Provision Newsletter

Introduction

World oil prices have spiked since last week following weekend drone attacks on oil production in Saudi Arabia. This has naturally raised questions about the threat to economic growth, particularly if oil prices spike further, flowing on to petrol prices.

Why the spike?

Since last Friday world oil prices are up by around 13%. Tensions have been escalating in the Middle East for a while now following President Trump’s decision to re-impose sanctions on Iran after the US withdrew from the nuclear deal with Iran. This has shown up in several attacks on oil shipments through the Strait of Hormuz, but the attack on Saudi oil production by drones takes it to a new level. Roughly 5.7 million barrels per day (mbd) of Saudi production is impacted and this is around 6% of global oil production. It also comes at a time when OPEC’s spare capacity of around 4mbd is reasonable but less than the outage from Saudi Arabia and there are ongoing issues in terms of supply from Venezuela and Libya.

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Source: Bloomberg, AMP Capital

Of course, the 13% spike in the last few days needs to be seen in context and so far it’s a bit of a non-event with prices still below levels seen in April and a year ago.

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Source: Bloomberg, AMP Capital

However, the concern is that oil prices could go higher and listed here are the key uncertainties involving:

• how long takes Saudi production to return to normal – latest indications are that it may take weeks and months;

• the extent that the outage can be covered by stockpiles, reserves and spare capacity elsewhere – this should help but is unlikely to cover the full outage;

• whether there might be more similar attacks – with drone attacks posing a new threat in multiple areas;

• the retaliation Saudi Arabia and the US undertake with President Trump saying that the US is “locked and loaded” – which may worsen the conflict with Iran.

The 5.7mbd disruption makes it the worst in history – worse than the Iranian revolution (5.6mbd) that saw a roughly three-fold increase in oil prices and the Iraqi invasion of Kuwait (4.3mbd) that saw oil prices briefly double. So, a further spike in prices is likely if the threat continues to escalate.

Working against this though: some of the disruption may be brief; OPEC’s share of world oil production has fallen from around 50% in the 1970s to below 40%; President Trump was elected after campaigning against never-ending wars in the Middle East and he may not want to risk further pushing up oil prices just over a year out from next year’s Presidential election so the US response may be limited to say taking out the drone bases where the attacks came from, albeit the risk of wider conflict has increased, and the US today is less reliant on global oil imports given a sharp spike in shale oil production. See the next chart.

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Source: Bloomberg, AMP Capital

Impact on global growth

What happens if tensions in the Middle East between Iran & its proxies and Saudi Arabia & the US continue to escalate resulting in a further threat to supply and a further spike in oil prices? Past oil price surges have clearly played a role in US & global downturns – in the mid 1970s, the early 1980s, the early 1990s, early 2000s and even prior to the GFC. See the next chart. They weren’t necessarily the driver of these recessions as other factors (like interest rate hikes and the housing downturn prior to the GFC) often played a much bigger role. But they made things worse because a rise in oil and hence broader energy prices is effectively a tax on consumer spending which leads to lower growth in retail sales, car sales, etc.

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Source: Thomson Financial, AMP Capital

It’s not so much the oil price level that counts as its rate of change, as businesses and consumers get used to higher prices over time. Trouble normally ensues if the oil price doubles over 12 months. From where we were last week at around $US55 for West Texas Intermediate this would imply a rise to around $US110 a barrel (more for Brent and Tapis) and right now at around $US62 a barrel we are nowhere near that.

The situation in the US is also complicated because the surge in US oil production means that there is a huge boost to energy producers from higher prices providing some offset to the drag on consumers and businesses that use energy. Ultimately the negative impact on US consumers from rising oil prices would still dominate the positive impact on US energy producers so net its probably still a negative for US growth but just less so than in the past.

So, a further spike in oil prices that ultimately saw them double last week’s levels would be a significant threat to global growth. Particularly at a time when global growth has slowed, and trade wars pose an ongoing threat.

While higher oil prices boost inflation, central banks will ultimately look through this as it’s seen as a one off and ultimately less consumer spending power weighs on underlying or core (ie ex energy and food prices) inflation. So, a spike in oil prices is unlikely to stop further central bank easing as we saw in the early 1990s, early 2000s and through the GFC.

Impact on Australia

As can be seen in the next chart, Australian petrol prices track the Asian Tapis oil price in Australian dollars pretty closely because our prices are largely set globally (absent the GST, fuel excise, distribution costs and retailer margins). So spiking world oil prices will flow though to Australian motorists. Prior to the attacks in Saudi Arabia, Australian capital city petrol prices were around $1.40 a litre. The rise in oil prices since then implies a rise to around $1.46 a litre. This is not great for those of us who have cars, but would still see average petrol prices below the levels seen last October.

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Source: Thomson Financial, AMP Capital

The real issue would come if world oil prices double as in past major Middle East crises. This would push petrol prices up to around $1.95 a litre. Such a rise in petrol prices would push the typical Australian family’s weekly petrol bill up to around $68 compared to $49 last month.

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Source: AMP Capital

This extra $19 a week impost would act as a significant tax on consumer spending and almost offset the recent tax refunds for low and middle income households. This in turn would act as an additional drag on consumer spending. Again, while higher energy prices would temporarily add to inflation the RBA with its focus on underlying inflation would look through this, particularly given the reduction in spending power – and hence underlying inflation pressures – that sharply higher petrol prices would result in. So, it would be another reason to expect further monetary easing from the RBA.

Implications for investors

The surge in oil prices is great for energy shares, but not good for the rest of the market given the impact on profit margins and consumer demand. It has also come at a time when global economic growth is fragile. Our base case is that tensions around Iran will be contained and the oil price won’t rise too far from here so it will be broadly neutral for global and Australian growth. But the risks have clearly increased and the situation regarding the Middle East and oil prices could trigger more volatility in the next month or so.

If you would like to discuss any of the issues raised by Dr Oliver, please call on |PHONE| or email |STAFFEMAIL|.

Source: AMP Capital 17th September 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

These tips are a good starting point to become acquainted with van life.

You’re going on your first caravanning trip? Excellent! It’s an exciting time of freedom, fun, and the thrill of a new experience. It’s also a big step…

Towing a caravan adds a whole new dimension to any holiday. Factors such as what to bring, time spent on the road, and where to park suddenly have much greater importance.

To help, we have a bunch of great tips for first-time caravan users to allow a smooth journey and an enjoyable holiday.

Caravanning can have many rewards. Location: BIG4 Rollingstone Beach Front Resort, QLD.

1. Make a checklist

You’ll need a comprehensive array of items when holidaying with a caravan. Obviously, a towing aid is required, but you need to select one that is right for your vehicle.

Other essential caravanning items include a fire extinguisher, wheel chocks, caravan jack, sway control device, towing mirrors, extra coolant and oil, a spare fan belt, and insulation tape.

As with any hobby, some items are essential for newbies, while others can be purchased over time for extra comfort and convenience.

2. Ensure your van is safe and secure

Once armed with the essentials, you’ll need to make sure your caravan (and vehicle) is safe to be on the open road. It’s best to write a checklist well before you depart and keep it within your caravan for easy referral.

Among necessary checks are that the towing aid is fitted correctly, drawers and other loose items are secure, and windows and doors are locked. Also, remove wheel chocks and the jockey wheel (or secure it), and raise the caravan’s steps. It is also essential that the lights of both your vehicle and caravan are operational and all tyres are inflated correctly.

Nail the routine of completing necessary checks and you’ll be cooking with gas in no time. Location: BIG4 Moruya Heads, NSW.

3. Take it easy

No doubt you’ve been stuck behind a slow-moving caravan. Now it’s your turn to irritate other motorists! Naturally, towing something the size of a bloated elephant takes getting used to – and you should take extra care anyway – yet there is another important consideration: fuel consumption.

Travelling at high speed drains your vehicle’s fuel as it is, let alone when you are towing a caravan. And it’s even more pronounced when driving into the wind.

If towing a caravan at a reduced speed, be mindful of traffic behind you, and use slow vehicle turnouts where possible.

When on the road, other important tips for caravanners include avoiding the desire to swerve if wildlife strays onto the road and being aware of side winds caused by large vehicles.

Slow down. There’s plenty of time to enjoy your stay. Location: BIG4 Caloundra Holiday Park, QLD.

4. Have an early start

Following on from the tip above, it pays to rise early and hit the road before the crowds join the party. This is especially so when towing a caravan for the first time, as you’ll feel much more confident driving in light traffic.

5. Be prepared for confined spaces

No matter the strength of your relationship, a caravanning trip can be a test for you and your partner. One of the top tips for caravanning is to be prepared for the fact that you will be travelling in confined surrounds. Give each other space, where allowable.

6. Work as a team

When it comes to tips for using a caravan for the first time, one of the biggest of all is how to reverse the darn thing. Practice makes perfect: put in training runs before facing an audience at your BIG4 park.

When at your site, choose the shortest path necessary for reversing (if you want to challenge yourself on holidays, bring along a Rubik’s cube). From here, parking a caravan requires you to work as a team.

Ensure you and your partner’s communication is sound and you can hear each other loud and clear. However, consider using hand signals – or even two-way radios – as it might be difficult to hear instructions over a loud engine. Use your mirrors, be patient, and don’t panic.

7. Have a set-up routine

If you’ve spent considerable time on the road, the last thing you’ll want to do is spend hours setting up your site. Once again, a practice run is worthwhile, as the process will become more efficient over time.

As each caravan differs, so too does the setting-up process. However, here’s a brief rundown: start by unhitching the caravan, putting on its handbrake, and clearing your vehicle away.

Once done, level the caravan, lower all four corner steadies until they are touching the ground, set up the gas and water systems, and connect the power. From here, head inside the caravan and check the power and water supplies: heating, taps, oven, fridge, etc.

It’s a great life once the caravan is set up. Location: BIG4 Beachlands Holiday Park, Busselton, WA.

8. Don’t take opinions as gospel

Having a rig makes you a target to cop advice of fellow caravanners, and there’s every chance you’ll be hit with more opinions than a talkback radio host. In no time, you’ll be informed about the best bakery, the cheapest beer, and alternative routes that are ‘so much quicker’.

We’re not suggesting that some advice isn’t useful, but if it gets too much, simply nod and smile.

9. Pack up properly

For this tip, it’s best to refer to point number three: follow your checklist. However, there will be additional factors to consider, such as turning off the gas, disconnecting electrics, and removing water and waste water supplies.

The more you practise your pack-up routine, the easier it will be. Location: BIG4 Phillip Island Caravan Park, VIC.

10. Take a course

If you’re serious about caravanning, you should do it properly. While they might seem excessive, the various ‘caravanning for beginners’ courses on offer will provide great theoretical and practical advice and boost your confidence. Alternatively, arrange for a caravan specialist to check your rig before you set off.

At the very least, have a trial run with your caravan before beginning an epic journey. It’s important to familiarise yourself with your new ‘home away from home’.

A trial run is advised before tackling the bigger, more challenging routes.

Source : BIG4 Holiday Parks

Reproduced with the permission of BIG4 Holiday Parks. This article first appeared on BIG4.com.au  and was republished with permission.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page. 

Introduction

After the biggest fall in at least 40 years – with a 10.2% top to bottom fall between September 2017 and June this year – average capital city home prices have turned up again. I thought prices would fall further with a 15% top to bottom fall led by around 25% falls in Sydney and Melbourne. But the facts changed from May – with the election removing the threat to negative gearing & the capital gains tax discount, earlier than expected interest rate cuts & a relaxation of APRA’s 7% interest rate test all pushing prices up again. So, where to from here?

Extreme property views

There are basically two extreme views amongst “property experts”. On the one hand, some real estate spruikers still wheel out the old “property will double every seven years” line. On the other hand, property doomsters say it’s hugely overvalued and overindebted with massive mortgage stress and so a 40% or so crash is inevitable. The trouble with the former is that implies home price growth of 10.3% pa, so even if wages growth picks up to 3.5% (a big ask!) it implies that the average price to income ratio of Australian housing will rise to around 9 times over the next 7 years from around 6 times now and in 14 years’ time it will be 14 times! The trouble with the doomsters is that they’ve been saying that for 15 years and we’re still waiting for the crash. In between, first home buyers are wondering why it’s so hard to do what my and my parent’s generation took for granted: be part of the Aussie dream with a quarter acre block. The reality is it’s far more complicated than these extremes. Here’s seven stylised “facts” regarding Australian property.

First – it’s expensive

This has been the case since early last decade and remains so despite the recent correction in prices:

• According to the 2019 Demographia Housing Affordability Survey the median multiple of house prices to income is 5.7 times in Australia versus 3.5 in the US and 4.8 in the UK. In Sydney, it’s 11.7 times & Melbourne is 9.7 times. 

• The ratios of house prices to incomes and rents relative to their long-term averages are at the high end of OECD countries.

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Source: OECD, AMP Capital

• The surge in prices relative to incomes has seen household debt relative to household income rise from the low end of OECD countries 25 years ago to the high end now.

These things arguably make residential property Australia’s Achilles heel. But that’s been the case for 15 years or so now.

Second – it’s diverse

While it’s common to refer to “the Australian property market”, in reality there is significant divergence between cities. This divergence has been extreme over the last five years with Perth and Darwin seeing large price falls in response to the end of the mining investment boom, as other cities rose.

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Source: CoreLogic, AMP Capital

The divergence is also evident in gross rental yields that range from 8.7% in regional WA units to 3.1% in Sydney houses.

Third – talk of mortgage stress is overstated

Headlines of excessive mortgage stress have been common for over a decade now. There is no denying housing affordability is poor, household debt is high and some households are suffering significant mortgage stress. But most borrowers appear to be able to service their mortgages. And despite some seeing negative equity and a significant proportion of borrowers switching from interest only to principle & interest loans (which has seen interest only loans drop from nearly 40% of all loans to 23%) there has been no surge in forced sales and non-performing loans. Non-performing mortgages have increased but remain low at around 0.9%. While Australia saw a deterioration in lending standards with the last boom, it was nothing like other countries saw prior to the GFC. Much of the increase in debt has gone to older, wealthier Australians, who are better able to service their loans. Low doc loans are trivial in Australia and the proportion of high loan to valuation ratio loans has fallen as has the proportion of interest only loans.

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Source: APRA, AMP Capital

Fourth – it’s been chronically undersupplied

Annual population growth since mid-last decade has averaged 373,000 people compared to 217,000 over the decade to 2005, which requires roughly an extra 75,000 homes per year. Unfortunately, the supply of dwellings did not keep pace with the population surge (see the next chart) so a massive shortfall built up driving high home prices. Thanks to the surge in unit supply since 2015 this is now being worked off, but it follows more than a decade of accumulated undersupply which is the main reason why housing has remained relatively expensive in Australia. Not tax breaks or low rates – all of which exist in other countries with far more affordable housing!

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Source: APRA, AMP Capital

Fifth – house prices go up and down

After several episodes of price declines ranging from 5 to 10% across various cities over the last 15 years and 15%, 21% and 31% for Sydney, Perth and Darwin respectively in recent years home buyers should be under no illusion that prices only go up.

Sixth – the housing market remains rate sensitive

While it varies from city to city, despite much scepticism recent rate cuts have helped push up the property market again.

Finally – house price crashes are not easy to forecast

The expensive nature of Australian property and associated high debt levels have seen calls for a property crash pumped out repeatedly over the last 15 years. In 2004, The Economist magazine described Australia as “America’s ugly sister” thanks in part to soaring property prices. Property crash calls were wheeled out repeatedly after the Global Financial Crisis (GFC) with one commentator losing a high-profile bet that prices could fall up to 40%. In 2010, a US newspaper, The Philadelphia Trumpet, warned that “Los Angelification” (referring to a 40% slump in LA home prices around the GFC) will come to Australia. Similar calls were made a few years ago by a hedge fund researcher and a hedge fund: “The Australian property market is on the verge of blowing up on a spectacular scale.” Over the years these crash calls have often made it on to 60 Minutes and Four Corners.

But our view remains that to get a national housing crash – as opposed to periodic falls in some cities – we need much higher unemployment, much higher interest rates and/or a big oversupply. But while the risk of recession has increased it remains unlikely, aggressive rate hikes are most unlikely and while property supply still has more upside it’s unlikely to lead to a big oversupply as approvals to build new dwellings are now falling. As we have seen for years now overvaluation and high debt on their own are not enough to bring on a crash.

So where to now?

The rebound in buyer interest since May has seen auction clearance rates in Sydney and Melbourne rise to around 75% and prices lift nearly 2%, albeit other cities are mixed.  

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Source: Domain, CoreLogic, AMP Capital

This has so far come on low volumes, but they now look to be rising. Our base case is that house price gains will be far more constrained than the 10-15% implied by current auction clearance rates. Compared to past cycles debt to income ratios are much higher, bank lending standards are tighter, the supply of units has surged with more to come and this has already pushed Sydney’s rental vacancy rate above normal levels and unemployment is likely to drift up as economic growth remains soft. So, we don’t expect to see a return to boom time conditions and see constrained gains through 2020 – eg around 5% or so. There are three key things to watch:

• The Spring selling season – if auction clearances remain elevated as listing pick up then it will be a positive sign that the pick-up in the property market has legs.

• Housing finance commitments – these have bounced but will have to pick up a lot further to get 10-15% price rises. 

• Unemployment – if it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in another leg down in prices.

We don’t see the rebound in the Sydney and Melbourne property markets as a barrier to further monetary easing, but it may reduce the need as it turns the wealth effect from negative to positive. And if it continues to gather pace then expect a tightening of the screws again from bank regulators.

Implications for investors

Over long periods of time residential property provides a similar return to shares (at around 11% pa) but it offers good diversification as it performs well at different times to shares so it has a role to play in investors’ portfolios. The pull back in prices in several cities in the last few years provides opportunities for investors, but just bear in mind that rental yields remain relatively low in Sydney and Melbourne and be wary of areas where there is still a lot of new units to hit. There is probably better value to be found in regional centres and Perth, and Brisbane looks attractive in offering reasonable yields, a low vacancy rate and improving population growth.

If you would like to discuss any of the issues raised by Dr Oliver, please call on |PHONE| or email |STAFFEMAIL|.

Source: AMP Capital 11th September 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Having studied my own habits – in between randomly browsing infographics, social media and videos of classic newsreader bloopers – I’ve compiled a set of sure-fire principles on how to get less done in more time.

1. Hit the inbox first thing every morning, definitely

Unquestionably, an hour attending to random promotions, LinkedIn requests and Facebook photo alerts will be more important than anything else on your to-do list. Treat your inbox like your boss – it knows exactly what’s important for you to do all day and every day.

2. Answer the phone, always

It doesn’t matter who you are with or what you are doing, never forget that the sound of your ring tone supersedes ALL else in terms of priority – treat it like a fire alarm.

3. Relax, you’ll have a clear day tomorrow

Despite the fact that this has never ever happened before, you can rest easy knowing that you’ll definitely have an empty mind and clear schedule tomorrow, so you can put off tackling that important proposal until then.

“Treat your inbox like your boss – it knows exactly what’s important for you to do all day and every day.”

4. Respond to everything immediately

Make sure that other people’s priorities become your own. Constantly reacting to ‘urgent’ yet ‘unimportant’ tasks is how visionary people achieve great things. Pretty sure it’s how the Pyramids were built for example.

5. It’s got to be 100% perfect

Firstly, don’t start anything until you have absolutely everything you need. Secondly, understand that you can never do too much tinkering around the edges. It’s not done unless it’s a masterpiece.

Time flies when you’re running your own business. Days can quickly turn into weeks as you focus on the day-to-day work. And sometimes you can work so hard it’s easy to lose sight of the big picture. Our monthly checklist will ensure you keep your business on track.

This monthly checklist will help you assess the health of your business and stay in control.

1. Step back and do a financial overview

Your business won’t survive unless you have a tight grip on your finances. Make sure you carefully manage:

• expenses and bills – pay quickly to ensure goodwill

• invoices – chase all late payers

• payroll – ensure all staff records are up to date

• taxes – file your returns and pay on time, every time.

2. Review account statements from suppliers

Are your suppliers charging a price that’s fair? Are you still getting good value for money? If not, it might be time to look for new suppliers.

3. Review annual sales

Look at your year-on-year sales. Are you doing better than the same time last year? Are costs and profit levels where they should be? Refer to your business plan and make changes if necessary.

4. Keep a close eye on stock

If you’re running a retail or manufacturing business then stock is your lifeblood. You should:

• carefully match stock levels to sales forecasts

• make special provision for perishable goods

• ensure storage is safe and secure

• work with your accountant or bookkeeper to find the optimum stock levels.

5. Make sure your customers remember you

In a crowded marketplace, customers are likely to forget your service or product, so help them remember:

• Use a CRM (Customer Relationship Management) or MAS (Marketing Automation System) tool. This will help keep your customers and partners up to date with news about your business.

• Use all available communication methods. For example, email newsletters are a highly effective way of keeping in touch with customers – as long as they’re well written.

6. Spread the word about your business on social media

Social media can be a very effective marketing channel if you use it regularly. Make sure your blog always has fresh content, send new tweets and post on Facebook and LinkedIn.

7. Review your website traffic

Google Analytics is a tool that makes it easier to understand your website traffic. It will identify pages that are performing poorly and pages that are doing well. Ask a web developer to help you if necessary.

8. Keep on top of industry news

Set aside two hours a month to review industry news. Sign up for Google Alerts and set an alert so that the news comes to your inbox. If you are a consultant in the medical industry, you could set one up for ‘medical trends’ or ‘new technologies in medicine’.

9. Keep your data safe

Use cloud-based applications to store data and ensure your information is always available and automatically backed up. Relying on your hard drive leaves you vulnerable in the face of burglary, fire or natural disasters. If you use your hard drive to store data, make sure you do at least one monthly backup online or to an external device.

10. Talk to your advisors

Arrange meetings with your accountant or bookkeeper, board of directors and investors. Meet them at the office or a cafe for a half-hour chat over coffee. Review business performance for the last 30 days and last quarter to check you’re on track.

Please contact us on |PHONE| if you seek further assistance on this topic.

Successful business owners have great habits

Set yourself up for success and get into the habit of setting aside time for monthly tasks. Business can move at a rapid pace, especially in the first year. So make this checklist a priority to ensure your business is going in the right direction. This will keep things on track and in control – which can make all the difference.

Source: Xero

Reproduced with the permission of Xero.

Xero is software designed to make life better for small businesses and their advisors. Its online accounting platform provides the foundation on which businesses can build a complete business solution. It connects businesses with their bank, accounting tools, their accountant, payment services and third-party apps, so everything is securely available at any time, on any device.

Important:
This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Has a family member or friend asked you to be a ‘co-borrower’ or guarantee a loan for them? Before you say yes, think carefully – you could lose not only your money, but valuable assets such as your house or car.

What is a guarantor or co-borrower?

Co-borrower

You are a co-borrower if you sign a loan with someone else.

In most instances both you and the other co-borrower are jointly and individually liable for the debt. If the person you borrow the money with is unable to pay their share of the loan, you will be responsible for repaying the full amount outstanding.

Guarantor

If a credit provider is not willing to give a loan to a person on their own, they may ask for a guarantee. If you sign a guarantee for a friend or family member, you are known as the ‘guarantor’ of the loan.

When you sign your name as a guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. You will also have to pay any fees, charges and interest.

As a guarantor you don’t have the right to own the property or items bought with the loan.

Reasons you might have to say no

Think very carefully before guaranteeing a loan. Is there another way you could help without becoming a guarantor? For example, could you contribute to a deposit so that a guarantee is not needed?

Consider how you will pay back the loan if your friend or family member can’t. Can you afford the repayments? Do you have savings you can use or assets you can sell to pay the debt? If you do have to use your own money or assets to pay off someone else’s loan, you could be risking your financial future.

What about your relationship with the borrower if something goes wrong? It may be better to say ‘no’ now and avoid damaging your friendship.

The effect on your future loans and credit report

You will need to tell your credit provider about any loans you are a guarantor for, when you apply for credit. They may take into account the loan repayments on the loan you have guaranteed when they assess your ability to repay a new loan. This may stop you getting a new loan even if the person who’s loan you are guaranteeing is making the repayments.

You may end up with a bad credit record if you and the borrower can’t pay back the guaranteed loan. The loan will be listed as a default or non-payment on your credit report, making it hard for you to borrow money for several years.

You may also affect your credit score, a number based on an analysis of your credit file, at a particular point in time, that helps a lender determine your credit worthiness.

If you provide security, such as a mortgage on your home, to guarantee someone else’s loan, you may not be able to use your home as security for your own loan. You may even end up losing your home if you don’t pay out the guaranteed loan.

You may also be made bankrupt by the credit provider. Even assets you haven’t offered as security for a guarantee may then be sold to pay the outstanding debt.

Questions you must ask before you sign the loan

Before you guarantee a loan, ask the credit provider the following questions.

Q. What type of loan am I guaranteeing?

Be very careful about guaranteeing a loan that has no specific payback time, such as an overdraft. This kind of loan could potentially go on forever.

Q. What should I check if I am asked to guarantee a business loan?

Find out everything you can about the business. Ask for a copy of the business plan to understand how it will operate. It’s also important to look at the business’ financial state. For example, check past financial statements and speak to the business’ accountant to make sure the company is in good financial health and has good prospects.

Q. Is the guarantee for a fixed amount of money, or is it for the total amount owing?

You are better off guaranteeing a fixed amount because you will know exactly what you owe. If you sign a guarantee for the total amount owing, you will be legally responsible for what the borrower owes now and in the future. This could include interest, fees, charges and penalties. If you think there has been an increase in the amount you agreed to guarantee without your consent, seek legal advice straight away.

Q. Exactly how much am I guaranteeing?

The guarantee should clearly describe how the amount of money you owe will be calculated if the worst happens and the borrower does not pay. If you are not comfortable with the amount, ask if you can reduce it.

Q. Do I have to put up assets as security?

If the loan is not for personal, household or domestic purposes, you may be asked to put up an asset, such as your house, as security. This means the credit provider can sell your house to pay the debt if the borrower defaults on their loan.

Q. What should the loan contract tell me?

Get a copy of the loan contract from the credit provider. It should tell you:

• The amount of the loan

• The interest rate, fees and charges

• Whether the loan is secured (where the borrower has to put up an asset, such as their house, as security)

• How long the borrower has to repay the loan

• The amount of the repayments

How to get help and free legal advice

Never let a family member pressure or force you into signing anything.If you’re feeling pressured, seek financial counselling – it’s a free and confidential service.

You can also visit our webpage on financial abuse for some red flags to watch out for, as well as the contact details of organisations that can help you.

If a large amount of money is involved, talk with a lawyer or get free legal advice so you understand the risks you are taking on.

Challenging a claim

In certain situations, guarantors may be able to challenge a claim even though they have signed contracts.

You should get advice immediately if you:

• Only agreed to sign through pressure or fear

• Suffered from a disability or mental illness at the time of signing

• Did not receive legal advice before signing and did not understand the documents or the extent of the risk you were taking on; for example, you thought you were guaranteeing a certain amount but a much larger amount is now being claimed

• Believe the credit provider or broker used unfair tactics, or tricked or misled you

What to do if a personal relationship breaks down

A breakdown in your personal relationships affects every part of your life, including your finances. If you were a guarantor or co-borrower for your ex-partner, you may be liable for their debts if they can’t or won’t repay their loan.

In most cases, you won’t be able to get out of loan contracts you made in the past, but speak to a lawyer or get free legal advice about where you stand. Also see divorce and separation and relationships and money for more information.

Stop and think before agreeing to be a co-borrower or to guarantee someone’s loan. If they cannot or will not pay off the loan, you will be responsible for the debt. Take the same care that you would if you were taking a loan out for yourself.

Please contact us on |PHONE| if you seek further assistance on this topic.

Source : ASIC MoneySmart

Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://www.moneysmart.gov.au/borrowing-and-credit/borrowing-basics/loans-involving-family-and-friends

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