Newsletter - July 2023

Newsletter July 2023

Welcome to the latest edition of our client newsletter,

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want — now and in the future.

In this edition we discuss “Capital gains tax” and provide you with information on . “Lender’s Mortgage Insurance (LMI)” and “Saving house deposit”.

If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us.

In the meantime we hope you enjoy the read.

All the best,
Planet Wealth

Planet Wealth

921, High St Road, Glen Waverley, Vic 3150

Planet Wealth Pty Lt (AGN 137 467 362) as Trustee of the Planet Insurance and Financial Planning Unit Trust ABN 15 757 194 605 is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.

Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your advisers, our practice, AMP Financial Planning, its associates and other companies within the AMP Group may receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more deals. If you no longer wish to receive direct marketing from us please call us on the number in this document and if you prefer not to receive services information from AMP, you may opt out by contacting AMP on 1300 157 173, To view our privacy policy visit www.amp.com.au

What is capital gains tax and when might I pay it

Capital gains tax may be payable when you sell a certain asset (such as shares, land or property) and make a profit.

Capital gains tax is charged on the profit you make from the sale of certain assets. These could be assets that you’ve purchased or inherited.

To give you a few examples, capital gains tax might apply to things such as shares, investments, land and property (unless it’s your primary residence), and it may even apply to certain collectibles and personal items, depending on what you paid for them.

The good news is, if you understand the general ins and outs of capital gains tax in Australia, which we explain in more detail below, you could reduce the amount you have to pay.

When is capital gains tax payable?

When you make a capital gain, the amount is included as part of your personal income for tax purposes. While capital gains tax has its own name, it’s not a standalone tax.

What that means is any capital gains you’ve received will need to be declared when you lodge your annual tax return and will then be assessed as part of your total income for the year.

The amount of tax you pay on that income will then vary depending on what income bracket you fall into.

In the instance you have a shared asset, you need to work out each owner’s individual interest in the asset, as this is how capital gains and losses are determined for each party involved.

Tip

You might be interested to know that strategies that reduce your total income might help to reduce the amount of tax you pay on any capital gains you make,

One example is if you make a tax-deductible super contribution. For instance, if you’ve sold an asset that you have to pay capital gains tax on and you decide to contribute some or all of that money into super, which you then claim a tax deduction for, this could reduce or even eliminate the capital gains tax that’s owing altogether.

How are capital gains calculated?

Generally, you can calculate your net capital gain by adding up your capital gains over the financial year and subtracting your capital losses (including any net capital losses from previous years that haven’t been claimed already) and any capital gains discounts or small business capital gains tax concessions you may be entitled to.

The important thing to note is a capital gain is typically reduced by 50% when an asset has been held for at least 12 months. So, if you sell an asset you’ve owned for less than a year (an investment property or shares in a business for example), the entire gain will need to be included in your taxable income.

What assets does capital gains tax not apply to?

If you make a profit on an asset, there are instances where you won’t be it with capital gains tax.

Capital gains tax generally doesn’t apply to:

Assets acquired before 20 September 1985
A property that is your main residence
A car, motorcycle or similar vehicle
Personal-use assets, which you paid under $10,000 for
Winnings or losses from gambling and prizes.

The Australian Tax Office (ATO) has further details as to which assets are subject to capital gains tax and which assets are exempt on its website.

How important is keeping records?

You must keep records of everything (every transaction, event or circumstance) that may be relevant to working out whether you’ve made a capital gain or loss from an asset for a period of five years.

Also note, there’s no time limit on how long you can carry forward a net capital loss and it can be deducted against capital gains in future years, helping to reduce the tax you pay in future years.

For more information, speak to an accountant or contact us, we may be able to assist.

Source: ato.gov.au/Individuals/Capital-gains-tax/ © AWM Services Pty Ltd. First published Jun 2021

Understanding Lender’s Mortgage Insurance (LMI)

If you’re looking to buy a home or investment property, or considering refinancing, it helps to understand the role of lender’s mortgage insurance.

What is lender’s mortgage insurance?

Lender’s mortgage insurance (LMI) protects your lender when you take out a home loan where there’s an increased risk associated with your loan.

If you have a deposit of at least 20% of a property’s purchase price, generally you won’t be asked to pay this type of insurance®.
However, if a lender (such as a bank or financial institution) agrees to lend you more than 80% of the property’s value, there is a higher risk that—if the loan isn’t repaid as agreed—the lender may lose money.

That’s where LMI comes in. It’s important to understand it’s there to protect the lender, not the borrower, unlike some other types of insurance.

When do I need lender’s mortgage insurance?

As a property buyer, you may need LMI if your deposit is less than 20% of what the lender thinks your property is worth, sometimes called a bank or lender assessed valuation. Note that your lender’s value of the property may not be the same as the purchase price you pay, or what you believe your existing home is worth.

What is the cost of LMI?

It is a one-off cost that will generally come down to the lender you choose, the loan amount, the size of the deposit you have, and the value of the property that you’re looking to buy or refinance.

LMI is calculated as a percentage of the loan amount. It varies depending on a number of factors including your loan to value ratio and how much you plan to borrow.

Alternatively, you may be able to add the LMI fee to your total home loan amount. However, it’s important to note that this will increase what you owe, what you will have to pay back in interest, ae well as your minimum monthly loan repayments.

Can I avoid paying LMI?

If you can’t save up a 20% deposit, you could avoid the costs of LMI if someone acts as a guarantor for your home loan. A guarantor is responsible for paying back the entire loan if the borrower can’t. The property to be purchased o refinanced acts as partial security for the lender, and the equity in a guarantor’s property provides additional security. Guarantors generally need to be immediate family members, though each provider may have its own terms and conditions.

Risks of having a guarantor

The guarantor’s property and credit rating could be put at risk if the borrower doesn’t repay the loan.
By tying up the equity in their own home, the guarantor may not be able to use it if they need to.
Relationships could be affected if things don’t go to plan.

It’s important that your potential guarantor understands what’s involved, and seeks legal and financial advice before acting as a third party on your loan.

Don’t confuse LMI with mortgage protection insurance. Mortgage protection insurance is designed to help you meet your mortgage repayments if you become seriously ill or incapacitated and can’t work.

What happens if I refinance?

When you refinance, your original mortgage ends and you make a new loan arrangement with another lender. You can’t transfer an LMI policy.

That means you’ll need to pay for a new LMI policy if you still have a low amount of equity in the property (you’re borrowing more than 80% of the property’s value).

The pros and cons of LMI

Pros

If you can meet the normal lending criteria but can’t make it to the 20% deposit threshold, you may still get into the property market with a smaller amount, as long as you can meet the mortgage repayments.
You won’t need a guarantor to supply additional security.

Cons

It’s an extra cost to pay on top of your home loan.
You’re paying the lender’s mortgage insurance costs.

Is it worth paying LMI or should I save more?

Home buyers often debate whether it’s better to hold off on house hunting until they’ve saved up a bigger deposit or bite the bullet and pay LML.

Every buyer’s situation is different and may depend for instance on how likely they are to be able to find a bigger deposit and whether they think house prices will rise or fall.

For example, if you’re looking to get a place of your own to start a family in a city with rising house prices, you might find it hard to get close to a 20% deposit.

You may be keen to get into the property market as soon as you can, because you think prices will accelerate faster than your ability to raise a larger deposit.

If that is the case, you might opt to pay LMI because you believe the chance of capital gain in a rising market outweighs the cost of LMI.

Alternatively, you might feel more comfortable waiting until you have a deposit big enough to pay less, or no LMI.

The answer depends on your personal circumstances, as well as factors such as loan amount, house market volatility and interest rates.

Have a word with your mortgage broker or talk to us about what’s right for you.

* Restrictions may apply if the security property is in a rural or remote location.

5 things to consider when saving for a house deposit

Before you can step onto the property ladder and buy your first home, you’ll likely have to do some serious saving to build up a deposit. Here are some things to consider that can help get you started, and on the road to home ownership sooner.

Work out your current situation

It might sound obvious, but it’s easier 1o reach a savings goal when you know where you’re starting from. Understanding your current financial situation — what your income and expenses are – will help you set a budget. You can then track your spending and save a set amount each week, fortnight or month towards your deposit.

Find out how much you can borrow

Knowing how much you might be able borrow can help you figure out how much home loan deposit you’ll need to save. Borrowing calculators can give you an idea of how much you may be able to borrow. Remember though, the amount calculated is only an estimate based on the income and expenses you put in. It’s likely to differ from the amount a lender formally approves you for when the time comes.

It’s also important to remember that interest rates do change, so think about building a buffer into the repayment amount so that you’d still be able to cover your loan repayments if interest rates rise.

Figure out how much deposit you need

Once you know roughly how much you might be able to borrow, compare this with the cost of your ideal property and it can give you a good ballpark figure to aim for. The size of the deposit you need for a home loan is typically 20%. Although in some circumstances it may be possible for home buyers to have as little as a 5% deposit.

Understanding the loan to value ratio and whether you’ll need to pay lenders mortgage insurance can also help you work out how much you can afford to spend when buying a property.

When you’re closer to reaching your house deposit goal, you can speak to a lender about conditional approval for a home loan.

Don’t forget the other upfront costs associated with buying a home such as legal fees, building and pest inspection fees, stamp duty, moving costs and insurances.

Know how long you’ll be saving for

Of course, this all depends on how much you can afford to save each month. But every dollar you can put towards your savings plan means growing a bigger deposit or saving money for less time.

As an example:

Depending on your financial circumstances, a separate savings account for your home loan deposit may be an option you want to consider. It can pay to shop around and find an account that’s right for you, whether it be a regular savings account or a term deposit.

Find out if you’re eligible for first home buyer help

If you’re a first home buyer, you might be eligible for the First Home Owner Grant (FHOG). It’s an Australian state and territory-based scheme that aims to help first home buyers with the cost of purchasing a residential property.

Tips to save a deposit faster

If it’s an option, you might consider temporarily moving back home with your parents, S0 you can save on rent.
Free up extra cash by cutting down on unnecessary spending – takeaways, another pair of sunglasses, or monthly subscriptions you don’t use are a good place to start.
Make additional income by selling things you no longer use or earning money through a side hustle.
Cut back on food waste and plan your meals so you spend less on groceries.
Review your utility providers to make sure you have the best deal.
Defer any big purchases or upgrades like cars or appliances.

If buying a property is on your agenda and you’d like to find out more about saving for a deposit, call us today.