The Experts

Christine St Anne
+ About Christine St Anne
Christine St Anne is a senior financial journalist who has had a career-long interest in the superannuation and investment industry. Christine was the editor of a number of trade publications including an online website for retail investors.

How to boost your income

Thursday, June 02, 2016

by Christine St Anne

Product Review

With cash rates at all-time lows, income-seeking investors will need to rethink their exposure to traditional sources of income such as term deposits.

Investing in fixed income assets such as bonds can access alternative sources of income. There are even a number of high-yield bond funds in the market that give investors that extra income kick. One example is the Supervised Global Income Fund.

Who is Supervised Investments?

Supervised Investments was established in 1999 by David Constable who has over 60 years of experience in financial markets. The firm’s first product was an Australian-based international equities fund, which was launched in 2007. Following the global financial crisis, the business saw an opportunity and expanded its investments into debt securities. Headed by debt market specialist Philip Carden, the firm set up the Supervised Global Income Fund (previously Supervised High Yield Fund) in April 2009. The fund has managed to achieve a 7-year track record of outperformance. Phil has 35 years’ experience managing bond funds here in Australia and overseas.

What are fixed income assets?

Traditional fixed-income assets include bonds and high-quality, investment-grade credit, that is, corporate bonds. Fixed-income managers can also invest in higher-yielding assets such as high-yield debt, syndicated loans and hybrids. Fixed-income funds can invest in all of the above mentioned bonds with the obvious focus on generating income for investors. These funds do not invest in shares or any other asset class apart from bonds.

Supervised Global Income Fund

The Supervised Global Income Fund invests in both the domestic and global debt markets. The Fund can invest in corporate bonds, mortgage and asset-based securities, bank bills, commercial paper, interest-rate markets and hybrid securities.

Key details are as follows:


In terms of its performance, the Fund has achieved positive monthly returns and an annual return of 9.39%* since inception (1/4/2009), net of fees. The Fund also has a very low correlation to the ASX 200. This means the Fund’s returns are positive when the ASX returns are negative. While the Fund’s returns may not be as high when the ASX200 outperforms, this low correlation to the Australian equity market brings true diversification benefits to investors.

As mentioned previously, the Fund’s lead manager Philip Carden has over 35 years’ experience. His extensive background and expertise has contributed to the Fund’s performance and risk record.


The Fund’s focus on protecting investors’ capital and the nature of fixed-income can lead to underperformance compared with rising equity markets. The Fund had negative performance including two negative months in January 2016 and April 2009 of -0.51% and -0.12% respectively, but this has corresponded to 98% of positive monthly performance since inception.

There is key person risk in Philip Carden. This risk would impact the ongoing management of the portfolio rather than the ability of the Investment Manager to wind down in the event the Fund needs to be liquidated in his absence.

Another risk for investors is the liquidity of the underlying assets. While these assets can be liquidated, they are not traded on-market.

Bottom line

The Supervised Global Income Fund will suit investors looking for extra income but expect lower risk than other income producing assets. Investors do need to understand that the Fund does not trade in highly liquid securities, but its focus on capital protection ensures a prudent approach to investing in higher yielding securities.

Important information: This content has been prepared without taking account the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.


How to boost your borrowing capacity

Monday, May 09, 2016

By Christine St Anne

The recent rate cut to historic lows of 1.75% will most likely spur many people to look at getting a home loan. However, it may be worth your while to look at your debt before tapping the bank for that low-rate home loan. 

According to, the debt held by Australians impacts their borrowing power by $99,000.  

The comparative website provided this interesting table below that has a breakdown of how the different levels of debt can reduce a person’s borrowing power. 


Source:, Reserve Bank of Australia Credit and Charge Card Statistics

Let’s look at an example. The borrowing capacity of an individual earning $75,000 per annum was $420,000, according to’s borrowing power calculator.   

The average $12,643 personal loan lowers the amount a person in that scenario can borrow by $41,000. The average $16,320 car loan shaves off $46,000, while the average $3,114 credit card reduces borrowing power by $12,000.

If you triple the value of your debt, that’s about how much less a lender will be prepared to loan you when purchasing a property,’s Bessie Hassan says. 

“With the average house price in Australia at $612,100, any reduction in borrowing power could severely limit what property you can afford to buy,” she says. 

Hassan says that a car loan or credit card may cost you dearly with some causing home loan applications to be rejected. 

So what can borrowers do to get that debt monkey off their shoulder and score that home loan? 

“Before applying for a home loan, make a determined attempt to get rid of all the outstanding debts you have and, if possible, get rid of any credit cards you don’t need or reduce their limits,” she says.

Your ability to demonstrate ongoing savings will also be a positive for lenders. 

One way of doing this is to redirect your salary into a high interest account – this should fast-track your savings. 

You can alleviate credit card interest payments by using an interest-free balance transfer credit card. This can help consolidate your debt. 

This tip was further explored in my earlier article, 5 money savers for the New Year.

Hassan says people should also look at cutting their savings in order to pay their debts, particularly on credit cards. 

“If you have spare cash think about using it to pay off your credit card first. Even if you stop adding as much money to your savings, keep your good debt repayments such as a home loan to the bare minimum or stop adding to your savings account altogether,” she says.

“Not only will you cut down the time to pay it off, but you will be debt-free sooner.”

Hassan says you should remain vigilant with your debt reduction plan in order to get the loan you want. 

“Go into discussions with your potential lender with as little financial baggage as you can and it's more likely you'll be rewarded with the borrowing capacity you need to buy the home you want.”



How to find real income

Thursday, May 05, 2016

By Christine St Anne

Switzer Daily brought together portfolio managers from bond managers PIMCO and Kapstream to talk about fixed income investing. 

They were joined by facilitator Peter Switzer to explore the themes, challenges and opportunities to investing in fixed income. In the fourth part of the series we look how to secure in a low-return market. 

Bond managers expect interest rates to remain lower for longer as highlighted in the previous article, investing in a low-growth world

The Reserve Bank of Australia is even expected to cut rates further follwoing this week's decision.

Amid an environment of anaemic growth and low rates, roundtable facilitator Peter Switzer asked how can investors find real income? 

Kapstream’s Kumar Palghat says the income challenge will force investors to rethink the way they manage money and the way the approach bonds. 

As bond managers, it was tricky to compete against the 5 to 7% term deposit rates pre-GFC, however, bonds offer liquidity and greater diversification than term deposits, according to Palghat. 

“Everybody needs some form of liquidity. With term deposits you are locked into a term and exposed to a single institution. With bonds, you are getting paid better than term deposits but also have that liquidity and diversification across a number of institutions,” Palghat says. 

PIMCO’s Rob Mead says bonds bring a lot of benefits to an overall portfolio. It’s not just about the return but also managing risk. 

“When thinking about retirement, people should think about how much volatility there are prepared to accept for a certain level of income. A stock might trade at an apparent 6% dividend yield, but its capital value could fall by 30% to 40%, in-line with some recent market experiences. Not all investors are comfortable with that level of volatility,” Mead says.

For Kapstream’s Palghat, investors tend to assume that income doesn’t come with default risk. 

When it comes to investing in bonds, Palghat says investors need to think about who they are lending money to and what risks they are getting from a certain level of return. 

As bond managers, however, Kapstream and PIMCO invest across a range of bonds including government, semi-government and corporate bonds. This ensures diversification and mitigates the risk of default. 

Palghat says the search for income will spur investors to also re-think their risk tolerance. 

“You have to take some risks if you want a rate of 4% compared to 2%. This means investors may need to consider leverage or taking on additional credit risks,” Palghat says. 

Mead says the good news for Australian investors is that they can still access a relatively risk free rate of 2.0% in term deposits, which is the starting point, or hurdle, for other asset classes to be considered for investment. However, like Palghat, Mead says investors can boost their return by taking on additional credit risk, especially global credit.

This of course does not mean investors need to consider Greek bonds. High quality global credit (fully hedged) can give investors a 5 to 6% return.

Another option are corporate bonds. These bonds offer a higher yield than a government bond given their slightly riskier profile but as Mead notes, the best companies in the world can issue these bonds.

“You have to take a risk, but in a measured way. Considering that the rest of an investor’s portfolio may be invested in things like bank stocks because of their potential dividends, then other assets, like bonds, should be considered as an income-generating diversifier in the portfolio,” Mead says. 


Super changes: the bad and the good

Wednesday, May 04, 2016

By Christine St Anne

SMSF Association chief executive Andrea Slattery did not expect the government to introduce the level of complex changes to superannuation in last night’s budget. 

“The way we see it is that the changes announced in the budget highlights that the government is seeking to make the superannuation system more sustainable and fair,” Slattery said. 

Although the government is trying to implement a more adequate superannuation system, Slattery said there were a number of disappointing decisions. 

“The government’s decision to reduce the concessional contribution cap down to $25,000 is a backward step that will severely reduce the ability of people to save adequately for retirement,” Slattery said.

Research by the SMSF Association has revealed that people have taken advantage of concessional caps in the lead up to their retirement, particularly by people approaching the age of 50. 

“We strongly believe that adequate concessional contribution caps are vital to allow people to save for a secure and dignified retirement,” she said

“It is especially important that people approaching retirement have adequate contribution caps to maximise contributions to superannuation when they are most likely to have the financial resources to do so.” 

The carry forward of unused concessional contributions policy was supported by the SMSF Association, and Slattery said the measure will help particular women and people with broken work patterns but the $500,000 balance limit on this measure will “restrict people building truly adequate retirement incomes.” 

Although transition-to-retirement pensions (TTR) were not abolished, the government announced that underlying assets will be tax-exempt from 1 July 2017. This will reduce the tax effectiveness of TTRs.

Three other measures that concern the association are:

1. Non-concessional contributions are being reduced to a $500,000 lifetime limit. “Although a change to non-concessional contributions was expected in the current fiscal environment, the fact that it includes contributions made since 1 July 2007 adds an unfair element of retrospectively to the proposed change particularly for people who contributed in that period in good faith,” she said. It will also add a significant degree of complexity. 

2. Tax-free earnings in retirement will be limited to retirement account balances of $1.6 million. Assuming an earnings rate of 5% a year, this allows people an annual income supported by superannuation of $80,000 a year. 

“While this is a reasonable amount, it is a complex measure and refining the concessions for retirement phase could be done more efficiently,” Slattery says. 

3. Increased tax on concessional contributions for high-income earners (Division 293 tax) has been lowered from people earning $300,000 and above down to those earning $250,000 and over.  

“Although we expected this change and see it as a reasonable targeting of super tax concessions, what makes it disappointing is that’s happening in addition to concessional contribution caps being reduced,” she says.

Now for the good 

Slattery said there were some positive announcements to superannuation from last night’s budget. 

One positive measure was the government’s decision to remove the 10% rule for personal deductible contributions. This will mean people can make tax-deductible contributions to their super over and above the current superannuation guarantee of 9.5%. Slattery says this will also make it easier for employers who don’t have to necessarily introduce salary sacrifice measures. 

Another measure welcomed by the association was the decision to remove the work test for contributions made by people aged between 64 and 75. 

“This means more contributions can be made by people in this age bracket and it’s a measure we have lobbied strongly for. We are very happy with the outcome,” Slattery says. 

The association was also pleased that the government will introduce the Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution. 

“This will mean a more equitable treatment for low income earners,” Slattery says. 


Super hits and bright spots

Monday, May 02, 2016

By Christine St Anne

Given the leaks in the media over the last month (including today's newspapers), changes to superannuation are a certainty. 

As a senior policy manager for the SMSF Association, Jordan George has been involved in lobbying the government on super changes in the lead up to the budget. He gives us his take on the expected changes and some positives he is hoping to come out in tomorrow’s announcement. 

1. Lowering concessional contribution caps 

According to the Australian Taxation Office (ATO), concessional contributions are contributions made into your SMSF that are included in the SMSF's assessable income. These contributions are taxed in your SMSF at a ‘concessional’ rate of 15%, which is often referred to as ‘contributions tax’.

Common types of concessional contributions are employer contributions, such as super guarantee and salary sacrifice contributions. Concessional contributions also include personal contributions made by the member for which the member claims an income tax deduction.

In each financial year people can plough up to $30,000 into their fund. It’s been an effective strategy for people who want to top up their retirement savings.

There is speculation that concessional contribution caps will be lowered from $30,000 to $20,000 per annum. 

“This will be really damaging for people who are approaching retirement, “George says. 

He says the expected changes will also impact women with broken work patterns (most notably mothers) who are wanting to “catch-up” with their super balances by putting that extra in. Small business owners with volatile earnings will also be affected. 

2. Changes to the non-concessional caps 

The ATO says that non-concessional contributions are contributions made into the fund that are that are not included in the SMSF's assessable income. The most common type is personal contributions made by the member for which no income tax deduction is claimed.

Currently non-concessional contributions are capped yearly at $180,000 for SMSF members 65 or over but under 75 or $540,000 over a three-year period for members under 65. 

There are rumours that non-concessional caps will also fall from $180,000 to $120,000 per annum. 

This planned change could also limit those under 65 to put only $360,000 into their fund from $540,000 over the three-year period.  

George says this measure may stop people putting in large sums of money into retirement using the sale of a business, an investor or a bequest from parents. 

“A substantial drop in those caps will really restrict the way people save for retirement,” George says. 

3. Changes to Division 293 

There has also been widespread speculation that the government’s super changes will target Division 293, which imposes a 30% tax rate on the super contributions (everybody else of course pays 15%) of high-income earners. A point Switzer Super Report’s Paul Rickard raised way back in March

Division 293 kicks in when before-tax income plus super contributions exceeds $300,000. The government now has plans to drop the threshold to $180,00. 

Paul has already said that the proposed measure is going to catch a lot more people because if superannuation contributions are included in the definition of income, someone earning $162,000 will still have to pay 30% on their super contributions. 

Again, the SMSF’s George this will impact the ability of people to put extra into superannuation. 

4. The end to transition-to-retirement (TTR)

A change also touted by Paul Rickard on Switzer Daily a month ago.  

Treasurer Scott Morrison has already made noises about closing a tax loophole for people using transition-to-retirement. 

“The budget may just announce a tightening of rules for people transitioning to retirement,” George says

This means people may have to prove that they are legitimately reducing their work hours as they move to a TTR pension. 

“This strategy has proven to be an important planning tool and effective tax strategy. Our concern is that the government will effectively ban TTR on budget night,” George says. 

What can you do?

People should take action now and maximise the current benefits to superannuation. George believes the expected plans to lowering the concessional and non-concessional caps and changes to Division 293 tax will not be immediate and could in fact only take effective in 2017/18.

“This means people will have two financial years to take advantage of the tax benefits in topping up their superannuation,” George says.

In terms of changes to TTR, well you have just one more day to get one! 

“There is no harm in starting a TTR as you can switch it off or simply commute it back to accumulation if you decide you don’t want one, says George. 

And the bright spots?

George expects a “carrot and stick” approach will be used in the budget. 

“Given some of the negative measures touted, it is likely the government will deliver some benefits for superannuants, “ George says.

At the moment, Australians working overseas can’t make contributions to their self-managed superannuation fund. 

George expects this to change, giving these Australians the ability to pay into their SMSF while working overseas. 

He also believes the government will introduce flexibility with contribution caps. 

The current system is use it or lose it. This means that if you don’t’ maximise your caps in the financial year then you effectively lose the benefit.

“The government could pave the way for people to bring forward their unused caps form previous years to top up their contributions in the current year. This would help a lot of people save for their retirement,” George says. 


5 steps to take before trading online

Thursday, April 28, 2016

By Christine St Anne

Successful investing requires developing an overall strategy that helps you maintain discipline and control.

Investors also need to allocate time and research in order to understand what their requirements are to choose the online broker that best meets their needs. 

View the full The investment landscape has changed infographic here.

Here are -five steps to help you build a plan that provides you with the foundations for a long-term investing and trading plan. 

1. Devise a strategy

There is an often-used saying in small business: If you fail to plan, you are planning to fail. This saying is just as relevant to investors as it is to entrepreneurs. 

Before you begin your online trading strategy, devise an overall investment strategy. Don’t just think about investing in shares because of a tip from a friend or a family member.  

Your investment objective could as simple as maximising returns from an investment, or a more specific one such as achieving a return of inflation plus 3% over a five-year period.  

You should also think about your level of risk tolerance and whether you can bear more than two years of negative returns and, what approach should you take to mitigate these risks. 

Key to risk mitigation is an investment plan that includes a diversification of assets that goes beyond equities. An investment plan should outline allocation to a wider range of assets such as fixed-income and cash. Equities could even diversify into global equities, and even small and mid-cap stocks. 

A timeframe is important and should be consistent with your objectives. For example, saving for a deposit on a home requires a shorter timeframe than saving for retirement.  

2. Education and research 

As an investor planning to directly invest in shares, education and research bring many benefits to your investment plan. It’s important not to get caught up in tips heard at the water cooler or from the taxi driver over the excitement of a rising stock price. 

A disciplined approach to understanding a company’s financial information such as the balance sheet, the dividends paid, quality management and other relevant market information is an important foundation to identifying the right stocks for your portfolio. Online brokers today provide in-depth research and insights that can help you understand the companies you are looking to invest in, stocks to watch as well information on emerging investment trends. 

3. Choose an online broker 

It’s important to choose an online broker that can provide you with the tools and information to help you trade effectively. Some online brokers like nabtrade give investors the ability to develop a virtual portfolio of shares, which allows them to trade for a short period before they invest in shares.  

It’s also important that investors compare the brokerage costs of each online broker as well as the level of research they provide and platform innovations. Many brokers now offer the ability to trade using mobile apps. 

Some online brokers also provide investors with research on not only shares but other asset classes and strategies such as exchange-traded funds (ETFs). ETFs have become very popular with investors because of their relative low costs and ease of execution. These ETFs also give investors access to a wide range of asset classes such as international equities that can help investors compliment their domestic equities portfolio. 

4. Research stocks 

It’s important to conduct comprehensive research on a company stock. Read the company’s annual report and financial statements. Broker reports are also handy as they provide information on how each broker rates a company. Their opinions can be valuable! Keep an eye out for company announcements and watch trends for results. 

5. Make a plan 

Now that you have devised a strategy, incorporated research into your investment plan and chosen an online broker, it’s important to secure a robust investment plan. An investment plan should also consider whether your investment portfolio is meeting your goals. For example, do you have enough growth assets that will ensure capital growth? If you are moving into retirement, income-oriented assets such as fixed income or dividend-paying stocks will be of more importance. Your investment plan isn’t necessarily set or forget either. Make sure you revisit your plan as you continue on your investment journey. 

These tools and research provide investors with the ability to make the right trading decisions. This will ensure that your investment strategy is on track to meet your investment objectives.   


Investing in a low-growth world

Thursday, April 28, 2016

By Christine St Anne

Switzer Daily brought together portfolio managers from bond managers PIMCO and Kapstream to talk about fixed income investing. They were joined by facilitator Peter Switzer to explore the themes, challenges and opportunities to investing in fixed income. In the third part of the series, we discuss the outlook for global growth. 

There was a time when interest rates on term deposits were offering 5 to 7%. That was then and this is now.  Today, investors can now only garner 2% return globally and in Australia, just 3%. 

Roundtable facilitator Peter Switzer asked the bond managers, where have those juicy rates gone?

In over 25 years experience as a bond manager, Kapstream’s Kumar Palghat has never seen interest rates this low. 

For PIMCO’s Rob Mead, those “juicy rates” vanished following the global financial crisis. 

According to Mead and Palghat, the relatively low interest rate environment is systematic of a low growth world. 

Palghat notes that economic growth is stimulated by consumption through people essentially buying things, which provides the uptick to the economy. 

“Consumption feeds into corporate profit but with consumption down, there is very little to support growth,” Palghat says. 

These bond managers also have a tempered view on the growth outlook for the world. 

Mead says investors are now confronting a “new normal”. Under a “new normal”, interest rates will remain lower for longer. 

“All this stimulus that was generated from low interest rates and aggressive money printing was designed to stimulate growth. Growth rates have been reasonable but if we get organic growth, that is, growth that is not reliant on central bank activity, then we will be in much better shape,” Mead says. 

Palghat says both developed and emerging markets are now struggling to boost growth and it’s getting increasingly difficult to get the balance right with the respective policies. While monetary policy has eased around the world, fiscal policy is needed to support growth. 

Palghat says an overreliance on monetary policy won’t do much to achieve further growth. 

“To stimulate growth, monetary policy has lowered interest rates but that has been achieved through an enormous amount of money being printed. So one policy arm – fiscal policy – remains uncertain while the other policy arm – monetary policy – has been spent. We need to get out of this dilemma,” he says. 

He highlights a number of factors that could impact growth, such as the UK mulling an exit from the European Union, the US elections and the possibility of German Chancellor, Angela Merkel, not getting re-elected.

“Politics looks messy now around the world. The political cycle doesn’t help economic growth,” Palghat says. 

PIMCO’s Mead sees important portfolio ramifications from a low interest rate world. 

“Low yields on bonds indicate that growth is going to be low and even anaemic. Other asset classes will also struggle to deliver single or double-digit returns. This will mean that investors will have to re-think their asset class exposure and their approach to risk,” Mead says. 

Next week’s final article in the series will look at the role of bonds in generating income and rethinking investment risks.  


Navigating 3 market "swing factors"

Thursday, April 21, 2016

By Christine St Anne

Switzer Daily brought together portfolio managers from bond managers PIMCO and Kapstream to talk about fixed income investing. They were joined by facilitator Peter Switzer to explore the themes, challenges and opportunities to investing in fixed income. In the second part of the series we look at the market uncertainties ahead. 

According to global bond manager PIMCO, there are three “main swing factors “for the global economic and financial market outlook this year. China, commodities and central bank polices. 

These factors will continue to have an influence on the markets and Peter Switzer began the roundtable by asking bond managers, are there calmer Cs ahead? 

PIMCO’s Rob Mead says that central banks are trying to ensure a calmer market. 

“Whether they have the ability and policy effectiveness is to be determined. But what is certain is that volatility is here to stay,” Mead says. 

Amid the volatility, China, commodities and central banks will have an impact and in terms of China, Mead notes that the CNY devaluation will be the biggest risk for the global economy and markets.  

PIMCO’s Asia-Pacific Portfolio Committee expects 7% CNY depreciation versus the USD supported by currency intervention and targeted controls. Mead also says it’s also worth watching the size of capital outflows by Chinese companies and households this year. 

With an annual growth rate averaging 9%, Kapstream’s Kumar Palghat says China holds the record for the fastest developing major country in the history of the world. 

While construction is continuing at an “unprecedented pace, and the country’s middle lass continues to leap – from 100 million to 700 million people by 2020, Palghat says concerns around the rate of China’s growth will continue.  

“It’s now the second largest country in the world GDP-wise and a slowdown will have massive implications for the world,” he says. 

In terms of commodities, Mead says the worst for oil could be over. 

He says that the recent recovery in oil prices has provided relief in equity and credit markets. 

PIMCO’s commodity team provided a baseline view where higher demand sparked by lower prices and ongoing supply rebalancing could see oil price rise higher in the course of the year to around $US50.  However, PIMCO remains mindful of the risk that the oil price could fall below $US30 in the near term. 

According to Kapstream’s Kumar, although there as been a commodity boom, commodities including iron ore have fallen by 50%. 

He says growth will need to pick up in order to drive up the prices of commodities. 

While Mead says that central banks are trying to calm the markets, Kapstream’s Palghat notes all the central banks have cut rates close to zero and printed an “enormous amount of money.”

Total assets held by the major central banks are now $163 trillion, “QE4 is now at $47 billion, - with the high level of printed money out in the market “we are in unchartered territory”. 

Mead, however, says that if monetary easing is done the right way, it can still be supportive of asset prices, growth and inflation, even though returns are clearly diminishing. 


Alarming signs emerge in housing sector

Thursday, April 14, 2016

By Chrisitine St Anne

Switzer Daily brought together portfolio managers from bond managers PIMCO and Kapstream to talk about fixed income investing. They were joined by facilitator Peter Switzer to explore the themes, challenges and opportunities to investing in fixed income. In the first part of the series we give the bond manager’s view on whether Australia is facing a housing bubble. 

In 2006, PIMCO called the housing bubble in the United States just before the global financial crisis (GFC). Back then, PIMCO senior credit analyst, Mark Kiesel, spoke to CNBC about his concerns over the US housing market on the back of high prices and interest rates.

By 2007, the sub-prime mortgage crisis exploded in the US, triggering the GFC.

PIMCO’s Australian colleague Rob Mead never harboured the same concerns over Australia’s housing bubble, despite the relatively high housing prices. 

Mead believed the market fundamentals in the US were quite different to Australia.

Most notably, the US had different lending standards. If a US borrower defaults, they don’t have to pay back the loan. This made Australian mortgagees more responsible than their US peers in repaying their mortgages. 

Moreover, private housing investment remained steady and unlike the US, there was no housing oversupply in Australia. 

However, Mead now sees some signals emerging in the domestic housing market and outlined his concerns at the roundtable. 

“There will be no bursting of a housing bubble in the next 12 months or so, but there are some important signals that are becoming alarming,” Mead says. 

Mead says that a catalyst is needed to burst a housing bubble, to the extent one exists, and such a catalyst has emerged in the restriction of credit. 

“What has really now changed is the availability of credit. For the first time, banks are penalising a different cohort of investors by increasing the interest rates on their loans,” Mead says. 

He also highlights that the mortgage rates have increased despite the face that the Reserve Bank of Australia has not moved on interest rates. 

Mead also notes that “we are seeing a crackdown on credit to foreign borrowers who have driven price appreciation”. 

Furthermore, Mead says the Australian consumer is not deleveraging and is instead becoming increasingly leveraged. 

“These are all things we need to watch,” he says. 

Kapstream’s Kumar Palghat says the housing market “does feel like a bubble”. 

Palghat thought there was a housing bubble in Australia 14 years ago when he came to Australia, but says he continued to be wrong on the market since then.

“Most people think housing is subject to demand and supply. We can see the Chinese buying and capital coming in. Compared to other markets it feels expensive,” Palghat says. 

However, there are two key drivers to a bubble, according to Palghat. 

The first driver is jobs and employment. With unemployment at 5.8%, Palghat says most people are positioned to make their mortgage repayments. The second driver is interest rates.  

“This isn’t too much of a concern given the current low rates. If there is a rapid rise in interest rates, however, that’s when people really can’t afford their mortgage repayments as they have not had the time to plan for the increase,” Palghat says. 

“I don’t see any of these things happening now. There could be a bubble, but are house prices going to fall by 30%? That is unlikely.” 

He notes that the market is already pricing for a slowing housing market, given that bank share prices have fallen by 20% since the start of the year. 

“With banks being heavily exposed to the mortgage sector, the market obviously has some concerns,” he says. 

PIMCO’s Mead says investors should be mindful of not being too exposed to the major banks and residential property. 

“The Australian economy has been incredible. The country has had one hundred quarters of uninterrupted growth. It’s an incredible track record,” Mead says.

“Most of the rebalancing away from mining has been led by housing. If housing does slow that will have a big impact on the broader economy.” 


Would you consider an interest-only loan?

Monday, April 04, 2016

By Christine St Anne

People on tight budgets may be interested in taking out an interest-only loan as a finance option for their home. As the name suggests, an interest-only loan only requires you to pay back the interest on the loan you’ve taken out. 

In comparison, stand home loans require you to pay back both the interest and a portion of the principal. Removing the principal portion from the loan results in reduced monthly repayments. This can be attractive for people looking to get some spare cash. 

However, it is important people assess the risks when considering this type of loan. 

Interest-only loans generally appeal to the property investor. Depending on your personal situation, interest instalments may be tax deductible, unlike owner-occupier loans. 

“As interest-only loans don’t require premium payments, the interest on the loan remains static, which can help maximise tax advantages available through negative gearing,” says Bessie Hassan, consumer advocate from

This can be an attractive option as Hassan says that investment properties allow you to make claims on the interest you pay and the higher the balance of the loan, the more you’re able to claim back.”

People taking out interest-only loans, however, have to be mindful of putting in a strategy in place that ensures they are positioned to eventually pay back the principal of the loan. 

“The main risk associated with interest-only loans is as you’re not required to pay back the principal, you could find yourself trapped only making interest repayments with no strategy to pay the principal off,” Hassan says.

“If you’re unable to pay back the principal over the long term, the balance of the loan will remain high and as a result, the interest repayments will be higher.” 

As a borrower making interest-only repayments, you must not develop the mindset that you’re meeting your entire borrowing commitments. 

Hassan advises that  - once the interest-only period ends, borrowers will need to budget for the additional principal repayments.

Market risk is also a factor to consider when taking out an interest-only loan. As you’re not building equity in the property, a decrease in market value could see you with negative equity. Additionally, a rise in interest rates will have you paying more for the same property value.

A mortgage vs interest-only loan

Hassan says that although interest-only loans allow you to make lower repayments and potentially have access to increased tax benefits, they also come with a ‘comfortability risk’.

Therefore It’s important to remember that while paying off interest installments, you’re not actually diminishing your overall mortgage. 

“Although interest-only loans afford you a little extra cash flow, they shouldn’t be exploited for an extended period of time,” Hassan says.

“Eventually you will be required to pay both interest and principal and delaying reality will only see you suffer more once the interest-only term expires.”



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