Firstly, I wish to be clear that I am not talking about how valuable you are as a person, nor do I hope to influence, raise or lower your opinion of yourself with this topic. This is not a discussion about self-worth.

[Although, I do acknowledge our self worth is vitally important and well worth investing time and thought however, there are plenty of material in books and the internet for guidance on that topic!]

Instead, I am going to address another form of personal worth – one that is rarely talked about and with much less information readily available to understand and improve…

Your personal equity, also known as your personal financial net worth.

Put simply, your personal financial net worth is the totalled value of everything you own less the totalled value of everything you owe. It’s really easy to calculate:

1. List all of your assets, including savings accounts, cars, computer, home, home contents, jewellery, motor bike, superannuation, etc.

2. Next to each asset, write its dollar value as at today; and then add up the total.

3. Now create a list of all the money you owe, such as home loans, credit cards, personal loans, etc.

4. Next to each debt, write the balance as at today; and then add up the total of all the money that you owe.

5. Calculate your net worth = Total of Assets minus total of Debts.

In very simplistic terms, if I chose to sell you, then your Net Worth would be an estimate of your sale price!

On a serious note, it is important to understand our net worth, as banks look at your financial position, ie all your assets and liabilities, and they calculate your net worth as described above. They consider your net worth, apart from just your borrowing capacity, when deciding whether to lend you money.

Obviously, banks admire applicants with a good net worth (positive, and the higher the better) and tend to frown on those people with a negative net worth. The good news is that your net worth is not a fixed amount nor set in stone, it can change…

The most practical way of improving your net worth is to reduce your debts!

So, when was the last time you considered your own financial net worth? And, if you’ve never calculated your own financial net worth, now is a good time to start!

The concept of compound interest is not a normal nor interesting conversation piece, however it is interesting to note that compound interest is really important to all of us, even though most of us don’t understand it! Let’s change that; to become interested in interest.

WARNING: There is maths ahead… but please stay with me as, interestingly, it’s worth it!

Interest is money paid regularly at a particular rate for the use of money. Interest is charged by the bank for money that they lend to you and interest is paid by the bank to you for money you have deposited, ie savings. In simple terms, interest is calculated on the original amount of a loan or the original amount of funds deposited to an account.

Compound Interest is calculated on the original amount (of the loan or deposited savings) and also on the accumulated interest of the previous periods. It is also referred to as “interest on interest”.

Let me explain/explore what this means to you…

WHAT COMPOUND INTEREST MEANS TO YOU AS AN EXISTING HOME OWNER… for your home loan, the bank calculates the interest charged on a daily basis and charges it monthly. For example, at day one, your original loan amount is say $500,000 and each day the bank calculates the 4% pa interest on that $500,000 and at the end of the month adds the interest charged so that the balance becomes $501,667. At the same time, you make a monthly loan repayment (assuming P&I) of $2,387, leaving a balance of $499,280. From that day and beyond for the next month, interest is calculated on that end of month balance; and so on.

Let’s see what happens if you choose to make weekly loan payments instead of monthly repayments:

At day one, your loan balance is $500,000, at day 8 you make a repayment of $597 and the balance is $499,403 until day 15, when you make another repayment of $597 bringing your balance to $498,806, and again on day 22 your loan balance becomes $498,209, and on day 29, $497,612. Remember, that the bank calculates interest daily and charges it monthly. So, in this instance, instead of the interest being calculated for the entire 31 days of $500,000 - the interest is calculated for only 7 days at $500,000, the second week at $499,403, etc. In this first month, by paying weekly, you will save $26.10 in interest charges in the first month. This might seem small and insignificant… BUT…

… the benefit of making weekly loan repayments will continue throughout the life of the loan, and in this example could save you $56,692 in total interest charges and reduce your loan term by over 4 years!

ACTION: As an existing home owner, review your home loan repayments and if necessary make adjustments to weekly or fortnightly loan repayments instead of monthly repayments.

WHAT COMPOUND INTEREST MEANS TO YOU AS A FUTURE HOME OWNER… and whilst you might not yet own a home and therefore not have a loan, an understanding of the concept of compound interest is important as the same phenomenon occurs when depositing funds in the bank! However, this time significantly in your favour and particularly so if you are aware of the bank’s policy.

Let’s use an example of $50,000 sitting in a savings account earning 2%pa in interest. Your bank will choose to pay you interest on an annual, monthly or daily basis, depending on the policy of your savings account. If paid annually, after two years you will have earnt $20 in interest, whereas if paid monthly, you will have earnt double that amount!

ACTION: As an aspiring home owner, it’s important that you accumulate as much savings as possible so it’s important to maximise the amount of interest that your money earns by sitting in the bank. Therefore, as a responsible savings accumulator, review your savings accounts and ascertain how and when your bank is paying you interest; and if necessary, find an alternate savings account.

When I bought my first home (as pictured) in Camperdown, Sydney back in 1996, pre-approved loans did not exist. I was successful at auction, paid my deposit and then went to the bank to obtain a loan. I didn’t know if I would get a loan or even the loan amount that I needed. As you might imagine, that was a rather nerve wracking time!

Today, pre-approved loans are common practice and most first home buyers commence their journey on to the property ladder with a loan pre-approval which is a good first step. However, whilst a pre-approved loan gives confidence to buyers about what they can borrow and up to what limit they can spend, a pre-approved loan does not necessarily guarantee that it will convert to a full loan when you purchase. Let me explain why.

When assessing a full loan application, in very basic terms, the bank will assess three things:

Your ability to afford a loan by considering your income and expenses;How much you will be contributing to the purchase, by looking at your savings history, source of funds; andThe type of property you are purchasing.

For a pre-approved loan application, the bank can only assess the above points 1 & 2, because you have not yet bought a property. Therefore, if the bank is happy that you can afford the loan and are satisfied that you have enough funds to contribute to the purchase, they will grant you with a conditional loan approval, also known as a Pre-approved Loan. The Loan is conditional on you finding a property which is acceptable security to the bank.

What does “acceptable security” mean? Put simply, the property that you purchase must fit with the bank’s lending policy. All banks have different lending policies in relation to income, expenses, other debts, savings, etc and property. For example, some banks prefer to lend against units, some will not lend to a unit block more than 4 stories high, some banks already have too great an interest in one block of units and will not lend at all to that address, some banks will not lend against vacant land.

It is therefore very important, when submitting a pre-approval loan application, that you have thought about what type of property you are planning to purchase so that the application can be placed with the right lender.

You might be thinking, well, is it necessary to have a pre-approved loan in place before I start looking for my first home? It is not mandatory to have a pre-approval before you buy, however the existence of one gives you confidence (to avoid the angst I experienced 21 years ago)!

Apart from providing you with piece of mind that you can get a loan, a pre-approved loan also provides you with:

a clear understanding of how much money the bank is willing to lend you;you will know your purchase limit which gives you confidence if you have to go to auction and/or negotiate with a real estate agent;being “ready to go” might also give you an advantage over your fellow buyer competitors; anda pre-approval also allows you to budget as you will have a good idea of what your loan repayments are likely to be.

If you are looking to purchase your first home and are seeking a pre-approved loan application, call me on 0413 246 820 or email me at emma@emmamcleodfinance.com.au to ensure that we find the right lender that suits both your dream property and that of the bank.

I'm often asked my clients about financial goal setting and given that it's the first day of 2017, this is a good time to review your finances and ensure that you are on track to reaching your goals! Whilst I am not a financial planner, the information contained here provides general ideas and some tools that should be able to assist you.

For any person who has successfully achieved a goal, whether it be financial or not, they will describe for you a three step process:

1. Setting your goals by clearly identifying where you want to be.

2. Planning how to reach your goals.

3. Reviewing your progress.

STEP 1 - GOAL SETTING

The first step for any successful financial goal setting is to clearly identify your goals and make certain they are specific. Also, choose a series of goals, being short term (within the year), medium term (in 2 to 5 years) and longer term. For example, you might wish to ultimately own your home outright, purchase an investment property to increase your retirement wealth, and must also fulfil your promise to finally take your children to Disneyland! In this example, your short term goal would be to save funds for the Disneyland trip, your medium term goal to purchase an investment property and your long term goal to entirely pay off her own home loan.

STEP 2 - PLANNING

The setting of goals is very important as without the goals, you can't create the plan to get there! Which leads us to step 2 in the process, to decide how to reach each of your goals. When considering financial goals, this usually involves saving and budgeting. I've created a worksheet that can assist in this process which can be found in the complete article at this link.

STEP 3 - REVIEWING

The world we live in is forever changing and unexpected circumstances occur - some good and some "not-so-good"! We have to factor these into our plan to achieve our goals. If for example, you receive a small cash windfall such as a bonus, this will most likely ensure that you are closer to one or more of your goals. However, if your dishwasher breaks unexpectedly, you might have to use some of your short term savings to replace it! The key is to regularly review your plan and assess the changes made. Don't give up on the goal, but re-calculate how to achieve the original goal.

More detailed information is available here at my website, along with an Achieving Financial Goal Worksheet which allows you to define your goals and accurately plan for them.

Current interest rates offered on savings account are very low; in the order of 1 to 2%. Likewise, the current interest rates applied to home mortgages are also low. Regardless, the interest component on any 25 year loan can be significant. The simple rule of thumb to remember is; “The quicker I pay off my mortgage the less interest I pay”. This is a cost saving to you. For example on a $400,000 loan with an interest rate of 4.8% and a term of 25 years the interest component alone equals $287,597.

In very simple terms, banks receive income from the interest rate charged on mortgages and loans and it costs them money to pay interest savings deposits. For the bank to make money, the interest rate they charge on mortgages must be greater than the interest rate offered on savings.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” - Robert G. Allen

With the knowledge that savings interest rates will always be lower than mortgage rates and with mortgage interest rates at an all time low, what should you do with your own savings?

Your best option is to pay off debts if you have any, which includes your home loan. Almost all of your debts would have an interest rate much higher than what money in your savings account would be earning, which means you’ll get a much higher return on your dollar by making an early debt payment.

Let’s consider if you have an additional $200 each month to save. What return would you get for this $200 if you chose to save it or make additional repayments toward your home loan.

If you deposited $200 each month into a transactional account offering 0.01%, it would take you five years to earn $3. However, if you put this money into a high interest savings account offering 2.75%, you would have earned $30 in one year and $848 in 5 years. Say you have a $400,000 mortgage at 4.8% interest (25 year term), and you chose to make an additional payment to that home loan of $200 per month. After one year, you would have saved $54 in interest and reduced your loan term by 3 months. After five years the return is even greater, saving you $1,532 in interest and reducing your loan term by 1 year and 14 months. Clearly, in this instance, the repayment of debt provides a greater return on your money than a savings account deposit.

And don’t forget, many loan products offer a redraw facility which can allow you to redraw the extra payments in the event you need to use the money for a different purpose.

If you want to know how much you would save by increasing payments toward your home loan, call me on 0413 246 820 or email me at emma@emmamcleodfinance.com.au.

Gearing - we hear the word “gearing” thrown around in relation to mortgages and investment properties, yet many know little about gearing debt – Often our only knowledge about gearing is in relation to our car! Let me put the concept of gearing debt in simple terms:

Gearing refers to the debt used to purchase an asset, such as an investment property. A property is said to be “geared” if you have a loan attached to it, and can be either negatively or positively geared.

NEGATIVE GEARING

Negative gearing means that the costs associated with owning an investment property are greater than the income (usually, rent) that the property generates. In this situation when costs are greater than income, the difference is a “loss”. A loss can provide you with tax savings, as fundamentally the loss will reduce your other income, such as your wage and salary, which reduces the amount of tax you pay.

For example, let’s consider Anna who owns one investment property from which she receives $25,000 in rent annually. Anna has costs associated with this property, including mortgage interest, agent fees and rates, and they total $30,000. The difference between the two amounts is a $5,000 loss, which Anna uses to reduce the tax payable on her salary.

POSITIVE GEARING

Positive gearing is simply the opposite. Positive gearing occurs when the income that a property generates is greater than the costs associated with owning the property.

To illustrate positive gearing, let’s consider the situation of Anna’s sister, Jane, who also owns an investment property. Jane also receives $25,000 in rent each year, but for Anna the costs associated with owning the property are only $20,000. Therefore, Jane receives a profit of $5,000 from her investment property which is deemed as additional income. As this profit is taxable, Anna needs to pay tax on the $5,000 income from her positively geared property.

You might think that Anna’s negatively geared situation is better because her taxable income is reduced and she pays less tax, whereas Jane’s positively geared situation brings in additional income and pays more tax. However, a loss is still a loss for Anna, and the whole point of investing is to make money at some stage.

Contact me on 0413 246 820 if you’d like to learn more about gearing a property.

I am often asked by many young couples seeking to “tie the knot” as to how their credit rating will be affected when they marry. Many are concerned by myths and misconceptions about what happens to their credit rating if they choose to become an official couple.

If you have ever wondered what the difference is between Big Bank A’s mortgages and Big Bank B’s mortgages, let me assure you that the differences aren’t necessarily noted by just different fees and interest rates. The main differences are often found in the way the different lenders choose to assess your credit file.

This is why you are at an advantage by choosing me to arrange your loan. Because I am very familiar with what the different lenders look for when they assess your application I can help you by letting you know which lender is most likely to approve your application. The last thing that you want is for a lender to assess your application and choose to decline it. This results in a “credit enquiry” being registered on your credit file – a scenario that could go against you when you make an application with the “right” lender.

Lenders want to know a lot more about you then you could imagine, before they agree to extend you a home loan. Knowing what information they seek will help you to manage your credit file in a way that pleases their appetite for information about you.

The main things all lenders look at are: * Your salary * Your age * How many children you have * How often you change addresses * A history of your credit accounts * The mobile phone contracts you have

If you change your name after you are married and report this change to your creditors, you will see some updates to your existing credit reports. Along with your old name, your new name will be listed as an alias. You will not have to start from scratch with a new credit file.

Huge amounts of credit card debt from funding your wedding and your honeymoon may harm your credit scores, but the act of getting married will not.

Essentially, nothing automatically changes on your credit reports when you get married, so nothing should impact your credit file. And your spouse’s poor credit history should also have no effect on your credit file.

HOWEVER:-

If you’ve held a joint account with someone who has a bad credit record, this may affect your ability to get credit. The reason for this is that lenders may assume that your partner could have an influence on your income at any time. It’s important to close these accounts and take care of any shared debt you may have.

And finally, Marriage doesn’t automatically make you an authorised user or co-signer on your spouse’s accounts. If you wish to be added to your spouse’s credit cards, you will need to call the creditors with this request. Also it is important to know that being added as an authorised user will not result in the account being factored into your credit file.