MTO News March 2009

Australians have loved investment properties for many years.  After recent changes to the superannuation laws you can now borrow to purchase a property inside of your Self Managed Superannuation Fund (SMSF). 

The advantages of using your super fund are:-

• You can use your existing superannuation as a deposit for the property.  This can substantially reduce the loan you need to purchase an investment property.
• You control the investment directly.
• Many people understand property better than shares or managed funds so they can predict the returns more accurately.
• Super funds have a very low tax rate.
• If you hold the property until retirement you will not have to pay any Capital Gains Tax.
• Even if you sell the property before retirement the Capital Gains Tax is only 10%.
• After retirement income from a super fund is completely tax free.
• Your employer super contributions can be used to repay the loan.

Every time you borrow to invest you are increasing your risks as many people have found out over the past year.  So although you can use a loan to double or treble the size of your superannuation fund you do need to ensure that you are capable of repaying the loan and have a secure job.  This is particularly true if you are using your employer super contributions to help repay the loan.

For more information on this strategy please contact our office and talk to your adviser. 

Trauma or Critical Illness insurance continues to be important for our clients.  We have had more claims against this type of insurance policy than any other last year. 

Many people still do not understand what this insurance will cover them for so are naturally reluctant to purchase insurance they do not understand.  Below is a typical range of conditions people would be able to make claims against:-

A trauma claim is generally paid on diagnosis and is not subject to you having to take time off work or having to wait until after surgery.  Last year a client of ours was diagnosed with cancer.  We put the client's claim in immediately, and the claim was paid within 3 weeks. 

If you do not have trauma insurance we recommend you contact our office for a free review of your situation.

Since September 2008, the Reserve Bank of Australia (RBA) has reduced official interest rates by 4%, which has seen standard mortgage rates drop to unprecedented levels. For many of us, fixed rate loans taken some 12 months earlier appeared to be a sound commercial decision, as the RBA moved to counter inflation by increasing interest rates.

We are now faced with the dilemma of break cost implications, i.e., termination of the existing fixed rate prior to maturity, with the view of securing today’s lower interest rate. The break cost figure is calculated by a complex formula, but is best described as the lenders’ “economic loss” associated with the premature retirement of their hedged interest position.

Due to the recent dramatic falls of interest rates, the break cost can be sizeable, and importantly is a cost that is paid up front to the lender. In other words, for the purpose of securing a lower rate, one is effectively paying interest on interest. More over, the actual break cost figure, is in most cases not recouped from the reduced interest savings.

While every individual scenario will be different, we recommend you discuss your options with us, so that an informed decision can be made to best suit your future situation.