Bank of Mum and Dad overhaul + save big on your home loan

Hi everyone,

Greetings from Balmoral in the heart of Victoria’s Grampians region. Libby and I are on a road trip speaking in country communities about building financial resilience, both business and personal. It has been so much fun (I even read out the Balmoral Footy Club team selections for this week’s first game of the season) and thank you everyone for having us.

For all the trivia buffs, did you know Helena Rubenstein, the global cosmetic legend, started her cosmetics business in the town of Coleraine in north western Victoria?

Anyway, let’s get into the most important things I think you need to know about money for this week:

• Change your home loan repayment schedule to slash your mortgage

• Solve the housing shortage by increasing density and loving landlords

• To fix or not to fix your home loan?

• Avoid conflict at the Bank of Mum and Dad

• Latest property snapshot

• What the experts are saying about the future of CSL shares

This simple hack can save you big bucks on your home loan

Changing your home loan repayment schedule from monthly to fortnightly can save you a small fortune on your mortgage and pay the loan off faster.

My mates at Compare the Market (where I am Economics Director) crunched the numbers and found that a person with a $600,000 loan could save over $160,000 in interest over the life of the loan and cut down their loan term by over five years just by paying their mortgage fortnightly instead of monthly.

The reason is that when people pay their monthly mortgage payment at the end of the month, the balance has been higher throughout the month. The amount of interest you pay in any month is calculated based on how much you owe on each day of the month.

So, when your repayments are made fortnightly, it means that your loan balance reduces through the month and so does your interest bill. This simple hack could save you tens of thousands of dollars and shave years off your loan – but you’ve got to do it right.

You’ll need to tell your bank that you want to pay half of your monthly repayments fortnightly. Because if you simply switch to a fortnightly repayment plan, this could be a smaller payment amount, and then this hack might not work for you. 

For example, if your monthly payments are $3,694 you will want to pay $1,847 per fortnight. This means you’ll be paying an extra $3,694 each year, which will cut down your principal and interest owed to the bank. 

You’re not just paying it back early; you’re paying slightly more. I doubt paying extra into the mortgage is a top priority for many Australian households, but for those who have the means to do so, it is worth considering. 

The more you can contribute now, the bigger and better the safety net will be to break your fall if you end up needing some support down the track.

Housing shortage solutions

I’ve been talking about the housing shortage for over a year now which is underpinning the rise in property values. We simply aren’t building enough properties to meet demand; and with building approvals at 10-year lows there is not much coming through the pipeline which will change the situation.

It means property values will keep rising for the foreseeable future.

One of the solutions to the land shortage could be to go up… and focus on building more home units and other medium density properties like townhouses. Many of the great cities of the world have already done it, as this chart from real estate Ray White shows.

I’ve also talked about how we need to love landlords rather than castigate them for lifting rents and we also need to stop giving so much power to tenants. It has been one of the themes I’ve been hearing this week in my tour of country Victoria. Many farmers have an investment property as a way of building a financial safety net to protect them from cycles in agricultural prices (lamb prices, for instance, have dropped a lot).

Many of the people we’ve talked to this week are thinking of selling their investment property because of the increase in Victorian land tax and the fact that tenants now have so much power. In their eyes it’s just becoming too hard to own an investment property when alternatives like shares are so much easier.

Yes, we have a rental crisis because of a shortage of rental properties. But if we drive landlords out of the market the crisis will deepen. Remember those ATO statistics I wrote about which showed the vast majority of landlords own just 1-2 properties and are a cross section of the community?

They aren’t property moguls but, as this chart shows, they are doing the heavy lifting when it comes to providing properties for rent. Federal and state governments are not doing much at all to help the situation.

Fixed home loan rates are falling… so is it time to lock-in?

The tide is turning on fixed rates with a growing number of lenders announcing reduced rates for fixed term loans. But borrowers who lock in a rate now could find themselves worse off if the RBA decides to reduce the cash rate later in the year.

This comes as ME Bank announced they will slash their fixed rates by as much as 0.60 per cent. Some of their most attractive owner-occupied fixed rates will be as low as 5.79 per cent.

While these fixed rates below 6 per cent may seem tempting, it may be better to wait for a rate cut. Fixed home loans are great for shielding you from rate rises, but they will block you from getting any interest rate cuts. 

Generally, when we’re at the peak of the cycle (which we probably are now) fixed rate loans are a leading indicator on where the market is thinking interest rates are going to go. That’s because banks won’t reduce their fixed rates unless they think it’s a safe bet for them. 

The reality is rates could be a lot lower in four years’ time. History tells us it’s usually better to remain a bit flexible and stay on a variable rate when we’re at the peak of the cycle and rates are likely to go down.

It just depends whether you want to take a chance sitting on a higher variable or if you would rather lock in a stable rate that you think you can afford. 

All of the big four banks have forecast a rate cut this year. Commonwealth Bank is the most aggressive, predicting the equivalent of three 0.25 per cent reductions by the end of 2024. 

Compare the Market analysis shows that three rate cuts of 0.25 per cent could reduce repayments on a $750,000 by $354 a month.

While fixing a rate during 2021 could have saved you thousands during the record run of rate rises, that era is over.

It could cost you more if you were to fix your home loan interest rate and miss out on the rates cuts which are, hopefully, coming by the end of this year.  It’s a personal decision but be wary and consider carefully before locking in a rate that could cost you in the long run.

How to operate the Bank of Mum and Dad

There’s the old saying that you can’t put a price on love. But the Bank of Mum and Dad provided $2.7 billion to their adult children to buy property over the last year.

The Productivity Commission estimates mum and dad as a collective would be between the 5th and 9th biggest home loan lender in Australia.

We all love our kids and, like we were at their age, they are impatient when it comes to getting ahead with things like buying a property. The big difference is that our parents’ generation would largely encourage us to work harder and make sacrifices, while today’s parents are more likely to stump up the cash themselves and help financially.

We all want to help our kids. That’s the core of being a parent. But the question is what that help looks like.

For those of us who are Baby Boomers, we’re more than likely to be guilt-tripped into helping financially. We caused the high price of property, we’ve made it hard to save for a deposit, we have all the cash, we don’t have to pay high interest rates, we live a better lifestyle…

All the same arguments we used at their age on our own parents.

The inter-generational wars have literally lasted for generations. Your adult children will be having the same argument with their children.

A University of Newcastle study found parents offering their children help on the property ladder are at increased risk of financial elder abuse. Borrowing from the Bank of Mum and Dad encourages ageist attitudes which leads to kids financially abusing their parents.

I’ve seen too many close friends lose big chunks of their savings – and have to scale back their retirement lifestyle – when they acted as a family bank and things went wrong. And it’s not just the finances that can suffer, either. Relationships can quickly sour and families can be torn apart by money issues.

But there is a solution. Parents can help financially, kids can get the money and there is a safety net which protects everyone.

If you’re playing the role of a bank, don’t be afraid to act like one. Treat the loan as a business transaction and draw up a formal agreement between each party outlining the terms of the deal, including a set repayment schedule.

Using a lawyer to draft this helps to avoid potential pitfalls. It signals that you’re serious and can also help to ensure the money stays in the family if your child’s relationship ends.

At the end of the day the most important thing is to communicate. If a payment is late, deal with it straight away and don’t let things fester or become awkward.

Gifts can be taken away

Some parents may be in a position to gift money to their children. While gifts are great in that they’re generally tax-free if tax has already been paid on the money, there are pitfalls to be aware of.

For example, if your child is married or in a de facto relationship and it ends, gifts will usually be considered part of the family assets and divided up in court.

On the other hand, formal loans are legal liabilities for your child and their partner, which will ensure that your gift doesn’t leave the family unintentionally.

Going guarantor is risky

Becoming a guarantor for a loan sounds like a simple proposition to help out. Fill out a couple of forms, sign on the dotted line and think happy thoughts about how you’re helping your child get a loan and realise their dreams.

But if things go wrong and your child defaults, that fuzzy feeling can quickly translate into a lack of cold hard cash. So it’s important to stop and think hard about what would happen if things go wrong.

In many cases it’s possible (and prudent) to limit your liability to a fixed amount that you can realistically afford to repay. An unlimited guarantee means you can have unlimited risk. If your kid defaults on a loan it’s way easier for a financier to go after you and your wealth than your child.

Stay business savvy

The Bank of Mum and Dad often extends beyond mortgages. If you’ve raised a family of budding entrepreneurs, it’s highly likely that at some stage your children will ask you to invest in their new business. Now, I’ve been involved in small business for decades and think entrepreneurship is something to strongly encourage… sensibly.

Think of your role as that of a regular investor.

Be clear about what this money entitles you to when the business takes off. Ask to see a business plan, and feel free to make suggestions or call out areas for improvement.

And don’t front up the entire amount either.

If the kids haven’t got any money, tell them to save and come back when they do. Or give them a smaller amount than what they’re asking for with the promise you’ll add to it if the business passes specific milestones.

The latest property snapshot from CoreLogic

Every month property research group CoreLogic puts out a monthly chart pack which I always look forward to reading. It provides a snapshot of where the property market is at the moment and also throws up some quirky charts as well.

Like this one which shows the best performing council areas for growth in property values, both as a percentage and in dollar value. We get fixated with percentage growth but the bottom line is really the amount of actual dollars you make.

While Perth and Brisbane dominate the actual percentage growth it’s mainly in affordable suburbs. The big dollar gains are in more expensive suburbs across Sydney and Brisbane where percentage growth may be less but it’s based on higher values.

Other highlights from this month’s CoreLogic pack:

• National home values rose 1.6 per cent in the March quarter, which is the largest quarterly increase since the three months to November (1.9 per cent).

• Despite an uptick in the quarterly growth trend, the annual growth trend ticked lower in March (8.8 per cent), down from the 9 per cent rise seen over the twelve months to February.

• Growth in regional dwelling values has continued to outpace growth across the capitals for the third consecutive month, with regional values up 1.8 per cent over Q1 compared to a 1.5 per cent rise across the combined capitals.

• Perth continues to lead capital growth performance in the greater capital city markets, with values up 5.6 per cent in the three months to February and up 19.8 per cent over the past year. 

• The time it takes to sell a home continued to trend slightly higher in March, with the median time on market rising to 36 days. While up from a recent low of 27 days in the three months to September, national selling times are still roughly in line with those seen this time last year.

• National vendor discounting rates compressed through the year's first quarter to -3.6 per cent, down from -3.8 per cent in December.

• Australian rent values continued to trend higher in March, up 1 per cent over the month and 8.6 per cent over the year to March.  The annual rental growth trend has been drifting upwards since October (8.1 per cent), led by a re-acceleration in house rents, from 6.8 per cent over the year to September 2023 to 8.4 per cent.

• Dwelling approvals continued to slide lower in February, with just 12,520 new dwellings approved. This was driven by a 20.8 per cent decline in the more volatile home unit segment, while house approvals rose 10.5 per cent compared to January.

Stock of the Week: CSL

CSL is the home-grown global medical giant which plays a big part of many Australian investor portfolios.

In the middle of last year, the company’s share price was above $300 and lots of analysts were saying it was set to break out of its long-term trading band and leap up. But it released a disappointing earnings update and fell to $230 last October. It’s now back at around $280.

This week analysts at Macquarie predicted CSL shares would hit $500 within three years. That is a big call.

On Monday CSL came up on my sharemarket program The Call on the ausbiz streaming network with analysts Gaurav Sodhi (Intelligent Investor) and Mathan Somasundaram (Deep Data Analytics) on the panel. Both agreed with Macquarie that CSL had the potential to reach $500 and both recommended buying at these levels.

Despite the ups and downs, over the last 15 years the biotechnology giant's shares have produced a total average annual return of 16.4 per cent. Impressive.

If you had invested $5,000 into CSL's shares back in 2009 and held them until today, your investment would have grown to be worth $49,000.

Both UBS and Macquarie have CSL as a buy rating with a short term $330.00 price target. A $5000 investment now would be worth $5,940 if the CSL share price gets to that $330 prediction. If the CSL share price gets to $500 within three years that $5000 invested now will be worth $9000.