Provision Newsletter

Three years after it first started raising interest rates in this cycle the Fed has increased rates for the ninth time, raising the Fed Funds rate another 0.25% to a target range of 2.25-2.5%. While this was largely anticipated by markets, the Fed was less dovish than expected and so shares sold off in response. That said it does appear that the Fed has got to a point where it can now pause or at least raise rates more slowly.

Fed hikes and market turmoil

After some initial ructions after the first Fed hike in December 2015 into early 2016, markets generally were not too fussed about Fed hikes in 2016 and 2017 as tightening was “gradual” and we were only going from very easy monetary policy to less easy. However, this year markets have become fearful that the Fed will go too far and push the US into recession. In fact, fears about the Fed were the main initial trigger for falls in shares back in February and more recently since October. Of course, lately they have combined with worries around trade, US technology stocks, slowing growth indicators globally, worries around President Trump and the Mueller inquiry and US politics to accentuate share market falls. This has all combined to push global shares down 14% from their September high and Australian shares down 13% from their August high.

The Fed blinks, but not enough yet

In raising the target range for the Fed Funds rate by another 0.25%, the Fed remains upbeat on the outlook for the US economy and noted the continuing strength in the US labour market and solid growth. However, it has added the word “some” in reference to “further gradual” increases in interest rates going forward. It has also indicated it’s monitoring global economic and financial developments. And it has lowered the “dot plot” median of Fed meeting participants interest rate expectations from three hikes next year to two – albeit it’s still above market expectations – and edged down the long run estimate for the Fed Funds rate to 2.75%. While it’s not enough to satisfy share markets just yet, the Fed is moving dovish.

Source: US Federal Reserve, AMP Capital

Basically, with the Fed Funds rate getting close to neutral, US core inflation stabilising around the 2% target, interest sensitive sectors like housing and autos slowing and various headwinds to the US economy next year the Fed can afford to pause or at least go more slowly in raising interest rates. Our base case is that the Fed will hold the Fed Funds rate flat during the first half of next year and only raise rates once in the second half. So, to the extent that fear of the Fed has been a big factor driving share markets lower and volatility up this year, a more cautious Fed next year should help start to allay the fears around it.

It could be a gummy, but is still unlikely to be a grizzly

As I have pointed out in recent notes, there are three types of significant share market falls:

• Corrections with falls around 10%;

• “gummy” bear markets with falls around 20% meeting the technical definition many apply for a bear market but where a year after falling 20% the market is up (like in 1998 in the US, 2011 and 2015-16 for Australian & global shares); and

• “grizzly” bear markets where shares fall 20% and then a year later are down another 20% or so (like in 1973-74, US and global shares through the tech wreck or the GFC).

Grizzly bears maul investors but gummy bears leave a nicer taste. Corrections are quite normal and healthy as they enable the sharemarket to let off steam. Excluding the present episode since 2012 there have been four corrections and one gummy bear market (2015-16) in global and Australian shares. Bear markets generally are a lot less common, but what we saw in 2015-16 was a gummy bear market.

Source: Bloomberg, AMP Capital

Gummy bear markets are shorter and see smaller declines than grizzly bear markets. And the deeper grizzly bear markets are invariably associated with recession, whereas the milder gummy bear markets including the 1987 share market crash tend not to be. (The Australian experience is discussed here.)

With uncertainty around trade, global growth and President Trump remaining high shares could still have more downside into early next year, particularly after having broken below their October/November lows. In other words the further break down in share markets seen in December may be signalling a shift from a simple correction to a gummy bear market. However, our view remains that a grizzly bear market is unlikely because a US, global or Australian recession is not imminent. Put simply:

• Monetary conditions are still not tight in the US and they are still very easy globally. While there has been much fretting about the US yield curve flattening and in some cases inverting (with long term bond yields falling below short-term interest rates) the two yield curves we have found most reliable are still positive albeit less so. The gap between the 10-year bond yield and the Fed Funds rate has flattened dramatically but is still positive at 39 basis points. And the gap between 2-year bond yields and the Fed Funds rate has also flattened a lot but is still positive. As can be seen in the next chart, prior to the last three US recessions both of these yield curves inverted – but there were several false signals and the gap between the initial inversion and recession can be around 15 months. So even if they both invert now recession may not occur until 2020 and yet historically share markets only precede recessions by around 3-6 months so it would be too far away for markets to anticipate. And past recessions in the US have also been preceded by the Fed Funds rate being well above inflation and nominal growth and it’s a long way from that.  

Source: Bloomberg, AMP Capital

• Fiscal stimulus will continue to boost US growth in 2019.

• We have not seen the sort of excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normal precede recessions in the US or globally. While the housing downturn is an issue in Australia its negative impact on the economy is likely to be offset by business investment albeit growth will still be constrained.

A more dovish Fed, the US and China starting to work through their differences on trade and the positive impact of the 40% fall in oil prices since their October high (which is bad for energy producers but takes pressure off inflation and helps boost consumer spending) add to confidence that we are not heading towards a US/global recession. Which in turn would mean we are not heading into a grizzly bear market.

However, our expected road map for share looks like this: shares possibly have more downside into early next year into a gummy bear market (hopefully at least after a Santa rally!) as global growth indicators remain softish in the near term. This in turn is likely to prompt more stimulus in China, the ECB to provide more cheap bank funding and a bit of fiscal stimulus out of Europe (was Macron’s concession to the “yellow shirts” a sign of things to come for fiscal stimulus in Europe?) at a time when the Fed pauses. This combines with signs that US/China trade negotiations are making make progress. Shares then bottom around March. Economic data starts to improve, and it looks like 2015-16 all over again (albeit a bit more compressed in time). In this context a further leg down in shares turning the correction we have seen so far into a “gummy bear” market (down 20% or so from top to bottom but up a year later) is a high risk. But a grizzly bear market is unlikely.

What should investors do?

Of course, sharp market falls are stressful for investors as no one likes to see their wealth decline. I don’t have a perfect crystal ball so from the point of sensible long-term investing the following points are worth bearing in mind.

First, periodic sharp setbacks in share markets are healthy and normal. Shares literally climb a wall of worry over many years with numerous periodic setbacks, but with the long-term trend providing higher returns than other more stable assets.

Second, selling shares or switching to a more conservative strategy after a major fall just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy and stick to it.

Third, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.

Fourth, while shares may have fallen in value the dividends from the market haven’t. So, the income flow you are receiving from a well-diversified portfolio of shares remains attractive.

Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is warning of disaster it’s often time to buy.

Source: AMP Capital 20 December 2018

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) 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.

The impact of global economic trends on the demand for new infrastructure assets and the growth of existing ones cannot be underestimated.

On this front, the World Bank 2018 Global Economic Prospects – which provides economic forecasts out to 2020 and insights on the prospects of both developed and emerging economies – provides both good and bad news. The good news is that the global economy may at last be returning to sustainable global growth following the global financial crisis (GFC). As the World Bank notes:

“About half the world’s countries are experiencing an increase in growth. This synchronised recovery may lead to even faster growth in the near term, as stronger growth in, say, China or the United States spills over to other parts of the world. All the consensus forecasts for 2018 and 2019 reflect optimism. And this growth is occurring for the right reasons – investment and trade growth.” ¹

This optimism is reflected in their forecast of world growth over the next few years as shown in  Figure A below.

Source: World Bank Group, Global Economic Prospects, TH eTurning of the Tide? 2018.

This forecast highlights the growing contribution of emerging markets and developing economies (EMDEs) on future global growth.  Growth in developed (or advanced) economies is projected to moderate gradually as current stimulus initiatives are withdrawn and labour market slack  decreases, before a moderate level of sustainable growth is reached.

However, the bad news is that the World Bank also highlights forecast growth is highly sensitive to two factors:

1. Continuing access to reasonably priced debt to allow ongoing investment. The wind down in stimulus packages in developed economies will reduce liquidity and cause rising interest rates globally which may affect investment in highly leveraged EMDE economies.

2. The rise of geopolitical risk, particularly popularism and protectionism in developed economies. This has the potential to hurt growth in both developed and EMDE economies.

The impact on infrastructure

Future economic growth is important for infrastructure investors.  An understanding of likely economic trends allows us to estimate the potential demand for new infrastructure and effects on existing infrastructure asset performance and valuations.

Historically, the performance of a nation’s infrastructure has been a key determinant of that nation’s economic performance. For example, US studies on the benefit-cost ratio of highways in Texas show that it could exceed 6:1.2 More locally, recently benefit-cost analysis on Sydney’s West Connex F6 motorway indicates a benefit cost ratio of 2:1.³

Conversely, inadequate transport, communications and energy infrastructures are often limitations to growth in emerging and developing economies. High interest rates can also dampen investment and subsequently slow growth. 

Infrastructure investment characteristics

Infrastructure offers a range of very diverse investments which can broadly be categorised as shown in the following table.

From this table, it is apparent that cash flows of different types of infrastructure assets may respond differently in a sustained, moderate growth, post-GFC environment.

• In a gross domestic product (GDP)-linked asset, a return to sustained growth would result in sustained growth in future cash flows and give investors the confidence to invest for future growth. Bond rates could also be expected to rise in a sustained growth environment, increasing debt costs. However, as cash flows are also likely to increase, the net impact on valuations should be positive with moderate economic growth and prudent gearing levels.

• For economically regulated assets, most economic risks are passed through to consumers over the longer term. That is, over the longer term, net cash flows should be largely indifferent to the changing economic circumstances, although the regulatory cycle may impose delays. Utility-style infrastructure has traditionally been a ‘go to’ investment in times of market uncertainty, as infrastructure cash flows may, in large part, be decoupled from market and economic cycles. This characteristic led to many investors using utilities as a bond proxy as a consequence of the post-GFC erosion of bond yields. 

• Public Private Partnerships (PPP) enjoy many of the protections of economically regulated assets, with minimal regulatory risk. They are, however, exposed to limited operational risk (e.g. an obligation to maintain facilities in a fit-for-purpose condition) and debt financing risk. Pass through of consumer price index (CPI) and debt hedges protect against interest rate increases. However, as PPP’s are effectively a bond proxy, improving bond yields may reduce demand for such assets.

Unlisted/Listed infrastructure investments 

Infrastructure equity investments can be accessed either through unlisted or listed markets. While the operational results for listed and unlisted assets tend to be are similar, the difference in market access has important effects on the characteristics of the investments, as summarised in the table below. These differences can be exploited to increase diversity and reduce volatility in an infrastructure portfolio.

For most retail investors, an investment in a specialist fund is the most practical way to invest in both unlisted and listed assets as this brings down the minimum investment size to reasonable levels, while also enabling access to well diversified portfolios. For example, while there are some high-quality infrastructure companies listed on the Australian stock exchange, there is only a small handful of them. This means investing directly in these stocks makes it hard to implement a well-diversified infrastructure portfolio. Investing through a specialist fund typically provides exposure to a well-diversified global infrastructure portfolio.

The following table summarises the characteristics of both unlisted and listed infrastructure investments and is based on AMP Capital’s more than 20 years of experience of infrastructure investing. 

Considerations for portfolio construction

The above considerations highlight the benefits of maintaining a well-diversified infrastructure portfolio. For example, if the World Bank forecasts prove to be substantially correct, we would expect to see some softening demand for bond proxy-type assets, while growth-linked assets would prosper.

If the risk factors highlighted by the World Bank dominate, producing a lower growth outcome, we expect demand for bond proxy assets would still remain high while valuation growth for growth assets would remain at current levels.

Additionally, a mix of listed and unlisted assets in a portfolio provides further diversification opportunities such as:

• The different basis for unlisted and listed valuations means that the movement in valuations is largely uncorrelated (that is, they don’t necessarily move in the same direction at the same time). For example, listed markets usually respond negatively to an interest rate movement. As discussed above, interest increases may have very little impact on the fundamental valuation of unlisted assets, or may even be positive in the case of a growth-linked asset. This means that the movement in valuations in a combined listed/unlisted infrastructure portfolio can cancel each other out to a degree, effectively reducing overall portfolio risk.

• Listed markets provide access to assets which are not generally available as unlisted investments, for example, US utilities. This allows greater geographic and sector diversification.

Final thoughts

The World Bank forecasts clearly show the increasing reliance global growth has on EMDE performance. Growth in EMDEs will drive the need for additional infrastructure in those economies, which in turn will lead to an expanded set of infrastructure investment opportunities for investors over the medium term. At the same time, while growth in developed economies is not expected to be as strong as in the EMDEs, there will still be a need for substantial infrastructure spend in those markets due to themes such as replacing existing ageing infrastructure, the advent of disruptive technologies, and the ageing demographic.

Author: Greg Maclean, Global Head of Research, Infrastructure

Source: AMP Capital 4 December 2018

1 World Bank Group, Global Economic Prospects, The Turning of the Tide? 2018. 

2 McFarland, W and Memmott, J. Ranking Highway Construction Projects: Comparison of Benefit-Cost Analysis with Other Techniques.

3 Infrastructure Australia, Project Business Case Evaluation, West Connex, 2016.

4 AMP Capital Core Infrastructure Fund

5 AMP Capital Global Infrastructure Securities Fund (Hedged)

6 Based on observed long-term historical performance. Performance may vary according to a range of factors including economic conditions, the type of asset and market cycles. Past performance is not an indicator of future returns.

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) 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.

While interest rates in the US are rising, Australia’s interest rates remain stubbornly low. That flows through to subdued returns from term deposits and government bonds, and many investors continue to be faced with the question of where to invest for income in a low yield environment.

Corporate bonds – debt securities issued by companies – can diversify portfolios and generate a higher income return than term deposits and government bonds. Those are just two of four reasons investors looking for stable income might want to consider them as part of a diversified portfolio.

1. A strong buffer against share market volatility

Corporate bonds can be a lower-risk way to gain exposure to corporates than equities because they pay investors relatively stable cash flows. Corporate bonds and Australian equities are also often negatively correlated: when share values increase corporate bonds fall, and vice versa. So, when investors allocate a part of their portfolio to corporate bonds, it can make their portfolio more ‘defensive’ – returns will be smoother and less volatile, particularly during times of equity market turmoil.

2. Higher income than term deposits and government bonds

Corporate bonds are expected to provide investors with a relatively high excess yield over term deposits and government bonds in the medium term, as illustrated by the chart below, which shows the historical excess yield of the AMP Capital Corporate Bond Fund over term deposits and government debt. However, it should be noted that the AMP Corporate Bond Fund is a managed investment scheme, which has a different risk profile to a bank term deposit. In addition, given sound company fundamentals, corporate bonds are well positioned to benefit from continued recovery in the global economy.

Past performance is not a reliable indicator of future performance.
Source: AMP Capital, Bloomberg. As at October 2018.

3. Risk of capital loss is reduced

Active bond managers use multiple levers to manage downside risk, particularly in a rising interest rate environment. Primary amongst these is the ability of a manager to adjust the bond portfolio’s ‘duration’. Duration measures the sensitivity of a bond’s capital value to a change in interest rates in years.

For example, if a bond has a duration of five years, its price will rise about 5% if interest rates drop by 1%, and its price will fall by about 5% if interest rates rise by 1%. Given this multiplicative outcome, corporate bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.

Subsequently, when interest rates rise, portfolios with higher duration suffer bigger losses. By managing the fund’s duration – or shortening the fund’s duration – an investment manager can aim to limit the risk of capital loss in a rising interest rate environment.

4. Access to the benefits of diversification

Investors in an actively managed corporate bond fund can spread their portfolio risk by being exposed to a range of issuers, industries and geographies. Typically, when investors have exposure to a large number (upwards of 100) of securities it minimises the impact of a default or systemic event on the portfolio.

Other considerations

Corporate bonds are traditionally considered lower down the risk spectrum than shares. Nevertheless, when investors explore investing in corporate bonds it is prudent to have a focus on investment-grade credit.

It is important to invest in companies with strong or improving corporate fundamentals, a solid management team with a bondholder focus, and where a normalisation of global growth could translate into revenue and earnings growth.

Important note: AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMPCFM) is the responsible entity of the AMP Capital Corporate Bond Fund (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, AMPCFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to their objectives, financial situation and needs.

Author: Steven Hur

Source: AMP Capital 3 December 2018

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) 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.

After solid returns and relatively low volatility in 2017, many investors entered 2018 fairly optimistic, however we expected returns would be more constrained and more volatile than they were last year.

Looking at the big picture, global growth was good, we saw relatively low inflation globally and the Australian economy grew at a reasonable rate.

Five big fears

But five big concerns came together to deliver a surprisingly tough year and rough ride for investors in 2018.

1. Fear of the Fed. The first was what I’ve coined ‘fear of the Fed’. From around February, investors began to fear that the US Federal Reserve would keep raising interest rates until it caused the US economy to fall into recession. The impact was a lot of market volatility. 

2. President Trump’s trade war: We had the ongoing US-China trade war which started fairly calmly but escalated as the year continued. We recently had a bit of good news on that front with China and the US agreeing at the recent G20 meeting to pause tariff increases until March 1 next year as they continue to negotiate. But fears about the trade war caused a lot of volatility and angst amongst investors and this continues despite the truce.

3. China slowdown: Chinese growth slowed to 6.5% because of tighter credit, but investors also worried the trade war with the US would slow it further. Concerns around China added to worries about global growth.

4. Global desynchronisation: Investors became concerned that while the US economy was strong, the rest of the world, including Europe, Japan, China and emerging markets, have slowed down.

5. US dollar strength: Finally, while a rising US dollar wasn’t that surprising – and it didn’t eclipse its 2016 highs – it has put a lot of pressure on parts of the world that are sensitive to a stronger US dollar, such as emerging market and Asian shares (because of their US dollar-denominated debt).

Muted returns

Those five factors came together to give us quite constrained returns out of the major asset classes over 2018 for the year to date to November, as illustrated by the table below.

**Warning: These forecasts are prospective financial information based on various assumptions. The forecasts are predictive in nature, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and may differ materially from results ultimately achieved. Source: Thomson Reuters, Morningstar, REIA, AMP Capital

While the table shows global shares rose, this was mainly because the Australian dollar fell. Other share markets had a pretty rough ride. Australian shares fell 2.7%. Emerging markets and Asian shares fell well into negative territory, with declines of 7.8% and 10.8% respectively.

Investors also received restrained returns from bonds, with bond yields rising as the US Federal Reserve raised interest rates. Rising rates and yields, of course, also impacted interest-sensitive parts of the share market like Real Estate Investment Trusts (REITs), which returned just 1.2% for the year (shown in the table as Australian listed property trusts).

The only areas providing good returns were unlisted commercial property and unlisted infrastructure which saw another year of strong returns.

If we come back to Australia, the big drag for property investors was quite sharp falls in Sydney and Melbourne property prices.

Some cause of optimism

Add all that together and it’s been a volatile and pretty constrained environment for investors in 2018.

But to end on a note of optimism, I think there is some light at the end of the tunnel. Despite Australia posting GDP growth of just 0.3% in the September quarter I don’t see us falling into recession, and I believe global growth will hold up, and investment returns should bounce back in 2019.

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital

Source: AMP Capital 12 December 2018

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) 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.

Starting a family is an exciting time but it can also be an expensive one. Check out these nine financial tips from AMP to ensure you’re family-ready. 

Amid the excitement and anticipation, if you’re about to start a family or are thinking about doing so, it’s a good idea to get across the upfront and ongoing costs that are likely to be coming your way.

After all, according to research, it costs an average of $144 a week to raise a child between the ages of zero and four, and that doesn’t take into account the potential amount you may be paying for childcare¹.

If you’re not sure where to start, here are some tips to get your finances in order.

9 money tips for expecting parents

1. Make sure you’re across any medical expenses

Medical costs may include doctor and hospital bills, scans, birthing classes and special medical tests.

Also think about whether you want to have your baby in a public or private hospital, as there may still be out-of-pocket expenses with either option, even if you have Medicare or private health insurance.

Many private health funds also have waiting periods before you can claim on pregnancy and birth-related costs, so this is worth looking into if it’s something you’re considering.

Meanwhile, if you want your child to be covered under a health insurance policy, this is worth some investigation, as a single or couple policy may need to be extended to a family policy.

2. Consider other upfront and ongoing costs

These might include things like:

• car seat and stroller

• cot and mattress

• change table and high chair

• baby clothes and diaper bag

• food, nappies, bottles and formula

• childcare.

3. Research your employer entitlements

Many organisations have their own parental leave policies, which may include various paid and unpaid parental leave entitlements for new mothers and fathers.

Check out whether your employer has such a scheme in place and what they offer. You may also want to find out if you’re eligible for any annual leave, long-service leave or regular unpaid leave if you’re planning to take time off work.

Meanwhile, superannuation is generally not paid when you’re on parental leave, so you may want to consider whether you’ll make additional contributions while you’re still working.

4. Explore the government’s paid parental leave scheme

If you meet criteria, primary carers of newborn or adopted children can apply for parental leave payments from the government, which provide the national minimum wage for up to 18 weeks².

These payments can be received in addition to any payments your employer pays under its own parental leave policy if you’re eligible.

5. Investigate other government assistance options

You may be entitled to other assistance such as Dad and Partner Pay³, which provides up to two weeks of government funded pay, and the Family Tax Benefit, which helps with the cost of raising children.

There are also a range of additional payments for families, such as assistance with child care fees that also may help. See the Department of Human Services website to find out more.

6. Create a budget with the information you’ve collected

Once you’ve considered the costs, any entitlements you may be eligible for and how long you may take off work, it’s important to set up a budget and start putting money aside.

When you do this, remember you’ll need to account for existing day-to-day expenses, such as utility bills, groceries, petrol, insurance, rent or home loan repayments, and other debts you may be paying off.

Remember to also factor in any additional sources of income you could be receiving and whether you have family that may be able to assist in helping you minimise expenses, such as childcare.

7. If you can, prioritise your existing debts

If you do have existing debts—credit cards, personal loans or a home loan—it may be a good idea to reduce these debts as much as you can before the baby arrives, particularly as, like with most things, there may be unexpected expenses along the way.

Higher interest rates and added fees can also really impact what you pay back on top of the principal amount, so also consider shopping around to see if you can get a better offer.

Other things worth looking into might include:

• Your credit card situation and whether you’re really getting a good deal

• Consolidating your debts into one if it means you’ll pay less in fees and interest charges

• If you can pay off your home loan faster or refinance to reduce the loan payment amounts.

8. Consider your will and broader estate plan

If a little person is about to enter your life, who you love and want to take care of, thinking about your estate plan may also make good sense, noting this involves more than just drawing up a will.

It’ll include decisions around who will look after you and your child if you’re ever in a situation where you can’t make decisions for yourself, as well as documenting how you want your assets (which may include insurance and super) to be distributed should you pass away.

9. Don’t forget, money does not trump love

A new addition to the family can be an expensive time and a slightly daunting one, particularly if numerous people are giving you their ‘two cents’ on the parenting front.

With that in mind, remember your ability to afford the most expensive pram, baby clothes and possibly day-care centre will not outweigh the love you have for your child.

If you do have to go without a few non-essential baby items, opt for things that are second hand or handed down from families whose children are now a bit older, it’s all good – don’t be afraid to tell those with a few too many opinions where to go.

Please contact us on |PHONE| if you seek further discussion.

¹ AMP.NATSEM report – The Cost of Kids: the cost of raising children in Australia
² Department of Human Services – Parental Leave Pay
³ Department of Human Services – Parental Leave Pay – related payments and services

Source: www.amp.com.au

Important information:This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 13 30 30, before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.

All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.

If you look at the statistics, it takes the majority of Australians a little over three and a half years on average to save for a deposit on a first home¹

If you’re thinking about, or aren’t far away from, putting some money down on that place of your dreams, we look at some of the financial and non-financial considerations you’ll want to be across.

1. Figure out how much money you have to play with

The most common loan terms in Australia are generally 25 and 30 years², and as a mortgage is likely to be the biggest debt you’ll ever take on, it’s important to prioritise any other financial goals you may have and figure out where a home purchase ranks on that list.

The price of the property you’re looking to buy will also play a big part as it will often determine the deposit you need, so it’s worth figuring out how much you can realistically afford early on.

If your family is willing to help, it’s a good idea to discuss how they plan to do this. And, keep in mind there could be risks, benefits and tax implications if financial help is given.

Meanwhile, if you’re buying property with a partner, it’s important to be upfront about your financial past and plans, and whether you’ll put something in writing should the unexpected happen.

Check out AMP’s cost of home loan calculator if you’d like help crunching the numbers, or alternatively speak to a bank or mortgage broker.

2. Find out if there are black marks on your credit report

A credit report, which details your repayment history, could affect your ability to get approval on a loan if it doesn’t read well.

As each lender will assess your credit file against their own policies, there may be instances where some approve your application, while others reject it or delay the process.

The main credit reporting agencies in Australia are Veda, Dun & Bradstreet, Experian and the Tasmanian Collection Service, and you can request a copy if you’d like to see what yours says.

3. Know what you’re going to fork out

Here’s a snapshot of some of the costs you’re likely to come across early on and on an ongoing basis.

The upfront costs

• Purchase price – This is the actual cost of the property. And, unless you’re able to pay for it outright, you’ll generally need to take out a loan, noting that lenders will generally ask for a minimum deposit of 10% to 20%.

• Loan application fee – This is a one-off payment to your lender when your loan commences. Fees may vary depending on your provider and will cover things such as credit checks, property appraisals and basic admin.

• Lender’s mortgage insurance – If you have a deposit that’s less than 20%, you may be required to pay lender’s mortgage insurance which is there to protect your lender in the instance you’re unable to repay your loan.

• Government fees – Stamp duty is a land/property transfer tax applied by all Australian state and territory governments, which can vary greatly depending on where your dream home is located. Mortgage registration and transfer fees also apply and differ from state to state.

• Legal and conveyancing fees – These cover the services of a real estate conveyancer or solicitor, who’ll prepare the necessary documentation and conduct the settlement process.

• Building, pest and strata inspections – Payment for these services or reports will identify structural concerns, as well as maintenance and financial issues (if you’re in a body corporate).

• Moving costs – This will come down to how much you do yourself, whether you rent a truck, or hire professionals to move your stuff for you.

The ongoing costs

• Loan repayments – What you pay back and how often you make repayments will generally have a big impact on the length of time it takes you to pay off your home loan.

• Interest charges – You can generally choose a fixed or variable rate, or a combination of the two, which is worth some research, particularly as interest rates can go up and down.

• Other ongoing expenses – This might include strata fees for communal properties, council rates, utility costs, building and contents insurance, and things like home improvements.

4. Ensure the locations you’re looking at stack up

To ensure you buy something you love and for the right price, consider:

• How much properties are going for in the suburbs you’re interested in

• How far you’re willing to live from family, friends and work

• Whether there’s off-street parking and local amenities, such as schools, shops and transport

• Whether you’ll need to renovate and if you have the extra funds available to do so

• If there is price growth potential in the suburbs you’ve shortlisted

• If there are proposed developments in the area that may impact the value of your home

• What the crime rate is like in the areas you’re keen on

• If you’re moving far away, how the local job market fares and what the weather is like.

If you need help gathering some of this information, speak to real estate agents who work in the area, or look at real estate companies online.

Meanwhile, different features will appeal to different people when looking for a home to live in, so consider what works for you.

5. Research whether you’re eligible for assistance

The First Home Owner Grant

The First Home Owner Grant is a national scheme. If you’re unsure about eligibility, contact your state revenue office and be sure you apply with enough time.

Stamp duty concessions

Certain state and territory governments offer additional incentives to first home buyers, some which involve stamp duty concessions, so research what’s on offer in the area where you’re buying.

The First Home Super Saver Scheme

Eligible first home buyers can withdraw voluntary super contributions (which they’ve made since 1 July 2017), to put toward a home deposit.

Under the First Home Super Saver Scheme (FHSSS), first home buyers who make voluntary contributions into their super can withdraw these amounts, up to certain limits, in addition to associated earnings, from their super fund to help with a deposit on their first home.

If eligible, the maximum amount of contributions that can be withdrawn under the scheme is $30,000 for individuals or $60,000 for couples.

6. Familiarise yourself with different types of loans

Depending on whether you’re after a basic package or one with added features, home loans can vary a lot when it comes to interest rates and fees.

To get a better idea of costs, when you see a home loan advertised, you’ll notice two rates displayed—the interest rate and the comparison rate.

The comparison rate will incorporate the annual interest rate as well as most upfront and ongoing fees. Some home loans, with lower interest rates, are laden with fees, so while they appear cheap, they aren’t. The comparison rate can help you identify this and compare loans more accurately.

Some other things worth exploring when you’re looking at different loans is the potential advantages and disadvantages of various features, which may allow you to make extra repayments, redraw funds, or use an offset account which could reduce the interest you pay.

If you’re looking for the best deal, remember to shop around and don’t be afraid to ask your lender if they can do better than the rate that they’re currently advertising.

7. Get your finances in order so you’re ready to go

It’s a good idea to have your loan pre-approved so you know exactly what you can borrow. You’ll also need formal approval closer to purchasing and to have your deposit ready, or you may miss out.

This may mean having your cheque book or a bank cheque ready to go if you’re buying your first home at auction.

As part of the process your lender will also advise if lender’s mortgage insurance is required.

8. Don’t forgot your last chance for an inspection

Inspections will alert you to serious issues that may not be visible to the eye—asbestos, termites, electrical, ventilation and serious plumbing faults, which could in the long run cost you a whole lot more than the building inspection itself.

Meanwhile, strata reports, if you’re buying a townhouse or apartment, can tell you whether the property is well run, well maintained and adequately financed.

Please contact us on |PHONE| if you seek further discussion.

¹ Finder – 1 in 3 first home buyers stuck saving for a deposit for over 5 years press release
² Finder – How long should my home loan be? paragraph 12

Source: www.amp.com.au

All information on this website is subject to change without notice. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.