- Fixed or Floating - the mortgage decision?
- The biggest mistakes self-employed business people make...
- Investment Update
- RIVAL is looking to grow - Are you?
- RIVAL in the news
- Is your financial health up to date? And what will it cost to fix it?
- KiwiSaver Member Tax Credits
- Make your health insurance more affordable
- Investment Update
- Referral Competition
Welcome to Financial Health. This month we want you to think about how the current changes in the New Zealand economy affect you. Do you need to fix your mortgage or stay floating? Has your mortgage increased or decreased and you need to reassess your life insurance? Or maybe you are ready to start saving more as your position improves?
Quote of the month - " When I was young I used to think that money was the most important thing in life and now that I am old, I know it is.” — Oscar Wilde
Fixed or Floating - the mortgage decision?
Short term mortgage rates have started a new phase of increasing after 18 months of lower floating rates. So should you keep paying the low floating rate or would it be best to fix in for a longer period to make sure that you are not paying 8.5% again this time next year. Is there anything that you can do to save on mortgage interest for the next few years as rates increase?
We overheard a chap this morning, in his 70’s, talking about how his generation had seen the most change of any other generation in history. Back at the office, we certainly agreed in terms of technological advances, economically though we didn’t think this was the case. All countries and economies have always gone in cycles – boom, bust, recovery and then it all starts over.
At present we are in the recovery phase, and so to control the recovery the Reserve Bank increases the Official Cash Rate (OCR). The main concern is controlling inflation, which is the increase in the cost of goods and services over time. This is predicted to spike in January 2011 at 5%. So to get this down again the Reserve Bank has indicated they will be increasing the OCR by 0.25% at each meeting over the next 12 months or so.
Allan Bollard, the Reserve Bank Governor, said at the June increase, “The economy has entered its second year of recovery with growth becoming more broad-based.” This means the very low floating mortgage rates that we have loved for the last 18 months have already started increasing, and will continue to do so over the next 12 months.
BNZ Chief Economist Tony Alexander has recently commented on whether fixing mortgage rates for 2 or 3 years is going to be a better option going forward. Alexander queries whether he would choose 2 years at 6.99% or 3 years at 7.30%, saying if BNZ's forecasts are right, the floating rate will exceed 7% at the end of January 2011 and 7.30% by the end of March. "I'd actually take the short term cash flow pain and fix three years, but I'd expect most people who do switch will opt for the two year rate as the jump from floating is less painful to immediate cash flows." Alexander said. We agree with his assessment and think that fixing for 3 years will have great long term benefits quite soon.
So where to from here? Firstly, I would suggest sitting down and doing a quick budget for your family. This sounds simple but most people spend what they earn before even considering saving. If you do find you can save on other outgoings, your increased mortgage payments are not as big a burden as you think. The first question to ask yourself is ‘what are my objectives for this loan?’ as everyone’s situation is unique and requires a different approach. You may have the ‘perfect property’ and plan to stay there for 30 years, or you may be moving to another country in the next year or so. The term of a loan will reflect your circumstances.
There is no wonderful money-saving opportunity for mortgages at present. You either stay floating and risk paying 8.5% in 12 months time, or fix and get hit by higher interest payments in the short term. There is simply nothing you can do to save on mortgage interest for the next few years as rates will be increasing with the recovery, but you can fix in a rate now and know that you won't be paying more than that for a few years. For those who have held off fixing simply to enjoy low floating rates as long as they can - there is no point waiting any longer. It is now time to embrace the facts of the recovery and look to the future.
The biggest mistakes self-employed business people make...
Self employed people rely on themselves for income, and need to make sure the business is structured correctly. If you were injured, diagnosed sick, or passed away, your business would obviously suffer, so why not have a business succession plan in place to allow for the unexpected. You can even replace some of your expensive ACC cover to cover sickness as well. The two biggest mistakes that self employed business people make is spending truck loads on ACC premiums, and realising the value of their business for their families if something unexpected happens to them.
The first mistake self employed business people make is neglecting to insure their most valuable asset - your ability to earn an income. If you insure your vehicles, buildings, and stock, why would you not protect the income of the person who generates the wealth? Particularly when you are probably paying a fortune in ACC premiums for cover that will never pay if it is not structured correctly. You could be paying the same amount of money and be covering sickness as well.
Overlooking the value of a key person, and the impact the loss of one of them (or yourself) would have on your revenue and profitability would have a massive influence on your business, and more importantly the equity that you have built up. If a key person died or was disabled, would the future profitability of your business be as certain today, as it was yesterday?
The second mistake is assuming that your business is not worth anything if you were no longer to work in it. It is going to be far cheaper for you to cover your business succession issues in an adequate plan before something happens to a shareholder or director, rather than once an event has occurred. If your business partner died last week, who would you be in business with today - their spouse? their children? their accountant ?or their lawyer?
Why would you risk your health and lifestyle to jargon, out-dated policies, and "wishful thinking" - when you can have a confidential, risk management consultation?
What do we think about the long term prospects for the global economy? Our investment expert, Tim, puts the current situation into perspective.
Global
Issues around European sovereign debt and decelerating global growth rates remain a headwind for markets. Despite this, most managers we talk to remain encouraged by the investment opportunities that are presenting themselves. Even though companies have had pressure on their share prices, most are holding massive amounts of cash for re investment, and the valuations of these companies are proving to be very cheap considering the market sentiment. Balance sheets are strong and the competitive positions that companies operate in have improved as weaker competitors have been forced out of their industry. As investor sentiment has dropped in recent weeks the opportunity to own these strong businesses at attractive prices has improved.
Australia and New Zealand
During June, the Australian political landscape underwent some major changes with Julia Gillard usurping the role of Prime Minister from Kevin Rudd. Voters had become disenchanted with a lack of progress around the carbon emissions scheme and a proposal to change the tax regime for mining companies. A ‘wait and see policy’ is still needed for the outcome of these reforms.
New Zealand economic news flow has been dominated by the budget. While the rise in GST and the drop in tax rates and bands were changes that had been well flagged, there was surprising news that the company tax rate was being dropped to 28%. The budget also offered some pleasant news for investors with the decision to drop the top PIE tax rate, the maximum rate payable by investors in savings vehicles, also to 28%.
Outlook
We are still feeling very positive on world markets over the medium term - 3 to 5 years. With the world economy in recovery mode, economies and companies are more than ever focused on getting costs down and income up. So regardless of what happens over the next few months, once countries sort out their debt issues, we will see higher stock markets in the medium term. Add to this that the New Zealand Dollar will start to come under long term pressure over the next 12 months to go down against our major trading partners as their economies gain ground on the growth we are currently seeing. Having investment money outside New Zealand is a very attractive medium term proposition.
We are looking for proactive individuals to join RIVAL Wealth to provide financial advice, starting in basic products and building to become fully qualified financial advisers. Knowledge of the industry would be a bonus but not essential as full training will be provided along with ongoing mentoring and sponsored education. So if you are feeling a bit stale in your current role, think financial advice may be an area that would get you excited each day, or even want to be your own boss, then what have you got to lose by having a confidential chat with Tim and Carissa.
You may have seen the "Most Wanted Man" Competition which ran in the Wairarapa Midweek newspaper recently - promoting men in the Wairarapa that gave the best service to their customers. We are very proud to announce that our very own Tim Fairbrother took out the award - 'Wairarpa's Most Wanted Man'. You can read all about it in the next issue of the Wairarapa Midweek.
You can also find an article on Tim and Carissa in the latest issue of Wairarapa Lifestyle Magazine (Winter 2010). The article highlights their journey to end up in the sunny Wairarapa, and why we think it’s a great place to live – a great magazine that is well worth a read.
We hope you have taken something from this edition of 'Financial Health'. If you have any suggestions or would like to see a topic covered in the future then please send them in.
Kind regards
Tim, Carissa and the RIVAL team
A copy of our disclosure statement is available free of charge at any time.
