Implications from our surprise election
The surprise re-election of the Liberal-National Coalition has important implications for Australia’s investment markets and financial planning strategies.
• Franking Credit refunds are to stay which is positive for SMSF’s and the use of a Debt Recycling to pay off your mortgage faster. It is unlikely that this will come back onto the political agenda in the future.
• Negative Gearing to remain and a boost for First Home Buyers through the deposit guarantee scheme.
• Capital Gains Tax Discount to remain with a 50% discount on the assessable gain for assets held for more than 12 months.
Changes in Lending
- The RBA have reduced the cash rate to 1.25% and a further cut is likely this year
Reduced interest rates are supportive of investment in residential property and share markets. The lowering of rates improves the ability of borrowers to meet loan repayments and generally encourages borrowers to take on increased borrowings to support house prices. Share markets benefit from interest rate reductions through a combination of expected increased economic activity and also due to funds flowing out of low return generating cash and fixed income investments into higher yielding shares as investors seek out their required returns.
- Lending restriction to be loosened
Banking regulator, APRA, have proposed to lenders a change in the assessment method of a lender’s borrowing capacity to better reflect the current interest rate environment. Lenders are currently required to assess a lender’s capacity to make loan repayments at an interest rate of 7% per annum. Under the proposed new assessment method, lenders would assess repayment capacity at 2.5% above the actual rate applied to the borrower. With home loan rates at record lows of approximately 3.44%, the assessment rates for banks could be as low as 5.94%. For a family of two adults and two dependents with a household income of $150,000 and no other debt, the borrowing capacity could increase from approx. $800,000 to $900,000 under the proposed changes.
What are the financial planning implications?
- More flexibility with Super contributions
Labor had proposed further restrictions to super contribution limits. The re-election of the Liberal-National Coalition provides greater flexibility. With superannuation being among the most tax-effective methods of accumulating and holding your retirement saving, you should ensure you are maximising your superannuation strategy by discussing this with your Wealth Partner.
- Property Investment to remain a key strategy for wealth accumulation
The retention of negative gearing and existing capital gains tax concessions will likely result in property being a preferred method of wealth accumulation. Policy stability and relaxation of lending standard will likely provide support to the housing market, with price falls in Sydney and Melbourne close to bottoming out.
- Property Strategy – Mini-Development with Buy, Build & Sell
This is a strategy that we have had great success with lately and is driven by Benn Lane, our Head of Property. It involves sourcing land that can be subdivided, building a duplex to suit the local owner occupier market and then listing it for sale through a local agent. Returns have been in the range of 20%-30% in 12 months on the gross value or 80%-120% as a Return on Equity. If this is of interest, then please get in touch with your Wealth Partner.