get this out in the open from the start.
Bang the drum Tracy and Brock knew it was time to give up the renting game. Their first child was still a toddler, but the writing was on the wall . . . literally. They would go mad if they didn’t get safely inside the walls of their own place soon. Although they, as a couple or individually, had never been very good at saving money, they realised it was time to stop going out as much and spending their weekly pay packets. They put their heads down, watched a whole lot more television, and saw their savings start to grow. But cutting back on their lifestyle expenses just wasn’t enough. Said Tracy, ‘It didn’t take long for us to see that there was a limit to what we could save just by pulling in our heads and buying less chocolate and alcohol—although every bit helped. We needed more income.’ This is where Brock took the bull by the horns. For many years he had been a casual musician, playing in a number of spectacularly unsuccessful bands. He was lucky to end up with enough 91
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money at the end of a gig to pay for his drinks that night. Still, it was a talent he had—but could he put it to real financial use? Brock asked around and found a singer who was putting together a band for a series of shows. This singer had good contacts and Brock was soon playing two or three nights every week. Because the singer had arranged the band on a professional basis, with agents booking the gigs, posters, demo CDs and the whole box-and-dice, the band members were making money. Now it wasn’t enough money to live on. But it made a fantastic supplement to Brock’s day job. After tax, Brock was earning $160 to $300 each week. And within two years Brock and Tracy had bought their first home—a two-bedroom flat in a good suburb of Sydney. ‘The good thing about having a casual job,’ said Tracy (who didn’t have a casual job), ‘is that it’s all savings. We already knew we could live on our wages so the music money went straight to the home deposit account. It was all cream.’ ‘It was pretty exhausting, finishing work and then going out again at night several times a week,’ said Brock. ‘But look where it got us! Finding that extra income was the key for us. It broke us out of the stalemate we were in, where the longer it took to save money the further house prices seemed to rise above us. The pay wasn’t very good—if you looked at it on an hourly basis we were being ripped off—but the job fitted in well with our lives. Everyone in the same position as us should take a look at their talents and hobbies and see what they can turn to good use.’ Two years was about right for the band too. It imploded thanks to the usual spicy mix of colourful personalities, insecurities, jealousies, ‘musical differences’ and too much junk food. i 3 New job, work from home
Time is money, or sleep. If you can avoid travel time you are already ahead. Can you work from home? This option requires a good sense of self-discipline. Not everyone can do it. You have to be able to shut yourself off from your 92
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location, avoiding the temptation to raid the fridge, water the garden or lie down on the bed. It’s lonely, quiet, unseen and badly dressed. For some of us these factors are great attractions; others crave noise and human society. i 4 New job, new workplace
Not the easiest of options, but it’s probably something you’ve done at least once or twice before and know how it goes. The problem you’re going to face is that part-time or casual work may involve either a drop in status or a raising of responsibility. Much part-time work is unskilled—delivering pizza, for example. Or it might require skills you are not presently using—like typing or interviewing. You might have to do some training or, conversely, put your brain in neutral. That could be pleasant after a day job with stress and responsibility! It can be messy having to come home from one job and head out to the next. But you certainly won’t be on your own. I know people who have held down three jobs at once. I grew up in a household where everyone, at some time or another, held down a couple of jobs. The explosion in part-time work is in your favour. The employment figures tell the story: there has been a fall in full-time employment and a sharp growth in part-time and casual work. In the first quarter of 2002, for example, full-time employment in Australia decreased by 55 100 jobs while part-time employment increased by 11 600. Almost 30 per cent of jobs are now part-time. In Melbourne, where part-time jobs account for 25 per cent of all employment, most are taken by women (72 per cent) as you might expect, juggling childcare and so on. What is revealing is that male part-time work has shot up by more than 200 per cent over the last 20 years—compared to a mere 10 per cent lift in full-time work for men (Australian Bureau of Statistics figures). Two out of every three new jobs created here are part-time (OECD). We are becoming a nation of gap-fillers. It’s a land of opportunity—but the opportunity is to work part-time and earn insufficient money to live well. That’s why we all need to get cracking and buy a home—an asset that will increase in value throughout our life. 93
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Still, seize the opportunity provided by the collapse of traditional job structures.
WHERE ARE THE JOBS? There are parts of Australia where a job is almost impossible to find. You might have to consider moving if you are to build a future. But it is surprising when you hear of people who find employment where everyone thought there was none to be had. It requires determination if the outlook is grim. I know a woman who headed bush with her husband and son; they had inherited a block of land (but no house) and their future in Sydney was cut short for a whole range of reasons. So they headed for the block of land to make a new future. Neither he nor she had employment waiting for them. But she worked her way into the small local community, singing to the oldies in halls and helping out at the fete. She got to meet people, put herself right into circulation. She set her eyes on a particular workplace and made an effort to get in. Eventually she did a little casual work, then became part-time, then permanent part-time and on to full-time. Friends had told her the task was hopeless. They looked at the dying town and said there was no money, no employment, no hope. ‘Just sit on your block of land and wait for the pension.’ They were wrong. Are you prepared to see the opportunities? Then, are you prepared to have a go? An organisation called Workventures runs a number of programs to help people find work and train for particular jobs. A mature workers program, which is funded by the government, sets out to get people aged 40+ into the workforce. Workventures places a lot of people into full-time, part-time and casual work. According to one of the program managers, ‘People who have skills can find work.’ There’s basic work available in the city. Often the key is found in upgrading skills which have got a little rusty—for 94
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example, by leaving the workforce to have children—or by learning new skills which are in demand now. Here are some job suggestions for regular work throughout the year:
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Hospitality: food preparation—making sandwiches, cooking— and bar work. Waiter/waitress; catering for functions. You can train to obtain a certificate in gaming or alcohol supervision for club work. Concierge in an apartment block (these often run on six-hour shifts, 24 hours a day, seven days a week). Security. Deliveries—pizza, other takeaway food, flowers, etc. Courier. Secretarial—typing, etc. Clerical—administration, filing, etc. (particularly in small and medium-sized businesses). Retail—department stores and chain stores. Cash register work—supermarkets, department stores. Stacking shelves—supermarkets and large stores. Computer work—data entry (names and addresses). Market research—interviewing people, surveys. Telemarketing—phoning people to sell products, from wine to raffles to raising donations for charities. Customer service—for a bank, post office, department store, etc. Cleaning. Mowing lawns and gardening. Newspaper/brochure delivery run. House painting. Nurse’s aide.
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Some jobs are seasonal—they only appear for a particular period each year and may be quite short term:
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Fruit picking—there is a circuit around the country. The pay is low, the work is hard, but you get to spend the day outdoors and you’ll end up fitter. Taxation—the end of the financial year (30 June) brings a number of opportunities. Often government agencies need more people to answer phone queries and to process tax returns. People with aptitude can be trained by accounting franchises to help clients prepare basic tax returns. New government schemes—every time a government (State or Federal) announces a new scheme they increase the numbers of people dealing with inquiries from the public (remember the introduction of the GST, for example?). The same situation arises whenever a large company is ‘floated’ (shares are offered to the public). When it’s cold look to the ski industry—winter brings opportunities to work where there’s snow, supervising chair lifts, cleaning hotel rooms and so on. When it’s hot—over summer many shops need a hand selling drinks and icecreams or taking them to where the customers are. Tourism—tour guide work, driving buses, collecting tickets, helping with activities (abseiling, rafting, bushwalking, canoeing, etc.). In retail the jobs emerge in the lead-up to Christmas and through the New Year period. Read the papers: if a local factory reports winning a large contract or tender, give them a call. They could be looking for new workers and might be interested in those who are prepared to live with the insecurity of being part-time or casual.
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A different set of part-time or casual jobs draw upon special skills which you might have but are not currently putting to economic use:
Special skills i i i i i i i i i
Singing or playing music Stand-up comedy Washing dogs and cats Walking dogs Feeding pets while the owners are away Helping out in people’s gardens—with a knowledge of plant selection, propagation, water issues, diseases, pruning, etc. Knitting or quilting Painting and other artwork Home handyperson activities
You can bring your skills up-to-date or learn new ones from books, over the Internet, from instructional videos or by attending courses. According to Workventures, a course suitable to get you work in the computer field will set you back around $250 (through TAFE) or around $400 through a private provider. Check out TAFE and community evening college courses.
HOW MUCH COULD I EARN? The money from most part-time or casual jobs is not great and, of course, is subject to income tax. You can expect to earn $14 to $20 per hour gross unless you have valuable skills. For example, a musician in a good duo can earn $100 to $250 for a night’s work (four hours of playing, a couple of hours’ travel and setting up equipment). Feeding people’s pets when they go away on holiday might get you $10–$15 a day for one or two weeks. Open a can of food, fill the water bowl and see that Spot is generally healthy and happy. Once you’ve built up a clientele in your local area this can turn into a nice little earner—neighbours will spread the word for you. 97
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When it’s suddenly $30 or $40 to open two or three cans of pet food in the same street each day over the school holidays, you’re looking good. Big things can come from a host of little things packed together in a convenient form. If you don’t have contacts for work, or are unsure what is available within a close distance, get in touch with a job agency and discuss your skills and interests. Find out what courses they recommend to fit you for well-paying jobs. If you are enterprising, walk up to people who are engaged in jobs you think you can do. Ask them if they need a hand. For example, the guy across the street with the lawn mowing business might, in spring, be running ragged trying to look after all his regular customers. His business is going to be dead quiet over winter and through much of the summer, so he is not really looking to employ people over the whole year. But casual work is a different matter. Next time someone phones you at home and tries to sell you something, ask them if their boss needs more people on the phones. There’s usually a high turnover of staff in telemarketing. It can be hard and depressing if you see your whole life stuck there. But it’s a source of part-time or casual work for someone with their eye on a greater prize and who knows they will be out of there in 104 weeks. At the same time ask the person on the phone about the business— find out if the workplace sucks. Is a neighbour having trouble finishing the painting of their fence or building a pergola on the weekends? If they seem to be struggling why not ask if they are willing to pay you to finish the job promptly. My experience is that if you solve one person’s niggling job, and act professionally about it, they will refer you to a mate who has another niggling little job. Someone can be a dynamo in the office, getting a hundred different jobs completed each day, but when you go to their home you’ll usually see several incomplete ‘projects’ which never seem to get to the finish line. We all need a professional, reliable, inexpensive and affordable hand with something. 98
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THE PART-TIME WORK MODULE The tables below show how much you could earn for your part-time or casual job in a lowly paid activity. Figures will be better if you can find a suitable higher-paid job. All figures assume you already have a job and have received the benefit of the tax-free status of the first $6000 you earn.
Part-time or casual work for 104 weeks— one person working, taxed at 30% plus 1.5% Medicare Levy One person
$14 per hour*
$17 per hour*
$20 per hour*
4 hours per week, net earnings
$3989
$4845
$5699
8 hours per week, net earnings
$7979
$9689
$11 398
$11 968
$14 533
$17 098
12 hours per week, net earnings Notes
* These figures in the column headings are gross hourly rates. The figures shown in the body of the table, however, show net earnings after deduction of income tax at the rate of 30% plus the Medicare Levy of 1.5%. Income tax is deducted at 30% plus 1.5% Medicare Levy.
If your total taxable income for a financial year exceeds $50 000 you might move into a higher tax bracket on the extra income you earn above that $50 000—42% plus the Medicare Levy of 1.5% where taxable income is in the range $50 001–$60 000 and 47% plus Medicare Levy where taxable income exceeds $60 000. And, at this highest level you may be up for the Medicare Levy Surcharge (an additional 1% deducted) if you do not have adequate private patient hospital insurance. If you currently have an annual taxable income between $6000 and $20 000 you might only be paying income tax at the rate of 17% plus the 1.5% Medicare Levy. Bear in mind when making your calculations that extra work and income may take you into a higher tax bracket. 99
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If your additional taxable income falls wholly in the next tax bracket—income $50 001 to $60 000—your tax rate is 42 per cent + 1.5 per cent Medicare Levy. Here’s what you would earn for your part-time work over 104 weeks:
Part-time or casual work for 104 weeks— one person working, taxed at 42% plus 1.5% Medicare Levy One person
$14 per hour*
$17 per hour*
$20 per hour*
4 hours per week, net earnings
$3291
$3996
$4701
8 hours per week, net earnings
$6581
$7991
$9402
12 hours per week, net earnings
$9872
$11 987
$14 102
Now here’s what happens if you have a partner who can join in: Part-time or casual work for 104 weeks— you and your partner working, taxed at 30% plus 1.5% Medicare Levy Two people
4 hours per week each, net earnings
$14 per hour* $17 per hour* $20 per hour*
$7978
$9690
$11 398
8 hours per week each, net earnings
$15 958
$19 378
$22 796
12 hours per week each, net earnings
$23 936
$29 066
$34 196
Notes * As for the previous table, figures in column heads are gross hourly rates, but figures in the body of the table show net earnings. Where total taxable income per person is in the range $20 000 to $50 000, income tax is deducted at the rate of 30% + 1.5% Medicare Levy
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Part-time or casual work for 104 weeks— you and your partner working, taxed at 42% plus 1.5% Medicare Levy Two people
$14 per hour*
$17 per hour* $20 per hour*
4 hours per week each, net earnings
$6582
$7992
$9402
8 hours per week each, net earnings
$13 162
$15 982
$18 804
12 hours per week each, net earnings $19 744
$23 974
$28 204
Notes * As for previous tables, figures in column heads are gross hourly rates, but figures in the body of the table show net earnings. This table shows earnings that wholly fall within the $50 001 to $60 000 tax bracket which are thus taxed at 42% plus the 1.5% Medicare Levy. The tax rate for taxable income above $60 000 is 47% plus Medicare Levy of 1.5% or 2.5% if you are caught by the Medicare surcharge.
The figures are impressive but quite achievable with motivation. If you find a Saturday or Sunday job for eight hours weekly you will still be able to enjoy one day off per weekend—you’re not giving up all your free time by any means. Maybe you’d prefer to do a couple of evening shifts at a takeaway shop or work as a cleaner? Could you manage four hours over a whole week where you sit down in front of a computer keyboard and type? That’s a bit more than just one hour every second night. Now take the figure you think you can achieve and add it to your home deposit worksheet at page 35.
THE HOLIDAY OF YOUR LIFE Some people can live with the idea of taking on regular part-time work to top up a full-time job; others can’t. If you feel unable to add to your weekly burden, consider this: you can earn a substantial amount of money for your home deposit by taking a different job during your annual leave. 101
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Do it all in one hit. If you plan well you should be able to find a job which is not just a repetition of what you do all year but which, somehow, feels at least like a change, an escape from the everyday. OK, it’s not the same as a holiday. But you will be mixing with new people, you can put old workplace feuds and frictions to one side, you will be in a different location. And if you really think about it you might just find yourself working a four-week block in somewhere really enjoyable: i i i i i
selling takeaway chicken or icecreams in a beachside town or suburb over summer making beds in a resort environment selling lift tickets in the snow (and partying after dark) working outdoors after a year stuck indoors travelling from town to town selling or promoting a product or information campaign
A lot of the demand for casual jobs is found where tourists gather— the beach, the snow, the lakes and rivers, the mountains. These are wonderful areas of natural beauty or, where the natural has been crushed by the unnatural, at least a lively and entertaining night life. And if you go there with your partner you can have a lot of fun and great experiences wrapped around the hours of work. Watch your costs, however (accommodation, travel, meals, etc.). Can you stay at a friend’s place? If you need to stick close to home because of your commitments—children, pets, sick relatives, and so on—you might like to think of your four weeks’ annual leave as a period where if you can’t holiday (because you want to get that home deposit!) you can at least find work in a job which teaches you something of value. Is there a particular skill you need to acquire if you are to advance (and earn more money) in your current job? If it requires experience yet your boss won’t let you gain that experience, try to find it elsewhere. For example: i marketing i budgeting 102
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bookkeeping cash register work catering making espresso learning a new software package working on a database managing a small team using particular chemicals photography skills working with children outdoors adventure training sales experience
These are just some ideas. The point is you don’t have to ‘throw away’ your precious holidays in the mere pursuit of money (albeit so you can afford to buy a home!). You can use the time to improve your prospects—for advancement, for increased pay, for life enhancement. It’s not a waste. Even if you simply work in a factory for four weeks you will meet new people and might make lasting, important friendships. Then there’s the money too. I’ll give you an example. I met a woman who wanted to be a professional photographer. It was her hobby and her passion. But she couldn’t find a job doing it. ‘After a year or so looking for work as a photographer,’ she told me, ‘I landed a job in a graphic arts studio doing the lowest of the low in terms of work. I did the photocopying, made the routine phone calls, arranged couriers, walked to the shop to buy everyone’s lunch. ‘When I told the boss I could help with the photography, he almost choked. How could I, at the bottom of the ladder, assist with an important technical skill? “What’s your experience?” he asked. I couldn’t answer this question with any experience worth mentioning. It was just my hobby, although I had studied it and taken it seriously. ‘Then, over a holiday period from work, I spread the word around my friends that I was available for professional photography. I did a wedding and a few family portraits. Not only had I made 103
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some money but now I had a portfolio of professional work and experience to show my boss. He looked at me in a new light and gave me my first opportunity to show what I could do for the business. I lost my holiday that year, but gained what I needed to move ahead in my job. And the cash came in handy too!’ Is there any skill you need to acquire if you are to break out of the rut in your current job? Perhaps a four-week block of employment will do the trick. Another perspective goes beyond simple income and skills issues and lands us in the territory of life enhancement. For those four weeks you could do a job—a paying job—which helped people in the community. It might be working for a charity, cooking at a campsite, assisting someone run a retreat for meditation, helping with childcare, running a holiday program teaching kids to swim. You might earn less, and you will give up your annual leave. But you could also boost your self-esteem and zest for life. What’s it worth to you?
THE HOLIDAY JOB The four tables on the following pages show how much you could earn by working during your annual leave from your usual full-time job. Again we are looking at a number of weeks from within your 104-week allowance. The maximum is two periods of four weeks over the 104 weeks. If you have a partner who can get in on the act you have a potential 16 weeks of extra income. For one period of your life can you do it? The table also shows shorter periods of holiday work—can you manage even two weeks over the 104 weeks? You’ll still have six weeks of holiday left. Figures shown in the column headings are gross but figures shown below are net of income tax. This is what you should get in your pocket. However, different marginal tax rates will affect this, up or down as the case may be—as with the part-time work examples we’ve just looked at. 104
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Holiday job—one person working,
taxed at
30% plus 1.5% Medicare Levy, for 40 hours per week excluding breaks One person
$15 per hour
$20 per hour
$25 per hour
$30 per hour $40 per hour
2 weeks
$822
$1096
$1370
$1644
$2192
4 weeks
$1644
$2192
$2740
$3288
$4384
8 weeks
$3288
$4384
$5480
$6576
$8768
Holiday job—one person working,
taxed at
42% plus 1.5% Medicare Levy, 40 hours per week excluding breaks One person
$15 per hour
$20 per hour
$25 per hour
2 weeks
$678
$904
$1130
$30 per hour $40 per hour
$1356
$1808
4 weeks
$1356
$1808
$2260
$2712
$3616
8 weeks
$2712
$3616
$4520
$5424
$7232
Now let’s look at two of you sacrificing your annual leave.
Holiday job—you and your partner working, taxed at 30% plus 1.5% Medicare Levy, for 40 hours per week excluding breaks Both working $15 per hour $20 per hour
$25 per hour
$2740
$30 per hour $40 per hour
2 weeks
$1644
$2192
$3288
$4384
4 weeks
$3288
$4384
$5480
$6576
$8768
8 weeks
$6576
$8798
$10 960
$13 152
$17 536
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Holiday job—you and your partner working, taxed at 42% plus 1.5% Medicare Levy, for 40 hours per week excluding breaks Both working $15 per hour
$20 per hour
$25 per hour
$30 per hour $40 per hour
2 weeks
$1356
$1808
$2260
$2712
4 weeks
$2712
$3616
$4520
$5424
$3616 $7232
8 weeks
$5424
$7232
$9040
$10 848
$14 464
If you like, take the figure you choose and put it on your home deposit worksheet at page 35. And don’t forget you’ll be getting holiday pay, too, from your full-time job if you are an employee with this entitlement. Use these tables constructively. Savings and budgeting probably won’t get you to your goal on time—you need to beef up your income as well. The two go hand-in-hand. One hundred and four weeks give you two full sets of holidays to use to your advantage. When you’ve got your home you’ll have the rest of your life to enjoy holidays, you’ll be able to travel or simply laze about the house. Now is the time to take the steps which will deliver you this freedom of choice for the future. Does it mean, even in the short-term, the death of holidaymaking? Of course not. That’s being too dramatic. There still will be plenty of opportunity, if you are employed, to take a holiday. The trick is to make the most of what you’ve got—to maximise your ‘break’. Over the course of the year there will be many days off, including long weekends: January New Years Day Devonport Cup (Tasmania) Australia Day
February Royal Hobart Regatta (Tasmania) Launceston Cup (Tasmania)
March Labour Day (WA) King Island Show (Tasmania)
April Good Friday Easter Monday
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Labour Day (Victoria) Eight Hours Day (Tasmania) Canberra Day (ACT)
Easter Tuesday (Tasmania) Anzac Day
May May Day (NT) Labour Day (Queensland) Adelaide Cup Day (SA)
June Foundation Day (WA) Queen’s Birthday (all except WA)
July Alice Springs Show Day (NT) Tennant Creek Show Day (NT) Katherine Show Day (NT) Darwin Show Day (NT)
August Picnic Day (NT) Bank Holiday (ACT, NSW) Royal Queensland Show (Queensland) Borroloola Show Day (NT)
October November Queen’s Birthday (WA) North Tasmania Recreation Day Labour Day (ACT, NSW, SA) (Tasmania) Burnie Show (Tasmania) Melbourne Cup (Victoria) Launceston Show (Tasmania) Devonport Show (Tasmania) Flinders Island Show (Tasmania) Hobart Show (Tasmania) December Christmas Day Boxing Day (except SA) Proclamation Day (SA)
Make the most of these and you’ll be doing fine. Remember there will be a lot of people out there doing the same as you—working extra hours. Ask any friend who runs their own business how many days off they get each year. You can expect the answer to be precious few. Many ordinary employees work two jobs at a time and then work right through their annual leave too. 107
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If you’re motivated you can really boost your income. Don’t be embarrassed to take a job which is a few steps down from what you do day-in, day-out. It’s only for a short time. Just don’t be too ambitious in setting your target. Maybe set yourself a goal of working two extra weeks in the first year and three the year after. Start the ball rolling. Ask around about additional work—speak to friends, family, your employer and any organisations to which you belong. Drop in at a local jobs agency. Check noticeboards. Above all, look around you. Sources of extra income are sometimes hidden, just waiting for someone to come along and ease them out into the open.
UPDATE YOUR SOCIAL SECURITY ENTITLEMENTS Are you overlooking any social security benefits to which you might be entitled? There are regular payments, entitlements or annual rebates for things such as: i i i i i i i i i i
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Family Allowance including a large-family supplement (four or more children) and multiple birth allowance. Child Care Benefit. Parenting Payment and sole parent rebate. Carer Allowance. Looking after dependent relatives. Newstart and Youth Allowances—while studying or looking for work. Education assistance—Austudy, Abstudy and Partner Allowance. Assistance for Isolated Children and a Remote Area Allowance. Rent Assistance. Health Care Card.
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SUMMARY i
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When you consider additional part-time or casual work take a good look at your responsibilities. Assume you will need help and think who can assist you with your family and other obligations. What type of job? 1. Work more hours or extra shifts at your current job. 2. Same job, extra responsibilities. 3. New job, work from home. 4. New job, new workplace. Where are the jobs? There are regular ones and seasonal ones. Some jobs require special skills—you might possess these skills already but are not using them to earn income. How much could you earn? Rates of pay for part-time and casual jobs are fairly low. But, over time, the money really adds up. The trick is not to see all your hard work as a permanent way of life. You will leave it behind when you have reached your goal. Are you prepared to take The Holiday of Your Life by turning your annual leave (or at least part of it) into income? When you take on extra work, try to find something different from what you do every day: learn new skills for job advancement; meet new people; find some joy and life enhancement if you can. There are still many holidays over the course of the year— aim to maximise their usefulness as recreation. Think about working overseas for a couple of months, where there may be tax benefits and/or salaries paid in US dollars.
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7
LIFE’S LITTLE LUXURIES Getting through life is not easy so we love our little luxuries. At the end of the day it might be opening a bottle of wine. Maybe it’s hiring the latest DVD, smoking cigarettes or downing a few beers at the pub on the way home. We love ’em, often we simply need ’em. And they are costing us a small fortune. Mostly we don’t mind this. Sometimes when I travel to another city to visit friends I might cook dinner one night as a kind of ‘thank you for having me’. I’ll make a special trip to the shops and pick up, say, some nice steaks or a free-range chicken for around $15 and enough seasonal vegies for as little as $6–$10. So far so good. But then I’ll purchase a few extras to give the meal real character and zing. Some fresh basil and coriander ($6), a small bottle of special sauce or mustard ($4), a little extra virgin olive oil like all the TV chefs go on about ($8), a lemon and some garlic ($1). ‘Hey, what have I done?’ I usually ask myself as I stand in line at the check-out. ‘I’ve spent almost as much on the extras as I have on the fundamentals!’ Knowing all this, I ask myself if I should do things differently. The answer is always ‘No’. It’s a great thing to have a tasty, special meal with friends. Enjoy the moment and the friendship. But I also have no doubt that there are times in one’s life when it is wise to pull back on the ‘extras’ so that you can make faster progress towards a fundamental savings goal. 110
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My aim is to move fast with the savings so I can get back to the little indulgences of my lifestyle. For example, I’m just back from a camping trip with the family. It rained. We got wet. We were at the beach, the water was warm, we ate mushy food and huddled together when the thunder roared. We had a good time. To get out of the rain we really need more protected space under cover. Now I’ve just priced a range of options, from larger tents to additional rooms. For $400 to $600 we can get something happening here. Our next trip will be drier. But will it really be any better? Maybe, maybe not. Who can tell? All I can be sure of is that we’ll still have fun being on a camping holiday together. And the closer the camping experience gets to being like the comforts of home, the lesser will be its impact and refreshment value. But what I also know for certain is that spending $400 to $600 now on camping extras will take that large sum of money away from our family’s current savings goal. Is the extra room a luxury or a necessity? At best it’s a little of both. But it makes nonsense of having a savings goal if I’m going to be easily led away from my target. Because my savings goal has a timeline there is an end point in sight. If I can keep up my motivation I’ll get there. And then I can reassess getting the camping gear upgraded. Till then I suppose we’ll have a few more days crammed into smaller tents while the rain pounds down outside. We’ll all get a little wetter too. In this chapter it is time to take a look at the cost of luxuries. By no means am I suggesting you give them all up or throw them away forever. Take a look at the figures and you can decide what to do, and for how long you’ll do it, to modify your lifestyle so as to purchase your home faster. And a good place to start planning is over a cup of coffee.
A DRINK OR AN EVENT? Coffee has all the hallmarks of a drug in our society. Coffee shops are springing up in suburban shopping centres from big cities to small country towns. And these are real coffee shops with genuine espresso coffee. International chain stores are pushing hard into the Australian 111
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market to get us hooked on their more expensive products, with loyalty schemes and a wide choice of flavours. The price of a cup of coffee is whatever you are prepared to pay. It’s a luxury that helps us make it through the working day and then comes in to assist us unwind in the evening. Many friends can’t begin the day without a good solid cup of coffee—but the pressures of long working hours and avoiding commuter rush hours mean we are picking up that cup on the way to work rather than brewing it at home. It’s a costly little exercise to buy a cup of coffee if you’re a regular customer. I love coffee and I know how addictive it can become. So it makes a good illustration of where the ‘hidden’ money for your home deposit might be lurking. The two tables opposite look at the cost of a cup of coffee, purchased from a shop, at a range of common prices. The figures show the cost over our 104-week period. Think about how often you buy a cup of coffee—or some similar stimulant—then look at the table. If you and your partner are enjoying two cups of coffee a day each from one of those designer coffee chain stores, allowing one coffee-free day per week, it’s adding up to around $9984 over 104 weeks. That’s a slug. But if you think that’s bad, remember to factor in the income tax you’ve paid along the way. At a marginal tax rate of 30 per cent you’ve had to earn more than $14 000 gross pay in order to have your coffee. That’s not just a hill of beans. Now, if you can live with a little less coffee in your life, use the table to find how much you can save. If you’re acting on your own, cutting out one cup a day for six days at $2.50 per cup will deliver savings of $1560. If you and your partner are prepared to forsake three cups of coffee each week for 104 weeks, at $3 per cup, the table shows you can save $1872. Add that figure to your home deposit worksheet on page 37. But be realistic: don’t give up your daily well-made coffee if you really need it or simply love it so much. If you can’t make this a positive step then it isn’t all that likely you’ll maintain your abstinence. If coffee is not your thing, what is? Look into your lifestyle. Picture yourself in the kitchen of your own home, purchased with your own sweat and initiative. Pour yourself as many coffees as you like now. Heck, just buy the espresso machine. 112
$260
$312
$416
$2.50
$3.00
$4.00
$832
$624
$520
2
$1248
$ 936
$ 780
3
$1664
$1248
$1040
4
$2080
$1560
$1300
5
$2496
$1872
$1560
6
$2912
$2184
$1820
7
Cups per week 8
$3328
$2496
$2080
9
$3744
$2808
$2340
1
$520
$624
$832
Cost
$2.50
$3.00
$4.00
2
$1664
$1248
$1040
3
$2496
$1872
$1560
4
$3328
$2496
$2080
5
$4160
$3120
$2600 $4992
$3744
$3120
6
$5824
$4368
$3640
7
Cups per week 8
$6656
$4992
$4160
9
$7488
$5616
$4680
10
$8320
$6240
$5200
10
$4160
$3120
$2600
The coffee fix—you and your partner, for 104 weeks
Now account for your partner’s coffee habits.
1
Cost
The coffee fix—one person, for 104 weeks
11
$9152
$6864
$5720
11
$4576
$3432
$2860
12
$9984
$7488
$6240
12
$4992
$3744
$3120
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WHAT ARE YOUR LUXURIES? Coffee is just an example. Maybe for you the hidden cash is lurking in pots of chai or diet soft drinks. Here are a few to think about. Use the table opposite for your calculations and move any savings to the home deposit worksheet at page 37. i Clothing
What do you spend on clothing each year? It can be hard to know for sure as the figures get buried. Take a look in your wardrobe and make an estimate—shoes, sports gear, jackets, T-shirts and so on. Maybe you could make a pact with your partner that you only replace wrecked clothing and shoes rather than buying for fashion. Or give yourselves a reduced budget and allocate the rest to your home deposit. i Lunches
Bring your lunch from home? A net five dollars per working day (after ingredients costs) adds up to $2400 over 96 weeks (104 weeks minus eight weeks of annual leave). Bring in your partner and there’s room to save almost $5000. That $5000 saved could support extra borrowings of up to $45 000 for your home. i Takeaway
Fast food and restaurant food are eating into the average household budget. Almost one-third of the total money Australians spend on food and drink goes on takeaway and eating out. Can you rearrange your spending in this area? For a couple, demoting a night at a restaurant to a night with takeaway chicken or pizza will represent a saving of $30 to over $100 per occasion. i Entertainment
Just going to the movies can cost almost $30 for two people, plus extras like parking, petrol, junk food, babysitting, etc. Are you a regular purchaser of compact discs, DVDs, videos, books, magazines, multiple newspapers? Assess your lifestyle and look for patterns of behaviour where you can make regular savings. 114
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Luxuries—estimated savings over 104 weeks Estimated savings per week per person
One person
Two people
$1
$104
$208
$3
$312
$624
$5
$520
$1040
$10
$1040
$2080
$15
$1560
$3120
$20
$2080
$4160
$25
$2600
$5200
$30
$3120
$6240
$40
$4160
$8320
$50
$5200
$10 400
$60
$6240
$12 480
$70
$7280
$14 560
$80
$8320
$16 640
$90
$9360
$18 720
$100
$10 400
$20 800
SUMMARY i i
i i
There are savings hidden in our little luxuries. These savings can be substantial over 104 weeks. Reassess your lifestyle and look for patterns of behaviour which will indicate where you can cut back on costs without necessarily making life dreary. Put a dollar figure to your cutbacks; transfer this to your worksheet. Remember you must set the money aside each week or on payday or you will find you are sacrificing your lifestyle without any corresponding saving of money towards a home deposit.
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8
THE THEORY OF RELATIVES This is a chapter to make you grit your teeth, to test your resolve. In short: what can your parents or family do for you? Not only have your parents given you the precious gift of life . . . can you ask them for more? Can they, in some way, help you reach your home deposit? To put it another way: maybe it will help them if you buy your own home. Don’t just limit your thoughts to your parents. Sometimes friends, brothers and sisters can step forward and be counted on at this crucial stage of your life. For some it’s a cultural issue. Many Anglos have been raised to be independent, to bear the burdens of life privately and face them single-handedly. They find it embarrassing to ask for help. And so, large numbers of people in our community battle on financially, never quite getting on top of the monthly, weekly, daily struggle to pay the bills. In fact it’s often the case that we are proud to be selfsufficient. Meanwhile, in another part of the city, many people from other cultural backgrounds approach the situation from a different perspective: i i 116
Instead of being totally self-sufficient they are happy to accept assistance. Instead of concentrating solely on their own financial needs
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i
they cooperate within the wider family group to aid each other on projects such as buying a home or renovating a run-down bargain property. Instead of being proud of ‘doing it alone’ they are proud of working together and being aware of each other’s needs.
Do you worship the Cult of the Individual or belong to the Community of Cooperation? Let me assure you there are many people who can’t afford to buy their first home but who are nevertheless sitting in the lounge room of a home they own. They certainly didn’t do it all themselves. When a couple marry, or at other key stages of life, the family and friends combine their resources to ensure the next member of the community gets off to a sound start. Wealthier families simply hand over, as a gift or by way of mortgage, the money necessary to place a deposit on a home. Sometimes the couple moves in with friends and shares living expenses. It might be as simple as putting in some serious effort to renovate a tired cottage or flat which is all the family member can afford to purchase. The plumber brother fixes the pipes and hot water, the sister’s electrician mate checks the wires and replaces dodgy power points, dad actively takes steps to secure a whole stack of part-worn carpet which is being thrown out during refurbishment at his workplace. The reward is often little more than a meal and a few drinks together after the weekend’s work. I’ve known situations where the renovations have gone on for months, with relatives and friends putting in many hours of part-time work. Often there is just the warm glow of friendship driving the process. In some communities there is the clear understanding and expectation that the one who benefits today will be the one to help someone else later on. And so the question you must ask yourself is this: are you willing to ask for help? How can relatives and friends assist you to reach your home deposit goal? Here are some suggestions, not all of which will be equally palatable to everyone: 117
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i i i i i i i
i i
You can move into their home, saving money on rent. You can rent a home together, reducing the costs to each of you. They can move into your home, once you buy it, and pay you rent. You can borrow money from them. You can work for money—relatives and friends can be a source of casual work. You can ask for cash instead of ‘things’ as presents. You can seek encouragement in the form of sponsorship from them: for example, for every $100 you save towards a home deposit they will contribute an additional five dollars. They can assist with renovations if you buy a place needing a lot of work. They can prepare or share meals and entertainment costs (for example, they rent the holiday cottage this year).
For these purposes can it be assumed that at least somebody likes you enough to want to help out? Sadly, your parents might have passed away or be ill or in some way unable to assist. What about your friends? Two people I know, James and Leslie, had been married for about two years when they got worn out from living in run-down, semisordid inner-city terrace houses. They had had enough of share households and mad flatmates. Dirty floors, all the good food raided from the fridge before they got to eat it themselves, comings and goings at all hours of the night, no privacy. And continual rent increases. James’s parents were struggling financially themselves, but Leslie had lucked into being born to fairly wealthy parents. In fact her parents had trouble working out where to put all their money—it gave them sleepless nights, tossing and turning with worry! James and Leslie were desperate to move out of their flat. It seemed the only way forward, with any speed, would be to ask Leslie’s parents for some financial help to put together a home deposit. One evening the young couple were at Leslie’s parents’ place for dinner. After downing a couple of quick beers James gently 118
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pushed Leslie towards her father out on the terrace. It was a nice spot, overlooking the backyard pool and about $30 000 worth of landscaping. ‘Dad,’ said Leslie. ‘You know how James and I are saving for a home deposit? Well it’s taking too long and with house prices rising all the time we’re not sure we’ll ever get there. And yet we don’t feel we can stay much longer where we are now—it’s a madhouse. I’m sure you remember what it was like when you and mum were young. ‘Anyway, James and I were wondering if you might be able to help us with a few thousand dollars—just a loan, of course—to top up our savings so we can afford to buy a place now.’ Leslie’s dad was silent for a moment, before smiling. ‘Of course I can help you out, darling. We’ve got enough money to go round, and it’s important that you get into the property market as soon as you can. Delay is fatal! Now can I have a word with James?’ Leslie got dad’s smile. James, however, got The Lecture. ‘Can’t you even look after my daughter? How can my girl ever have a family of her own? What are you proposing to do about it? ‘How much money are you earning in that lousy job of yours? I think you should move into computers—that’s where the money is. ‘I’ll lend you the money you need . . . but I don’t want you thinking you can come back every time you want some little thing or other. Don’t think of me as some kind of easy touch—I know you’re not saying that, but I just want to be clear about a few things before we start . . . ‘You can have my money . . . every cent if necessary. ‘My lawyers will get in touch with your lawyers to arrange the paperwork. ‘I hope you won’t think of me as your mortgagee. ‘I knew this was coming. ‘Does this mean I’ll get my own room in your new house? Ha ha.’ The Lecture is not a pleasant thing. In fact, after The Lecture, James and Leslie flatly rejected accepting any financial assistance from Leslie’s parents. They redoubled their savings efforts and bought a home themselves. It wasn’t the area they wanted to live in, but at least they owed nobody any favours—in particular, their family. 119
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If I got The Lecture I’d probably react in just the same way. It’s up to you (and your partner if you have one) to discuss the issue and weigh the risks. You might be disappointed but you might equally be pleasantly surprised. Anyway, here you’ll find a few options to discuss with anyone—parent, sibling or friend—who might lend a helping hand. Let’s take a closer look and consider a few strategies to make the options more realistic.
A PAUSE ON PRESENTS I know a family that had a lot of kids. These kids all got married and had lots of kids of their own. Christmas time simply became unaffordable. So everyone decided to give presents only to the grandchildren and grandparents. And it worked very well. It took a lot of the pressure off in the weeks leading up to Christmas (‘What do I get my brother-in-law? He has no hobbies or interests!!’), stopped waste on mediocre presents, yet kept Christmas as a time of bounty for the young children. As a mark of special affection the grandparents still got gifts too. In the end this family found their system not only worked well financially but helped make Christmas more meaningful and enjoyable. Families have all sorts of schemes for limiting the financial damage of Christmas shopping: i i i
Taking it in turns to put on and pay for Christmas dinner. Placing a cash limit on presents. Buying a single ‘family’ gift for each adult, in place of gifts from everyone.
Apart from Christmas there are a number of other things to do about gift-giving over the 104 weeks of your savings period: i
120
Ask your family (and your partner’s family if relevant) to give you cash instead of birthday and religious festival presents.
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i
i
Perhaps family members will let you place into your savings account the money you would have spent on gifts for them. Like giving to charity, this sort of sacrifice may be gratifying to them. Consider making gifts for family and friends. With craftwork the cost of materials might be small and it’s your time and labour which make the savings.
How much could you save in this way? Add up the family members that you are able to include, and then look at the table. Although the left-hand column of the table looks at how many gifts you give each year, the body of the table presents savings over a 104-week period. This would include four occasions, such as two birthdays and two Christmases (or equivalent events). Gift giving—reorganised and showing savings over 104 weeks Average value of each present Number of presents each year
$10
$20
$30
$50
$70
$100
$150
$200
$800
2
$40
$80
$120
$200
$280
$400
$600
3
$60
$120
$180
$300
$420
$600
$900 $1200
4
$80
$160
$240
$400
$560
$800 $1200 $1600
5
$100
$200
$300
$500
$700 $1000 $1500 $2000
6
$120
$240
$360
$600
$840 $1200 $1800 $2400
7
$140
$280
$420
$700
$980 $1400 $2100 $2800
8
$160
$320
$480
$800 $1120 $1600 $2400 $3200
9
$180
$360
$540
$900 $1260 $1800 $2700 $3600
10
$200
$400
$600 $1000 $1400 $2000 $3000 $4000
For example, let’s assume by way of illustration that you have a partner and, between you, three parents living. You and your partner give each other birthday and Christmas/holiday presents worth $50 each, and you receive presents worth $30 on similar occasions 121
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from your parents. Using the table, this means, over the 104-week savings period, that you will set aside 4 $50 per year and 8 $30 per year in money which would otherwise be spent on presents by you. This totals $880. And if your parents and parents-in-law agree to let you keep cash instead of paying them presents for two birthdays and two Christmases, this adds a further $120 per parent. The total is a significant $1000-plus. Now, if you are more generous to each other—say, you and your partner tend to give each other presents worth around $100 on each occasion—your total moves to $1400. So, work out your present-giving practices and, using the table, see what you can shift to the home deposit worksheet at page 37. Remember, you can always break away from the plan if circumstances warrant it—for example, if someone is unwell or you feel particularly grateful for some reason. It’s not a trap—it’s just a guide for planning. The main thing with family is to be generous and loving. Don’t approach this if you feel you could end up looking mean or feeling like you’re ripping them off. It has to be a cooperative thing or it won’t work. As I say, in some sections of the community it is automatic to make substantial financial or other sacrifices to help a member get ahead. But if that’s not your family then don’t push the point.
THE SUBSIDY APPROACH When the government wants to encourage someone to use their initiative it doesn’t generally just hand over a sum of money. There are conditions attached. And, sometimes, these conditions provide a real incentive for a person or organisation to raise most of the money themselves. So, for example, an organisation which wants to do some important research into the causes of an illness might obtain a promise from the government to top up the funds it gets from community donations. It might be a formula like ‘for every two dollars you raise, the government will provide an additional one dollar’. The harder 122
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the organisation works at ‘saving’ or finding donations, the more dollars it will get from the government too. Do little and you will receive little. This idea will appeal strongly to certain families for the same reasons. Essentially, it rewards the ‘doer’ for their effort and commitment. It deals forcefully with the concern many parents have of letting their children get things too easily. ‘If they don’t work for it they won’t appreciate it.’ That’s fair enough too. OK, so maybe your parents will agree to provide a subsidy. Even a small subsidy will help—particularly once your worksheet takes shape and you can see where the money comes from and how it adds up to your total deposit. What about a one-for-ten subsidy? That’s ten cents for every dollar you set aside for the cause. Not much? On the contrary. If you manage to save $30 000 that onefor-ten subsidy will mean an additional $3000. If your planned deposit is only $15 000 the subsidy is still a meaningful and valuable $1500. Some parents or family members might even consider a super-subsidy, paying you more than you save yourself—say, $2 for every dollar you save. Now that would be a dramatic incentive! Check out the savings subsidy table on page 125. If your relatives are willing, discuss the idea and the amount. It need not be a straight gift either. You might agree to make it a loan, repayable at some future time. And, rather than a lump sum at the end, perhaps it might be easier all round if the subsidy dribbles across to your account week by week—a weekly $20 hurts less than finding $2080 at the end of the 104-week savings period. If any money changes hands on the understanding that it is a loan and not a gift it is wise to do two things: i i
Get a solicitor to write up the arrangement. Keep accurate financial records, including dates and amounts paid.
In some families you might want to put it in writing that the money is a gift. The situation of a subsidy or loan from your parents (or other 123
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relatives) must be contrasted with the other possibility: becoming a guarantor. This is a very dangerous way for one family member to assist another to buy a home or borrow money for other purposes. Here’s how it works: your parents want to see you get a home of your own but they have no spare cash or don’t want to put their own cash into the purchase. However, you don’t have enough money to use as a deposit on the home, or your income is too low to adequately support the loan (mortgage). In these circumstances it may be possible to satisfy the lender (such as your bank) by having your parents back you up with a guarantee—a promise to make good any default you make on the loan. Generally, this takes place where the borrower’s parents own their home—this property is put at risk. Sometimes things go wrong and the borrower loses their job, gets sick or otherwise can’t meet the monthly mortgage repayments. If this situation continues the bank or other lender will look to the guarantor to pay back what is owing. Often the debt will be covered by a sale of the borrower’s home. But sometimes things go from bad to worse—such as where the property values are in decline or if there has been a fire and the home wasn’t fully insured. In these circumstances the guarantor can be compelled by law to pay the debt owed to the lender, even if this means the guarantor’s home must also be sold. What a tragedy all round! And it happens. Make sure whatever arrangement you reach with your parents is documented by a solicitor. Even if legal, the arrangement should still be fair to all. You don’t want to end up in the position where you own your new home but have no relatives willing to come around and freeload off your hospitality! If your parents or relatives are pensioners be aware that their pension entitlement may be affected if they give away more than $10 000 in any one financial year (with a maximum of $25 000 in any three-year period). Seek advice from Centrelink first. If you can set up a subsidy arrangement, move the appropriate total to your home deposit worksheet on page 35. 124
$5000 $20 000
$2 for $1
$3333
$1 for $3 $10 000
$2500
$1 for $4
$1 for $1
$2000
$1 for $5
$1 for $2
$1000
$1 for $10
$30 000
$15 000
$7500
$5000
$3750
$3000
$1500
$1000
$750
$666
$1 for $15
$500
$1 for $20
$15 000
$300
$10 000
$1 for every $50 you save $200
Subsidy
$40 000
$20 000
$10 000
$6666
$5000
$4000
$2000
$1333
$1000
$400
$20 000
$50 000
$25 000
$12 500
$8333
$6250
$5000
$2500
$1666
$1250
$500
$25 000
$60 000
$30 000
$15 000
$10 000
$7500
$6000
$3000
$2000
$1500
$600
$30 000
Deposit target
A savings subsidy—what it’s worth to you
$70 000
$35 000
$17 500
$11 666
$8750
$7000
$3500
$2333
$1750
$700
$35 000
$80 000
$40 000
$20 000
$13 333
$10 000
$8000
$4000
$2666
$2000
$800
$40 000
$90 000
$45 000
$22 500
$15 000
$11 250
$9000
$4500
$3000
$2250
$900
$45 000
$100 000
$50 000
$25 000
$16 666
$12 500
$10 000
$5000
$3333
$2500
$1000
$50 000
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All for one Lena’s father, Joe, was living on his own. He had had enough of the city and wanted to move to a country town. Property was cheap there so he thought he should buy a home where he could find some security. But he didn’t have enough money for the deposit. Joe had half the money necessary to buy a typical home in the town. And this is when the family stepped in. Lena and her brother—neither of whom owned their own home—were both in steady employment. They had each saved a little money but were a long way off from being in a position to buy a home. Rent and living expenses in the city seemed to eat up most of what they earned. Still, when the call came they kicked in most of their savings to help their father raise the deposit to buy his home straight away. There would be no period of renting or ‘lost money’. On the title to the property Lena and her brother are shown as having a quarter share each, alongside Joe’s half share. Neither Lena nor her brother are married yet. They are both still renting flats in the city. But when the time comes they know they can rely on each other to help put together a home deposit.
MOVING IN TOGETHER This is the one most of us are likely to dread. Yet the savings are huge if you are paying market rent for your accommodation now. The question is, can you move back home—or into your partner’s family home—for a short period in order to save for your own home? It’s an issue that has to be considered carefully and thoroughly. Many of us spent effort and time trying to work our way out of our parents’ home, which is a natural process and part of establishing an independent life. Going back has the potential to open old wounds. It is not something done lightly. 126
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For many others, however, the family home remains a place of comfort and stability in a changing world. We enjoy going home where we feel we can finally drop the masks and be ourselves, warts and all. But the money side is important too. Anyone who rents their accommodation knows it is a huge drain on their income (even if they are receiving rent assistance from Centrelink). It would be wrong, however, to call rent ‘dead money’ as so many people do. Renting can be a legitimate choice ahead of buying a home for lifestyle reasons (as discussed in the book’s introduction). How much can you save by changing your rent situation?
SAVING RENT The table on page 128 shows the cost of renting over a period of 104 weeks. If you are paying $200 per week in rent, for example, you can see that the total for this period is $20 800. By moving in with your parents you can save this amount. Alternatively, you might move back home but still contribute a set amount per week to your parents as a sort of rent (above and beyond normal food and other ‘living’ expenses). For example, your old rent might be $200 per week but you will pay $50 weekly to your parents for letting you stay. From the table look at the entry for $200 minus $50 = $150, and see the 104-week saving as $15 600. You should also understand that if you pay a regular sum of money as rent to your parents it becomes income in their hands and may be taxable. For readers in some parts of the country these rents might seem extremely high. However, for our purposes, the table assumes a more modest level of rent or board is being paid. Even a small weekly saving on rent will amount to thousands of dollars over 104 weeks. For this amount of saving, could you handle moving back with your parents or parents-in-law? Now here’s the thing: I’d recommend you don’t do it for the full 104 weeks. You can make a big saving, in a more realistic way, if you limit the amount of time you live at your parents’ home. Think of it like 127
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Moving back home—what you’ll save Weekly saving on rent you pay now
Weekly saving over 104 weeks
(after deducting any contribution to your parent/s)
$25
$2600
$50
$5200
$75
$7800
$100
$10 400
$125
$13 000
$150
$15 600
$175
$18 200
$200
$20 800
$225
$23 400
$250
$26 000
$275
$28 600
$300
$31 200
$325
$33 800
$350
$36 400
$375
$39 000
$400
$41 600
$425
$44 200
$450
$46 800
$475
$49 400
$500
$52 000
$525
$54 600
$550
$57 200
$575
$59 800
$600
$62 400
this: when are you going to be most motivated to make it work? The obvious answer is: right at the beginning. If you don’t think you will be able to last 104 weeks with your parents, try it for the first 26 weeks of your savings period. This is the time when everyone—you, your partner and your parents or parents-in-law—will be most tuned in for success. Everyone will 128
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want to make it work. What’s more, the end is quickly in sight. After 26 weeks you move out again. And at a rent saving of, say, $200 per week, you’ll have saved $5200 towards your home deposit. But there’s more you can probably do. I’d even suggest putting in a second period of living with the parents provided your moving and lease exit costs are minimal. This time look at the end of your 104-week savings regime. In the last few months your motivation will soar again. Your savings will be mounting up and, if you are proceeding according to the plan in your worksheet, you will know you are close to your deposit goal. This is the time to go looking at real estate and narrowing your broad property focus towards your selection. If you’ve followed your plan, albeit with occasional lapses, this will be a fun time. Why not consider moving back home for this period too? This option is only realistic, however, if you can move home easily and at low cost—perhaps you have a friend with a truck. Be careful not to run up expenses for breaking a lease. There will be some ancillary costs to consider, including connection/disconnection costs for phones, electricity, gas and letting agent costs/bond hassles. Add a further 26 weeks’ worth of rent savings and your $5200 in the tin becomes $10 400. Deduct your expenses. Check the table on page 130.
ANYTHING . . . BUT NOT MY PARENTS! Here’s an alternative that is less dramatic but is still a powerful tool for savings: sharing a flat with friends or even with strangers. The rent savings will still be significant. You can use the ‘moving home’ saving table to work out how much money you could save in this way. Remember that even a mere $50 saved per week will bring you $5200 after 104 weeks. Have you got good friends who are also motivated to save for a home of their own? Work cooperatively towards your goals. A further alternative is to get your parents to move in with you. This puts the shoe on the other foot in some important psychological 129
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Moving back home—what you’ll save (cont’d) Weekly saving on rent you Weekly saving over pay now (after deducting any 26 weeks contribution to your parent/s)
Weekly saving over two periods of 26 weeks
$25
$650
$1300
$50
$1300
$2600
$75
$1950
$3900
$100
$2600
$5200
$125
$3250
$6500
$150
$3900
$7800
$175
$4550
$9100
$200
$5200
$10 400
$225
$5850
$11 700
$250
$6500
$13 000
$275
$7150
$14 300
$300
$7800
$15 600
$325
$8450
$16 900
$350
$9100
$18 200
$375
$9750
$19 500
$400
$10 400
$20 800
$425
$11 050
$22 100
$450
$11 700
$23 400
$475
$12 350
$24 700
$500
$13 000
$26 000
$525
$13 650
$27 300
$550
$14 300
$28 600
$575
$14 950
$29 900
$600
$15 600
$31 200
Now take the relevant savings figure and move it onto your home deposit worksheet on page 37.
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ways. It’s not their home. It’s not the place where you were a little kid. They can share the overall rent burden. There are situations in which this could work out well for all concerned. For example, your parents might want to take a few months to travel across Australia. They might be in the process of selling their home and taking to the roads in a campervan—part of the wave of Australian ‘Grey Nomads’, as they are known. They’ll just move their furniture in with you and give you a few dollars for looking after it. It’s a way of sharing the savings your parents will make by not having a mortgage or rent to pay on their own home. Of course, if your parents are off travelling for an extended period, you could babysit their home and make a rent saving. Finally, would you consider moving to a cheaper rental area or to a smaller property in the short term? For 104 weeks could you drop one bedroom, lose a garage or pool, or shift a suburb or two further away from the action (the beach, the shopping mall, the park, etc.)? Once you start looking at your family and the needs of the various members you might find that other creative strategies come to light. For example, you mightn’t be the only ones wanting to cut living expenses in the short term while saving for a home! Families that work cooperatively are capable of achieving financial goals rapidly. Use the tables and take a figure to the home deposit worksheet.
Saving money while they slept ‘You guys don’t get it, do you? You just don’t get it!’ This Lebanese-Australian man was complaining to an AngloAustralian friend about the latter’s attitude to getting a home. ‘You’ve got to work together. It’s all about family. ‘I’ve got two younger brothers who moved in together into a small flat. They had their hearts set on owning their own homes— not one but two properties—in as fast a time as possible. This meant making what you might think of as “sacrifices”.
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‘To keep rent costs as low as possible they found a onebedroom flat. They both worked shiftwork but they made sure they were never on the same shift. I tell you, that bed never got cold! ‘That’s right—they shared the one bed. As one brother came in from work the other got out of that bed and headed for the door. ‘After three years of living like this they had saved enough money so each one could buy his own place. ‘It might seem unusual or a sacrifice to do this, but in my family we are used to living more as a community. We share, we cooperate and don’t feel we have to compete all the time. And we all end up better off as a result.’
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Can you work on your savings with your parents, parentsin-law or other friends and relatives? Many families and some cultures have a cooperative approach to buying and renovating homes. Is your self-sufficiency costing you a high price? Within the family think about how you can help each other to reach financial goals. This could involve areas such as: building work, renovation, gift-giving, storage and moving in together. Is there a relative who would like to help you financially but who wants to see you work hard for your goal? Discuss the option of sponsorship on a dollar-for-dollar basis or according to some other formula which meets mutual aims. Be prepared for The Lecture. It is probably based on love and concern rather than as some kind of put-down. Don’t involve your parents, friends or family if you think, ultimately, it will upset them or adversely affect relationships. Everyone must be keen on the idea and happy to part with the cash.
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If money is changing hands as a result of your strategy, try and make it flow in small amounts rather than as a bigger lump at the end. If significant sums of money will pass your way as a loan it is wise to get the arrangement written up by a solicitor so that everyone knows precisely where they stand. Be scrupulous about documenting dates and amounts. In stark contrast is the situation where a family member goes guarantor for your home loan. Rarely, in my experience, is this a prudent thing to do. Your solicitors should advise you on this and discuss the significant dangers with you all.
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CHAPTER
9
HOW ESSENTIAL ARE THE ‘ESSENTIALS’? As I write this page it is summer. There’s been a run of days with temperatures up in the thirties and the beach is calling. When Australians holiday they cannot resist the siren call of the water. Fishing, surfing or just lying in the sun with the tang of salt in the air. And it seems we’ll do whatever it takes to get a home near the water or, ideally, with a water view. I recently heard of a young couple who heeded the call and moved closer to the beach. About ten minutes closer (by car). They closed the door for the last time on the two-bedroom apartment which had been their home for some time (rent: $200 per week) and shifted a few suburbs to their new two-bedroom apartment (rent: $400 per week). They were now closer to the beach though they still could not see the water or hear the surf pound the sand. A ten-minute walk or five-minute run would get their feet wet, so they were reasonably close. They no longer required the car to make the trip. If this couple wanted to save the deposit for a home, what has the move cost them? Over 104 weeks they’ll ‘unsave’ $20 800. And then there was around $400 in removalist expenses and $300 in lease fees and sundries. Let’s say a total of $21 500. If they saved nothing else other than this $21 500 they would have the minimum 5 per cent deposit the bank would require for the 134
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purchase of the beach-suburb apartment into which they have moved. The apartment is worth $400 000. If they worked on a savings plan for 104 weeks at the old address they might well have reached a 10 per cent deposit. Of course, they would still need a high income to support a huge loan. But, as a matter of fact, the couple did earn around $200 000 a year between them. That’s one of the reasons they could afford to jump from a weekly rent of $200 to one costing them double. Many people in Australia are able to afford to put immediate lifestyle issues ahead of long-term saving or home ownership. That’s one of the great things about living in Australia and I support it wholeheartedly. Why live where you are unhappy? Why not be where you would love to be? And I would add to the list, ‘Why not own your home if that’s your dream?’ The example of the beach-loving couple is not put here as a profound example of buying a home on a small percentage deposit and getting into huge debt. The point, for the moment, is to open up the area of what we would call—when doing a home family budget—‘fixed’ costs. Rent is generally regarded as a fixed cost of living. It’s something we can’t readily change. It’s just there. Well it isn’t. Let me give two other illustrations. In regional areas (that is, what city people call the ‘country’ or ‘the bush’), if you can afford even just an extra $20 per week in rent you can make significant improvements to your standard of living. You’ll move from a fairly Spartan but clean old flat to one with proper heating throughout, maybe airconditioning too, a newer kitchen and bathroom and probably more space. In Sydney and Melbourne during 2001–02 there was an upward explosion in the value of homes and an accompanying sharp decline in the rent that could be charged for them. This affected many parts of the two cities. The Commonwealth Government’s First Home Owner Grant played a significant role in this— why continue to rent when the government was handing out up to $14 000 if you became an owner? Other factors were at play too. It was not uncommon to see rents fall by 15–20 per cent. In parts of 135
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the eastern suburbs of Sydney I saw $600-per-week rents drop to $500 and the high $400s. It was not just vacant properties which were experiencing the rent collapse. Smart tenants whose leases had expired were negotiating hard with landlords and agents. Thanks to the drought of tenants they were able to slash the rent they were paying to stay in the same place. Savings were there to be made—if you acted now. Everyone knew it was just a blip. Rents would eventually come back to their natural level. But there was an opportunity to lock in a good rent deal in return for giving the landlord the security of a tenant for a fixed term and the assurance of a fair, but reduced, income from the property. If you must stay where you are, yes, it is true, your rent is a fixed part of your personal budget. But is that how you want it to stay? Do current circumstances—either in the wider economy, your local area or personally—suggest useful ways to change your situation?
PREPARING A BUDGET Following is a worksheet for a household budget. It’s broken into sections for fixed expenses, discretionary expenses and income. On pp. 141–5 I’ve provided an example of a completed budget.
136
Loan repayments (credit cards, personal loans, etc.)
Subscriptions & memberships
Insurance—other
Insurance—hospital
Insurance—life
Insurance—contents
Car—registration
Car—insurance
Car—servicing and repairs
Car—fuel
Public transport
Telephone—mobile
Telephone—fixed line
Gas
Electricity
Rent
Item
FIXED EXPENSES Jul
Aug
Sep
Oct
Budget for a non-homeowner
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Yearly total
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Jul
Chemist
Shoes
Clothing
Entertainment
Recreational drugs
Other
Cigarettes
Alcohol
Food at home
Cost
Jul
DISCRETIONARY EXPENSES
Total
Fees—other
Fees—bank
dental, etc.
Fees—medical,
Fees—school
Superannuation
Childcare
Item (continued)
Aug
Aug
Sep
Sep
Oct
Oct
Nov
Nov
Dec
Dec
Jan
Jan
Feb
Feb
Mar
Mar
Apr
Apr
May
May
Jun
Jun
Yearly total
$
Yearly total
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$
3 Medical and similar expenses should be shown after allowing for any refund from Medicare or your health fund.
more takeaway food, for example.
2 Allow for variations due to holidays. On holiday the usual expenses often change—you might buy fewer newspapers but more magazines, or eat
employer). If you claim any expenses on your tax return as deductions you should calculate the net cost to you and put that figure here.
return) and sometimes expenses like travel or food may be tax deductible as work expenses (for which you were not reimbursed by your
1 Remember to use net or ‘after tax’ money for your expenses. For example, union fees, accountancy fees (for assistance in preparing your tax
Notes
Total
Other
Health therapies (massage, chiro, physio, naturopath, etc.)
Boat, trail bike or other
Hobbies
Eating out
Sport
Gifts
Video, DVD hire
CDs, DVDs, etc. purchased
Books
Newspapers, magazines
Holidays
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My household budget Income and expenses
Value ($) over one year
Income (after tax)
...................
Wages or salary (main job)
...................
Wages from additional casual or part-time job
...................
Bank or other account interest
...................
Shares dividends
...................
Distribution from managed funds
...................
Centrelink or other government benefits
...................
Other
................... Total income
$_____________________
Expenses Fixed expenses
....................
Discretionary expenses
....................
140
Total expenses
$______________________
Total income minus total expenses
$______________________
Electricity
33 86 125
Telephone—mobile
Public transport
Car—fuel
–
(motor bike)
Insurance—other 280
256
Insurance—life
Insurance—hospital
–
compulsory insurance
Insurance—contents
–
400
Car—registration &
300
and repairs
Car—insurance
Car—servicing
100
Telephone—fixed line
–
400
Rent
Gas
Jul
866
Item
FIXED EXPENSES
–
–
–
–
–
–
125
86
33
100
–
866
Aug
–
–
–
370
–
–
–
125
86
56
120
–
–
866
Sep
–
256
–
–
550
–
150
125
86
60
90
–
250
866
Oct
–
–
–
–
–
–
–
125
86
33
80
–
–
866
Nov
–
–
–
–
–
–
–
125
86
33
120
–
–
866
Dec
Jan
–
256
–
–
–
–
–
125
86
66
100
–
250
866
Illustration: Budget for a non-homeowner
Feb
–
–
–
–
–
–
460
125
86
50
100
–
–
866
Mar
–
–
–
–
–
–
–
125
86
33
70
–
–
866
Apr
–
256
–
–
–
–
80
125
86
33
90
–
300
866
May
–
–
–
–
–
–
–
125
86
33
100
–
–
866
Jun
–
–
–
–
–
–
–
125
86
50
110
–
–
866
280
1024
0
370
550
400
990
1500
1032
513
1180
0
1200
10 400
Yearly total
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10 –
Fees—bank
Fees—other
Total
25
–
–
360
50
120
Jul
dental, etc.
Fees—medical,
Fees—school
contributions)
(additional
Superannuation
Childcare
personal loans, etc.)
(credit cards,
Loan repayments
memberships
Subscriptions &
Item (continued)
–
10
25
–
–
360
50
–
Aug
–
10
10
–
–
360
50
–
Sep
–
10
–
–
–
360
50
–
Oct
–
10
–
–
–
360
60
–
Nov
–
10
10
–
–
180
75
–
Dec
–
10
10
–
–
0
80
–
Jan
–
10
10
–
–
360
60
–
Feb
–
10
–
–
–
360
50
–
Mar
–
10
–
–
–
360
50
–
Apr
–
10
–
–
–
360
50
–
May
–
10
–
–
–
360
50
–
Jun
$24 224
0
120
90
0
0
3780
675
120
Yearly total
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Jul
120 20 30
Video, DVD hire
Gifts
30
purchased
CDs, DVDs, etc.
Books
magazines 40
200
Holidays
Newspapers,
– 15
Chemist
100
Clothing
Shoes
130
drugs
Entertainment
–
60
Cigarettes
Other recreational
120
50
350
Alcohol
toiletries etc.
Household cleaning,
Food at home
Item
30
20
–
–
40
–
15
–
100
130
–
60
120
50
350
Aug
Discretionary expenses Sep
100
20
–
–
40
–
15
–
100
130
–
60
120
50
350
Oct
20
20
20
15
40
–
15
–
100
130
–
60
120
50
350
Nov
20
20
–
–
40
–
15
70
100
130
–
60
120
50
350
Dec
500
20
120
–
40
–
15
–
100
130
120
60
200
50
350
Jan
20
20
50
–
40
500
15
90
100
130
120
60
150
50
350
Feb
20
20
–
30
40
–
15
–
100
130
–
60
120
50
350
Mar
30
20
–
–
40
–
15
–
100
130
–
60
120
50
350
Apr
30
20
–
–
40
–
15
–
100
130
–
60
120
50
350
May
100
20
30
–
40
–
15
30
100
130
–
60
120
50
350
Jun
20
20
–
15
40
–
15
–
100
130
–
60
120
50
350
920
240
340
90
480
700
180
190
1200
1560
240
720
1550
600
4200
Yearly total
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110 10
Eating out
Hobbies
or other
Total
Other (donations)
etc.)
physio, naturopath,
(massage, chiro,
Health therapies
30
30
10
15
Sport
Boat, trail bike
Jul
Item (continued)
30
30
10
10
110
15
Aug
30
30
10
10
110
15
Sep
30
30
10
10
110
15
Oct
30
30
10
10
110
15
Nov
30
30
10
10
150
15
Dec
30
30
10
10
200
15
Jan
30
30
10
10
110
15
Feb
30
30
10
10
110
15
Mar
30
30
10
10
110
15
Apr
30
30
10
10
110
15
May
30
30
10
10
110
15
Jun
$15 800
360
360
120
120
1450
180
Yearly total
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My household budget Income and expenses
Value ($) over one year
Income (after tax) Wages or salary (main job)—mine
15 500
—My partner’s
25 450
Wages from additional casual or part-time job Bank or other account interest Shares dividends
0 1 120
Distribution from managed funds
–
Centrelink or other government benefits
–
Other
– Total income
$41 071
Expenses Fixed expenses
$24 224
Discretionary expenses
$15 800
Total expenses Total income minus total expenses
$40 024 $1047
You might like to have a go at filling in the budget worksheet yourself. It’s more accurate if you pull out the old bills and put in genuine figures rather than estimates, but in some places you’ve just got to make a guess. A personal budget is one of the foundation tools of good financial planning. But if it contains more guesses than facts it can be an unhelpful guide. Much of what we’ve looked at elsewhere in the book could be termed discretionary expenses—entertainment, lunches, food generally, clothing, CDs, magazines and so on. This means you’ve got a lot of say about whether to keep paying them or not. This is the column we first go to when we know we’re living beyond our means. We rummage around in the discretionary expenses hat and hope to solve our debt or lack-of-savings problems. 145
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I’d have to say, however, that I’ve rarely known anyone to pull the proverbial life-saving rabbit out of this particular hat. Most of us will also need to expand our income (chapter 6). In this chapter, we’ll look at what to do with ‘fixed expenses’ as we look to marshal all our resources to the task of getting that home deposit in 104 weeks.
RENT Savings on rent were largely dealt with in chapter 8. I only mention the issue again here as it’s an important part of the household budgeting process. Once your current lease expires what will you do? Will you take the opportunity to cut costs? Pull out the lease document and check what period of notice you must give if you intend departing.
ENERGY Since 1 January 2002 in New South Wales and Victoria it has been possible for consumers to choose their electricity providers (gas, too, for the Australian Capital Territory and New South Wales from this date). Other States may follow in due course and to different timetables. You can leave the company you’re with and take up with a different retailer. Just as we’ve found with phone companies, this can lead to savings— and confusion. Energy costs are high and getting more expensive, so make a few phone calls and see what competition can do for you. Move any savings to the home deposit worksheet on page 36.
LOANS In chapter 4 we looked at interest rates for various types of loans and how you should consider restructuring any loans so you are paying less wasted interest. Now we should put a dollar figure on this for personal loans. 146
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For example, if you can’t pay off your credit card—the new bed, skis, clothes, computer, etc.—you are probably paying something like 15–16 per cent interest on this debt. If you were to go to your bank, building society or credit union and restructure this out of the credit card and into a personal loan you would be paying 9–13 per cent interest. (Out of interest, if you could roll it into a home loan—once you’ve got one—the interest rate would fall to something like 6–7 per cent.) All figures are at the time of writing—they may have changed by the time you read this, although the margins between the various rates will probably remain much the same. On an outstanding credit card balance of $8000, this represents a saving over 104 weeks of something like $680 if you move the debt to a personal loan ($1440 if you move the debt to a home loan). As mentioned earlier, there are problems with doing this as you turn a short-term debt (one you might pay off within say one or two years) into a debt which is structured to take five, 25 or even 30 years to pay off completely. In so doing you will pay an enormous amount more in interest than if you stuck with the debt on the credit card and paid it off quickly. Whatever you do, make sure you discuss the options with your lender and, if you are in deeper financial troubles, with a financial counsellor before proceeding. Check with your bank and, if restructuring your debts, move any savings to the home deposit worksheet on page 36.
TRANSPORT Do you know what your car or cars are costing you? The NRMA has done the calculations on running costs as at June 2002. For example, let’s take a car three or less years old. Assume you travel 15 000 kilometres each year and that you’ve borrowed 75 per cent of the purchase price for the car. You insure it and get it serviced. The average weekly cost of owning a small Hyundai Accent three-door manual hatch back (1.5 litre engine) is $108.70, a Toyota Corolla Conquest automatic (1.8 litre) is $155.67, a people-mover 147
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such as the Toyota Tarago Gli automatic (2.4 litre) is $244.21, a fashionable 4WD like the Subaru Forester automatic is $192.68 and a family-sized Holden Commodore Executive automatic (3.8 litre) is $187.74. It seems unrealistic, doesn’t it? Not when you add it all up: i i i i i i i i i i
interest on the loan registration compulsory third party insurance comprehensive insurance servicing tyres fuel motoring association membership repairs depreciation (loss of value as the car gets older)
It’s not hard to spend the best part of $14 000 to $16 000 over 104 weeks on a fairly new model car. Two cars and you could be doubling this. Just one single, heavily financed, newish car represents a home deposit throughout most of regional Australia and in some capitals too. Of course, if you own a much older vehicle you start to save— insurance, depreciation, car finance—and you might skip some servicing and not bother with the odd repair. But if you have a car which is no more than five years old it will be costing you a substantial sum. Two cars and you’re splashing the money around— you’re making a lot of businesses happy. Can you move back to a one-car household? Would you consider selling your only car and relying on public transport for a while? These are big decisions. You might be locked into a finance contract, for example, or be unable to pay out your loan with what you would get for selling the car now. Still, take a look at the figures and ask your lender for an early payout figure. Get out your bills and see what the car or cars are costing you. Older cars can start costing plenty when they misbehave and become unreliable. 148
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How much can you save on transport? Getting rid of a second car should save you at least $4000 over 104 weeks in registration, compulsory insurance, minimal other insurance, motoring association membership, basic necessary maintenance and fuel. And that’s on a simple old car with no finance owing. For newer cars which are financed check the NRMA website <www.nrma.com.au>, RACV or your motoring association for an all-up weekly cost. Multiply the figure by 104 weeks to get your savings estimate. Add back into the mix the extra cost of public transport before moving any savings to the home deposit worksheet on page 36. If you are using public transport consider ways of reducing costs: i i i
Buying weekly or longer-term tickets to get a discount. Getting a lift with a colleague. Moving home closer to work or college—there are massive savings if you can walk or cycle instead.
Going public Nick worked for the bank. He was young, single and without any responsibilities whatsoever. As most of his forms of entertainment were cheap he found he had no difficulty saving up a home deposit. In fact, he didn’t have much time for a social life because his work hours were so extreme. But the bank helped him out with the money side of things too. Yet the mortgage costs would be crippling! Nick decided he would have to choose his financial strategy carefully or his life— as he knew and enjoyed it—would effectively be over. Nick’s strategy involved getting rid of his car. It was a few years old now and not as glamorous or exciting as it used to be. If he could live without the car he realised he could afford a bigger mortgage and could live in a more stimulating environment. So he bought a house in inner-city Sydney. It was a tiny semi but it was near some major transport routes and a host of clubs 149
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and movie theatres. He could almost walk to the city centre too— except he wasn’t that inclined towards exercise. He sold the car and took the bus to work. When he needed to come home late at night or to go somewhere off the beaten track he called a taxi. ‘The combination of taxis and buses worked out much cheaper than owning my car,’ he says. ‘The convenience of the car was costing me thousands of dollars each year.’ Nick would advise others to close the car door and not look back. But you must consider your location if you really want this to work. ‘Living on the edge of the city made it all the more feasible. In fact owning a car in the inner city—without having offstreet parking at home—was a problem. And finding parking was a real issue for most of the places I tended to go.’
COMMUNICATION The pressures of time and modern living have made us leap at the benefits of owning mobile phones. Where would we be without them now? Yet it’s only a few years ago that we managed somehow to get by with only fixed-line phones and the mass of vandalised public phones. A family I know has five mobile phones for four people. Three are on minimum $15 plans, one is on a $30 plan and the other is on a $70 plan. Mobile telephony is costing them $3480 over a period of 104 weeks—extra if they make more than the cost-included calls. Then there is the home landline phone, Internet usage and pay TV. It’s quite a bundle of services. I’m not advocating throwing away the mobile phone or other useful communication services. But you owe it to yourself to review the situation in light of your goal. i
150
Can you share a mobile phone or phones rather than everyone having their own? Get rid of one most basic phone plans and you’re adding at least $360 to your savings worksheet (for a $15 monthly plan over 104 weeks).
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i
i i
Look at the bills: are you using all your ‘cost-included’ calls for each phone contract? Does anyone in the family use a phone plan which is out of step with their usage pattern? If you are out of contract get quotes from other phone companies. Better deals may now exist. Major carriers offer discounts on total bills if you combine several phone services, sometimes in combination with pay TV or Internet. Would you save money by bringing them together?
Check the deals and add any savings to the home desposit worksheet on page 36.
INSURANCE As a general rule throughout life it is good to reassess your insurance needs from time to time. They do not remain constant. You may be underinsured or you may find you are paying too much. I’ll give you an example. Once when I moved home it was also time to pay my car insurance. As I was about to hand over the cheque I decided to ask if I was paying the right premium. They looked up their database and said ‘no’. The renewal slip in my hand was based on my old address. The new address attracted a cheaper rate. Similarly, I tend to let my hospital insurance just run on from year to year. But when I read about a way of reducing the cost substantially—while still retaining a top level of cover—I jumped at it. The reduction was based on having to pay an ‘excess’ before I could make a hospital claim. That was fine by me. I even saved money on my life insurance by switching companies. Newer policies offered better benefits and came at a cheaper cost than the one I had taken out years previously. How long is it since you read the brochures and compared policies and insurance companies? Are you insuring your car for too much? Do you make good use of any ‘extras’ cover on your health 151
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insurance? Maybe you’ve lost some valuable jewellery or sold items which boosted your insurance cover. Are you underinsuring your household contents? That too is a problem. Pull your policies out of the drawer and make a few phone calls. If you have a lot of insurance policies you might want to contact an insurance broker and see if they can save you money. I just checked my car insurance which is due for renewal today. I found I’ll save $160 by taking my business to another insurer. That’s maybe $320 in savings over 104 weeks. Now I’ll get some quotes on my home insurance just to check if I’m keeping pace with the best prices. Make a few calls and take any savings to the home deposit worksheet on page 36.
MEMBERSHIPS AND SUBSCRIPTIONS Do you belong to a gym? Do you use your membership to the point where it gives you real value? Any magazine subscriptions or club memberships which are expensive? Only you know the true value these things bring to you. If you can save $500 a year by jogging round the park instead of on the gym carpet, now is the time to get into the great outdoors. But whatever you do, don’t give up on exercise. If the gym, yoga, tai chi or cycle club motivates you, then keep it going. Your health is more important than buying a home. But if, on reflection, it’s a dud then liquidate it. Move savings to your home deposit worksheet on page 36.
SUPERANNUATION Australia’s superannuation guarantee charge means your employer is putting aside money for your retirement (unless your wage is below a specified cut-off). The guarantee is currently 9 per cent of your salary. Generally speaking you can’t access it until you permanently leave the workforce—it is ‘preserved’ until then. For anyone born 152
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after 30 June 1964 their preservation age is 60 (see table). (In very special circumstances it may be possible to get your super early, usually because of some great hardship being suffered.) During this time it grows through interest and other earnings of the superannuation fund, and it is taxed at a concessional rate. So, in theory, your investment in superannuation works harder for you than money you might otherwise earn. Preservation ages—when can you get your super out? Date of your birth
Your preservation age
Before 1 July 1960
55
1/7/60 to 30/6/61
56
1/7/61 to 30/6/62
57
1/7/62 to 30/6/63
58
1/7/63 to 30/6/64
59
After 30 June 1964
60
Self-employed people have no one to pay super for them so they must plan more fully for their own retirement. Again, there are government incentives (concessional taxation) to lock money away in superannuation. What we know is that the superannuation guarantee in itself will not provide for a financially secure retirement. Nine per cent? You probably need more like 15 per cent! And this amount should be set aside from the time you first start adult work until the time you retire. Then you’ll have something to rely on. After all, we are living longer—the average life expectancy for an Australian born now is almost 77 for males and 82 for females. How long have you got left to plan for?
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Average life expectancies in Australia (in years) Your age now
Women
Men
0
82.00
76.60
30
51.98
46.79
40
42.28
37.41
50
32.80
28.18
55
28.24
23.78
60
23.83
19.62
65
19.61
15.82
70
15.67
12.45
Source: Australian Bureau of Statistics
There are plenty of things we can do to plan for our retirement. Arguably the best of these—in Australia at least—is to buy your home and pay it off as quickly as you can and then start investing elsewhere the money you were previously paying each month on the mortgage. You can also add to your superannuation over the years, above and beyond the superannuation guarantee charge. You don’t have to be self-employed to do this. For example, an employee can ask his or her boss to deduct some money from his or her wage and place this into the super fund. This is called making a salary sacrifice. And if your spouse or partner is earning little or no income it is possible to make superannuation contributions on their behalf and get a tax benefit for doing so. There are limits and means tests for some of these strategies so it is essential you seek expert advice from a financial planner before implementing them. Now the point of including superannuation here is not so much to encourage you to plan for your retirement but to remind anyone already topping up their super to pause for a moment’s reflection. i
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Are you self-employed and putting your own money into super each year?
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Are you an employee who has set up a salary sacrifice arrangement at work? Are you making super contributions for a low-income spouse or partner? Are you making a super contribution for a child or grandchild?
The big question is: should you pause your super efforts and redirect this money towards a home deposit? You have the choice to do so. Many financial experts would suggest directing all your financial resources towards getting your home as the first priority. Then, once a home base is secured, you could return to making your super contributions. Remember, your super is locked away until your preservation age. On the other hand, if you buy a home you might have paid the mortgage off by then (or at least substantially reduced it). When making long-term plans get personalised financial advice to determine your best strategy. If you decide to stop making super payments for 104 weeks, include the amount of your current payments in the home deposit worksheet on page 37. If you are an employee and are making no additional payments above your employer’s superannuation guarantee then there is nothing to add to the worksheet.
WASTE This is not a book about budgeting or ‘200 Great Tips for Saving’, but I feel it is worth mentioning one little area of waste which pops up in occasional conversations I have: dead things in the fridge. We all try to eat well for good health. That means lots of fresh fruit and vegetables and making use of the freezer to buy meat, chicken or fish in bulk or when it is discounted. And you can make substantial savings doing so. However, most families I know have a problem getting through their food before it goes ‘off’. Even frozen food suffers from this. 155
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Who hasn’t despaired at the wet, slimy dead vegetables lying forgotten in the fridge? Or the fruit bowl which has turned to mush? There’s good money lost in those green fur balls. And mouldy bread. And sour milk, wilted herbs, bitter fruit juice, flat soft drink . . . Take a look at the way you are running your kitchen. Some people tackle the problem of food waste by: i i
Better meal planning—if you plan your week’s meals you should use fresh produce on time. Buying only two or three days ahead—give up on the weekly mega-shopping expedition (at least for your fresh foods).
Give your kitchen a quick audit now. A single piece of fruit probably cost you 80 cents, a dollar, or more. The expired herbs probably set you back $2–$3. Is there $5 worth of wet vegies you are not going to use? And perhaps a bottle of drink or half-used loaf of bread gone beyond the veil? Don’t forget to look in the freezer for any year-old prawns, mince or packets of denatured vegetables. Food waste Your estimate food wasted each week
$5
104 week savings
$520
$10
$1040
$15
$1560
$20
$2080
$25
$2600
$30
$3120
$35
$3640
$40
$4160
Estimate what you’re losing each week. Maybe you can add something to your home deposit worksheet on page 36 from this.
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SUMMARY i i i
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By filling out a household budget we get an idea of where hidden savings may be lurking. In reality few of our expenses are ‘fixed’—you can renegotiate or make adjustments until you get your home. Don’t just automatically renew expenses, from magazine subscriptions to rent, power bills, phone contracts and insurance. The marketplace is competitive so update the quotes before simply rolling over the old ones again. If you are carrying debt, seek expert assistance about restructuring your situation to your best advantage.
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10
THE PRICE OF VICE I love my vices and I guess you are pretty content with your own. Well, maybe we’re not always that pleased to have them, particularly when they hold us back from things that are very important in our lives—our family, our friends and buying a first home. It’s at this level that we must, out of fairness to ourselves and our dreams, take a look at our vices in the light of what they are costing us. Obviously we’re only talking in financial terms here, though this pause for reflection might pull to the surface other ways these things affect our lives. Knowledge is the key. What are those vices costing you? Are you prepared to put a dollar value to them and make decisions which limit or rationalise their use? There’s no way I’d be suggesting you give up your cigarettes, beer, gambling or whatever for the rest of your life. Not even for an extensive period. But can you put the brakes on for 104 weeks? I’m not even asking you to give up totally for any particular period. But can you shave your use back just a little in order to get your home? i i i
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If you smoke 40 cigarettes a day, can you get by on 35? If you drink a carton of beer (24 cans) each week, can you survive on 2–3 cans per day? If you place $10 bets on four races every weekend, would you be prepared to pull back to three races weekly?
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Can you play the pokies on a cheaper machine or set yourself a time limit? If you have a glass or two of wine most nights, can you adapt to the health recommendation and have two alcoholfree days per week?
The list could go on, but I don’t want to risk trivialising the issue. What seems simple to one person might bring on the sweats in another. Taming your vices can sound either too easy or just too mean and boring. But there’s such a lot of money buried here. Why not liberate some of it?
WHAT YOUR VICES ARE COSTING YOU i Beer and wine
For these purposes I’ve chosen a price per can/bottle which is based on the assumption that you are buying beer in 24-can/bottle cases. If you are more likely to purchase beer in six-packs you are paying substantially more for your drink and so if you reduce your consumption your potential savings are much greater. Beer—what you’ll save Number of 375 mL cans/bottles saved per week @ $1.20 each
Potential saving over 104 weeks
1
$124.80
2
$249.60
4
$499.20
6
$748.80
8
$998.40
10
$1248.00
24
$2995.20
30
$3744.00
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A few cans a week less? It’s not just small beer. Could you do with another $500 on your home deposit worksheet?
Wine—what you’ll save Number of 750 mL bottles per week @ $15 per bottle
Potential saving over 104 weeks
half
$780
one
$1560
two
$3120
i Drinks at the club
What would it mean to cut back by one drink or one round of drinks each week while out clubbing?
Social drinks—what you’ll save Cost of your regular drink or one round
Potential saving over 104 weeks
$3
$312
$5
$520
$7.50
$780
$10
$1040
$12
$1248
$15
$1560
$20
$2080
If you consume recreational drugs other than alcohol and tobacco you might wish to calculate their cost and potential saving too.
i Cigarettes
Let’s ignore the health issues for the moment. Just how much cash from the ash can you recover? 160
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Cigarettes—what you’ll save Can you cut back by:
Potential saving over 104 weeks
1 per day
$255*
2 per day
$510
3 per day
$764
4 per day
$1019
5 per day
$1274
7 per day
$1785
10 per day
$2548
15 per day
$3822
20 per day
$5096
40 per day
$10 192
Note * calculated at 35 cents per cigarette
Even four fewer cigarettes per day can shift over $1000 to your home deposit worksheet. i Gambling
With all forms of gambling there is only one money rule: if you continue to play, the house always wins. So why do we do it? A lot of our self-image is tied up in our gambling pursuits. It’s a social thing too—a night at the club with a session at the pokies or being part of the office Lotto pool. According to a Productivity Commission report on gambling in Australia (December 1999), around 80 per cent of Australians gamble each year (leaving aside sweeps and raffles) and 40 per cent gamble regularly. An estimated 290 000 of us are classified as ‘problem gamblers’. On the whole we lose something like $11–$13 billion annually in our gambling endeavours. This translates to an average loss of $650 or so for each of us gamblers who have got our act under control. But the problem gamblers annually lose an average of $12 000 each. 161
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Putting this into an international perspective, Australians are among the biggest gamblers in the world. We spend (mostly lose) twice as much per head of population as they do in Europe and North America on legalised gambling. But consumers are not the only ones hooked on gambling. The Commission report notes that government revenue from gambling taxes doubled over a ten-year period. On average our State and Territory governments now find around 12 per cent of their own revenue from various forms of gambling taxes. It’s no wonder gambling has such a hold on our community—government needs us to be big losers. The report found that one of the really important things consumers need is better information about our chances of winning. This varies widely from one game to another. For some games and pursuits the odds are well-known while you have to search hard to find information on what other games are costing. And games that appear all much the same can have widely divergent odds for and against the player. As one example, the Commission noted that while the odds of winning a first division prize on one popular ‘pooled’ ticket game were one in 8 million, a game with a similar presentation had first division prize odds of one in 55 million. Wouldn’t it help to know which is which? Here’s another example, this time from the world of poker machines. Poker machines are set to return a high percentage of the takings back to customers. For example, one particular 20-cent poker machine offered alternative return rates for New South Wales of 87.70 per cent, 90.04 per cent, 92.33 per cent and 94.99 per cent. Put in this way there seems little difference between them. However, when the true ‘price’ of using the machines is calculated it turns out that players will lose their money twice as quickly on the machine returning 87.70 per cent as on the 94.99 per cent machine (around $53 per hour down the tube compared to $21 per hour of play at 20 cents per game). Yet the machines visually appear the same, offering the same game. Simple ‘rates of return’ are not a good way of telling consumers how they will fare in their gambling. 162
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Gambling—what you’ll save Average net gambling loss weekly
Potential saving over 104 weeks
$5
$520
$10
$1040
$15
$1560
$20
$2080
$25
$2600
$30
$3120
$40
$4160
$50
$5200
$100
$10 400
$200
$20 800
Can you estimate what gambling is costing you? Let’s just say, for example, that you put $20 through the machines each week, winning on average $8 and losing the lot by the end of the night. You put up a set amount and are prepared to spend it all over the evening. The net cost is still $20 per week. But then you don’t usually do it every week of the year, so let’s call it an average of $15 weekly across the year. Take a look at the table above. Can you see the way to curb a small part of your wagering or pokie playing in order to set aside money for your home deposit? You could adopt a similar approach to the family subsidy strategy detailed in chapter 8. For example:
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‘For every dollar I put in the poker machines I will put 20 cents into savings’; or ‘Before I commence my punting or gambling I will take 20 per cent from my pool and set it aside for savings.’
In reality anything like this is best done before you arrive at the TAB, racetrack, club or newsagency. Have your fun but also guarantee a good return for yourself. 163
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There are plenty of other vices which are really a form of luxury to us. Yes, if pushed, we could probably live without them (although with differing levels of discomfort or downright pain in doing so). But, on the whole, they are not essential living expenses. They should not be part of our household ‘bottom line’. Now, let’s tally up. Are there any savings that you can make from limiting or rationalising one or more of your vices? If so, do the calculations and transfer the figures to the home deposit worksheet on page 38. SUMMARY i i i i
164
Work out what your vices are costing you. Can you cut back on them? Formulate a strategy with which you are comfortable. Consider a subsidy: for every dollar you spend on your vices set aside a percentage as savings. Don’t try and go ‘cold turkey’. Be realistic about your choices.
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BUMPS IN THE ROAD Graeme and Sharon just got married. It was an office romance—they met at the bank branch where they both worked. They felt they had every good reason to be financially set for life. They had a lot to look forward to. For a start, they had enjoyed a great time dating before Graeme finally popped the marriage question. Their good (but not wonderful) salaries meant they travelled on many weekends, stayed at cute B&Bs, drove a nice new car and went out for dinner or to see a movie at least three times a week. Then comes one of the best bits: they had access to plenty of money. Through the bank they were able to come to an arrangement that meant they could borrow sufficient money to buy their first house. There would be no period of renting for them. So they went through the Saturday papers, found a nice new home, bought it and moved in. Graeme and Sharon knew their mortgage and home ownership were just the beginning. Their experience with the bank had shown them a range of financial opportunities that were available to those who a) owned their home, b) were prepared to take a modest degree of risk with their investments, and c) could borrow money readily for investment purposes. Their plan was exciting. Within five years they would have paid off 80 per cent of the mortgage. At this point they would borrow 167
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against the equity in their home in order to finance the purchase of an investment property—probably a flat in some outer suburb. The rent would help pay the mortgage. Then, three to five years after that, they would borrow again—this time to pay for the acquisition of a share portfolio. And, all the time this was going on, both Graeme and Sharon would know their superannuation was building as well. They could already see themselves sitting on the deck overlooking their pool (thanks to a later extension of their loan!), growing old gracefully and with sound financial security. Yet within a few months of their wedding day they filed for divorce. Their new home would be sold. Expenses would eat up all their savings ‘equity’. Apart from the emotional toll, they were set back at least five years financially. Sitting at a comfortable distance it’s hard to know with any precision what went wrong for Graeme and Sharon. One day Graeme gave me an insight to their relationship. Two critical errors started the rot. The first was their love of all things nice and new. Their decision to purchase a brand new home meant they were moving from a part of the city they knew well to a suburb in the new housing estates on the fringe. They may as well have moved to another country. They were isolated and experienced a sense of loss, almost grief, at the shift from the familiar landscape to a place where they knew no one and where no one would readily come to call. The second disaster is perhaps more telling. Because of their high level of motivation to ‘set themselves up financially for life’ they made a sudden change to the way they lived. They married, moved home and suburb, became property owners, took on the largest debt of their lives and set themselves an ambitious, rapid timetable for investment, all commencing at the same time. Graeme revealed to me that he became a bit of a money tyrant. ‘Sharon says I changed. We stopped going out and having fun— I couldn’t see the point in spending or wasting money like that. Now we had a plan, a direction. It was important to both of us. But maybe we were too hard on ourselves. 168
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‘And then Sharon announced I was no longer the man she had married. I guess she saw the dark side of our relationship and decided to cut her losses quickly.’ Counselling didn’t save the marriage. Some invisible, fundamental line had been crossed and Sharon wasn’t coming back. I’m no psychologist but I got the point Graeme was making. I can’t pretend that saving money is fun, that sacrifice is always ‘worth it’. Certain people, however, really get off on seeing their account balance grow or watching the mortgage fall with each payment. But not everyone is so focused on the money. As a lawyer I saw the same sort of problem played out time and time again. When a couple’s relationship went sour their financial nest egg got scrambled too. And in our legal system you don’t just end up with half of what you, as a couple, had before the split. After all the valuations, expenses, legal fees, delays, lies and cover-ups, each partner will be left with substantially less than was necessary to support their joint lifestyle. Even the so-called ‘winner’ out of the property settlement may have difficulty remaining in the former family home. At least one of the partners is likely to become a renter or else move to a different, more affordable suburb. The level of borrowings—now supporting two households—will increase. It’s like those cartoons where the character falls down the ladder breaking all the rungs. How can you climb back up to where you once were? But it’s not just in Jekyll/Hyde changes of personality that couples falter. For many years I was editor of a national magazine for people planning their retirement. Readers liked sections of the magazine which helped them get stuck into the details of making financial and investment plans. So we gave them plenty of this. Readers—and some experts in retirement—would warn how easy it was for one partner of a relationship to get caught up in the necessary detail of retirement planning, surging on ahead but leaving their partner somewhere in their wake. There’s usually one partner of the couple who really enjoys the planning process and who does all the reading and note-taking. It’s up to them to slow down from time to time and ensure their partner remains involved in the planning process. 169
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Retirees tell me that resentment builds if the front-runner never pauses. Relationships are strained and serious damage can be done. And if the relationship fails or collapses to a sick level of mutual torture, then the money side of things goes to hell in a handcart. Perhaps it’s not usual, in a book about money, to focus on personal relationships. Yet it’s one of the most important lessons that I learned from my years as a solicitor. Like a game of Snakes and Ladders, I saw the couples climb and I saw them on the slide. A family with enormous financial security can quickly become two separate households each of which is dependent on government social security to make ends meet. A profound move from a state of independence to dependence. Similarly, those without a partner should consider whether to discuss their plans with family and close friends. Will friends get the wrong idea if you stop going to the club, for example? What are you going to do to ensure this doesn’t happen to you in your drive to get your own home? I won’t presume to offer advice about maintaining a relationship, just the encouragement to recognise the risks which arise when a sincere savings plan is implemented. And while working together towards a savings goal might harm your relationship, I would have to add that it might actually enhance it. Some couples find they thrive under the pressure to make sacrifices and in the pursuit of a common interest. It’s not all negative by any means. Communication, as with so many other things we do, is one of the keys to success. When going through this book, choosing options and filling in the worksheet, don’t leave your partner (or other significant people in your life, like friends and family) behind. If you can’t work together within the covers of this book then it might be wise to delay the project for the time being. There are a number of other ‘wealth hazards’ which have the capacity to lay waste to your home deposit plans. These include losing your job (chapter 5) and suffering serious illness or injury. It’s possible to take steps now to minimise their potentially devastating impact on your financial planning. 170
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FALLING OFF THE SAVINGS WAGON The other ‘bump in the road’ I want to mention is the problem of falling out of step with your savings plan—in this case, as set out in your home deposit worksheet. Sooner or later you will fail to meet some savings or income targets. All we can do is: i i i
recognise this reality be comfortable with it make preparations: design a robust worksheet now
Of course we’ll fall behind. Don’t blame yourself (or your partner). There’s no room for guilt and blame here. If saving for a home deposit doesn’t enhance your life then leave the task for another time. Levels of motivation will rise and fall; things will go wrong at home or at work; unforeseen expenses will drop down on you; a great opportunity will open before you and it must be seized now. All sorts of things will slow you down. On the other hand, occasionally you might find yourself exceeding your target on a particular part of your deposit worksheet. One of the unexpected things I’ve learned about saving is that once you’re into the flow it seems to accelerate almost inexplicably from time to time. For example: i i
If you’ve landed a casual job you might be offered extra shifts or get a pay rise for your enthusiasm and skill. In changing your lifestyle to cut down on waste or luxuries in one area you could find you’ve also been trimming other kinds of excessive expenditure without realising it. If you’re not drinking as much alcohol you might also be smoking fewer cigarettes; if you cancel the pay TV you might find you’re eating less junk food.
Expect some surprises.
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The other important consideration is how best to build into your deposit worksheet a bit of slack, some room to move. This will vary for everyone. i
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If you have a great capacity for work, or are more likely to give in to your need for luxuries and treats, then think in terms of the income side of the equation. If you are fairly disciplined, look to the expenses side. If your parents or some other relative are prepared to be your back-stop, that should be sufficient to get you to the finish line on time. Aim high: add an extra module or two to your worksheet from the outset.
And you can always adjust the deadline as you approach it. This program seeks a balance between setting a savings goal and being realistic. Giving yourself a target of 104 weeks for your home deposit, for example, helps reduce the size of the task to something which is more manageable and more immediate. However, you can always finish later. It’s best if you don’t begin the process expecting this will happen—people tend to hit the target they set themselves, particularly if they know they can keep rolling it. And if things start going somewhat off the rails early on, don’t adjust your completion date right away. You might get back on track. Leave it to the second half of the period to shift the date. SUMMARY i
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Look after your partner and nurture your relationship. Don’t leave anyone important behind. Discuss your plans and ensure you are both ‘of one mind’ about your goal, the timeframe, and how you will get there. This is true for singles too; don’t follow your goal at the expense of relationships with family and friends. Good communication is essential—at the start and all the way through.
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Make this a process which strengthens your relationships, not one which weakens them. Don’t change your lifestyle savagely. Nobody wants to live with The Budget Nazi. Plan now for the inevitable hiccups. Make your worksheet robust. How will you cover for lost income or planned cuts in expenditure which fail to materialise? Aim to save more money than you need. In doing so, work to your strengths: are you better at earning more income than in reducing your expenses? The target timeframe is 104 weeks (or whatever you choose). You can do it. But it is only a target to inspire, not a deadline to enforce.
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12
KNOWING THE COSTS AHEAD For most of our ordinary consumer transactions the price on the sticker is all we have to pay. We get a rude shock if someone wants to add extra charges. Perhaps this is part of the reason behind the concern many people express about dealing with banks. Sometimes layers of fees appear, one after the other. The inclusion of government taxes only serves to further confuse and confound the consumer. Similarly, private hospital and health insurance has a long history of upsetting the very people it sets out to accommodate. You can have the highest level of private health insurance and yet, after a stay in hospital, can see all sorts of bills arrive back home. Sometimes the bills are from health professionals the consumer has never seen! Fortunately this issue, too, is being addressed. Now a consumer can find more accurate information up-front about what a hospital procedure will cost. The dreaded ‘gap’ in private health insurance can often be closed. Another example of hidden costs occurs when we purchase a car. What exactly are those extra ‘on-road costs’ the dealers charge? Sometimes they are clearly stated in the advertised price of the car, sometimes not. Stamp duty (State Government tax) is only part of the equation. If the rest of these charges are supposed to represent costs incurred by the dealer in getting the car ready for delivery, why do they range from a few hundred dollars to a thousand dollars or more? 174
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These things infuriate consumers because they seem to come out of nowhere. The deal is done . . . and then the extras appear. But bank fees or ‘on-road costs’ are nothing compared with the extras involved in buying a home. When planning your purchase you must be prepared for the fees and costs necessarily involved. You must also do your research about minimising these, whether through smart shopping or by accessing government assistance available to first home buyers. Here are the categories of fees and taxes: i i i i i i i i
conveyancing fees conveyancing search inquiries and sundries stamp duty on the purchase stamp duty on the mortgage registration fees expert reports on the property removalist expenses any penalties for getting out of an existing lease
Some of the bank websites have handy calculators which give a rough idea of the costs associated with purchasing property. Take a look at <www.wizard.com.au>, <www.anz.com.au> and <www.national.com.au>. They are a guide.
CONVEYANCING FEES The property you want to buy currently belongs to someone else. They have a legal right to own that property. Conveyancing is the process by which you: i i i
Check the person selling the property really owns it. Check there is no legal impediment to the transfer of ownership of the property. Confirm that the place you have seen is the place you are buying (that is, that the legal and documentary details of the property in the purchase contract correspond to the physical property you have inspected and want to buy). 175
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Check there is no financial debt attached to the property which is capable of being passed from the current owner to you. Transfer legal ownership to you.
These are serious matters. I’ve certainly been involved, after the event, in trying to fix problems where a person paid money to buy a property from Mr X only to find out later that the property was owned by Mr Y. I’ve seen houses which were built across legal boundary lines, partly on one person’s land and partly on the neighbouring site. I’ve seen people ready to buy a building block only to find out there was no council approval for a home to be erected anywhere on that land. In Australia our property transfer systems are pretty good and it is rare for things to go wildly wrong. It is not particularly hard to make all the right checks—in fact you can probably do it yourself with a little guidance. But every purchaser needs to be able to identify what checks are necessary and to know when to call for expert help. These days it is generally cheap enough to get an expert to do the conveyancing for you so there is less incentive to cut costs by trying to do it yourself. In the bad old days solicitors had a monopoly on conveyancing through much of Australia. Along came non-lawyer conveyancers—many of whom had significant experience gained while working in a solicitor’s office. And there are also DIY conveyancing kits, with all the forms and checklists you need to do the job. Fortunately, with competition in the legal services area came some price cuts. Now there is often little price difference between getting a solicitor or a non-lawyer conveyancer to do the property work for you. However, average conveyancing fees vary from State to State and may increase or decrease according to the purchase price and whether or not you are also taking out a mortgage. As a rough guide, you should be able to find a qualified person who will do the conveyancing for less than $1000 in professional fees. In South Australia and Western Australia you could be looking at paying much less. You might need to ask around or make a few 176
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phone calls to get the best price. Warning bells should sound if you are quoted much more than $1000 for professional fees alone. The issue remains, however, that there are certain occasions when a solicitor is the wise choice. Generally this imperative has little to do with the conveyancing itself, pure and simple, but with the wider context. For example: i
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Capital gains tax implications—will the property be your residence or will it be rented out from time to time? There are other matters of taxation to consider. Who will inherit the property should you die? Do you have significant other investments? Perhaps you should get a will prepared or your old will updated. You intend carrying out significant building work on the property—going up, an extension out the back, putting in a garage or carport next to the boundary. You want to run a business from the property.
I don’t particularly want to drum up work for solicitors here, nor do I have any preferences for or against the use of licensed conveyancers. You must make your own choice. Yet at certain times in our lives it is prudent to sit down with experts who can assist with important planning decisions. They may be financial planners, lawyers, tax accountants, doctors, priests/‘life journey consultants’, employment consultants, Centrelink staff or somebody else entirely. We miss out on our entitlements if we don’t know about them or fail to become aware that eligibility criteria have altered; we make mistakes which set us back. And from time to time we should discuss our plans with a solicitor. Capital gains tax or land tax can be incurred unnecessarily in some situations; a failure to plan for inheritance issues might mean one family member will benefit financially from your death in a way which you never intended and which the other family members will think is unfair. Sometimes we buy a property with clear thoughts in our head about what we can build there, only to have those dreams dashed when the plans are put into council. 177
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SEARCH ENQUIRIES AND SUNDRIES Part of the conveyancing process involves checking with government authorities whether they have any interest in the place you intend buying. For example: i
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The roads department might be considering widening the road out front of the house—and they might even want to put the road through the front yard. There might be a financial debt attached to the property. Some types of debt remain personal (for example, electricity and telephone bills) and some come across with a property transfer and become debts which might also be enforceable against the new owner (including some rates and land tax). This comes as a surprise to most people. Still, the debts are easily dealt with if discovered in time (as they should be). Your conveyancer will find out about these possible debts and ensure the vendor pays them or deducts any outstanding liability from the purchase price. The local council might be considering a change of zoning which would affect what you could do with your new property. And, let’s not forget, neighbouring properties may also change their zoning—to medium density or commercial use, for example.
Your conveyancer will access search records and protect your interests. The fees for this will add up to a couple of hundred dollars or so on top of the professional fees.
EXPERT REPORTS There are sound reasons for getting experts to check out certain aspects of the property you intend buying. You won’t necessarily need all of the following: 178
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i Building inspection report
Unless you are qualified or experienced in the building trades it is always wise to get an expert to look at what you are buying. This could be a builder or architect. They will inspect the property for shoddy workmanship and materials that are failing and will require replacement. If there are signs of water damage on a plaster ceiling your builder will get inside the roof and determine the cause and likely cost of repair. Is it an old problem, now remedied, or is it fresh damage? Rising damp, wobbly roof lines, cracks in walls, sloping floors, windows that don’t seal properly, bathrooms which contravene building codes and more. There are businesses that are established to carry out inspections and write reports or you can use a builder/architect you know personally. If you don’t know anyone just phone a local expert and find out if they do these inspections (and at what cost). Even if the property is a flat in a large building you should still get an inspection done. As well as reporting on the flat the expert should go around the entire building, including inside the roof, and put this in the report. If there’s something wrong with the building you, as a unit owner, will share in the cost of repairs or maintenance. A building report will cost in the vicinity of $300 to $500 depending on the size of the property. Contact your local State builders’ association, the Royal Australian Institute of Architects (Archicentre, <www.archicentre.com.au>) or look in the Yellow Pages for private firms specialising in pre-purchase inspection reports. i Engineer’s report
Do you intend adding another room, going up or going down, or pulling down walls? Will the walls carry the weight of a second floor or loft conversion? You can get an engineer to assess the site and let you know if the job can be done, how it would be done, and at what sort of cost. i Strata/unit body corporate/council records
If you are buying into a block of flats you are buying into a common life. You gain certain advantages (for example, a swimming pool and 179
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its maintenance) where you only pay a share of the total cost. And you have to deal with disadvantages (such as the unit owner who won’t pay his or her levies). If there is any trouble among the owners or expensive maintenance on the way (for example, repairs to a lift or to remedy ‘concrete cancer’) the body corporate/council records should reveal this. From the records you will also find out the extent of ongoing maintenance costs or be able to ascertain whether maintenance is not being done in a timely fashion. You can make the inspection yourself, by arrangement with the secretary of the body corporate/council, or engage an expert to do this on your behalf. i Pest inspection report
Anyone with experience of termites will know the cost of their destructive force. They can literally eat you out of house and home. Look in the Yellow Pages for companies which perform pre-purchase pest inspections. i Survey report
As mentioned earlier, the purpose of a survey report is to ensure that what you buy is what you’ve seen. A surveyor will take the legal title documents and match those with the physical land and its boundaries. The reports might also confirm whether recent building works, if any, have been carried out the regulated distance from boundaries or whether fencing is on, over or within the boundaries. A survey report is most commonly prepared for the purchase of a house, not for a unit in a block of flats. Your conveyancer should discuss these options with you and can arrange the appropriate inspections and reports. It can be tempting to save on the cost by getting the experts to deliver their reports verbally rather than in writing. But one of the main reasons for using (and paying) for expert services is that you might want to sue them if their advice turns out to be incorrect and you will be left out of pocket as a result—they should be carrying indemnity insurance. Would you sue someone for damages on the basis of a report which was never put on paper? That is an enormous hurdle which would 180
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be hard to overcome. Check any order form or contract with your expert to be clear on your rights if their advice proves wrong.
MOVING EXPENSES How are you going to get your belongings to your new home? Make sure you allow for the removal costs. Will you be under pressure to get all your possessions out of your current residence by a particular time on a particular day? Are you looking to buy a home now because the one you’re in is being sold? You know there is a deadline for vacating. Here you can run into the trap of getting out of one place but not being able to move straight into the new place on the same day. Then you might have to pay storage costs for your furniture and other possessions. Removalists tend to want payment on the day of the move. Do you intend using professional removalists or are you going to do it yourself, with or without friends assisting? Will you need to hire a truck, trolley and padding? Or will you be using a mate’s ute? Professionals will charge according to the amount of stuff you have, the distance to be travelled and whether you want assistance with packing. An alternative is to pay an hourly rate, although this puts you completely in their hands—and you’ll be paying the bill for time spent in traffic jams and so on. Packing cartons cost extra and you might want to pay for insurance cover against damage. Many removalists won’t insure or take full responsibility for items which have been packed by anyone else, so bear this in mind when arranging the deal.
LENDER’S MORTGAGE INSURANCE It’s not so long ago that a bank might only lend a home buyer less than 50 per cent of the purchase price for their home. You needed the remaining 50+ per cent from somewhere else. People who could 181
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never see their way to meeting the tough bank rules rejoiced when building societies loosened the knot a little—although you had to become a member and follow various savings guidelines before they would provide a mortgage. Ordinary home buyers had to top up their bank or building society mortgage with a second mortgage (and, sometimes, a third mortgage) from a different lender. Alternatively they went to a finance company. Here you’d get more money than from a bank or building society but the interest rate would be higher. It was a hard slog. With banking deregulation the rules relaxed. Some might say they collapsed, leading to a number of quite different problems arising. The good news is that you can now borrow on first mortgage pretty well as much money as you can afford to repay. The barriers and eligibility criteria are less rigid. The immediate consequence of letting people borrow so much money is that the lender is taking a greater risk. When consumers could only borrow less than half the property value from the bank, the bank’s risk was highly contained. Now a bank will generally let you borrow up to 95 per cent of the property value. So what can the bank do to protect itself from exposure to risks such as a 15 per cent fall in property prices or a situation where the borrower loses their job and stops paying the mortgage instalments? The solution lies with a product called lender’s mortgage insurance. If you are going to borrow more than 80 per cent of the value of the home you are planning to buy (75 per cent in some instances), then a likely requirement of your mortgage will be that you take out mortgage insurance. But mortgage insurance is not quite what its name suggests—it’s not about protecting you. You might think that mortgage insurance covers the situation where you (the borrower) get sick and have to take time off work without pay. In comes the mortgage insurance to see that your mortgage instalments continue to be paid so you won’t lose your home. Wrong. You might think that mortgage insurance looks after the instalments in the unfortunate event of losing your job through retrenchment. Wrong again. 182
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When you take out most forms of insurance the policy is there to protect you. But mortgage insurance is different. Although you pay the premium the policy exists to protect the lender, not the borrower. What it means is that if you get sick or lose your job or for any reason stop paying back the lender, the insurance company steps in and pays the lender what you owe. But it doesn’t end there. The insurance company then has the right to pursue the defaulting borrower to get the money back. If you want to protect yourself against financial problems arising from long-term illness or injury you need a different product altogether. This is called income protection insurance. Generally these policies will pay you around 75 per cent of your wage (after an agreed initial waiting period has first expired) when you can no longer work due to illness or injury. While there are a lot of tricky definitions involved in these policies they remain an important part of a person’s financial planning, particularly once they start borrowing money and have family or financial commitments. The premiums for this type of insurance are expensive but, fortunately, they are generally tax deductible. Check it out with a life insurance company or contact an insurance broker who should find a good deal for your situation. That’s an aside, albeit an important one, because this insurance is optional. Mortgage insurance, however, will not be optional if you will be borrowing more than 80 per cent of the value of the property. The cost of this insurance will be somewhere on a sliding scale between about 0.44 per cent and 1.65 per cent of the amount you are borrowing (the loan ‘principal’). A small amount of stamp duty is then added on top. The less equity you have in the property the higher will be the percentage of premium you will be charged. At least you only have to pay the premium once—it lasts for the full term of the mortgage. As a guide, in New South Wales you will pay roughly $2088 in mortgage insurance where you are borrowing 90 per cent of the value of a $200 000 property. The insurance rises to $3130 on a $300 000 property and to $5420 on a $400 000 property, and so on. 183
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Insurance costs are similar, or sometimes a little lower, in other States and Territories. If you borrow just over the 80 per cent threshold (instead of borrowing 90 per cent) your mortgage insurance could drop by up to half. Your lender will give you accurate figures when you discuss your plans. The other potential trap with mortgage insurance concerns the value of the property you are buying. Because the insurance company and your bank or other lender are in a situation where they want to control their risk exposure they will not necessarily base their calculations on the price you are paying for the property. That’s the purchase price. What they are interested in may be something a bit different: the valuation. When the margins are tight—such as when a person borrows to the hilt—the usual risks cannot be taken. One of the usual risks is to accept that the purchase price truly represents the real value of the property. But a moment’s thought should reveal that there will be exceptions to this assumption: for example, when a person falls in love with an unusual property (perhaps it is a Mexican-style villa in a street full of Federation homes), he or she will be prepared to pay more than it is probably worth. That’s the effect of falling in love. Now if the mortgagee (lender) ever needs to sell that property to get its money back, it might face an uphill battle to find another buyer who is prepared to pay the same amount of money for the hacienda. Another difficult situation is where the property market is in decline. It is not unheard of for property prices to fall by 20 per cent over the course of twelve months. Even in the generally hot property markets of Sydney and Melbourne major falls happen from time to time. If the borrower’s equity is less than 20 per cent you can see how a general 20 per cent collapse in property prices will impact on the lender. So, when margins are tight or economic conditions are dodgy, lenders will not simply proceed on the basis that what you are paying for the property is what it is worth. A valuation report will be required (which might cost you $500–$600, for example) and that figure will establish the value of the property. Mortgage insurance will also be based on this figure. 184
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The danger is that you might not be budgeting on paying a mortgage insurance premium—you might have saved a 20 per cent deposit for your home—but a low property valuation will pull you over the line where you have to get insurance. Illustration The home you want to buy is selling for $200 000. You have saved a $40 000 deposit—20 per cent of the price. You will need to borrow $160 000. Because you are not borrowing more than 80 per cent of the price you do not expect to pay mortgage insurance. Due to economic circumstances the lender wants a valuation done. The valuation for the property comes in at $190 000—$10 000 below what you have agreed to pay the seller. It’s not a big drop in value— $10 000 is only 5 per cent of $200 000, but it has financial consequences. You still need to find $160 000 to buy the place, but this now represents 84.2 per cent of the property valuation ($190 000). As a result you now have to find a couple of thousand dollars to pay the mortgage insurance premium.
Tip: Do you plan to have a deposit of 20 per cent or more? When you first start talking to your bank or other lender about a loan to purchase a particular property, get confirmation that they will be accepting the purchase price as the value of the property and will not be requiring a formal valuation report or mortgage insurance. Trap: There have been concerns expressed about the huge number of new units being built, particularly where they are congregated in the one site or suburb. Will values hold up? Are the initial purchase prices representative of their true value? Perhaps only the best units will perform well, with the smaller, less well-positioned ones becoming less desirable. If you will need mortgage insurance—as a condition of your loan approval—it is wise to wait for approval from the mortgage insurer before exchanging contracts in case there are unacceptable 185
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conditions placed on the insurance. The mortgage insurer may decline cover if, for example, it is already insuring a number of units in the one development or if it has had a bad experience with that particular development. Very small units—studios—might also be unacceptable. Don’t give up! If there is a problem you might have to shift to a lender who deals with a different mortgage insurer. GETTING OUT OF YOUR LEASE If you are renting your current home you should take steps to ensure you don’t waste money on the move to your new place by breaking the conditions of the lease. A breach might leave you liable for extra payments of rent. i
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Check with the lease document and with the managing agent or owner about the period of notice required (if any) for vacating. If you don’t follow the terms of the lease strictly you may have to continue paying rent beyond the date you leave. Replace items that were broken or damaged during your tenancy—or risk having the cost of repairs deducted from your bond/security deposit. Clean the place thoroughly, for the same reason. Don’t give notice too early. It’s handy to have a little buffer zone between when you intend leaving and when you absolutely must get out because a new tenant is outside the door waiting.
GOVERNMENT TAXES AND CHARGES i 1 Stamp duty
Governments need to find money from somewhere, be it tax on what we earn (income tax) or on what we purchase (GST). Historically, governments have made real windfall gains from what might be 186
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called ‘wealth taxes’. These are taxes which are raised at the point when we are building or selling our investments. Prime examples are capital gains tax and stamp duty. When you buy a piece of real estate, stamp duty will be charged by your State or Territory government at two points: i i
Stamp duty on the transfer of property. Stamp duty on the mortgage (except in the Australian Capital Territory and Northern Territory).
Timing is important here. As a general rule you will have to pay this stamp duty before you complete the purchase of your property. Make sure you’ve got the money on hand, either as your own cash or as part of the amount you are borrowing. However, there is a major exception to this. State and Territory governments provide generous concessions for people buying their first home (see pages 191–200). Stamp duty on transfer Stamp duty (State/Territory government tax) on purchase of real estate for a home. See pages 191–200 for government concessions to first home buyers and home buyers generally where there are eligibility criteria. You might be able to pay less than shown in this table if you are eligible. See following pages for information. Price
ACT
NSW
NT
$75 000
1500
1203
441
$100 000
2000
1990
1250
$125 000
2875
2865
2141
$150 000
3750
3740
$175 000
4625
4615
$200 000
5500
$225 000 $250 000
QLD
SA
TAS
VIC
WA
750
1 955
1675
1 600
1500
1000
2 830
2425
2 200
2200
1250
3 830
3175
3 160
3238
3113
1500
4 830
3925
4 660
4275
4166
1750
5 830
4800
6 160
5313
5490
5300
2000
6 830
5675
7 660
6350
6500
6365
6516
2250
7 893
6550
9 160
7388
7500
7240
7813
2500
8 955
7550 10 660
8425
$275 000
8500
8115
9191
3375
10 143
8550 12 160
9713
$300 000
9 500
8 990
10 650
4 250
11 330
9 550 13 660
11 000
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Price
ACT
NSW
NT
QLD
$325 000 10 875 $350 000 12 250
SA
TAS
VIC
WA
10 115
12 191
5 125
12 580
10 550 15 160
12 288
11 240
13 813
6 000
13 830
11 550 16 660
13 575
$375 000 13 625
12 365
15 516
6 875
15 080
12 550 18 160
14 863
$400 000 15 000
13 490
17 300
7 750
16 330
13 550 19 660
16 150
$425 000 16 375
14 615
19 166
8 625
17 580
14 550 21 160
17 438
$450 000 17 750
15 740
21 113
9 500
18 830
15 550 22 660
18 725
$475 000 19 125
16 865
23 141
10 375
20 080
16 550 24 160
20 013
$500 000 20 500
17 990
25 250
11 250
21 330
17 550 25 660
21 300
$525 000 21 938
19 115
26 850
12 188
22 705
18 550 27 160
22 675
$550 000 23 375
20 240
28 200
13 125
24 080
19 550 28 660
24 050
$575 000 24 813
21 365
29 550
14 063
25 455
20 550 30 160
25 425
$600 000 26 250
22 490
30 900
15 000
26 830
21 550 31 660
26 800
$625 000 27 688
23 615
32 250
15 938
28 205
22 550 33 160
28 175
$650 000 29 125
24 740
33 600
16 875
29 580
23 550 34 660
29 550
$675 000 30 563
25 865
34 950
17 813
30 955
24 550 36 160
30 925
$700 000 32 000
26 990
36 300
18 750
32 330
25 550 37 660
32 300
$800 000 37 750
31 490
41 700
22 500
37 830
29 550 43 660
37 800
$900 000 43 500
35 990
47 100
26 250
43 330
33 550 49 500
43 300
$1 000 000 49 250
40 490
52 500
30 000
48 830
37 550 55 000
48 800
Mortgages attract their own tax regime. Here are the details:
Stamp duty on mortgages Stamp duty charged on your home mortgage. There is no mortgage stamp duty payable in the ACT or NT. Queensland offers a further concession on the first $100 000 of the mortgage if it is for your first home. Mortgage
NSW
QLD
SA
TAS
VIC
WA
$50 000
141
nil/nil
165
165
164
125
$100 000
341
120/nil
340
340
364
250
$150 000
541
320/200
515
515
564
375
$200 000
741
520/400
690
690
764
500
$250 000
941
720/600
865
865
964
625
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Mortgage
NSW
QLD
SA
TAS
VIC
WA
$300 000
1141
920/800
1040
1040
1164
750
$350 000
1341
1120/1000
1215
1215
1364
875
$400 000
1541
1320/1200
1390
1390
1564
1000
$450 000
1741
1520/1400
1565
1565
1764
1125
$500 000
1941
1720/1600
1740
1740
1964
1250
$550 000
2141
1920/1800
1915
1915
2164
1375
$600 000
2341
2120/2000
2090
2090
2364
1500
$650 000
2541
2320/2200
2265
2265
2564
1625
$700 000
2741
2520/2400
2440
2440
2764
1750
$750 000
2941
2720/2600
2615
2615
2964
1875
$800 000
3141
2920/2800
2790
2790
3164
2000
$850 000
3341
3120/3000
2965
2965
3364
2125
$900 000
3541
3320/3200
3140
3140
3564
2250
$950 000
3741
3520/3400
3315
3315
3764
2375
$1 000 000
3941
3720/3600
3490
3490
3964
2500
Note * The two figures represent later home/first home amounts respectively
For different or higher mortgage amounts use the information below. Just read the bits that relate to where you will be buying and skip the rest: New South Wales Amount of loan
Mortgage stamp duty
Up to $16 000
$5
$16 001 and above
$5 plus $4 per $1000 or part thereof above $16 000
Queensland Amount of loan
Mortgage stamp duty
Up to $70 000 (or $100 000 if a first home)
Nil
$70 001 and above ($100 001 and above
$0.40 per $100 or part thereof
for a first home)
above $70 000 ($100 000 for a first home)
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The exemptions apply provided the land adjacent to the residence does not exceed 5000 square metres in size. If the land size exceeds 5000 square metres the exemption will be reduced proportionally. South Australia Amount of loan
Mortgage stamp duty
Up to $400
Nil
$401 to $4000
$10
$4001 to $10 000
$10 plus $0.25 per $100 or part thereof above $4000
$10 001 and above
$25 plus $0.35 per $100 or part thereof above $10 000
Tasmania Amount of loan
Mortgage stamp duty
Up to $8000
$20
$8001 to $10 000
$20 plus 0.25% of amount above $8000
$10 001 and above
$25 plus 0.35% of amount above $10 000
Victoria Amount of loan
Mortgage stamp duty
Up to $10 000
$4
$10 000 and above
$4 plus $0.80 per $200 or part thereof above $10 000
Western Australia Amount of loan
Mortgage stamp duty
All
$0.25 per $100 or part thereof
i 2 Registration fees
In addition to stamp duty come registration fees charged by the government department which runs the public registers of land transfers and mortgages. These government fees will cost you from a little over $100 in New South Wales (for transfer and mortgage registration) to just over $200 in South Australia and Tasmania. However, 190
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Victoria and Queensland both use significantly more expensive sliding scales for registering the transfer of title. Registering your transfer and mortgage in Queensland will cost you much the same as the other states where the purchase price is $200 000, but the cost leaps to $635 where the price is $400 000, for example. Victoria’s fees hit hard, rising from $642 on a purchase price of $200 000 to $1133 at a price of $400 000. And the scales keep rising in line with the property value.
ARE YOU ELIGIBLE FOR STAMP DUTY CONCESSIONS? Governments help soften the tax blow for first home buyers or those purchasing inexpensive properties. These concessions vary across borders and over time, so contact your State/Territory revenue office for the latest information—see the Resources, reading and contacts section at the end of this book. i Australian Capital Territory
The Australian Capital Territory stamp duty concession is notable for not being restricted to first home buyers. The concession applies to duty on the transfer of property; as mentioned earlier, in the ACT there is no stamp duty on mortgages. The transfer stamp duty is a mere $20 on homes worth no more than $116 000 (or $58 000 for vacant land), and follows a sliding scale before cutting out at homes worth more than $140 000 (or $70 000 for vacant land). Properties included in the scheme: i i i
completed homes vacant land (if you intend to build your first home here) can be full ownership (called ‘fee simple’) or a Crown lease
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Eligibility criteria: i
i
i
i i
You are not disqualified for having owned a property before. However, the owner or their spouse must not have owned or had a legal interest in land in Australia for the previous two years. The two-year waiting period may not apply if the previous interest in land was relinquished as part of an order of the Family Court or similar. There is an income test but not an asset test. The total income threshold for all applicants is $45 000 where there are no dependent children, rising by $1150 per dependent child to a ceiling of $50 750 (five or more children). Income is assessed against the threshold at three points: over the previous week, the previous month and the previous year. All applicants for the grant and transfer of property must be aged eighteen or over at the time of the transfer and grant. At least one of the owners must intend to live there for a continuous period of at least twelve months.
The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of the Australian Capital Territory Revenue Office at <www.revenue.act.gov.au> or by phoning (02) 6207 0028. Ask for ‘Home Concessions’. i New South Wales
In New South Wales there are stamp duty concessions available for both the transfer and mortgage of a first home. Importantly, the amount of the benefit varies according to the value of the property and whether it is in a large urban centre or in the country. If you meet the eligibility criteria (see below), and your targeted home comes within the scheme guidelines, first home buyers will pay no stamp duty on the transfer of a home costing up to $200 000 in defined ‘metropolitan areas’ or up to $175 000 in other parts of New South Wales. 192
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The concessions are on a sliding scale which cuts out completely if the home being transferred is worth more than $300 000 (metropolitan areas) or $250 000 (elsewhere). Different thresholds apply to vacant land, with a full concession on transfers of land up to $95 000 (metropolitan) or $80 000 (elsewhere), fading out at $140 000 (metropolitan) and $110 000 (elsewhere). Metropolitan areas are defined as the local government areas of Sydney (the County of Cumberland), the Blue Mountains City, Camden, Gosford City, Lake Macquarie City, Newcastle City, Penrith City, Shellharbour City, Wollondilly, Wollongong City and Wyong. The concession on mortgage stamp duty is also on a sliding scale, from nil to 100 per cent. Properties included in the scheme: i i i i
existing building new construction owner/builder vacant land (if you intend to build your first home here)
Excluded from the scheme are: i i i i
holiday homes business premises an existing building which you are renovating a property you own as a company, partnership or trustee
Eligibility criteria: i i i
i
It must be your first home or land for first home. There are no income or assets tests—you can be wealthy and own valuable assets and still be eligible. You are not disqualified if, as a couple, one of you has previously owned a property in Australia; one new purchaser is good enough. You are not disqualified if you have previously owned a commercial property or vacant land. 193
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i
You must not have previously received benefits under the scheme (unless your previous interest was solely to assist another purchaser obtain finance for the property).
The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of the New South Wales Office of State Revenue at <www.osr.nsw.gov.au> or by phoning (02) 9685 2122 or 1800 629 550. Refer to the ‘First Home Plus’ scheme. i Northern Territory
In the Northern Territory there is a stamp duty concession on property transfers for home buyers that is not restricted to those who have never owned property in Australia. However, this must be their first home owned in the Northern Territory. As noted earlier, there is no stamp duty on mortgages in the Northern Territory. If you are eligible, the concession means there is no stamp duty payable on a property worth up to $125 000. Beyond that, duty is paid at normal rates on the difference between $125 000 and the purchase price. If you are eligible but are buying the property jointly with another person or persons who have previously owned property, the concession is reduced in proportion to their share of ownership. Properties included in the scheme: i i i
completed homes homes under construction vacant land (if you intend to build your first home here)
Eligibility criteria: i
It must be your first home owned in Australia.
The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of Northern Territory Revenue Management at <www.nt.gov.au/ntt/revenue> or by phoning (08) 8999 6789. 194
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i Queensland
The system works differently in Queensland. Here there is a standard rate of stamp duty on property transfers where the owner does not intend living in the property. Everyone who does intend residing in their property is entitled to a concession, not just first home buyers. After that comes a rebate scheme for those buying relatively inexpensive properties. Properties included in the scheme: i i i i
dwelling house flat or unit part of shop or factory set up for a single family to live there it includes an area of land immediately adjacent to the residence not exceeding 5000 square metres; the concession is reduced if the area exceeds 5000 square metres
Eligibility criteria: i i
i i i i
i
It must be your principal place of residence. You must move in on the date you obtain possession of the property; in special circumstances this may be extended by up to six months. You must live there continuously for at least six months. In addition there may be a rebate if you are a first home buyer. The additional criteria for the rebate are: You must not have owned a previous residence in Queensland or elsewhere. The rebate might not be given if part of the purchase money for your home has come to you as a gift (for example, from a family member) or if you have purchased the property from a related person and the purchase price is lower than the full market value of the property. The rebate might be reduced if the land area exceeds 5000 square metres.
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Rebate for first home buyers in Queensland Value of home purchased
Amount of rebate
$0—$80 000
$800 (note: this effectively cancels the transfer stamp duty of $800)
$80 001—$150 000
$500
$150 001—$155 000
$300
$155 001—$160 000
$200
above $160 000
Nil
Stamp duty is charged on mortgages in Queensland and there are exemptions from duty for home buyers (up to a mortgage amount of $70 000) and first home buyers (the ceiling lifts to $100 000). The home must be your principal place of residence and to get the full exemption the land adjacent to the residence must not exceed 5000 square metres in size. The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of the Queensland Office of State Revenue at <www.osr.qld.gov.au> or by phoning (07) 3227 8733 or 1300 301 571. i South Australia
South Australia has a fairly complicated and detailed scheme for assessment of stamp duty so I will only go into some basics here. The first home buyer’s concession results in there being no stamp duty payable on the transfer of a property worth $80 000 or less, with a sliding scale up to a maximum purchase price of $130 000. Properties included in the scheme: i
i
196
dwelling house or unit where you intend to occupy the property as your principal place of residence within twelve months of the date of transfer/conveyance vacant land if you intend to occupy the property as your principal place of residence within twelve months of completion of construction of a dwelling, or within twelve
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months of the date of transfer/conveyance (where stamp duty is paid before there is a construction contract) Eligibility criteria: i i
i i i
The purchaser must be a natural person or persons (for example, the applicant cannot be a company). You must not have previously owned a home (including a holiday home) in South Australia or elsewhere (except as a minor). You must not have previously enjoyed a stamp duty concession under the scheme. You must live or intend to live in the property as your principal residence. You are not excluded from the scheme for previously owning vacant land, commercial or industrial property.
An additional concession—a stamp duty rebate worth up to $1500— is available for the purchase of a new residential home unit in the city of Adelaide, provided it has never been occupied and its allotment size is 350 square metres or less. There is no concession applicable to mortgage stamp duty. The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of RevenueSA at <www.treasury.sa.gov.au/revenuesa> or by phoning (08) 8226 3750. i Tasmania
Again, there are differences for those buying in Tasmania. Here you must pay the normal, full amount of stamp duty on the property transfer and any mortgage, but if you are eligible there is a scheme for an interest-free loan to cover your duty. The loan: i i
lasts for up to two years is repaid by quarterly instalments 197
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i i
is interest-free provided you make all repayments on time covers both stamp duty on the transfer and stamp duty on any mortgage
Properties included in the scheme: i i i
dwelling homes house and land package or where the dwelling is under construction does not cover vacant land
Eligibility criteria: i i i
it must be the first home for all purchasers. you must live there as your place of residence—it must not be used to make income. the value of the land and building must not exceed $120 000.
The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of Tasmania’s Treasury at <www.treasury.tas.gov.au> or by phoning (03) 6233 3100. i Victoria
Victoria runs three different stamp duty concession schemes for transfers of property. One applies to first home buyers with children, the second provides a benefit to those with a Centrelink or Department of Veterans’ Affairs concession card and the third is for buying ‘off the plan’. First home owner with family—eligibility criteria: i i i
198
One or more children under the age of eighteen must be living with you. You must intend living in the property as your principal place of residence. You are excluded if you have previously owned property, solely or with others, in Australia.
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The full concession applies to the transfer of properties which do not exceed $150 000 in value; a sliding scale applies, falling to nil after $200 000. The property must be an existing dwelling or house and land package. There is an exemption from stamp duty on any mortgages (where the applicant has qualified for exemption or concession on the property transfer) where the value of the mortgage does not exceed the value of the property being purchased. Concession card scheme—eligibility criteria: i
i i
You must hold a concession card (issued by Centrelink or the Department of Veterans’ Affairs) at the date of signing the contract to buy the home: Pensioner Concession Card, Veterans’ Affairs Gold Card, Health Benefits Card or Health Care Card. You must intend living in the property as your principal place of residence. You are excluded if you have previously received a benefit under the scheme.
The full concession applies to the transfer of properties which do not exceed $150 000 in value; a sliding scale applies, falling to nil after $200 000. A benefit might also be available for stamp duty on any mortgage. The property must be complete and ready for occupancy. The third scheme is available to everyone who purchases a property ‘off the plan’. They pay stamp duty on the value of the lot they are buying as at the date of contract. There may be big savings if the building has not been constructed yet. The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of Victoria’s State Revenue Office at <www.sro.vic.gov.au> or by phoning (03) 9628 6777 or 13 21 61. i Western Australia
In Western Australia there are concessional stamp duty rates on transfers and mortgages for people buying a dwelling home. In addition there is a rebate of stamp duty on the transfer where that is your first home. 199
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The concessional rate of transfer stamp duty applies only to homes valued no more than $135 000. First home buyers can apply for a rebate of transfer stamp duty up to a maximum of $500. The rebate cuts out on vacant land worth in excess of $52 000 or a dwelling worth in excess of $135 000. The threshold increases to $202 500 where the property is located above the 26th parallel. Properties included in the scheme: i i
existing dwelling vacant land where a dwelling is being constructed
Eligibility criteria: i i
it must be your first home it must be your principal place of residence
A concessional rate of stamp duty also applies to mortgages where money in excess of $35 000 has been borrowed to purchase, improve or erect a dwelling house or to repay a loan which had been used wholly towards the cost of purchasing, improving or erecting a dwelling house. The concessional rate is $0.25 per $100 or part thereof. The precise details of conditions and the amounts of stamp duty you will pay are quite involved and it is simplest and best to get them from the website of the State Revenue Department at <www.srd.wa.gov.au> or by phoning (08) 9262 1100 or 1300 368 364.
OTHER GOVERNMENT ASSISTANCE i First Home Owner Grant
First home buyers may be entitled to other government benefits above and beyond a concession on the stamp duty. In 2001 the Federal Government introduced a generous grant scheme to encourage people to purchase their first home and, in 200
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particular, a newly constructed home. At its height the scheme provided $14 000 to the purchaser of a new construction and $7000 to the purchaser of an existing home (provided it was the first home they had owned). The scheme wound down to $7000 for a first home plus $3000 for a new construction. The $3000 additional component expired on 30 June 2002 but the basic $7000 first home grant remains available (at the time of writing). If you have previously owned property you might not be entitled to the grant but it is worth confirming the details for your situation when you are looking to buy. i Social security
Are you entitled to any benefits from Centrelink? If you have children or are financially looking after any dependants (whether younger or older than you, whether family or not), check with Centrelink to see you are getting your full entitlements or, if already in receipt of payment, confirm that all details and amounts are up-to-date.
PROPERTY PRICES What will you have to pay for a home? An average property price for a suburb or town is found by adding up all the separate property prices in that location then dividing the total by the number of properties. The problem with a simple average figure is that it can be substantially skewed to one side or other depending on which end of the price spectrum all the recent action takes place. So, for example, in a city like Sydney there are many homes selling way above the million-dollar mark. The ‘average’ home price is pushed to a high level which can be misleading because many properties are still sold at low prices. For this reason we often look instead at a different measure of price: the median. The median is not an average but the figure at which 50 per cent of homes are sold at higher prices and 50 per cent at lower prices. It’s right there in the middle. When we know the 201
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median price we know where the property market in a place is centred. For example, in June 2002 the median house price in Brisbane was $230 000. Half the houses being sold in Brisbane at that time fetched prices above $230 000 and half sold for less. If we concentrate our planning on the median price for the city or town we know we are targeting a value where half the homes are affordable on our budget. Of course, the city-wide figures included here just give you a broad idea of property values. If you are particular about the suburb or area where you must live, then, if this is an expensive part of the city, you will clearly be paying more. To fine-tune your planning there are a number of sources of information about property prices. These include: i i i i i i
Local real estate agents. Phone them and check their websites. Newspaper ‘for sale’ classifieds. Magazine sections (e.g. ‘Domain’). Property searches. Real Estate Institute in your State or Territory (see Resources, reading and contacts at the end of this book). Other websites—see Resources, reading and contacts.
Your home deposit will usually be at least 10 per cent of the purchase price, though, if your income and assets support it, you might be able to borrow more than 90 per cent. As mentioned earlier in this chapter, you should be able to avoid paying mortgage insurance if you keep your borrowings at or below 80 per cent. Property figures are on the move constantly, but here, as a point of interest, is the size of deposit you would need to buy the median home in capital cities in 2002.
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Deposit required for a house This is for a 10 per cent deposit on the median-priced house in the city as at June 2002. City
Deposit
Adelaide
$17 000
Brisbane
$23 000
Canberra
$22 760
Darwin
$20 000
Hobart
$13 000
Melbourne
$32 750
Perth
$18 570
Sydney
$38 800
Source: Real Estate Institute of Australia
Median home unit prices are significantly below these figures.
How can I save money on expenses? There are several points at which you can save money on all those extras associated with buying a first home. Here are some hints: Negotiate hard with your bank or lender. They might start things off by wanting to charge you an ‘establishment fee’, also called a loan application fee. Typically, this might be $300 to $600. There is no reason for paying it any more. You will be able to find a lender who will charge you no such fee. If you like you can then return to your preferred lender and ask them to match the deal you have been offered elsewhere. Not all lenders will require a formal valuation report on the property. Again, you can shop around or you can persuade your ideal lender that it doesn’t need it. For example, many in the finance industry will accept that a price paid at public auction is a fair representation of the true worth of a property. This could save you $500 to $600. 203
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You can avoid lenders mortgage insurance if you keep your loan at 80 per cent or less of the value of the property. This could save you $1000+. You should shop around for a solicitor or licensed conveyancer to do the conveyancing. Get a quote. Make sure the quote includes these elements: professional fees, enquiries and search fees, and registration fees. Alternatively, you can purchase a DIY conveyancing kit and do it yourself. Bear in mind the warnings mentioned earlier in this chapter. You should be able to save at least $200 by choosing the best quote. If you have a friend or relative who is a builder or architect you could choose to ask them to inspect the property for you. This represents a saving of $300–$500. But if they won’t do a thorough job—getting into the roof, getting dirty while checking the foundations—it is a false economy. If this will be the first home you have owned, check out any government assistance in the way of grants or concessions. Your lender should be able to advise you on this. Go to the website of your State or Territory revenue office (see Resources, reading and contacts at the end of this book). This could be worth thousands of dollars to you.
SUMMARY Work out all the ‘extras’ costs that are associated with buying a home. These include: i i i
i i i
204
conveyancing costs fees for searches and enquiries fees for expert reports: building inspection, pest inspection, strata/body corporate records, survey report, engineer’s report moving expenses any charges arising from getting out of your leased premises stamp duty
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Know your entitlements! There are government schemes to assist first home buyers with stamp duty concessions and grants. You can save money by doing your own conveyancing. Weigh up the risks first.
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104
CHAPTER
13
THE LAST 26 WEEKS When you’ve got to this point you’ll be on fire, ready to do whatever it takes to reach your target. It’s all downhill from here. What should you do as deposit day approaches? i i i i i i
i
Check your progress on the home deposit worksheet and make any necessary adjustments. Start looking for the most suitable mortgage. See that your savings will be available—that is, not locked away—when you are ready to buy and need your money. Start seeing real estate agents and updating prices. Pay closer attention to auction results—know what is going on out there! Find a solicitor or conveyancer to do the conveyancing for you. Don’t leave it to the last thing. Get quotes or buy a kit if you want to do it yourself. Are there ways of accelerating your savings or income? Now you can suffer and survive things you thought impossible at the start.
Much of this is straightforward, so in this chapter we’ll focus on finding the right mortgage and some issues about new homes— buying ‘off the plan’ and building your dream home.
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FINDING YOUR MORTGAGE Not many of us can afford to buy a home with cash—we have to borrow money. When money is borrowed against the security of real estate we call this loan a mortgage. But which mortgage is right for you? The home loan market has exploded in this country. There are now more than 3000 home loans out there. How do you go about finding the best one for you? You can use a mortgage broker to find the deal for you or you can do it yourself. Start with your existing bank, building society or credit union. See if loyalty counts for anything. Try a few Internet lending sites (see Resources, reading and contacts). Show them (or fill in the blanks in their online form) your financial position—prepare a summary of assets (what you own), liabilities (what you owe), your income (what you earn) and your expenses (the bills you pay). Ask their advice and write down the key points of what they suggest. Use the headings on the mortgage questionnaire following. If you are looking at an Internet mortgage you should be able to find the necessary information on the website to complete a mortgage questionnaire like this. When you’ve filled in details on a number of loans, sit down and go through them with your partner or a wise friend. Then go back to the top two or three deals and ask them to match the best features of the other favoured loans. For example, you might be able to: i i i i i
Get them to waive the application fee. Get other benefits (such as fee-free credit cards). Get the best interest rate. Get them to waive the requirement for mortgage insurance. Get them to add your purchase costs—stamp duty and legal fees, for example—to the mortgage.
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MORTGAGE QUESTIONNAIRE Name of lending institution: Name of mortgage product: Fixed or variable interest rate?: Starting interest rate: Ongoing interest rate: Application fee: Ongoing fees: Any other charges: Term (how many years does the mortgage last?): Penalties for early repayment: Will mortgage insurance be required?: Features:
i i i i i i
Pay fortnightly? Redraw facility? Fees for redraw? Linked cheque account? Fee-free credit cards? Other:
Name of person I am dealing with: Their phone number, email address or website:
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Here’s an example of how you might fill out the form at your meeting with the bank officer.
MORTGAGE QUESTIONNAIRE Name of lending institution: Aussie Home Loans Name of mortgage product: standard variable Fixed or variable interest rate?: variable Starting interest rate: not applicable Ongoing interest rate: 5.95 % pa Application fee: $600 Ongoing fees: nil Any other charges: nil Term (how many years does the mortgage last?): up to 30 Penalties for early repayment: nil Will mortgage insurance be required?: if LVR* is 80% or more Features:
i i i i i i
Pay fortnightly? yes Redraw facility? yes Fees for redraw? no Linked cheque account? no Fee-free credit cards? yes Other: can switch to fixed loan; Aussie Card at discount rate of 6.50% for 8 months; will pay first year’s building insurance up to $400
Name of person I am dealing with: Francis Their phone number, email address or website: Phone 13 1333
Website: www.aussiehomeloans.com.au * LVR = loan to valuation ratio
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LAST-DITCH LENDERS All lenders have rules and sometimes they act to deny a mortgage to a person who can genuinely afford the repayments. For example: i i i i i i i
You are self-employed and are behind with your tax returns— you can’t substantiate your income on the bank’s terms. Your income is not straightforward—perhaps it is tied up with a business or a family trust. The bank does not like the property you want to buy. The bank does not like the location of the property you want to buy. The bank says you are too old to enter such a loan contract. You aren’t putting enough of your own money into the purchase. The bank does not like your job.
There is an alternative way ahead, albeit with some real drawbacks. Many companies now offer what are called ‘non-conforming’ loans. These are home mortgages which do not meet (conform to) the terms and conditions required by banks and most other financial institutions. These alternative lenders will let the borrower ‘certify’ their income level and that they can make the necessary loan repayments without hardship. So, you might be able to get the loan after all. Perhaps you will get one of these loans to cover you for a few years until you are in a position to get a loan from a bank, for example, and refinance the property. But first consider the downside of non-conforming loans: i
i
210
A higher interest rate. You can expect to pay 1.5–2.5 per cent more for your home loan than with a typical bank product. If your situation is in fact very risky for the lender, you could find the interest rate almost doubles. These lenders are well aware that customers might take out a non-conforming loan as a short-term fix until the bank will lend them the money. Accordingly, they charge a substantial fee if the borrower pays out the mortgage within
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i
the first few years. For example, the fee structure might be: four per cent of the loan principal to exit within the first year, three per cent within the second year, two per cent within the third year, and so on. On a $100 000 mortgage the borrower will pay $4000 to get out within the first twelve months. Whoever refers a borrower to one of these loans gets a hefty commission. It is something like $1200 up front plus a trailing commission for the life of the mortgage. As with all loans, be aware of any pressure being applied by the salesperson to get you into the deal.
Proceed with caution. It would be preferable to find a more traditional lending institution prepared to work with you to meet the terms and conditions for approval.
MAKING COMPARISONS How can we compare the cost of different loans? One has a low starting rate, another has a higher rate but good features, a third deal advertises no up-front application fee—it’s not easy to know the bottom line. For example, in 2002 there was a mortgage with an advertised ‘honeymoon’ or starting interest rate of 3.99 per cent which reverted to a standard variable rate of 6.07 per cent which carried high fees. Was this a good deal? There are a number of ways of making a comparison but one of the more widely used methods is the AAPR—the annualised average percentage rate. The AAPR calculates the all-up cost of a mortgage including any honeymoon period, up-front fees and ongoing fees. It bundles them together so you can estimate the real cost of a loan. As most loans are now paid off within seven years—or the property is sold within this timeframe—the AAPR uses this period as the basis for the calculation. But the AAPR is not a perfect tool. For example, it won’t inform you about other benefits or drawbacks of a loan, such as whether there 211
212
Ultimate Home
Bendigo Bank
4.84% for
na 5.64%
5.65%
na = not applicable
AAPR—a comparison interest rate (see page 211) called the ‘Annualised Average Percentage Rate’
Source: Cannex 13/3/02
Yes Home Loans 12 months
Standard variable Discount Access
The Rock Webloan
5.07% for
6.07%
6 months
6 month fixed
Sydney Credit Union
5.56%
5.90%
5.49%
Ongoing interest rate
5.54%
na
na
na
Initial interest rate and term
Endeavour Australian Credit Union Essentials Home Loan na
Loan
Commonwealth Bank
Economiser Home
Basic variable rate
Aussie Home Loans
Loan Package
Loan product
Lender
$1040
$407
$749
$600
$600
$685
$820
Application fee
0
$5
0
0
$8
$8
0
5.60%
5.72%
6.05%
5.59%
5.66%
6.01%
5.61%
Ongoing AAPR monthly fee
These are examples from 2002 to illustrate how AAPR helps borrowers compare loan deals
AAPR for various types of home loan
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is a redraw facility, offset account, or special penalties. Get the AAPR and the terms and conditions before you make your choice. You can find out the AAPR for most loans from advertisements or by looking up mortgages on the Cannex website <www.cannex.com.au>. It runs a calculator based on a number of assumptions (such as a seven-year timeframe). It’s quick, easy and illuminating to see how the fees and interest rates interact—the ‘cheapest’ advertised mortgage might turn out to cost more than one which sounded more expensive. Also try <www.interestrate.com.au>. National regulations which require lenders to specify the comparison rate of their loans in any advertisement are scheduled to commence from 1 July 2003. Check the fine print. Second, be careful about loans with advertised ‘honeymoon rates’. These loans have an initial period of very low interest rates. When the period expires—usually six or twelve months later—the loan rate rises to a more standard rate. You may be in for a bargain, or then again maybe not. The AAPR calculator tells the story. Here are some examples based on the following data: Valuation of home: $225 000. Amount to borrow: $200 000. Loan-to-valuation ratio (LVR): 89%. Term: 25 years. Type: variable interest rate, principal and interest being paid. What will the honeymoon rate deals mean in the pocket? With the Sydney Credit Union deal you start with a monthly repayment instalment of $1177, rising after six months to $1295. Over at Yes Home Loans you commence at $1151 per month rising to $1242 per month. There’s an extra $53 per month that stays in your pocket with the second loan. (Note, however, that things can and will change over the life of the loan—the better performer today won’t necessarily stay that way as fees and interest rates move over time. The AAPR is just a guide at today’s prices; consider all the other factors of the loan options as well.) Trap: If you use a mortgage broker or other intermediary to help you find your loan always ask for full details on who pays them for their services and how much they get for each mortgage 213
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product they recommend. Make sure that you are not being set up with a mortgage simply because it will earn the broker the highest commission.
FIXED AND VARIABLE INTEREST RATES Most home mortgages have a rate of interest which can rise or fall during the term of the loan depending on a number of economic factors. This is called a variable rate loan. A second type of mortgage has an interest rate which will not change at all. It is a fixed rate loan. You can get your lender to give you a mix of the two, with part of your loan at a fixed rate and part variable. The table summarises the pros and cons. The two sides seem out of balance. But fixed-rate loans offer a powerful benefit: security. If you can afford the repayments today you can probably afford them tomorrow too. You can sleep easier at night, particularly when the news is full of talk of rising interest rates. Features are another issue. To get the lowest interest rate you might have to forgo some of the features, like free and easy redraws, fee-free credit cards and linked cheque accounts. Is it worthwhile? Make a list of the features you want in a loan so that you are not caught in an inflexible mortgage which doesn’t suit the way you want to run your finances.
CHOOSING A PROPERTY i Setting your target suburbs and homes
You undoubtedly know how to go about finding the suburbs and homes you can afford and want to live in. You’ll check out the Saturday and local newspapers, look in real estate agency windows and move around the streets picking up on any ‘For Sale’ signs. You’ll soon find out what you can and cannot afford. But I’d like to add a few pointers for more probing action: 214
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i Don’t just look in the windows—get the agents on your side
Many times I’ve found out about properties which were not yet for sale. You can get in first if you have made contact with local agents and have established some kind of relationship. A good agency has properties coming up for listing all the time. They are always in discussions with people thinking about selling. You can get the details well before that photograph is taken and placed in the window. Second, an agent can point out for you the target streets and apartment blocks which are in your price range. This narrows your search and helps save you wasting time. Third, some agents are prepared to take an active role in finding the property for you. They will phone their contacts, knock on doors or even prepare a flyer to go in local letterboxes. And they’ll call you if they get a positive response. Don’t underestimate what a motivated agent will do on your behalf. Similarly, don’t believe they’re on the case for you if you’re not getting regular calls from them. i Use the Internet
Most ‘for sale’ properties end up in the newspaper classifieds on Saturday. But the development of the Internet has reached the point where estate agents are posting details of properties earlier in the week. It might be on Fridays (to get ready before the weekend), it might even be daily. The point is: you’ll find it on the web first. What’s more, the quality of information is, in many cases, excellent. Often there will be a range of pictures of the property and there might even be a ‘virtual tour’ so you can see more. You can copy some of this information and print or email it to a friend or partner elsewhere—they can admire the pictures too and you can start discussing the property. And then there are special websites which do a little more for you. Some agencies and property sites let you specify your price range, suburb and type of property, and will email you when something comes up. Again, I wouldn’t rely totally on being kept up-to-date by 215
216
within your initial budget.
and you can maintain your
5 or 10 years are common. After that you must renegotiate your
for a long term—25 to
30 years. additional expense).
The loan term is shorter—1, 2, 3,
amount as before; no change.
You can take out a mortgage
mortgage (which may involve
This hurts—though you are still
your costs remain the same budget.
rates are rising elsewhere—
paying more. This could
less.
blow out your budget.
When interest rates fall you are left paying the same monthly
—and you will start paying
Security. The interest rate does not change even when
Insecurity. The interest rate can rise—and you will start
The interest rate can fall
month.
the loan costs you less each
Generally, these are higher than
Disadvantages
current variable interest rates.
Advantages
interest rates you can get—so
Disadvantages
FIXED INTEREST RATE
Generally, these are the lowest
Advantages
VARIABLE INTEREST RATE
Pros and cons of variable and fixed interest rates
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and this can amount to thousands of dollars, particularly if fixed
the mortgage early—such as
when you sell the property.
higher-than-budget rate. Check this out carefully.
‘no frills’ loans at cheap
interest rates or a ‘honey-
moon rate’ loan.
features you want.
inflexible and lack the
No frills deals might be
The honeymoon ends and your rate might lift to a
Here’s where you will find
—see above).
the early repayment penalty
down the track (except for
No unpleasant surprises
No honeymoon rate.
facility.
a redraw facility—you can
get at your home equity.
Less common to find a redraw
Easy to find a mortgage with
commenced the loan.
interest rates have fallen since you
There is a penalty for
Disadvantages
FIXED INTEREST RATE
ending the mortgage early—
Advantages
There is usually a penalty for
Disadvantages
VARIABLE INTEREST RATE
Little or no penalty for ending.
(continued)
Advantages
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this service—I’ve been disappointed—but they can only improve as time goes on. See Resources, reading and contacts at the end of this book. i Reports for sale
There are businesses which specialise in pulling together reports on property sales. For a fee they will give you a report on the suburb or area of your choice. This should include sales price information but might also incorporate social statistics such as local income, migration, education and crime data. Estate agents should be able to give you the web addresses for those operating locally. A few examples are <www. apm.com.au> (Australian Property Monitors), <www.homepriceguide.com.au>, <www.domain.com.au> and <www. propertyvalue.com.au>. The Real Estate Institute in your State or Territory also produces statistical information which can prove useful for your research.
DANGER ZONES FOR BUYERS When you can walk around the property and get it inspected by experts where necessary, and you know the price being asked, life is pretty straightforward. Here are three exceptions: 1. Buying off the plan 2. Building your dream home 3. Buying at auction
1 BUYING OFF THE PLAN When there’s a housing boom with prices seeming to rise every weekend you start to see these ads appear: ‘Buy off the plan! Get in now!’ What does it mean and is it a good idea? Essentially, buying off the plan is about purchasing a home that has not been completed yet. In fact it might just be a hole in the 218
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ground. Or it could be an old warehouse which is being transformed into residential units. It is the meeting point of two strong interests: You, the buyer, want to get into the property market now. You are concerned that if prices continue to rise you may miss out altogether. Importantly, you want to agree on a price now, even if it takes many months or a couple of years before you can complete the purchase and actually move in. Or you may be keen on this particular building or development—the location, the floor plan, the finishes—and know that this is the place you want to call home. You may be worn out from inspecting properties which, in your price range, are run-down, broken, dirty, depressing, dark and dank, and you are willing to pay more to get a property which is brand new, shiny and clean. And the property developer wants to sell before the property is finished. Developers are always short of money. The process is a long one, from purchasing the site through to getting plans prepared and passed through council, then construction work and expensive marketing drag on. All the time the interest bill is rising—the developer has had to borrow money to finance the work. And, for a couple of years, there is no cash coming in. The property developer can start to pay its bills and keep the bank off its back if it can persuade prospective purchasers to hand over some cash straight away and to sign contracts for purchasing units. Buying off the plan means buying before the property is ready. It is a future hope not a present reality. The ‘plan’ shows the units— their size and location in the complex—and gives details about the finishes (granite benchtops, type of taps, etc.) and how the property will be run (the strata plan, its rules, carparking, exclusive garden areas and so on). You’re not always buying what you see in bricks and mortar—you are being asked to buy off paper. One of the incentives is that you might not have to pay a full 10 per cent deposit straight away then lose the use of that sizeable chunk of money for up to two years. You might be able to secure the property—at its current price—for much less. This involves getting a financial institution to pay the 10 per cent deposit on your behalf. In return, you pay that institution a fee ranging from around half a per cent to almost 2 per cent of the full purchase price of the property. 219
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This is called a deposit bond or deposit guarantee. The actual amount varies according to the time period until completion of the building and the amount you want to borrow (the shorter the term and the smaller the amount mean a lower fee). Illustration: deposit bond You want to buy a property ‘off the plan’. It is selling for $400 000. The required deposit on exchanging contracts is 10 per cent— $40 000. Time to completion of the property is an estimated eighteen months or two years. If you can’t get the cash right away, or if you don’t want to leave your deposit money sitting doing nothing much for eighteen months, you can buy a deposit bond. The bond will cost you approximately: i i
$2000 for an eighteen-month period, or $2900 for a 24-month period (mid-2002 figures).
This is a fee—it is not credited against the 10 per cent deposit on the property. Note also that different financiers will have their own formulas for their fees. If the building has already been constructed but you can’t get your hands on any spare cash at the moment to pay the 10 per cent deposit, you can also use a deposit bond or guarantee to pay the deposit for you. In this situation the fee is around 1 per cent of the purchase price (it’s similar to what used to be called ‘bridging finance’). Then, on settlement or completion, you pay the purchase price. This way you can ease your way into the property market. But you should not use a deposit bond if you will not be in a financial position to complete the contract and purchase the property. Another great attraction applies, as it does when buying any brand new property: more depreciation for investors. Depreciation is a tax deduction on the fabric of the building (bricks, windows, roof, etc.) and on the fixtures and fittings (carpets, blinds, stove, etc.). Each year the owner—who has put the property up for rent—will be 220
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able to claim a tax deduction for the economic ‘wearing out’ of these things. Without going into details here (as it is more to do with investors than buying a home), this is worth a lot of money. In fact, the tax deduction can help you borrow more money and thereby afford to buy a more expensive property. Brand new developments are very attractive to investors—you will bump into them when you go to the sales office. This can also have the effect of keeping prices high, so beware. (It goes against my nature to self-promote, but if you want to find out more about depreciation and other issues involved in purchasing a property for investment get hold of a copy of my book entitled Smarter Property Investment, also published by Allen & Unwin.) There are a number of problems underpinning this situation and it is a good thing to be aware of the dynamics at play: i What you see is not necessarily what you will get
At its simplest there is the problem of the home being smaller in real life than it looked on paper. Or you failed to take into account the fact that the view from the not-yet-existing seventh floor was straight into the seventh floor of the building next door. Reality will always be different from the drawings. But changes can take place too. Perhaps during construction it became clear that the original design could not be followed to the letter. Sometimes floor space or layout must be changed and your unit becomes smaller. And noise. Sound penetration is becoming a unit killer. Maybe it’s the fault of new construction techniques. Whatever. The problem of sound penetration is forcing many owners out of their beautiful apartments. There’s no way the plan can prepare you for this—there is no substitute for the real thing. I’ve heard people complain, ‘You hear when every neighbour goes to the toilet or turns on the shower.’ Buying off the plan is inevitably a punt in the dark. However, the contract should specify clear instances where you can walk away from the deal—such as excessive loss of floor space. This is one example of why you need an experienced lawyer or other expert adviser when entering an ‘off the plan’ contract. 221
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i You may be paying a premium
Many investors like buying ‘new’ because of the better depreciation cashflow. Battle-weary home buyers turn to ‘new’ when they have had enough of ‘old’. Overseas investors are steered towards buying new properties because of Australia’s foreign investment rules. These are motivated customers—and they are often willing to pay extra. You’ve got to do your valuation homework carefully when buying a new property such as one off the plan. Are you being asked to pay too much? A couple of years ago I looked at two identical units in multistorey buildings, both in a great location across the road from a major university. Both were in similar developments of a modern style: excellent facilities (shared gym, pool, high-level video security), two bedrooms, two bathrooms, internal laundry, security carspace, balcony with identical views. One was five years old and the other brand new. The fittings and fixtures in the older one were lightly worn but still in very good condition. The older unit was selling for $300 000 and the new one for $400 000. I’d say that extra $100 000 was a lot to pay for ‘new’—a 33 per cent premium. Remember, when buying off the plan you are also paying for the significant marketing costs of the developer. Many of the large new developments are promoted with ads and seminars in overseas markets as well as across Australia. It’s not cheap and someone has to pay for it. Note the stamp duty concession in Victoria (see page 198). i The developer could go broke
The developer’s life is one of constant risk. There is debt, debt, debt, followed by a BIG payday once every two or three years. It’s not hard to go broke. There are provisions in the contract to protect the interests of those who have purchased off the plan, but delays and other problems are possible. You should have the right to get out of the contract, but will you want to? By that time it might be impossible to find a similar property at the same price, so what good is it getting your deposit back? It’s terribly hard to face walking away with your original stake when the market has moved forward.
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i The reputation of the development has not yet settled
Ask around and you will hear the word on the street about the different property developers currently selling off the plan. Some buildings quickly attract a bad reputation—this can affect long-term values in the complex. Good reputations take longer to mature. The best you can do is to check out previous developments by the same company and, if possible, speak to the people who live there. There is also the general warning about buying into a building constructed during a property boom. When there’s a lot of work about, the best tradespeople are snapped up quickly and lessexperienced or capable tradespeople are called up to the front line. Tradespeople raise their prices but developers are often caught in fixed-price contracts—this can lead to cutting corners. It’s a time to be particularly careful. i Ensure your purchase contract includes:
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The strata plan. This must show the areas of your unit, car space, storeroom, any private land space (courtyard or garden), balcony and so on. A schedule of what’s included in your unit and how the ‘finishes’ will be applied (number of coats of paint, brands of fixtures such as the sink, taps and toilets, benchtops, appliances, number of powerpoints, etc.). A plan of the interior of your unit drawn to scale. A copy of the council-approved building plans and specifications. A clear obligation placed on the vendor to ensure the building construction is commenced by a certain date, that it is constructed using new materials and completed by a specified date. If the date passes unmet you can bail out. A procedure for handling delays and variations (for example, where specified appliances or finishes are not obtainable or a wall has to move a few centimetres). A time limit for the vendor to fix any defects in construction once you get to inspect the unit. 223
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2 BUILDING YOUR DREAM HOME Sometimes the only home we want is the one we’ve had a hand in designing. It might be a project home or you might use an architect to create a unique property. Maybe you’ll go for a kit home and build it yourself on weekends and holidays. Needless to say there are many opportunities for costs to escalate and for delays to occur. Should these problems put you off? Not if you and your partner can handle the stress. But you should do at least these five things: 1.
2.
3. 4.
5.
Get a good lawyer. Even basic building contracts are, in my experience, weighted in favour of the builder. An expert solicitor who is familiar with these contracts should be able to negotiate much better terms for you. This is not a time to skimp on costs—the risk is truly ruinous. Check out the contracts prepared by some Fair Trading Departments. Have cash or credit up your sleeve. It is rare to hear of a new construction which came in under or on budget. You can’t blame the builder for all of this either—often it’s the owners who want a little extra here and there as the building takes shape. If you haven’t got access to credit or further cash reserves you are asking for trouble down the track—you will be vulnerable to getting screwed. Remember the builder is probably running on empty too and cannot afford delays in receiving payment. The scene is set for a head-to-head battle of desperate foes if something goes wrong. Speak to friends who have gone through the process of having a house built for them. Extract their tips and hard-won wisdom. Check out the builder. Call your local builders’ licensing authority and confirm the builder is licensed and covered by indemnity insurance. Inquire also about any investigations or complaints involving the builder. Inspect the builder’s previous work.
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supervisor to do this for you. He or she will inspect the site and go through the bills to see that your interests are protected and that potential faults are identified while it is still relatively inexpensive to carry out remedial work. Do not rely on council building inspectors to do this job for you as it is not their prime focus.
3 BUYING AT AUCTION There are two main ways of buying a home: private treaty or at auction. A ‘private sale’ might mean you are purchasing direct from the seller (vendor) without the use of an agent or there might be an agent negotiating the deal and marketing the property. If it is a private sale the price is usually known. Get hold of a copy of the contract (from the agent or vendor) and look for any obvious problems. Negotiate on the price to get the best deal you can. If the vendor accepts your offer, you then take the contract to your conveyancer (solicitor or licensed conveyancer) and he or she will give you a view of the legal situation, including any less obvious problems, and make some searches and enquiries on your behalf. At this point you should also discuss obtaining expert reports (see chapter 12). You may feel entitled to renegotiate the price if you unearth any problems. When you and the vendor have agreed on the terms and signed the counterpart contracts your legal representatives will exchange the signed copies. At this point the parties become bound to sell and purchase the property respectively. Four to eight weeks later, after all the searches have been completed and you have signed the mortgage documents with your lender, completion or ‘settlement’ takes place and the balance of the purchase monies are handed over by the purchaser or their lender. And the purchaser gets the keys and possession of the property. Auctions are more tricky. Here the price is unknown. Further, any money you spend on searches and enquiries is at risk—if you don’t win the property these fees are money down the drain. And we are talking hundreds of dollars’ worth of fees to check out a property 225
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properly. Still, that’s the way it is in many cities and in the ‘hot’ areas of many towns, so we have to learn to live with it. What can you do about auctions? i
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Strike first: if your research in the suburb informs you what is the fair price for the property, consider making your offer before the auction. Assess the competition: go to several ‘open house’ inspections and see who and how many turn up. (The agent usually runs a list of names, so get a glimpse of it.) Ask the agent where you stand. Don’t trust any suggested price range: if the property has anything special about it—and I mean anything—then no one really knows what price it will fetch at auction. This includes the estate agent—who may be following a strategy either to talk down the value or to talk up the value. Who knows? One tip is to speak to a number of other local agents. They should know the property and will give you a guide to where it fits in the price range of the suburb. At least this is a viewpoint with a bit of distance on the subject. Determine your auction ceiling. Before the auction you should know how far you are prepared to go. Having discussed this with your partner (where applicable), ensure you have another two or three thousand dollars hidden somewhere because in the heat of the battle it is quite likely you will go beyond your so-called ‘agreed limit’. That’s the way we humans are built. Determine your bidding strategy. There are four theories or commonly used techniques for bidding: Out from Behind the Curtains: wait quietly until the main bidders have slowed to a standstill. Then make your first bid. This shows you are cunning and patient. The Drip Method: after every bid from another, top it by a paltry $500. Do this time and time again and without hesitation. This drives everyone nuts—but they do not know when it will stop. And they know you mean business.
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Money to Burn: when all other interested players have slowed their bids to $1000 increments, come in over the top with a huge increase—like $5000 or $10 000 above the last bid. This scares the pants off everybody. Why would anyone be so extravagant when they might have got the place for less? Obviously, you must keep within your own estimate of the true value of the property. Hold the Phone: get an agent to make the bids on your behalf. The agent is on the mobile phone to you—you are at home or even just outside the auction venue. This looks coolly professional and adds enormously to the ‘mystery bidder’ atmosphere. No one can read your expression or size you up. Be aware that some vendors and auctioneers introduce fake or dummy bids/bidders to push the price up. I’ve seen it happen several times and I suspect it will continue in some form—there is a lot of money at stake. At the time of writing, moves are afoot in some States to make this illegal, requiring all bidders to pre-register and limiting the owner/vendor to a single bid on their property. Other laws in the pipeline target agents who misrepresent the estimated selling price of a property and seek to introduce a cooling-off period when consumers sign an agency agreement for the sale of their property. Ask your agent about these reforms when you come to buy.
A final hope—for those who can’t get it together Has it all fallen in a heap? Are you sure you will never be able to save a home deposit? Cheer up—you’re not alone and there are still some options. Maybe you’re unemployed and there’s absolutely no work in your locality. Perhaps injury, illness or the assaults of life have left you economically unemployable. Are there family or cultural reasons why you can’t get a big lump of cash together? There 227
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are lots of good reasons why some people will never be able to save much money. There may still be hope of getting your own home. Consider these four options: i Group self-build State governments facilitate a number of schemes designed to assist people who are prepared to help with the construction of a home. Basically, a local organiser (an experienced building supervisor) puts together ten or twelve families who are prepared to work on the construction of separate homes for each of them. You put in your labour—something like a minimum of twenty hours per week (generally on weekends)—and the government assists with bridging finance, tools and some training. It is up to you (and your co-worker families) to make it happen and to deliver the right quality. You don’t need a deposit at all—your labour is your deposit (it is referred to as ‘sweat equity’). You can expect to take nine to twelve months to build the home. Costs are reduced because your group is able to obtain bulk discounts on many of the construction materials. At the end of the construction period you should have sufficient equity in the building to satisfy a lender and get a mortgage. Some schemes also have a rental system, where you pay rent for accommodation and also put in your sweat equity to earn shares in the equity of a property which could one day become your home. Contact your local council to see if any scheme is operating in your area. To get more of an idea about it all, take a look at the website of the South Australian Community Housing Authority (SACHA) <www.sacha.sa.gov.au>. Victoria also runs an extensive program, having built more than 500 homes this way. i Charitable organisations Habitat for Humanity is an international non-profit nondenominational Christian housing organisation ‘with a charter to
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build simple, decent, affordable houses in partnership with those in need of adequate shelter’. It has helped put 500 000 people into 125 000 homes in 83 countries—including 34 homes in Australia since 1991. It helps low-income families, and others, to get a home with a no-interest mortgage. ‘A Family Selection and Nurture Committee chooses homeowners on the basis of need, willingness to become partners in the HFHA program and their ability to repay the loan. Every HFHA affiliate follows a policy of nondiscrimination in their family selection process.’ There are a number of eligibility criteria which you can check out on their website at <www.hfhaustralia.org.au>. If you are willing to help out in some way—for example, with labour—that should aid your case. In your local city or town there might be other charitable organisations or individuals who are motivated to help people get their own homes. If you belong to a cultural organisation or club, for example, ask the leaders if they are aware of any programs of this nature. i Government schemes They can be hard to find, but from time to time various government agencies promote schemes to get people into homes at low cost. Check with Centrelink about getting into government housing which you may be able to purchase from the government at some point. Other financial assistance could be available. In late 2002 the Commonwealth government began looking at the problem of housing affordability, particularly in the larger capital cities. The prime minister raised a number of possible approaches including the idea of banks and other lenders becoming co-owners of a person’s home, so as to reduce the cost to the borrower of financing the mortgage. The lender would share in the ongoing cost of paying for the home but would also share in any capital gain on that property. Needless to say there are a number of concerns over such proposals and much work and thought would need to go into any scheme that artificially affected the property market and property prices. Still, keep an eye on the
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newspapers and see if anything concrete emerges from these deliberations. i Move to the country There are enormous tracts of this nation where housing is very, very cheap. Occasionally, local councils attempt to give land away to anyone who will move to their town and build. Your children help keep teachers at the local school, you buy your food, petrol and other supplies locally, your very presence is an asset to the community. Of course, lots of these towns are on a slow path to oblivion. The bank goes, the supermarket closes, the police station shuts, the doctor leaves town . . . and so on. And if the housing is cheap you may find it difficult to sell should you tire of your ‘sea change’ and want to rush back to the noise and bustle of big city living. What is a house worth in a dying rural town? How long will it take to sell if no one new passes that way? However, there are many regional towns and cities with healthy economies. While parts of even these towns suffer from stagnant property values there will be other key locations showing respectable capital growth on your asset. If you choose wisely, and with good advice behind you, you might just do well out of buying in these towns and cities. And you might love the lifestyle. Rent first in the area before you buy.
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Get the right mortgage! There are thousands of different mortgage products on offer but some will suit your needs better than others. Pay particular notice to the interest rate, up-front and ongoing costs, and features such as redraw. Compare the AAPR of various loans. Consider whether to lock in an interest rate you can afford (a ‘fixed’ rate mortgage) or to go with a variable rate. You can have a bit of both.
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Buying a new property ‘off the plan’ might deliver some savings, but there are major risks when buying sight unseen. Similarly, building a new home often seems very stressful. Allow for things to go wrong and ensure you have spare cash or credit to get the job done. If buying at auction, sort out your technique and budget in advance. If all else fails there are organisations which can help you get your own home if you are prepared to work creatively.
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104
CHAPTER
14
SOME WORKED EXAMPLES What does it all look like? You’ve seen the blank home deposit worksheet in chapter 2, now here are some illustrations to show how different people might fill theirs in. This should give you a few ideas about how to do it yourself. If you have a partner, sit down together. Get a calculator so you can better understand what’s going on. There’s nothing magic about it—small sums of money if saved and set aside out of easy reach as you go can add up to a home deposit. But if you don’t put your savings or additional income into a special savings account at least each week or fortnight you may as well kiss it goodbye. That’s the critical step on which you will build your deposit.
EXAMPLE #1—THE SINGLE PERSON You have to do it alone. You’re leading an active life and have travelled a bit, so your garage sale should be good. You’re prepared to give up your freedom, grit your teeth and move back with your parents for 52 weeks. You know you could put into automatic savings $30 per week straight away without affecting your lifestyle. There are a few shares you’ve picked up over the years from a couple of popular company floats—you feel OK about selling them 232
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sometime over the savings period. You’re aware you’ll have to do some serious part-time work to boost your income—perhaps all day Saturday or two four-hour shifts spread over the week. You’re prepared to cut back on a few of your vices and luxuries for 104 weeks. Food waste, eating out, subscriptions/memberships, clothes and CDs/books are where you think you can make some major savings. ASSETS Cash value
Existing savings
See chapter 3
Money in bank accounts now
$1500
Money in term deposits now
$……….
Value of shares now
$2500
Value of units in managed funds now
$……….
Money owed to me (from friends, family, etc.)
$……….
now or in a trust fund Money in property (e.g. shared ownership,
$……….
where the property will be sold) now
Total savings now
$4000
Cash value after sale
Assets
See chapter 3
Garage sale (estimate)
$1500
Specific items of value which
sports equipment
can be sold (estimate)
$200
e.g. car, sports equipment,
………. $……….
jewellery, furniture, collectables
………. $……….
Total asset sales
$200
$1700
Value after 104 weeks
233
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Cash value
Gifts and support
See chapter 8
From parents and family
Per birthday, Christmas and other special occasions
$….….
$………. Subsidy
Description (estimated value
$……….
of subsidy) scheme
Total gifts and support
nil
INCOME Value after 104 weeks
New income to be saved My income
[$700… per week net]
Partner’s income (if relevant)
[$nil per week net]
What I/we could
See chapter 4
save now from my/
$30.... per week net
$3120
our income(s) each week Part-time job#1 See chapter 6
$7991 $………. per week net
$……….
Part-time job #2
$………. per week net
$……….
Part-time job #3
$………. per week net
$……….
Existing job #1—overtime
$………. per week net
$……….
Existing job #2—overtime
$………. per week net
$……….
Annual leave—additional work
$………. per week net
$……….
$………. per week net
$……….
for me Annual leave—additional work for my partner
Total new income to be saved
234
$11 111
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EXPENSES Value after 104 weeks I/we can cut back in these areas
Transport
See chapter 9
What I/we can save by not using or
$………. per week
$……….
$………. per week
$……….
owning a car Cycling/walking—saving on public transport fares
Total transport saving
Communications
See chapter 9
Mobile phone Fixed-line phone
$………. per month
$……….
$………. per month
$……….
Total saving on communications
Loans
$……….
$……….
See chapter 9
Loans reassessment
$……….interest saved per year
Total saving on loans
Insurance
$……….
See chapter 9
Policies reassessment—
$100 per year
am I paying too much?
Total saving on insurance
Waste
$200
See chapter 9
Food
$10…. per week
$1040
Energy
$………. per week
$……….
Total saving on waste
Regular fees
$1040
See chapter 9
Memberships
$250 per year
Subscriptions
$120 per year
Other
$………. per year
Total saving on regular fees
$……….
$740
235
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Value after 104 weeks
Luxuries
See chapter 7
Luxury #1
$70…. per week (restaurants, takeaway)
Luxury #2
$25…. per week (CDs, books, magazines)
$2600
Luxury #3
$250 per year (saving on clothes)
$500
Luxury #4
$………. per week
$……….
Luxury #5
$………. per week
$……….
Luxury #6
$………. per week
$……….
Luxury #7
$………. per week
$……….
$7280
Total luxuries saving $10 380
Rent
See chapter 8
(current rent or board $150 per week) Moving to cheaper
$……. per week for ……. weeks
$……….
premises Living with parent(s)
$150 per week for 52 weeks
(after deducting any board I/we will pay) Living with friends
$……. per week for ……. weeks
$7800 $……….
Total rent saving $7800
Presents
See chapter 8
To my partner from me
$….…. per birthday, Christmas and other special occasions
To me from my partner
$……….
$….…. per birthday, Christmas and other special occasions
To my family
$……….
$….…. per birthday, Christmas and other special occasions
To my partner’s family
$……….
$….…. per birthday, Christmas and other special occasions
$……….
Total presents saving $……….
236
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Value after 104 weeks
Superannuation
See chapter 9
Amount ‘saved’ if I/we
$………….per week, or
$………
stop paying voluntary
$………….per year
$………
superannuation contributions (e.g. self-employed or employee ‘salary sacrifice’)
Total superannuation saving
Vices
$……….
See chapter 10
Smoking
$………. per week
$……….
Alcohol
$12 per week (one less bottle of wine)
$1248
Recreational drugs
$………. per week
$……….
gambling
$………. per week
$……….
Total vices saving Total saving on expenses
$1248 $21 408
GOVERNMENT HELP WITH YOUR DEPOSIT Value after 104 weeks
Government assistance First Home Owner Grant
See chapter 12
One-off payment
Other scheme?
$7000 $……….
Total government assistance
$7000
237
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WORKSHEET SUMMARY Where the money is coming from
Value after 104 weeks
Total savings now
$4000
Total asset sales
$1700
Total gifts and support
$nil
Total new income to be saved
$11 111
Total saving on expenses
$21 408
Total government assistance
$7000
HOME DEPOSIT GRAND TOTAL
$45 219
EXAMPLE #2—THE COUPLE WHO WON’T SACRIFICE LIFESTYLE You know it’s going to be a hard slog. Maybe you’ve tried before and failed. So you’re realistic about what you can achieve. You’re not going to move in with anyone to save rent! However, one of your parents is prepared to sponsor you along the way. One of you will return to an old part-time job you once had as a waitress, the other will work over his holidays but not during the normal working week—he’s just too wrecked already. Existing savings are small and there are no shares to sell. You are happy to ask relatives to give you cash instead of presents and you will do the same for each other and your parents. You’ll get rid of the second car—it’s not worth much but every little bit helps now. You’ll replace it with another cheapie once you’re in your home.
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ASSETS Cash value
Existing savings
See chapter 3
Money in bank accounts now
$500
Money in term deposits now
$……….
Value of shares now
$……….
Value of units in managed funds now
$……….
Money owed to me (from friends, family, etc.)
$……….
now or in a trust fund Money in property (e.g. shared ownership,
$……….
where the property will be sold) now
Total savings now
$500
Cash value after sale
Assets
See chapter 3
Garage sale (estimate)
$800
Specific items of value
car parts $350
which can be sold (estimate)
camera $100
e.g. car, sports equipment,
2nd car $2000
$2450
jewellery, furniture, collectables
Total savings now
$3250
Value after 104 weeks
Gifts and support From parents and family
See chapter 8
Per birthday, Christmas and
$……….
other special occasions $….…. Subsidy
Description of subsidy
(estimated value)
$1000
scheme $50 for each $1000 we save…..
Total gifts and support
$1000
239
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INCOME Value after 104 weeks
New income to be saved My income
[$540 per week net]
Partner’s income
[$320 per week net]
What I/we could
See chapter 4
save now from my/
$15…. per week net
$1560
our income(s) each week Part-time job #1 See chapter 6
$6581
$………. per week net Part-time job #2
$………. per week net
$……….
Part-time job #3
$………. per week net
$……….
Existing job #1—overtime
$………. per week net
$……….
Existing job #2—overtime
$………. per week net
$……….
$………. per week net
$……….
$………. per week net
$4384
Annual leave—additional work for me Annual leave—additional work for my partner
Total new income to be saved
$12 525
EXPENSES Value after 104 weeks I/we can cut back in these areas
Transport
See chapter 9
What I/we can save by
$………. per week
$3000
$………. per week
$……….
not using or owning a car Cycling/walking—saving on public transport fares
Total transport saving
240
$3000
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Value after 104 weeks
Communications
See chapter 9
Mobile phone
$………. per month
$……….
Fixed-line phone
$………. per month
$……….
Total saving on communications
Loans
$……….
See chapter 9
Loans reassessment
$………. interest saved per year
Total saving on loans
Insurance
$……….
See chapter 9
Policies reassessment—
$100 per year
am I paying too much?
Total saving on insurance
Waste
$200
See chapter 9
Food
$………. per week
$……….
Energy
$………. per week
$……….
Total saving on waste
Regular fees
$……….
See chapter 9
Memberships
$………. per year
$……….
Subscriptions
$………. per year
$……….
Other
$………. per year
$……….
Total saving on regular fees
Luxuries
$……….
See chapter 7
Luxury #1
$………. per week
$……….
Luxury #2
$………. per week
$……….
Luxury #3
$………. per week
$……….
Luxury #4
$………. per week
$……….
Luxury #5
$………. per week
$……….
Luxury #6
$………. per week
$……….
Luxury #7
$………. per week
$……….
Total luxuries saving
$……….
241
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Value after 104 weeks
Rent
See chapter 8 (current rent or board $.…...per week)
Moving to cheaper
$……. per week for ……. weeks
$……….
$……. per week for ……. weeks
$……….
premises Living with parent(s)
(after deducting any board I/we will pay) Living with friends
$……. per week for ……. weeks
Total rent saving
Presents
$……….
$……….
See chapter 8
To my partner from me
$30 per birthday, Christmas and other special occasions
To me from my partner
$30 per birthday, Christmas and other special occasions
To my family
$30 per birthday, Christmas
To my partner’s family
$30 per birthday, Christmas
and other special occasions and other special occasions
Total presents saving
Superannuation
$180 $180 $120 $120
$600
See chapter 9
Amount ‘saved’ if I/we stop
$………….per week, or
paying voluntary superannuation $………….per year
$………. $……….
contributions (e.g. self-employed or employee ‘salary sacrifice’)
Total superannuation saving
Vices
$……….
See chapter 10
Smoking
$………. per week
$……….
Alcohol
$………. per week
$……….
Recreational drugs
$………. per week
$……….
Gambling
$………. per week
$……….
Total vices saving Total saving on expenses
242
$………. $3800
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SOME WORKED EXAMPLES
GOVERNMENT HELP WITH YOUR DEPOSIT Value after 104 weeks
Government assistance
See chapter 12
First Home Owner Grant
One-off payment
Other scheme?
$7000 $……….
Total government assistance
$7000
WORKSHEET SUMMARY Where the money is coming from
Value after 104 weeks
Total savings now
$500
Total asset sales
$3250
Total gifts and support
$1000
Total new income to be saved
$12 525
Total saving on expenses
$3800
Total government assistance
$7000
HOME DEPOSIT GRAND TOTAL
$28 075
EXAMPLE #3—THE COUPLE WITH GREAT MOTIVATION As a couple you’re really prepared to do what it takes to get the best home you can afford fast. You’ll both take on some part-time work (a mix of overtime and helping out in a mate’s business) and you’ll move into a two-bedroom flat with friends who are also saving for a home. You will get a little sponsorship from a parent and you’ll cut expenses with a machete. At present you don’t own much of value, so your garage sale will not be a big financial success—though it’s still worth doing to get the account rolling. Two mobile phones and 243
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two cars are luxuries you are prepared to cast aside for 104 weeks, getting rid of one of each and sharing where necessary. Some (but not all) takeaway food and entertainment will be curtailed for the duration. Cigarettes and alcohol will be reduced. You’re carrying several thousand dollars in debt on credit cards and shop cards which you’ll convert to a personal loan to save on interest. ASSETS Cash value
Existing savings
See chapter 3
Money in bank accounts now
$2500
Money in term deposits now
$……….
Value of shares now
$……….
Value of units in managed funds now
$2000
Money owed to me (from friends, family, etc.)
$……….
now or in a trust fund Money in property (e.g. shared ownership, where
$……….
the property will be sold) now
Total savings now
$4500
Cash value after sale
Cash value after sale
Assets
See chapter 3
Garage sale (estimate)
$500
Specific items of value which can
2nd car $5000
be sold (estimate) e.g. car,
………….$……….
sports equipment, jewellery,
………….$……….
$5000
furniture, collectables
Total asset sales Value after 104 weeks
244
$5500
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Gifts and support
See chapter 8
From parents and family Per birthday, Christmas and other special occasions $….…. Subsidy
$………
Description of subsidy scheme $30 for each $1000 we save
(estimated value)
Total gifts and support
$1700
$1700
INCOME Value after 104 weeks
New income to be saved My income
($750 per week net)
Partner’s income
($430 per week net)
What I/we could save now
See chapter 4
from my/our income(s)
$25 per week net
$2600
each week Part-time job #1
See chapter 6
Part-time job #2
$………. per week net
$7979
Part-time job #3
$………. per week net
$……….
Existing job #1—overtime
$………. per week net
$……….
Existing job #2—overtime
$………. per week net
$……….
Annual leave—additional
$………. per week net
$……….
$………. per week net
$……….
Total new income to be saved
$15 280
$………. per week net
$4701
work for me Annual leave—additional work for my partner
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EXPENSES Value after 104 weeks I/we can cut back in these areas
Transport
See chapter 9
What I/we can save by not
$………. per week
$3500
$………. per week
$……….
using or owning a car Cycling/walking—saving on public transport fares
Total transport saving
Communications
$3500
See chapter 9
Mobile phone
$30 per month
$720
Fixed-line phone
$………. per month
$……….
Total saving on communications
Loans
$720
See chapter 9
Loans reassessment
$300 interest saved per year
Total saving on loans
Insurance
$600
See chapter 9
Policies reassessment—am I
$100 per year
paying too much?
Total saving on insurance
Waste
$200
See chapter 9
Food
$5 per week
$520
Energy
$………. per week
$……….
Total saving on waste
Regular fees Memberships
See chapter 9
$………. per year
Subscriptions
$………. per year
Other
$………. per year
Total saving on regular fees
246
$520
$……….
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Value after 104 weeks
Luxuries
See chapter 7
Luxury #1
$20 per week each (taking lunch from
$3840
home, except for annual holidays) Luxury #2
$14 per week (entertainment, movies, etc.)
Luxury #3
$25 per week (takeaway food)
$1456 $2600
Luxury #4
$………. per week
$……….
Luxury #5
$………. per week
$……….
Luxury #6
$………. per week
$……….
Luxury #7
$………. per week
$……….
Total luxuries saving
Rent
$7896
See chapter 8
[Current rent or board $300 per week] Moving to cheaper premises $……. per week
$……….
for ……. weeks Living with parent(s)
$……. per week
$……….
for ……. weeks (after deducting any board I/we will pay) Living with friends
$150 per week for 104 weeks
Total rent saving
Presents
$15 600
$15 600
See chapter 8
To my partner from me
$100 per birthday, Christmas
$400
and other special occasions To me from my partner
$100 per birthday, Christmas
$400
and other special occasions To my family
$….…. per birthday, Christmas
$……….
and other special occasions To my partner’s family
$….…. per birthday, Christmas
$……….
and other special occasions
Total presents saving
Superannuation
$800
See chapter 9
Amount ‘saved’ if I/we
$………….per week, or
stop paying voluntary
$………….per year
superannuation contributions
247
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Value after 104 weeks (e.g. self-employed or employee ‘salary sacrifice’)*
Total superannuation saving
Vices
$……….
See chapter 10
Smoking
$7 per week
Alcohol
$12 per week (one less round
Recreational drugs
$………. per week
$……….
Gambling
$………. per week
$……….
$728 at the club)
Total vices saving Total saving on expenses
$1248
$1976 $31 812
GOVERNMENT HELP WITH YOUR DEPOSIT Value after 104 weeks
Government assistance
See chapter 12
First Home Owner Grant
One-off payment
Other scheme?
$……….
Total government assistance
248
$7000
$7000
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WORKSHEET SUMMARY Where the money is coming from
Value after 104 weeks
Total savings now
$4500
Total asset sales
$5500
Total gifts and support
$1700
Total new income to be saved
$15 280
Total saving on expenses
$31 812
Total government assistance
$7000
HOME DEPOSIT GRAND TOTAL
$65 792
EXAMPLE #4—THE LOWER INCOME COUPLE Even though you’re not big earners there is still much you are prepared to do to get your home. One of you is already working part-time—you can’t find a full-time job. But you are willing to match it with a second part-time job till you get your deposit. Your partner will work his/her holidays. You don’t have much in the way of assets so even a killer garage sale won’t raise much cash—but it is still worth doing. You’ll sell your good tools, intending to replace them once you’re in your home. Your wider family is happy to support you by giving cash instead of presents. By re-assessing your existing credit card debt and insurance you can save a few dollars too. Rent is another area where you see the potential to make some big savings, even though your current rent is not very high ($120 per week)—friends and family are ready to share. But there’s not much fat you can take out of weekly living expenses, so you won’t—a little less alcohol, a few less cigarettes. You’re not going cold turkey on anything.
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ASSETS Cash value
Existing savings
See chapter 3
Money in bank accounts now
$250
Money in term deposits now
$……….
Value of shares now
$……….
Value of units in managed funds now
$……….
Money owed to me
$……….
(from friends, family, etc.) now or in a trust fund Money in property
$……….
(e.g. shared ownership, where the property will be sold) now
Total savings now
$250
Cash value after sale
Assets
See chapter 3
Garage sale (estimate)
$500
Specific items of value
tools $120
$120
which can be sold (estimate) e.g. car, sports equipment, jewellery, furniture, collectables
Total asset sales
$620
Value after 104 weeks
Gifts and support From parents and family
See chapter 8
Per birthday, Christmas and other special occasions $25
Subsidy
Description of subsidy
(estimated value)
$200 $…………
scheme ………………..
Total gifts and support
250
$200
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INCOME Value after 104 weeks
New income to be saved My income
[$550 per week net]
Partner’s income
[$350 per week net]
What I/we could save now
See chapter 4
from my/our income(s) each week
$10 per week net
$1040
Part-time job #1 See chapter 6
$………. per week net
$7979
Part-time job #2
$………. per week net
$……….
Part-time job #3
$………. per week net
$……….
Existing job #1—overtime
$………. per week net
$……….
Existing job #2—overtime
$………. per week net
$……….
Annual leave—additional
$………. per week net
work for me
(2 sets of annual leave)
$3288
$………. per week net
$……….
Total new income to be saved
$12 307
Annual leave—additional work for my partner
EXPENSES Value after 104 weeks I/we can cut back in these areas
Transport
See chapter 9
What I/we can save by not
$………. per week
$………
$………. per week
$……….
Total transport saving
$……….
using or owning a car Cycling/walking—saving on public transport fares
Communications
See chapter 9
Mobile phone
$…….. per month
$……….
Fixed-line phone
$…….. per month
$……….
Total saving on communications
$………. 251
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Value after 104 weeks
Loans
See chapter 9
Loans reassessment
$100 interest saved per year
Total saving on loans
Insurance
$200
See chapter 8
Policies reassessment—
$50 per year
am I paying too much?
Total saving on insurance
Waste
$100
See chapter 9
Food
$5 per week
$520
Energy
$………. per week
$……….
Total saving on waste
Regular fees Memberships
See chapter 9
$………. per year
Subscriptions
$………. per year
Other
$………. per year
Total saving on regular fees
Luxuries
$520
$……….
See chapter 7
Luxury #1
$………. per week
$……….
Luxury #2
$………. per week
$……….
Luxury #3
$………. per week
$……….
Luxury #4
$………. per week
$……….
Luxury #5
$………. per week
$……….
Luxury #6
$………. per week
$……….
Luxury #7
$………. per week
$……….
Total luxuries saving
Rent
$……….
See chapter 8
[current rent or board $120 per week] Moving to cheaper premises $……. per week for ……. weeks
252
$……….
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SOME WORKED EXAMPLES
Value after 104 weeks Living with parent(s)
$60 per week for 52 weeks
$3120
$60 per week for 52 weeks
$3120
(after deducting any board I/we will pay) Living with friends
Total rent saving
Presents
$6240
See chapter 8
To my partner from me
$25 per birthday, Christmas and
$100
other special occasions To me from my partner
$25 per birthday, Christmas and
$100
other special occasions To my family
$….….. per birthday, Christmas
$………
and other special occasions To my partner’s family
$…..…. per birthday, Christmas and other special occasions
Total presents saving
Superannuation
$……….
$200
See chapter 9
Amount ‘saved’ if I/we
$………….per week, or
stop paying voluntary
$………….per year
$……….
superannuation contributions (e.g. self-employed or employee ‘salary sacrifice’)*
Total superannuation saving
Vices
$……….
See chapter 10
Smoking
$2 per week
$208
Alcohol
$12 per week
$1248
Recreational drugs
$………. per week
$……….
Gambling
$………. per week
$……….
Total vices saving
$1456
Total saving on expenses
$8716
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GOVERNMENT HELP WITH YOUR DEPOSIT Value after 104 weeks
Government assistance First home purchase grant
See chapter 12
one-off payment
Other scheme?
Total government assistance
$7000 $……….
$7000
WORKSHEET SUMMARY Where the money is coming from
Value after 104 weeks
Total savings now
$250
Total asset sales
$620
Total gifts and support
$200
Total new income to be saved
$12 307
Total expenses
$8716
Total government assistance
$7000
HOME DEPOSIT GRAND TOTAL
254
$29 093
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These are just four examples of how it can be done. Your worksheet will be different again. But remember you won’t get to your deposit fast just by cutting back on expenses or just by getting some extra work. You need new income, new cuts and ideally a solid attempt to convert a few assets to cash. You’ll probably miss a few targets so make allowances as you go. And remember the expenses involved in buying a home (and any concessions on stamp duty to which you may be entitled—see chapter 12). If you choose the right suburb and price range these concessions will give you a lift. Now return to the home deposit worksheet in chapter 2 and fill it in.
DON’T PULL YOURSELF DOWN ‘It’s harder now to buy a home than it’s ever been.’ ‘I don’t know how I’ll live with such a big mortgage.’ ‘The whole idea of being in debt to the bank for 25 years sends shivers up my spine.’ Practically everyone I know who owns a home has at one time made these pronouncements. But who cares if they’re true or not? Despite the odds, we are a nation of home owners. Somehow vast numbers of us did it and get on with life. And you’re on that road now. You’ve read the book, you’ve thought about the options, you’ve gone through the home deposit worksheet. That’s an achievement worth celebrating. 255
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Take a few days to mull over your worksheet. Does it feel right to you? Does it feel good? If you have a partner, does he or she agree with you about this plan? Start the wheels in motion. Make a list of those people you need to speak to—family, friends, Centrelink, your employer, an employment agency, the bank, insurance companies (to find better deals at reduced premiums) and work out what assets you can turn to cash in your garage sale. Give yourself a little time before you start in earnest. Lay the groundwork so that you can proceed with confidence and with the support, where possible, of those around you. Be prepared for the knockers—it’s one of our national characteristics to pull down those who set out with determination to get ahead and improve their lives. Sometimes the criticism is direct (‘You’re mad! Think of all you’ll have to give up!’) and sometimes it is wearing (‘A home? Oh, that’s a nice idea for you to work on.’) But you’ve got your worksheet and a plan. You can see now what you are capable of achieving. Finally, don’t let yourself get depressed about the sort of home you can afford. When we think about buying a home we often turn our minds to something like the home we grew up in. But this is the home our parents could afford (if they owned their home) at the peak of their working lives! That’s not a start, it’s a finishing line! Almost everyone begins with a more modest home—a place with many faults and in the wrong suburb or location. But, eventually, we leave it—on average, every seven years we shift. Chances are you too will move on to something better. The first home you buy is the hardest. Make it happen—in 104 weeks.
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REAL ESTATE WEBSITES AND PROPERTY REPORTS Many real estate agents have their own individual websites. Contact them for the address. Here is a selection of more general property sites. Domain A Fairfax publications site <www.domain.com.au> Domain is a good place to check real estate advertisements from the Fairfax publications around Australia. You can get a suburb snapshot, ask to be electronically alerted when a type of property is advertised and can save particular property ads to your own short list file. A mortgage comparison tool is also available. Australian Property Monitors <www.homepriceguide.com.au> or <www.apm.com.au> This site sells property reports—you can select by postcode, suburb or even by street name. Auction results and a free email newsletter can keep you up to date. Homepath <www.homepath.com.au> Homepath is an information site which is a subsidiary of the Commonwealth Bank. Free registration brings you information on aspects of buying, selling and investing in property, including calculators, some price data and a personalised property alert function. Property <www.property.com.au> PropertyWeb <www.propertyweb.com.au> Although the focus here is largely on commercial and industrial 257
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property, there is still good information for those looking for homes or residential investments. Auction clearance rates and volumes (in price brackets) are a highlight feature. An interesting range of articles can be found here too. Realestate <www.realestate.com.au> Residex <www.residex.com.au> Here you can get hold of price information and reports for Queensland and New South Wales for a fee. Performance predictions are a feature. Residex links to <www.findmeahome.com.au> where you can search for a property and mortgage.
INVESTMENT PLANNING WEBSITES Here are some suggestions for starting out: Ninemsn <www.money.ninemsn.com.au> Moneymanager <www.moneymanager.com.au> Financialpassages <www.financialpassages.com.au> Investorweb <www.investorweb.com.au>
ONLINE MORTGAGE PROVIDERS Some examples: <www.eloan.com.au> <www.ewizard.com.au> <www.lendersonline.com.au> <www.loannet.com.au> <www.mortgagehouse.com.au> <www.yeshomeloans.com.au>
ONLINE MORTGAGE FINDERS Don’t know which loan is right for you? Online mortgage finders will help you. Here is a selection to get you started: 258
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<www.aussiehomeloans.com.au> <www.bankbid.com.au> <www.banksmart.com.au> <www.echoice.com.au> <www.homeloansnow.com.au> <www.isay.com.au> <www.mortgagechoice.com.au> <www.peachhomeloans.com.au>
FINANCIAL INSTITUTIONS Looking for the website for a particular bank or other lender? Try inserting the name of the institution, as in these examples: <www.anz.com.au> <www.aussiehomeloans.com.au> <www.commbank.com.au> (Commonwealth Bank) <www.imb.com.au> <www.national.com.au> (National Australia Bank) <www.westpac.com.au> <www.wizard.com.au>
RESEARCH AND MONEY ISSUES Architects’ building inspection reports <www.archicentre.com.au> or phone 1300 13 45 13. Australian Financial Services Directory <www.afsd.com.au> Australasian Legal Information Institute (AuslII) <www.austlii.edu.au> AMP AMP has a fine personal finance site. Go to <www.amp.com.au> The NRMA site also has good finance information: <www.nrma.com.au> Association of Superannuation Funds of Australia (ASFA) conducts research and represents the super funds. Phone 1800 812 798; <www.superannuation.asn.au> 259
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Australian Competition and Consumer Commission (ACCC) reports on scams and investigations. Good information on your rights. Phone 1300 302 502; <www.accc.gov.au> Australian Securities and Investments Commission (ASIC) Information phone line 1300 300 630; <www.asic.gov.au> and see ASIC’s consumer and investor website called FIDO, at <www.fido.asic.gov.au> Australian Stock Exchange <www.asx.com.au> For referral to a stockbroker phone 1300 300 279. Australian Taxation Office The Tax Office publishes useful booklets on a range of topics including capital gains tax, depreciation and a general guide to rental properties. Phone line for personal tax inquiries: 13 2861; <www.ato.gov.au> Cannex collates financial information on a huge range of banks and other financial institutions in a form which lets you make comparison about their terms and fees. Go to <www.cannex.com.au> Consumer Credit Code Find out about a lender’s obligations under the Credit Code at <www.creditcode.gov.au> You can compare interest rates between mortgage deals at <www.cannex.com.au> and <www.interestrate.com.au> echoice <www.echoice.com.au> Here you’ll find information on interest rate movements, calculators and graphing. The National Information Centre on Retirement Investments (NICRI) Phone (06) 281 5744 or Freecall 1800 020 110; <www. nicri.org.au> Real Estate Institute of Australia The institute collects statistics from the State institutes in such areas as median property prices and vacancy rates. Its publications are for sale. Phone (02) 6282 4277; <www.reiaustralia.com.au> Reserve Bank of Australia Phone (02) 9551 8111, fax (02) 9551 8000; <www.rba.gov.au>
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i Magazines
Here are four of my favourite financial information sites prepared by magazine publishers. They have useful calculators and carry helpful articles in a magazine style: Australian Property Investor magazine <www.apimagazine.com.au> Personal Investor <www.personalinvestor.com.au> CHOICE <www.choice.com.au> Your Mortgage <www.yourmortgage.com.au>
GOVERNMENT ASSISTANCE i First home owner schemes
<www.firsthome.gov.au> This site links to all State and Territory governments operating a First Home Owner Grant scheme of some kind. i Social security benefits
Centrelink To make an appointment to see someone, phone 13 1021 Employment services, phone 13 2850 Family assistance office, phone 13 6150 For information in languages other than English, phone 13 1202 Financial assistance, phone 13 2300 Go to <www.centrelink.gov.au>
INTEREST RATES Here are some sites where you can find current interest rates for loans from a wide range of financial institutions: Cannex <www.cannex.com.au> InterestRate <www.interestrate.com.au> Ninemsn <www.money.ninemsn.com.au> Mymoney <www.mymoney.com.au> Yahoo <www.finance.yahoo.com.au> 261
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STAMP DUTY For inquiries and information, call your State or Territory revenue office ACT: Phone (02) 6207 0028; <www.revenue.act.gov.au> NSW: Phone (02) 9685 2122 or 1800 629 550; <www.osr.nsw.gov.au> NT: Phone (08) 8999 6789; <www.nt.gov.au/ntt/revenue> Queensland: Phone (07) 3227 8733 or 1300 301 571; <www.osr.qld.gov.au> SA: Phone (08) 8226 3750; <www.treasury.sa.gov.au>/revenuesa Tasmania: Phone (03) 6233 3100; <www.treasury.tas.gov.au> Victoria: Phone (03) 9628 6777/13 2161; <www.sro.vic.gov.au> WA: Phone (08) 9262 1100 or 1300 368 364; <www.srd.wa.gov.au>
LAND TAX For inquiries and information, call your State or Territory revenue/ land tax office ACT: Phone (02) 6207 0049; <www.revenue.act.gov.au/r_ltax.html> NSW: Phone (02) 9685 2155 or 1800 061 163; <www.osr.nsw.gov.au> NT: Phone (08) 8999 6789; <www.nt.gov.au>/ntt/revenue Queensland: Phone 1300 301 549; <www.osr.qld.gov.au> SA: Phone (08) 8204 9870; <www.treasury.sa.gov.au/revenuesa/ltax.html> Tasmania: Phone (03) 6233 3068; <www.tas.gov.au> Victoria: Phone (03) 9628 6312; <www.sro.voc.gov.au> WA: Phone (08) 9262 1100; <www.srd.wa.gov.au>
LAW SOCIETIES Do you need to find a solicitor? The local lawyers’ society or institute will direct you. ACT: The Law Society of the Australian Capital Territory. Phone (02) 6247 5700; <www.lawsocact.asn.au> 262
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NSW: Law Society of New South Wales Phone (02) 9373 7300 or 1800 357 300; <www.lawsocnsw.asn.au> NT: The Law Society of the Northern Territory. Phone (08) 8981 5104; <www.lawsocnt.asn.au> Queensland: Queensland Law Society. Phone (07) 3842 5888; <www.qls.com.au> SA: Law Society of South Australia. Phone (08) 8229 0222; <www.lssa.asn.au> Tasmania: Law Society of Tasmania. Phone (03) 6234 4133; <www.taslawsociety.asn.au> Victoria: Law Institute of Victoria. Phone (03) 9607 9311; <www.liv.asn.au> WA: The Law Society of Western Australia. Phone (08) 9221 3222; <www.lawsocietywa.asn.au> ALTERNATIVE HOME OWNERSHIP SCHEMES Habitat for Humanity Australia Phone 1800 88 55 99 Address: GPO Box 4820, Sydney NSW 2001 email:
and web <www.hfhaustralia.org.au> Contact your local council about self-build co-operatives working in your chosen area. CONSUMER PROTECTION AGENCIES AND ASSOCIATIONS Australian Competition and Consumer Commission Phone 1300 302 502 or (02) 6243 1111; <www.accc.gov.au> Australian Capital Territory Consumer Affairs Bureau Phone (02) 6207 0400; <www.fairtrading.act.gov.au> New South Wales Department of Fair Trading Phone 13 3220 or (02) 9895 0111; <www.fairtrading.nsw.gov.au>
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Northern Territory Office of Consumer Affairs and Fair Trading Phone 1800 019 319 or (08) 8999 5184; <www.nt.gov.au/caft> Queensland Office of Fair Trading Phone (07) 3246 1500; <www.consumer.qld.gov.au> South Australian Office of Consumer and Business Affairs Phone (08) 8204 9777 or 13 1882; <www.ocba.sa.gov.au> Tasmanian Office of Consumer Affairs and Fair Trading Phone (03) 6233 4567 or 1300 654 499; <www.justice.tas.gov.au/ca> Victorian Office of Fair Trading and Business Affairs Phone (03) 9627 6000 or 1800 656 393; <www.consumer.vic.gov.au>/cbav/fairsite.nsf> Western Australian Ministry of Fair Trading Phone (08) 9282 0777 or 1300 304 054; <www.fairtrading.wa.gov.au> The Australian Consumers’ Association (ACA) Phone (02) 9577 3333; <www.choice.com.au> INDUSTRY COMPLAINTS HANDLING SCHEMES AND ASSOCIATIONS Have a complaint but don’t know where to take it? Try the federal government’s directory of consumer dispute resolution schemes and complaint handling systems at <www.dist.gov.au>/consumer/dispute/index.html Australian Banking Industry Ombudsman The Ombudsman handles disputes involving member banks and can make an award in the consumer’s favour up to a maximum of $150 000. There is no charge for this service. Phone 1800 337 444. In Melbourne, phone 9613 7333; <www.abio.org.au> Credit Union Dispute Reference Centre Disputes with participating credit unions (which abide by a code of practice) are handled without charge to credit union members. The centre has jurisdiction to handle a complaint up to $100 000. A decision of the centre is binding on the credit union but not binding on the customer. Phone 1800 624 241 or (02) 9267 1008; <www.cudrc.com.au> 264
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Australian Association of Permanent Building Societies Phone (02) 9223 4777; <www.aapbs.com.au> Building Societies do not have their own dispute resolution scheme but have officers trained to handle complaints. Contact the head office of the society or go to the Australian Association of Permanent Building Societies for information on what to do. Financial Planning Association of Australia Phone 1800 337 301, or in Melbourne (03) 9627 5299, or for referral to a planner 1800 626 393; <www.fpa.asn.au> Financial Industry Complaints Service This scheme handles disputes involving financial advice provided by a member of the Financial Planning Association. There is no charge for the service. An award in the consumer’s favour can be made up to a maximum of $5000 per month for income protection insurance, $250 000 for life insurance and $100 000 for funds management, stockbroking, investment and financial advice. Phone 1800 335 405; <www.fics.asn.au>. Insurance Enquiries and Complaints Ltd This scheme primarily handles complaints involving motor vehicle property damage and your insurance company, but also provides free advice about general insurance: property, contents, landlord’s policies and more (but not life insurance matters). The services are free of charge. Phone 1300 363 683; <www.iecltd.com.au> Insurance Brokers Dispute Facility This service handles disputes with insurance brokers. It’s a free service and can handle complaints worth up to $50 000 for life and general insurance. Phone 1800 064 169; email Mortgage Industry Association of Australasia This is the industry body for non-bank mortgage providers, brokers and mortgage managers. There is a code of practice—check the website. Phone (02) 9955 7788; <www.miaa.com.au> Mortgage Industry Ombudsman The Mortgage Industry Association of Australasia (MIAA) established an ombudsman scheme in May 2000. It handles customer complaints about its members provided the customer has already attempted to resolve the dispute directly with the member but is not satisfied with the 265
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outcome. Members of the MIAA agree to abide by a code of practice, part of which includes an obligation to empower the Mortgage Industry Ombudsman to investigate, negotiate and ultimately make a decision on a customer’s complaint. A decision of the ombudsman is binding on the association member. An award can be made in favour of the customer up to a maximum of $100 000 provided the customer accepts the settlement in full. The process is free of charge to the customer. Phone 1800 138 422 or in Sydney 9267 1000; <www.acdcltd.com.au> Supernannuation Complaints Tribunal This Tribunal, which is set up by the Commonwealth Government, handles complaints about Superannuation funds, annuities and retirement savings accounts (RSAs). There is no charge for its services. Phone 1300 884 114; <www.sct.gov.au>
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AAPR: this stands for annualised average percentage rate and is one of several methods of comparing one loan deal with another by incorporating the interest rate, any lower introductory rate, fees and charges. The aim is to quantify the true cost of the loan over a period of time. Other terms in use include ‘effective rate’ and ‘comparison rate’. Each method will have its own way of making the comparison, so one set of figures might not actually be a fair comparison with another if they were worked out under different methods. allotment: a block of land subdivided out of a larger section. amenity: the pleasantness of a place. The amenity of a street, for example, will be an amalgam of such features as the type and number of trees and bushes, the air quality, wide boulevard or narrow lane, noise and traffic. auction: the public sale of property to the highest bidder on the fall of the hammer. bank cheque: a cheque issued by the bank on its account. body corporate: the council or committee comprised of unit owners, which controls a strata/unit development including the buildings and common property. bond: a security for money lent by an investor to a company, the government or a government agency—e.g. government (treasury) bonds. The money is lent for a fixed term at a fixed interest rate. bridging finance: a short-term loan to help a person complete the 267
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purchase of a property, typically before they have sold their existing property. capital: accumulated wealth—a lump sum of money or other assets after deducting debt. capital gains tax (CGT): this is a Commonwealth tax payable on the increase, if any, in the value of assets such as shares or property between the time they were purchased or acquired and the time when they are sold or disposed of. The family home is generally exempt from CGT. CGT only applies to assets purchased or acquired after 19 September 1985. capped loan: a loan where the interest rate has an upper limit. caveat: a warning notice placed on the legal title to a property by someone other than the registered owner, claiming an interest in the property. While the caveat is present it will prevent the sale of the property and may make it difficult to borrow money using the property as security for the loan. CGT: abbreviation for capital gains tax. community title: this is the name given, in some States, to a form of property ownership designed for a mix of uses, from residential to commercial and industrial, within the one development. It may be used to create a resort, for example, bringing together villas, apartments, shops, a golf course, marina and tennis court with roads and other infrastructure. company title: this is an older form of title, generally pre-dating strata title, which uses a company structure to subdivide and own a property, creating separate units. Each property owner actually owns a share or number of shares in the company. Company title is now usually found only in old apartment blocks, some of which are run-down and others highly prized and exclusive. Company title properties often are more difficult to sell than a strata/unit title property, and this is reflected in generally lower prices. This situation arises because there may be restrictive conditions in the company documents which set out the agreement between the shareholders. For example, it may be necessary to obtain the consent of the other owners to a prospective purchaser of ‘your’ unit. 268
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consumer price index (CPI): a measure of the cost of living suitable for making comparisons over time. contract of sale: the legal document setting out the terms and conditions for the sale and purchase of property. conveyancing: the process whereby ownership of a property lawfully passes to another. It generally involves checking that the vendor has full and proper legal title to the property free of any encumbrance or hindrance. People usually engage a solicitor or licensed conveyancer to undertake this task, although there is nothing to stop a person performing their own conveyancing. A professional, however, will carry indemnity insurance for the consequences of mistakes. covenant: a restriction on the legal title to property that either benefits or burdens the land (e.g. to specify what building materials or fencing can and cannot be used). CPI: abbreviation for consumer price index. debenture: this is a form of security for a debt—where the investor lends money to a bank, finance company or the like, wishing to raise capital; the investor receives a fixed interest rate on this loan. default: to break the terms of your mortgage contract with your lender. For example, to miss the due date for a repayment, or to fail to keep the mortgaged property insured. deposit: it is an almost universal requirement, under contracts for the sale and purchase of property, to require the purchaser to pay part of the sale price to the vendor at the time of entering into the contract, with the balance of funds to follow after a period of investigation of the property’s legal title. The deposit is this first sum of money. Generally, the contract will call for a 10 per cent deposit. The deposit can be lost to the vendor if the purchaser fails to complete the contract within its terms. deposit bond: when buying a property which is not yet completed— such as ‘off the plan’—a purchaser can avoid having to pay the usual 10 per cent deposit on exchange of contracts. Certain financial institutions will pay the deposit for you and charge you a fee ranging from around half a per cent to almost 2 per cent 269
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of the full purchase price of the property. The actual amount varies according to the time period until completion of the building and the amount you want to borrow (the shorter the term and the smaller the amount mean a lower fee). This fee is not credited against the deposit, which you must pay at settlement or when the bond term expires. deposit guarantee: see deposit bond. discretionary trust: a legal structure for owning property (and/or other assets). The trustee is in control, determining which beneficiaries receive income and in what amounts. It is a structure used for tax planning and estate planning purposes. drawdown: to call loan monies from your lender/mortgagee and apply them to your purpose. For example, to pay for the purchase of your property or to pay out an earlier loan. In some situations, such as when building or renovating a property, there may be more than one drawdown of funds over a period of time. easement: a legally enforceable right to do something—such as walk or drive—over the land of another; generally the owner of the encumbered (burdened) land cannot build over the site of the easement or block the passage. encumbrance: a burden on a property giving legally enforceable rights to someone who is not the owner of the property. For example, a right of access, a driveway, a water course, a covenant (e.g. restricting the use of certain building materials) or a mortgage. The existence of the encumbrance will be revealed by a search of the title documents or certificate of title for the property. It is part of the role of a conveyancer to search for encumbrances and report to their client (purchaser, mortgagee) on their meaning and impact. equities: another name for stocks or shares in a company not bearing fixed-interest returns. equity: the net capital value of an asset free of all loans and debts. For example, if you own a property valued at $100 000 and it is subject to a mortgage of $38 000, your equity in the property is $62 000. This is not to be confused with equities. 270
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equity loan: a loan secured against the equity in a property. establishment fee: application fee for a loan. exchange: counterparts of the contract of sale for property are signed separately by the vendor and the purchaser. The contract is made, or comes into existence, when those signed counterparts are swapped, so that the vendor ends up with a copy of the contract signed by the purchaser, and vice versa. The swapping is called ‘exchange’ of contracts. It is the moment when the contract comes into existence and from which any time limits specified in the contract start to run. fee simple: a legal interest in property or estate capable of being inherited without limitation. It is the highest form of ownership. financial institution: an organisation or company that deals in financial services, such as taking deposits and making loans. Examples include banks, building societies, credit unions and finance companies. fixed rate: a mortgage is said to be ‘fixed rate’ when the interest rate will not vary during the term of the loan. It will remain unchanged even though the cash rate rises or falls. forfeit: this means to take something from another. In the context of conveyancing it generally means the purchaser has breached an important part of the contract and the vendor takes (forfeits) the purchaser’s deposit money. freehold: ownership of property in fee simple. gross: in money terms, it is a total without taking out any deductions. For example, a person’s gross wage is what their employer pays them without deducting income tax or any other amounts such as top-up superannuation (not the superannuation guarantee charge), Christmas club payments, union fees, etc. See also net. GST: abbreviation for Goods and Services Tax—a consumption tax at the rate of 10 per cent on most goods and services. The tax was introduced on 1 July 2000. Note that residential rent and many financial services are exempt from GST. guarantee: a contractual promise to do something (e.g. to pay back a loan). guarantor: a person or company which gives a guarantee; this is 271
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generally given for the benefit of another. For example, a parent might guarantee the fulfilment of the obligations under a loan contract entered into by his or her child. inclusions: objects included in the sale/purchase of property, such as carpets, blinds, curtains, light fittings, TV antenna, clothes line and so on. interest: money paid by a borrower in return for the use of money lent by another, or money paid for not requiring a debt or loan to be repaid. inventory: a schedule of items included in the sale/purchase which are not attached to the property or fitted. For example, beds, cupboards, chairs, tables, rugs, mirrors. joint tenants: a legal mode of ownership of property by more than one person. Joint tenants own the whole of the property in equal shares. When one joint tenant dies, their share goes to the remaining joint tenants equally. See also tenancy in common. land tax: a State/Territory government tax on property ownership. lease: a legal agreement—not always in writing—by which the owner gives exclusive possession of a property to another, generally in consideration of the payment of rent. lenders mortgage insurance: see mortgage insurance. lessee: tenant. lessor: landlord. line of credit: a loan account with a financial institution which the customer can use for deposits and withdrawals up to a prearranged credit limit. Interest is charged on any credit taken by the customer and, of course, there are various fees. managed fund: a unit trust that pools the investment monies of a number of individual investors. It is managed on behalf of the investors by a professional manager. managing agent: this is a person appointed by the owner of a rental property to manage that property. Tasks would generally include finding tenants, collecting rent, arranging quotes for maintenance and repairs, lodging bonds with relevant authorities, preparing and issuing all notices to tenants required by law or lease, handling disputes with tenants, including appearing 272
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before tenancy tribunals. Where a body corporate passes some of its functions to a professional manager that person might also be referred to as a managing agent. margin loan: a loan generally for the purpose of buying shares or units in managed funds. mortgage: this is the name given to a loan which is secured against real estate—for example, the bank loan used to enable a person to buy a property or to raise money for other purposes, even if these have nothing to do with the property itself (such as a business loan or to pay for a holiday or support a line of credit). The mortgage contract and associated legislation permit the mortgagee to sell the security if the loan is in default. mortgage insurance: this is insurance to cover the situation where the borrower (mortgagor) defaults in payments to the lender (mortgagee) required by the mortgage and there is a shortfall when the property is sold. The premium is paid by the borrower, usually as a one-off payment at the commencement of the loan. It is not to be confused with income protection insurance, which replaces lost income where a person suffers illness or injury and is unable to work as before, or mortgage protection insurance (which covers loan repayments). mortgagee: the name given to the lender where the loan is secured against a property. The mortgagee may be the bank, credit union, building society, finance company or even a family member. mortgagor: the name given to the borrower (and owner of the property) where a loan is secured against that property. negative gearing: a property used for investment is negatively geared when the net rent income, after deduction of operating expenses, is less than the interest paid on the borrowings (mortgage) used to purchase the property. This lowers the overall assessable income of the investor for taxation purposes. net: in money terms, it is a total after taking out any deductions. For example, a person’s net wage is what their employer actually gives them, after deducting income tax and any other required or negotiated amounts such as salary sacrifice contributions and union fees. See also gross. 273
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notice to complete: the contract for sale of property includes a provision for a party to the contract to issue a notice calling on a party in default to fulfil its obligations—for example, calling on the purchaser to pay the balance of the sale price and complete the contract. It will specify what will happen if the other party does not meet its contractual obligations by the notice deadline (e.g. the contract will be terminated and any deposit monies will be forfeited). off the plan: selling or purchasing a unit or other lot in a development before construction is complete, after inspecting the approved architectural drawings and building plans. old system title: this is the original form of legal title (ownership) in Australia—it has largely been replaced by Torrens title. Ownership of old system title property relies on being able to prove an unbroken chain of title leading up to the vendor. The chain of title consists of the documents by which the property has been conveyed (sold), mortgaged and otherwise encumbered over the years, going back to what is called a ‘good root of title’. State legislation covers many aspects of the operation of old system title. option: in the context of buying a home, it is a legally enforceable right to buy a property before the expiry of a deadline and at a predetermined price. A fee will generally be paid for this privilege; the fee might be credited against the eventual purchase price for the property if the option is ‘exercised’, but this is not always the case. outgoings: these are expenses associated with owning and running the investment property from day to day. They include rates, gardening, managing agent’s fees, insurances, strata/unit levies and maintenance. Pay As You Go (PAYG): this is a system of income taxation whereby the self-employed, some businesses and many investors are required to lodge an annual or quarterly return and pay tax on their income. From 1 July 2000 it replaced the system of provisional tax, as well as a number of other taxes. personal loan: a form of credit with a lower interest rate than credit 274
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GLOSSARY
cards and a fixed term (typically one to five years) to pay it back. It is a useful tool when you want to borrow money to finance a clear purpose: a car, a holiday, a home extension, household appliances. The interest rate can be fixed or variable. Most personal loans are unsecured. See unsecured loan. principal: the amount borrowed. private sale: sale of property by the owner, with or without a real estate agent involved. private treaty: private sale of property (as opposed to the public sale of property at auction). property syndicate: a group of investors who put their money together to jointly buy one or more properties; a syndicate usually has a fixed term of five to ten years after which the assets are sold and the net proceeds distributed; there are restrictions on getting your money out earlier. provisional tax: in the past those who earned income from selfemployment or investments (such as property) may have been required to pay income tax in advance in addition to normal income tax which was paid over the course of the past tax year. This ‘provisional tax’ was then credited against actual tax payable when the next year’s tax was assessed. A percentage ‘uplift factor’ was applied against this estimate of future tax, on the assumption that a person’s income increased from year to year. From 1 July 2000 the system of provisional tax was replaced in Australia by the Pay As You Go scheme. purchaser: the buyer. records: financial records to do with your investment—receipts, invoices, rent statements, bank statements and so on—must be kept for five years from the date you lodge your tax return. For capital gains tax purposes, you must keep the records of your ownership and capital improvements for five years from the date you sell or otherwise dispose of the property. redraw facility: a benefit offered by some types of loan contract— including many but not all mortgages—which allows the borrower to take money back out of their loan account provided they have paid in advance of the minimum require275
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ment of the loan contract. For example, if your mortgage requires you to make monthly loan repayments (principal and interest) of $1200 per month and you accelerate your repayments by making monthly instalments of $1500 per month (or you make a lump sum deposit into the account to reduce the loan principal), you might be able to withdraw some of the excess if your loan contract allows ‘redraws’. These might be free of charge or, particularly with ‘no frills’ mortgages, could cost tens of dollars each time. It is a very positive feature to look for in a home loan. refurbish: to decorate or fix up a property into good order. This might include painting, floor coverings, fixtures and fittings. rent: the money a property owner receives from the tenant in exchange for letting the tenant live in the property. It is commonly paid weekly or monthly. It is income for taxation purposes. Reserve Bank: the Reserve Bank of Australia is the central bank of the Commonwealth of Australia. However, it operates independently of the government. Its task is to keep the economy healthy through maintaining desirable levels of inflation, growth and employment. One of its chief tools for achieving these aims is by establishing the cash rate—the basic building block for the interest rates used by financial institutions—and the availability of money to service the national economy. responsible entity: the name given to the manager of a unit trust (e.g. managed fund or property syndicate). reserve: the purchase price set by a vendor at auction below which the vendor will not sell the property. salary sacrifice: this is to ask your employer to deduct money from your gross wage and to pay it into your superannuation fund (or for certain employment-related benefits, such as a car) on your behalf. There may be retirement planning and taxation benefits for engaging in salary sacrifice unless you are on a low wage because, if set up correctly, the employee avoids paying income tax on the ‘sacrificed’ salary amount, instead paying tax at concessional rates in the super fund. Get expert advice. 276
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GLOSSARY
stamp duty: a State/Territory government tax. Among many other situations it is payable on the transfer of property or an interest in property. Generally, in conveyancing, it is payable by the purchaser, though this is not always the case. strata title: a form of Torrens title which allows a single property to be subdivided, including vertically. An example is a block of home units, where each unit has a separate title and can be sold and owned independently of the other units. There are privately owned lots and lots owned in common (e.g staircases, gardens, pool, lift, the fabric of the building). In some places it is called unit title. superannuation guarantee charge: this is the Commonwealth Government’s scheme for compulsory contributions to superannuation, to be made by employers on behalf of their employees. Currently the employer contribution is 9 per cent of the employee’s wage (which excludes things like bonuses and overtime). There are exceptions, such as employees on very low incomes. syndicate: see property syndicate. tenant: the person or company which rents property from a landlord. tenancy in common: a legal system of ownership of property by more than one person. Tenants in common own the whole of a property in such proportions as the title certificate/deed indicates—the proportions do not have to be equal. This is useful when one part-owner contributes more than half the purchase price and both or all part-owners want to maintain ownership in their respective proportions. When a tenant-incommon dies their share is passed according to the provisions of their will. It need not necessarily go to the surviving tenants-incommon. See also joint tenants. Torrens title: a form of legal ownership of real estate guaranteed by the State/Territory government and based on a system of registration of interests and certificates of title. transfer: a document recording the change of ownership of real estate; it is designed to be placed on the public register at the Land Titles Office (or equivalent) and to change the details accordingly on the certificate of title. 277
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trust: See discretionary trust. unit trust: see managed fund. unsecured loan: a loan where the borrower has not provided any security (e.g. car, house) to the lender for the loan. Generally, a lender will charge the borrower a higher rate of interest to reflect the increased level of risk. See personal loan. valuation: what the property is worth. A bank or financial institution will often require a valuation both to determine if the property is in sound condition and to assess how much money it can safely lend using the property as security. Sometimes the valuation is a certificate from a licensed valuer, or simply a letter from an estate agent. In many cases lenders will use the purchase price of a property as its valuation, particularly where that property was purchased through public auction and the amount of the loan being sought is a moderate proportion of that price. variable rate: a mortgage is said to have a ‘variable rate’ when the interest rate is free to change, up or down, in line with the terms of the mortgage. Usually any change will follow a move in the official cash rate. vendor: the seller. yield: the yield of an investment is the ratio of its income to its value.
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Index
104 AAPR, 211–13, 267 ACCC, 260 access to your savings, 62 allotment, 267 amenity, 267 annualised average percentage rate, 211–13 application fee, 207–9 Archicentre, 179, 259 assets, 42 auction explanation, 225–7, 267 reserve, 276 tactics, 226–7 Australian Consumers’ Association, 264 bank cheque, 267 banking industry ombudsman, 264 beer and wine, 159–60 bond explanation, 267 see also deposit bond bonus saver accounts, 57
borrowing cost (different loan/credit products), 49 how much do I need?, 26–7 how much will they lend me?, 30 bridging finance, 267 budget, 136–45 building inspection report, 179 licence, 224 your home, 224–5 bumps in the road, 167–73 capital, 40–1, 268 capital gains tax, 177, 268 capped loan, 268 cash on hand, 70 cash advances on credit cards, 52 cash management trusts, 56 charitable organisation, 228–9 279
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casual work, 94–5 caveat, 268 CHOICE magazine, 261, 264 choosing a property, 214–18 cigarettes, 160–1 commission non-conforming lenders, 211 communications, 150–1 community title, 268 company title, 268 complaints industry schemes, 264–6 see also consumer protection agencies consumer price index, 269 consumer protection agencies, 263–4 contacts, 257–66 covenant see encumbrance conveyancing, 175–8 costs of buying a home, 174–205 conveyancing, 175–8 expert reports, 178–81 registration, 190–1 saving on expenses, 203–4 search enquiries, 178 stamp duty, 186–200 see also stamp duty credit, 41–2 cards, 42 cards from shops, 49 code, 260 cut them up?, 50 different types, 51–2 280
country home, 230 danger zones for buyers building your home, 224–5 buying at auction, 225–7 buying ‘off the plan’, 218–23 debentures, 57–8, 269 debt consolidation, 52–3 what to do with it, 48 default, 269 deposit what proportion of home price?, 26–7, 203, 269 worksheet, 32–9 deposit bond, 269–70 deposit guarantee see deposit bond discretionary trust, 270 drawdown, 270 easement, 270 encumbrance, 270 energy, 146 engineer’s report, 179 equities, 58–9 equity loan, 271 net capital, 270 see also investment equities, 270 establishment fee, 207–9, 271 exchange of contracts, 225, 271 expert reports, 178–81
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fee simple, 271 fees and charges, 54, 60 reducing them, 66–7 final hope charitable organisation, 228–9, 263 government schemes, 229–30 group self-build, 228 move to the country, 230 financial institutions online, 259 financial plan, 68–9 financial planning association, 265 Financial Industry Complaints Service, 265 fixed rate see interest rates forfeit, 271 freehold, 271 gambling, 161–3 garage sale, 42–5 government assistance first home owner grant, 200–1, 261 online, 261 for ownership, 229–30 social security, 108, 201, 261 stamp duty concessions, 191–200 grant (First Home Owner), 200–1, 261 gross, 271 group self-build, 228
GST, 271 guarantee, 123–4, 271 guarantor, 271–2 Habitat for Humanity, 228–9, 263 home ownership numbers, 5 homes great savings plan, 7–8 lazy, 11 special government treatment, 4 household budget see budget inclusions, 272 income how much could I earn?, 97–8 increasing it, 87–8 part–time or casual work, 89–97 work from home, 92–3 insurance, 70–1, 151–2 income protection, 183 industry complaints scheme, 265 Internet choosing a mortgage, 213–15 financial institutions, 259 interest rates, 261 investment planning websites, 258 mortgage finders, 258–9 mortgage providers, 258 281
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real estate websites, 257–8 savings accounts, 56–7 interest rates capped, 268 comparing (online), 260–1 fixed and variable, 214, 216–17, 271 on deposits, 55–8, 272 on mortgage, 207–9, 272 inventory, 272 investment home equity, 7, 8 planning websites, 258 job, 75–84 finding your value, 81–2 how much could I earn?, 97–8 losing, 170 security, 77–80 training for more, 83–4 where are the jobs?, 94–7 joint tenants, 272 see also tenancy in common land tax, 262, 272 last-ditch lenders, 210–11 last 26 weeks, 206–31 lawyers conveyancing, 175–8 law societies/institutes, 262–3 lease agreement, 272 termination, 186 282
legal issues will and power of attorney, 71–3 lender’s mortgage insurance, 181–6 lessee, 272 lessor, 272 life expectancies, 154 lifestyle worked example, 238–43 line of credit, 272 loans, 146–7 loan to valuation ratio, 213–14 lower income couple worked example, 249–54 luxuries, 110–15 memberships and subscriptions, 152 method, 11–12, 18 managed funds, 59–60, 70, 272 managing agent, 272–3 margin loan, 273 MIAA, 265 modules, 85–164 essentials, 134–57 communications, 150–1 energy, 146 insurance, 151–2 loans, 146–7 memberships and subscriptions, 152 rent, 146 superannuation, 152–4
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INDEX
transport, 147–9 waste, 155–6 holiday work, 101–8 life’s little luxuries, 110–15 part-time work, 99–101 relatives, 116–33 social security entitlements, 108 vices, 158–64 mortgage AAPR, 211–13 comparing, 211–14 explained, 26, 273 finders (online), 258–9 finding the right one, 207 industry ombudsman, 265–5 last-ditch lenders, 210–11 monthly repayments chart, 28–9 providers (online), 258 questionnaire, 208–9 redraw, 208–9, 211–13 mortgagee, 273 mortgage insurance see lender’s mortgage insurance mortgage trusts, 60 mortgagor, 273 moving expenses, 181 negative gearing, 273 net, 273 non-conforming lenders, 210–11 notice to complete, 274
ombudsman banking industry, 264 mortgage industry, 265–6 ‘off the plan’ contract inclusions, 223 deposit bond, 269 explanation, 218–23, 274 old system title, 274 option, 274 outgoings, 274 Pay As You Go, 274 penalties fixed-term mortgage, non-conforming lenders, 210–11 personal loan, 52, 274–5 pest inspection report, 180 preservation ages, 153 principal, 275 principles keep it short, 19–20 know today you can achieve your goal, 20–1 we’re not all the same, 22 allow for failure, 22–3 put it away as you go, 23 put it in the right place, 24–5 private sale, 225, 275 private treaty, 275 property, 69 choosing, 214–18 magazines, 261 reports, 218 reputation, 223 283
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property prices, 201–3 premium, 222 property syndicate, 275 provisional tax, 275 real estate agents, 215 Institute, 260 websites, 257–8 records, 275 redraw, 208–9, 211–13, 275–6 refurbish, 276 registration fees, 190–1 relationships, 167–70 relatives, 116–33 presents, 120–2 rent, 127–31 subsidy, 122–5 rent explanation, 276 saving, 127–31, 146 versus buy, 5–6, 9 rent escalator, 5–6 Reserve Bank, 260, 276 resources, 257–66 responsible entity, 276 reserve, 276 risk, 60–1 sale private, 225, 275 salary, 66–7 salary sacrifice, 276 savings, 1 access, 62–3 284
ease of use of accounts, 63 expenses, 203–4 how to, 24–5 not in daily transaction account, 48 now, 73–4 where to put them?, 47–74 search enquiries, 178 seasonal work, 96 shares, 58–9, 69 single person worked example, 232–8 social security entitlements, 108, 201 special skills, 97 stamp duty concessions, 191–200, 255 contacting, 262 explanation, 277 on mortgage, 188–90 on transfer, 187–8 strata/body corporate report, 179–80 strata plan, 219–23 strata title, 277 subsidy, 122–5 superannuation association, 259 complaints, 265 contributions, 67–8, 152–4 guarantee, 6, 69, 277 over working life, 6 preservation ages, 153 survey report, 180 syndicate, 275
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INDEX
target, 2, 19 tax Australian Taxation Office, 260 capital gains tax (CGT), 177, 268 GST, 271 land tax, 262 negative gearing, 273 provisional, 275 tenancy in common, 277 see also joint tenants tenant, 277 term deposits, 56 Torrens title, 277 transaction accounts, 55 transfer, 277 transport, 147–9 trust see discretionary trust unit trusts see managed funds
unsecured loan, 278 valuation explanation, 278 lender’s mortgage insurance, 181–6 ‘off the plan’, 221 variable rate see interest rates vendor, 278 vices, 158–64 waste, 155–6 wealth hazards, 167–70 will and power of attorney, 71–3 wine, 159–60 worksheet, 32–9 worked examples, 232–54 yield, 278
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