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Why fixing your mortgage rate means you will lose money · The Money Puzzle

0:09
Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirkby. Welcome aboard everybody. If you're an active investor
0:17
Speaker 1: of you're an active property investor in particular, I imagine
0:19
Speaker 1: you're starting to think about rates and where they're going
0:21
Speaker 1: because folks, the next time, they're going to move upwards.
0:25
Speaker 1: And you can see that consensus now building. It was
0:28
Speaker 1: like a marginal a couple of economists on the far
0:33
Speaker 1: end of the spectrum, like HSBC saying it two weeks ago.
0:36
Speaker 1: You're starting to see Warren Hogan other people like that
0:39
Speaker 1: starting to say it now. Everything leads to a suggestion
0:43
Speaker 1: that with inflation where it is, rates are going to
0:45
Speaker 1: go up. So big question what do you do? Do
0:48
Speaker 1: you fix? Because to fix would seem to be the
0:50
Speaker 1: sensible thing. If this is as low as they're going
0:53
Speaker 1: to be, why wouldn't you fix? Well, I've got some
0:56
Speaker 1: very interesting work I put across my debt by our
1:00
Speaker 1: guests this morning, and we're going to talk about that.
1:03
Speaker 1: We're also going to talk about these new lending limits,
1:05
Speaker 1: whether they will affect you, and a few other key
1:07
Speaker 1: factors for you. My guest is Stuart Beams of pro
1:11
Speaker 1: solution and man for all seasons when it comes to
1:14
Speaker 1: our property and finance, I say, how are you Stuart?
1:17
Speaker 2: Oh, I'm excellent. Thanks for having me back.
1:18
Speaker 1: James, great to have you back a regular on the show,
1:21
Speaker 1: of course, and all our listeners know you quite well.
1:23
Speaker 1: I most recently, in terms of fixed rates, I think
1:27
Speaker 1: it was about a month ago I did something for
1:31
Speaker 1: the simple reason that I thought it was the perfect
1:34
Speaker 1: time to do this and put forward the questions should
1:36
Speaker 1: you start to fix I put it forward about a
1:39
Speaker 1: month ago when nobody had touched fixed rates for years,
1:44
Speaker 1: the consumers and similarly the banks had some of the
1:48
Speaker 1: fixed below variable. Of course, logic would suggest economic logic
1:52
Speaker 1: would suggest that if rates are going to go up,
1:54
Speaker 1: then the fixed rates are going to start going up.
1:55
Speaker 1: And guess what, They've been going up ever since. Week
1:57
Speaker 1: by week we see them sort of creeping up along
2:00
Speaker 1: in the banking system. But you've done I've never seen
2:03
Speaker 1: this ever, and I've watched this area a long time,
2:06
Speaker 1: because obviously the banks are going to do this. No
2:09
Speaker 1: bank economist is going to do the exer you've done
2:11
Speaker 1: for us. But you had a look at fixed rates
2:15
Speaker 1: over twenty years twenty years folks twenty to two twenty,
2:19
Speaker 1: and you wanted to see basically, would the investor win
2:23
Speaker 1: or lose? Probability of gain probability of loss. What did
2:27
Speaker 1: you find out? Well?
2:29
Speaker 3: I found out that were you know, Well, I found
2:31
Speaker 3: out what I expected was that, you know, borrower is
2:34
Speaker 3: probably most likely worse off by fixing. So here's the
2:37
Speaker 3: numbers over that period of time. And let me explain
2:40
Speaker 3: the period of time because the data set that the
2:42
Speaker 3: RBA tracks begins in nineteen ninety, so we've got thirty
2:46
Speaker 3: five years of data there. But I think comparing interest
2:50
Speaker 3: rates in too nineteen ninety compared today isn't a good
2:54
Speaker 3: or fair comparison, mainly because mortgage margins have changed. So
3:00
Speaker 3: mortgage margin, there's the bank's profit, gross profit, if you're
3:03
Speaker 3: like when they give your mortgage is just slightly less
3:06
Speaker 3: than two percent today. Early nineties it was close to three.
3:10
Speaker 3: So of course it's going to look worse off because
3:12
Speaker 3: the market's got a lot more competitive. Also, the last
3:16
Speaker 3: five years, as we know, included a period of you know,
3:19
Speaker 3: a lot of interest rate increases off the back of
3:21
Speaker 3: a zero rate setting. So I thought that's and that's
3:24
Speaker 3: problem unless we have another pandemic Touchwood, that's probably not
3:28
Speaker 3: gonna happen again.
3:29
Speaker 1: Just to fill in listeners, what you're saying is that
3:30
Speaker 1: periods where the rest were just bizarre that there were
3:33
Speaker 1: zero basically post twenty twenty, you've studiously avoided that to
3:37
Speaker 1: give us a clear look at twenty years. So straight up,
3:42
Speaker 1: what's your probability of beating the banks if you fix
3:46
Speaker 1: and what are the bank's probability of beating you?
3:51
Speaker 3: So it's about thirty seven percent probability over that twenty
3:54
Speaker 3: year period of being better off, and the average or
3:58
Speaker 3: mean that you were better off was point three six
4:02
Speaker 3: of a percent, so about a third of one percent,
4:06
Speaker 3: whereas the probability of a loss you're being worse off
4:09
Speaker 3: as a fixed rate borrower sixty three percent, of course,
4:12
Speaker 3: but the average loss was point seven of a percent,
4:15
Speaker 3: so twice as much as the potential of gain. So
4:19
Speaker 3: the way that average result then is a loss of
4:22
Speaker 3: about a quarter of a percent. You just not it's
4:25
Speaker 3: just not worthwhile. And it kind of makes sense, James,
4:28
Speaker 3: because really it's not the banks coming up with fixed rates,
4:31
Speaker 3: it's the money markets. They go out and borrow for
4:33
Speaker 3: three years, they add their margin, they relean to you.
4:37
Speaker 3: So by accepting a fixed rate, what you're doing is
4:41
Speaker 3: taking the opposite view of the market. And the only
4:44
Speaker 3: exception to that might be one year fix rates, because
4:49
Speaker 3: what banks will sometimes do is use them as a
4:51
Speaker 3: hook to get new customers, and they might decide to
4:55
Speaker 3: take a much lower margin, or not much lower, a
4:57
Speaker 3: lower margin on a one year rate on the whole
5:00
Speaker 3: hope that they retain you as a customer, you know,
5:02
Speaker 3: after that one y fix rate ellapse. But except for
5:05
Speaker 3: those very short term fixed rates, if it's just about
5:08
Speaker 3: long term fix rates, they're driven by.
5:09
Speaker 2: The market and market expectations.
5:12
Speaker 1: So most rates, most of the time fixed rates. Your
5:15
Speaker 1: contention over that twenty year period, which is a long time,
5:18
Speaker 1: is that you're going to lose most of the time.
5:21
Speaker 1: You are not going to do better if you fix,
5:23
Speaker 1: and the statistics are there to prove it. Okay, do
5:27
Speaker 1: you think we can take that twenty year period as
5:31
Speaker 1: representative and reliable going forward? Look?
5:35
Speaker 2: I think so.
5:35
Speaker 3: And the thing we've got to remind ourselves is that
5:37
Speaker 3: interst rate expectations can literally turn on a dime. We've
5:41
Speaker 3: we've got to remind ourselves of this. Like, Okay, at
5:44
Speaker 3: the moment. The retrick is that interest rates are sort
5:47
Speaker 3: of on hold. In fact, just before we start this record,
5:50
Speaker 3: A and Z's come out and taken removed its forecast
5:54
Speaker 3: of an interest rate cut. They think the cash rates
5:56
Speaker 3: on hold at three point six percent. But we could
6:00
Speaker 3: wake up tomorrow and the tune has changed and they'll
6:04
Speaker 3: be talking about interestrate cuts and so forth. So the
6:06
Speaker 3: first thing, as borrow is we need to be careful
6:09
Speaker 3: not to be too reactive to the commentary of the day,
6:13
Speaker 3: which is why I think this analysis is quite valuable
6:16
Speaker 3: because it helps us make better longer term decisions. And
6:21
Speaker 3: then the other thing, James, is we're going to start
6:23
Speaker 3: thinking about the other considerations, like attaching an offset account.
6:28
Speaker 3: Most banks don't allow it to have an offset account
6:30
Speaker 3: attached to a fixed rate loan. Most banks limit the
6:33
Speaker 3: amount of extra repayments. It can lock you into a
6:36
Speaker 3: bank and you're not able to necessary refinance, or if
6:40
Speaker 3: a bank's going to give you a better valuation, you've
6:42
Speaker 3: got to potentially break that fixed rate.
6:44
Speaker 1: So you could be up for some extra fees or
6:48
Speaker 1: deaf fact or penalties if you fix.
6:50
Speaker 3: It overwhelming that's right, and they're unascertainable because It just
6:54
Speaker 3: depends on what interest how interestrates changed between when you
6:57
Speaker 3: fix and when you want to break it. But I
7:00
Speaker 3: think the overwhelming data suggests that the probability of you being.
7:04
Speaker 2: Better off is pretty slim.
7:06
Speaker 3: And notwithstanding that, you lose a lot of flexibility by
7:09
Speaker 3: fixing your rate. I had to look at the best
7:11
Speaker 3: times to fix over the last thirty five years. Of course,
7:14
Speaker 3: there's no surprising. The best time was late twenty to
7:17
Speaker 3: early twenty two, when, of course fixed rates were sub
7:20
Speaker 3: two percent at times three year fixed rates, and that
7:23
Speaker 3: was part of obviously the RBA's response to COVID is
7:27
Speaker 3: get that.
7:27
Speaker 1: And a lot of people did fix. At that time,
7:30
Speaker 1: it was up to forty percent of our new loans,
7:32
Speaker 1: wasn't it. So you know, people are pretty wise to this.
7:35
Speaker 1: Thinks it's obviously a bargain. Yeah. Was there any other
7:39
Speaker 1: time that it was good?
7:40
Speaker 2: Yeah?
7:41
Speaker 3: And in the end, during that time, of course, you know,
7:43
Speaker 3: most recently the average profit was between two to three
7:46
Speaker 3: and a half percent, So people have had good experiences
7:49
Speaker 3: with fixed rates. The only other time, James, was early
7:52
Speaker 3: two thousand and five to mid two thousand and six.
7:56
Speaker 3: Probably some of our listeners would be even too young
7:58
Speaker 3: to remember that time. But interest rates were relatively high
8:02
Speaker 3: at the time. It was pre PREGFC, and what was
8:06
Speaker 3: unexpected was how aggressive the RBA was going to be
8:10
Speaker 3: around that time in terms of increasing interest rates, and
8:14
Speaker 3: variable rates got to just shy of nine percent at
8:17
Speaker 3: the time.
8:17
Speaker 2: So if you think veriable rates are high today.
8:19
Speaker 1: That's right because we were rolling up on a spectacular market.
8:23
Speaker 1: Of course, that the share market hit its peak in
8:26
Speaker 1: two oh seven, folks, November two or seven, and took
8:28
Speaker 1: ten years to return to that. Now, Stuart, I've never
8:31
Speaker 1: seen anyone do this exercise. It doesn't take a genius
8:34
Speaker 1: to figure out that the banks aren't going to do
8:36
Speaker 1: it and circulate it. Why would they? But here's something
8:40
Speaker 1: there has often been work would suggests that if you
8:43
Speaker 1: do nothing but fix all your life, you just turn
8:47
Speaker 1: over five year fixer, three year fixed back to back
8:50
Speaker 1: and you stick to that principle all the time, that
8:52
Speaker 1: would even up wins and losses. Have you any sense
8:56
Speaker 1: of that whether that stacks up?
8:59
Speaker 3: This data would suggest not because the weighted average result
9:02
Speaker 3: is a loss of a quarter of percent, and it doesn't.
9:05
Speaker 3: It doesn't stand to reason either, James, because if I'm
9:08
Speaker 3: de risking by fixing. So if I'm not going to
9:10
Speaker 3: take the interest rate risk, there's always a margin, there's
9:13
Speaker 3: always a cost for that, just like any insurance. And
9:16
Speaker 3: really fixing your rate is important if you aren't in
9:20
Speaker 3: a position to be able to whether any higher interest rate.
9:24
Speaker 3: So if your financial position is such that you need
9:27
Speaker 3: to fix to give yourself certainty, then that's fine, that's
9:29
Speaker 3: a complete, completely valid reason to do it. But if
9:33
Speaker 3: you're playing the interest rate market, chances are that you're
9:36
Speaker 3: not going to be better off. And I think you know,
9:38
Speaker 3: if you look at those two times twenty twenty and
9:40
Speaker 3: then two thousand and five, I think in both situations
9:44
Speaker 3: it was not foreseeable that fixed rate borrowers at that
9:47
Speaker 3: time we're going to be so much better off. Something
9:51
Speaker 3: unexpected happened, a GFC and a surprise interest rate hike
9:56
Speaker 3: by central banks all.
9:57
Speaker 2: Around the world.
9:58
Speaker 3: So if your strategy is premised on this idea that
10:01
Speaker 3: you know that this whole thing's going to come out
10:04
Speaker 3: of nowhere and you're going to be better off, you know,
10:06
Speaker 3: that's a risky proposition. I think I go with the numbers.
10:08
Speaker 3: I always go with the evidence, and the overwhelming evidence
10:11
Speaker 3: says no, don't fix.
10:13
Speaker 1: And I suppose one fascinating thing of it was even
10:15
Speaker 1: when you win, you win less if you lose more, right,
10:20
Speaker 1: but if you win less, which was yeah, that's right,
10:22
Speaker 1: extremely interesting. I'll come up. Okay, I mean, I say,
10:25
Speaker 1: I haven't seen anything like it, and have you ever
10:27
Speaker 1: seen a report of this nature apart from your own work?
10:32
Speaker 3: Now, I haven't, which is the reason why I did it,
10:34
Speaker 3: because I've done a similar analysis over the years, but
10:38
Speaker 3: not to the extent that I've delved into it in
10:42
Speaker 3: this most recent time. But it's something I'll keep watching
10:45
Speaker 3: and keep updating. But it doesn't surprise me Jane's At
10:47
Speaker 3: least it gives us parameters to make better decisions rather
10:51
Speaker 3: than necessarily being overwhelmed by the retrick that might be
10:55
Speaker 3: present in today's market. And quite often people make financial
10:59
Speaker 3: decisions out of, you know, fear or emotion.
11:01
Speaker 2: So if all the noises, oh.
11:02
Speaker 3: Interest rates are going to arise, I better fix because
11:05
Speaker 3: I fixed in twenty twenty and it really worked well
11:07
Speaker 3: for me.
11:08
Speaker 2: Just be careful. That's not an evidence based decision. Evidence
11:11
Speaker 2: based decision would say don't fix.
11:13
Speaker 1: That's really interesting. The last time I fixed it was
11:15
Speaker 1: two point nine. Oh well, you know, we all knew
11:17
Speaker 1: that was good. Okay, very interesting, and folks do keep
11:20
Speaker 1: in mind, I mean though those Stewart has outlined this
11:23
Speaker 1: and he's it's very well underpinned by his data, and
11:28
Speaker 1: the data in turn is the RBA data. But it
11:31
Speaker 1: doesn't mean that it never suits anyone. And as Stuart said,
11:34
Speaker 1: there are situations where peace of mind, how much is that?
11:38
Speaker 1: And a lot of people do like to know how
11:42
Speaker 1: much they're going to pay. If things are very finely
11:44
Speaker 1: done in your world or on your books or in
11:46
Speaker 1: your accounts, then there can be great comfort in knowing, Okay,
11:50
Speaker 1: my rate is X and that's it for three years
11:52
Speaker 1: and that's not going to change, and that's one thing
11:54
Speaker 1: I can kind of control as such. But as Stuart says,
11:57
Speaker 1: if you're speculating that you have outsmarted the entire world
12:00
Speaker 1: banking system and the markets, and that that is that
12:04
Speaker 1: you know something they don't, the chances you're going to
12:07
Speaker 1: win not only are they slim in theory, but now
12:10
Speaker 1: we know historically they are actually pretty slim as well. Okay,
12:14
Speaker 1: really it's such a good issue. What I want, hopefully
12:18
Speaker 1: is I'd like to know what the audience thinks about this,
12:20
Speaker 1: Let us know the Money Puzzle at the Australian dot
12:23
Speaker 1: com dot au. I've had some correspondence on it, but
12:26
Speaker 1: I'd love to know what the audience thinks. We will
12:28
Speaker 1: be back in a moment to bring you up to
12:29
Speaker 1: date on more contemporary issues like are the banks going
12:33
Speaker 1: to clamp down? And is it going to cool the market?
12:35
Speaker 1: Back in a moment. Hello, Welcome back to The Australian's
12:46
Speaker 1: Money Puzzle podcast. I'm James Kirkby talking to Stuart Weems,
12:50
Speaker 1: who is of course the pros Solution Group, regular on
12:52
Speaker 1: the show and regular contributor to the Wealth section on
12:56
Speaker 1: The Australian. I have had such different views on this, Stewart,
13:01
Speaker 1: so it's only a matter of weeks since people were
13:04
Speaker 1: still talking. I mean, you talk about it, said, is
13:06
Speaker 1: it ain Zi just finally moving the note that says
13:09
Speaker 1: they don't take that they might expect more red cuts.
13:12
Speaker 1: I mean I think there is no one left saying
13:13
Speaker 1: it now, correct me if I'm wrong, but I don't
13:15
Speaker 1: think there is. So we've just about digested that the
13:21
Speaker 1: brains trust of the major banks are saying no more
13:23
Speaker 1: rad cuts. Some commentators in the banking system are saying
13:28
Speaker 1: the next move will be up. We've just about digested that.
13:32
Speaker 1: It incomes OPRA and they say, okay, we're moving in
13:34
Speaker 1: right now, straight away with a cap on lending for
13:38
Speaker 1: the banks smack in the residential market. And the law
13:44
Speaker 1: as such, the regulation is that the banks from this
13:48
Speaker 1: directive onwards, no more than twenty percent of their lending
13:51
Speaker 1: book can be given to people who are borrowing it
13:54
Speaker 1: more than six times income. Okay, And to put that
13:56
Speaker 1: in perspective, for you folks, to buy a house in
13:58
Speaker 1: the major cities where we're talking times, nine times, ten
14:01
Speaker 1: times depending on what city you're in, but certainly in Sydney,
14:05
Speaker 1: Melbourne and Brisbane that is the case. Do you think
14:09
Speaker 1: it will make a difference to the house price outlook.
14:16
Speaker 3: It's really interesting, James, because I wonder why they've done
14:19
Speaker 3: this at this time. In twenty twenty two, they did
14:22
Speaker 3: make an announcement to say that there are some lenders
14:26
Speaker 3: getting close to this benchmark, but they didn't disclose which
14:29
Speaker 3: lenders they were, So it's maybe there's an outlier there
14:33
Speaker 3: in terms of one of the banks that is doing
14:35
Speaker 3: more of this risky lending. Because some banks, I think
14:38
Speaker 3: CBA was saying it's like eight or nine percent of its.
14:40
Speaker 2: Book, so it's sort of questions.
14:42
Speaker 3: No, I don't think it's going to have any impact
14:44
Speaker 3: on the market and the reason for that, and I
14:46
Speaker 3: think everyone should really understand the market and the players
14:49
Speaker 3: in the market. But there's really two types of mortgage lenders.
14:52
Speaker 3: There's banks and non banks. Now, bank is what's called
14:56
Speaker 3: an ADI and approved deposit institution. They're heavily red because
15:00
Speaker 3: what they do they take deposits and they use some
15:03
Speaker 3: of that money to onlind and to fund mortgages, and
15:06
Speaker 3: of course we need to make sure that's safe for
15:08
Speaker 3: deposit holders that they're so that there's a lot greater
15:11
Speaker 3: oversight for banks through opera things like the three percent
15:15
Speaker 3: inch of straight buffer caps on high debt to income lending.
15:19
Speaker 2: These sorts of things.
15:20
Speaker 3: Now that's going to have an adverse impact on some borrowers,
15:23
Speaker 3: like in terms of you know, their borrowing capacity to
15:26
Speaker 3: bank is going to be lower. But the other cohort
15:29
Speaker 3: of mortgage lenders in Australia are non bank lenders. These
15:33
Speaker 3: are mortgage managers, typically called mortgage managers. They will raise
15:36
Speaker 3: money through securitization, which was something that was heavily used.
15:40
Speaker 3: PREGFC got a bit of a bad name, but it
15:42
Speaker 3: wasn't used in Australia like it was used overseas. And
15:46
Speaker 3: so they're not what's called balance sheet lenders because they
15:49
Speaker 3: don't take deposits. And so what they do is they
15:52
Speaker 3: go and sell a whole bunch of mortgages, bundle them
15:54
Speaker 3: up into a vehicle and then sell them to the
15:56
Speaker 3: market as a bond.
15:57
Speaker 1: And these are, to be clear, they're not banks, right,
16:01
Speaker 1: So that's the first point. So I think the part
16:03
Speaker 1: you're making to me, you know, it seems to me
16:05
Speaker 1: you're saying it won't change the market, but it'll change
16:08
Speaker 1: the banks. Right. So they're banks as we know them,
16:11
Speaker 1: the big four banks and all the other bank names
16:13
Speaker 1: that are adis government guaranteed regulated anyway, this cap applies
16:17
Speaker 1: to them. It doesn't to all these other names Pepper
16:20
Speaker 1: Liberty for US, mac Resumec, the non banks that are
16:23
Speaker 1: out there. And so are you implying, Stuart, basically that
16:28
Speaker 1: these guys that have just listed will will move in
16:30
Speaker 1: and take this business and so the market in its
16:33
Speaker 1: broadest sense won't be disturbed.
16:35
Speaker 2: Yeah, spot on.
16:36
Speaker 3: You know, I think for those people that are educated
16:39
Speaker 3: in terms of borrowing, either through using a broker or
16:42
Speaker 3: doing their own research. They're going to find that there's
16:44
Speaker 3: other alternatives out there that provide a lot more flexibility
16:47
Speaker 3: that aren't guided by these sort of appra regulations.
16:51
Speaker 2: Now, they're only a small part of the market.
16:53
Speaker 3: There's not a lot of great data, maybe sort of
16:55
Speaker 3: five year six percent, but these lenders are growing at
16:58
Speaker 3: a substantial pace, increasing their lending by thirty percent each
17:03
Speaker 3: year and so forth, because they need to fill a
17:05
Speaker 3: gap here because of borrowing capacity, contraction with the banks
17:09
Speaker 3: and so forth. So I think there are now the
17:12
Speaker 3: first I mean a lot of people think I've never
17:14
Speaker 3: heard of these people before.
17:15
Speaker 2: What are your risks?
17:16
Speaker 3: Well, firstly, if that mortgage lender goes bust, what will
17:20
Speaker 3: invariably happen is they will sell their mortgage book to
17:23
Speaker 3: another lender, And that happened in the Gfcquarie started to
17:28
Speaker 3: sell off some of their mortgages. Now they're back into
17:31
Speaker 3: the mortgage market in a big way over last since
17:33
Speaker 3: the GFC. But that happened, so the risk is very low.
17:38
Speaker 3: Like what's at the end of the day, you end
17:39
Speaker 3: up with a different lender. The only thing you need
17:42
Speaker 3: to think about is some of these mortgage managers can
17:44
Speaker 3: get a bit tricky with offset accounts, and so they
17:47
Speaker 3: advertise that they'll have an offset account. But if that
17:51
Speaker 3: offset account isn't held by a bank, and ADI be
17:55
Speaker 3: very careful, I would not use it because you don't
17:57
Speaker 3: then get the government guarantee the turn and fIF ty
18:00
Speaker 3: thousand dollars. That can be risky because sometimes they try
18:04
Speaker 3: and compete and they come up their systems don't really
18:06
Speaker 3: work and it's not a true offset account. But sometimes
18:09
Speaker 3: they'll have an arrangement with a bank like an A
18:11
Speaker 3: and Z or a CBA, and they'll link that account
18:14
Speaker 3: to their mortgage account.
18:15
Speaker 2: In that case, it's okay.
18:16
Speaker 1: But if they're taking more risk, someone might say, well,
18:20
Speaker 1: who cares you know, I'm borrowing from them if they're
18:23
Speaker 1: in trouble. Is there a problem? I get the loan
18:25
Speaker 1: from them? But is there a risk that their reds
18:28
Speaker 1: could rise higher and faster than bank reads?
18:34
Speaker 3: Yeah, there is, particularly if they get a bad name
18:38
Speaker 3: in terms of the quality of their book and they
18:41
Speaker 3: don't make it harder for them to go and raise
18:43
Speaker 3: funds and so forth. But these days, very there's almost
18:47
Speaker 3: no charges to refinance. There'll be an administrative cost, but
18:51
Speaker 3: very small, so you're not locked in anymore. These days,
18:54
Speaker 3: you would just refinance. But if you were trapped at
18:56
Speaker 3: that lender, that could be a challenge. That happened to
18:59
Speaker 3: some extent with Macquarie customers. I mean, anyone been around
19:03
Speaker 3: for sort of fifteen years would realize that. In the JFC,
19:06
Speaker 3: but it wasn't an insurmountable problem. We found solutions and
19:11
Speaker 3: found another home. It's something to look at, something to consider,
19:14
Speaker 3: particularly if you're not fitting into the parameters of the
19:18
Speaker 3: big banks. And you know that a lot of these
19:20
Speaker 3: brand names have been around for a long time. They're
19:22
Speaker 3: big businesses, well run businesses, but you know, normal due
19:26
Speaker 3: diligence supplies of course.
19:28
Speaker 1: Okay, So telling us two things there. One is that
19:30
Speaker 1: the lending limits imposed there's got a lot of atension
19:34
Speaker 1: from the prudential regulator may not affect the market to
19:36
Speaker 1: any great degree because of the fact that the non
19:39
Speaker 1: banks A are out there, b are looking for a
19:41
Speaker 1: new business and we'll pick up this business. But you're
19:44
Speaker 1: also telling us that if you are looking to borrow
19:50
Speaker 1: beyond that six times income, and the bank says no,
19:53
Speaker 1: whether non banks are there, as you say, with keeping
19:56
Speaker 1: your eyes for open and due diligence in that sector
20:00
Speaker 1: which is not as regulated folks, clearly as banks. Okay,
20:03
Speaker 1: because they're non banks, right, so they're not guaranteed. That's
20:06
Speaker 1: the whole thing. And interesting about the offset account too. Okay,
20:09
Speaker 1: we will take a quick break because I have just
20:12
Speaker 1: two last questions that I want to put to Stewart
20:14
Speaker 1: that we must recover. I think they're very important. Okay,
20:17
Speaker 1: back in a moment. Hello, Welcome back to the Australians
20:24
Speaker 1: Money Puzzle podcast. James Kirkby talking to Stuart Whims. Okay, now, folks,
20:30
Speaker 1: one thing I think you should be alert to. We're
20:32
Speaker 1: talking about how the lending limits for all the attention
20:37
Speaker 1: they've gone from opera that have just been imposed as
20:42
Speaker 1: a surprise. I think in the context of a market
20:44
Speaker 1: where rates are supposed to be going down. Stewart is
20:46
Speaker 1: making the point that they may not have much of effect. However,
20:49
Speaker 1: behind the scenes, there is a Senate inquiry going on
20:52
Speaker 1: into CGT and that I would expect, should it build
20:58
Speaker 1: from here, could be an issue. The Greens have called
21:02
Speaker 1: for that and they have sort of sharpened the focus
21:05
Speaker 1: of it by saying, look, we just want to zone
21:07
Speaker 1: in on houses. Don't worry about negative gearing in other areas.
21:10
Speaker 1: Don't worry about CGT in other areas. The CGT on
21:14
Speaker 1: houses is what we want to move in on. We
21:17
Speaker 1: want to see tax changes there. Specifically, they want to
21:20
Speaker 1: see it unestablished houses, which of course is where investors
21:24
Speaker 1: always go. Should we be worried do you think.
21:28
Speaker 2: Should we be worried about the Greens or should we
21:30
Speaker 2: be worried about the CGT discounts?
21:33
Speaker 1: Well, should we be worried about the government finding a
21:35
Speaker 1: marvelous gateway into the issue by having a Senate report
21:39
Speaker 1: which was sort of prompted by the Greens, and then saying, oh, well,
21:42
Speaker 1: look we've got this Senate report and really we must act.
21:45
Speaker 3: You know, before the discount came in. For those old
21:48
Speaker 3: enough to remember, and I'm certainly aging myself in today's episode,
21:52
Speaker 3: but we'll remember that you had to index your cost.
21:55
Speaker 1: Space fair a while ago. We're talking theater Costello were yeah.
21:59
Speaker 3: Yeah, we were talking twenty years ago, and then they
22:01
Speaker 3: brought in the fifty percent discount. It is just a
22:05
Speaker 3: shortcut way of doing that. But it was always criticized
22:08
Speaker 3: to some extent that it sort of overcompensated that it
22:11
Speaker 3: was it was generous. The Henry reviewing nine's again some
22:15
Speaker 3: time ago, arrived at you know, it should be forty percent,
22:18
Speaker 3: that should better align with CPI. So I think that
22:22
Speaker 3: there is probably a reasonable basis to say, look, maybe
22:26
Speaker 3: it can be pared back a little bit that. But
22:28
Speaker 3: whether that has any relationship with property, housing, affordability, all
22:33
Speaker 3: those sorts of things, you know, I just think is
22:35
Speaker 3: I mean, there's a lot of studies on this, right
22:37
Speaker 3: and most of it arrives at the conclusion that it
22:39
Speaker 3: has no impact. That it's all about it's all about
22:42
Speaker 3: supply more than anything else. The other thing the government
22:45
Speaker 3: wants to be careful of because it's always negative gearing
22:48
Speaker 3: is criticized. And I haven't looked at the more recent numbers, James,
22:51
Speaker 3: but it's something like they raised three times more revenue
22:54
Speaker 3: from CGT then they forego from negative gearing, So you know,
22:58
Speaker 3: that could be I guess it's a good way of
23:00
Speaker 3: them sort of raising tax revenue and a guess they've
23:03
Speaker 3: got a bit of a hole in the budget with
23:05
Speaker 3: the change to.
23:06
Speaker 1: Them, it would be a lucrative line of inquiry compared
23:09
Speaker 1: to negative gearing. Okay.
23:11
Speaker 3: I think what we want to do is increase long
23:14
Speaker 3: term supply of housing, rental housing accommodation in Australia. To me,
23:18
Speaker 3: what would make sense is to tear the discount. So
23:21
Speaker 3: maybe you can still get fifty percent, but you got
23:23
Speaker 3: to hold the asset for ten years or something like that.
23:26
Speaker 2: Reward the investors that are prepared.
23:27
Speaker 3: To, you know, not speculate on a market, not try
23:31
Speaker 3: and make a quick dollar, but genuinely investing in the
23:34
Speaker 3: market and providing rental accommodation.
23:37
Speaker 2: I think that would make sense.
23:38
Speaker 1: Reward the investor is not the flippers, the property flippers.
23:41
Speaker 1: Interesting line of thought there, Okay. One last question from
23:44
Speaker 1: cars on the show a week or two ago, one
23:47
Speaker 1: of your guests said they would only ever provide their
23:49
Speaker 1: children with a loan in order to protect the equity
23:52
Speaker 1: in the home. This will be a experct. My question is,
23:55
Speaker 1: can you loan your child money so they can put
23:58
Speaker 1: it into super I assume you would need a legally
24:01
Speaker 1: binding loan agreement. I don't know about that.
24:05
Speaker 3: So you could, I mean you could loan the money.
24:08
Speaker 3: Of course, it would need to be with the contribution cap,
24:11
Speaker 3: so one twenty for non concessional or thirty for concessional contributions.
24:16
Speaker 3: Of course they need to be able to get the
24:17
Speaker 3: money into Super. The thing James, that I would have
24:20
Speaker 3: a problem with, is it a genuine loan?
24:22
Speaker 1: Are you going to call it in?
24:23
Speaker 2: How are they ever going to repay it?
24:25
Speaker 3: Because once it's inside Super, the only way they can
24:27
Speaker 3: get it out is when they turn sixty or maybe
24:30
Speaker 3: financial hardship. So I think if it came to a
24:34
Speaker 3: relationship breakdown and that's the main risk asset protection risk here,
24:39
Speaker 3: I think there would be an argument to say it's
24:41
Speaker 3: not a genuine loan.
24:42
Speaker 2: Genuine loan because why would a parent.
24:44
Speaker 3: Loan money to put into Super and expect the child
24:47
Speaker 3: to repay it when they turn sixty.
24:49
Speaker 2: That doesn't make sense.
24:50
Speaker 3: Maybe a binding financial agreement would work better in this
24:53
Speaker 3: sort of situation. But I do know of you know,
24:56
Speaker 3: one of my mentors who's very wealthy, establish self managed
25:00
Speaker 3: super funds for each of his grandchildren and put money
25:04
Speaker 3: into those self managed super funds. And the way he
25:07
Speaker 3: explained it to me was that they're still going to
25:10
Speaker 3: have to go out, get a job, work hard, buy
25:13
Speaker 3: a house, do all those sorts of things. But he
25:15
Speaker 3: just viewed it as you know, that'll be invested for
25:19
Speaker 3: many decades and it'd be a great fullback position. So
25:22
Speaker 3: it's kind of an interesting thought around. I guess contribute
25:25
Speaker 3: using super as a vehicle to I guess create intergenerational
25:29
Speaker 3: wealth without necessarily dissuading you know, the beneficiaries from working
25:35
Speaker 3: hard during their working life.
25:36
Speaker 1: Yeah, yeah, one of our listeners think of that one.
25:38
Speaker 1: It's really interesting just on two things there with Carl's question,
25:42
Speaker 1: and this is not advised on information obviously, but you
25:45
Speaker 1: would seem Super would complicated quite significantly, and perhaps a
25:50
Speaker 1: standard loan if you want to tighten this a standard
25:53
Speaker 1: loan agreement. I think it really hinges on whether the
25:55
Speaker 1: parents would ever really call in the loan. That's the thing.
25:58
Speaker 1: That's that's the million question. As for starting a super,
26:03
Speaker 1: that's very interesting because I suppose it gives the person
26:06
Speaker 1: in question the ability in their mid career when they
26:10
Speaker 1: have so many costs too. For instance, maybe they would
26:14
Speaker 1: not need to do a voluntary salary sacrifice and it
26:20
Speaker 1: actually in a way loosens up some money for them
26:23
Speaker 1: at the time when they really need it. Really were
26:25
Speaker 1: thinking about Hey, terrific stuff, Thank you very much. Stuart
26:28
Speaker 1: for coming on the show. My pleasure is always always
26:31
Speaker 1: good to have you. Thank you very much. That was
26:33
Speaker 1: Stuart Weams of the pro Solution Group. As I say,
26:36
Speaker 1: a regular on the show and a regular contributor. Lookout
26:38
Speaker 1: for him in the Australians Wealth section. Let's hear from
26:42
Speaker 1: you folks. Really interesting issues there today the money Puzzle
26:45
Speaker 1: at the Australian dot com dot au. Talk to you
26:49
Speaker 1: very soon.