Wealth Solutions

Families

Click on the following headings for information relevant to families.

Home Ownership
Home Insurance
Family trusts
Baby bonus
Government Payments Available to Families

Home Ownership

Purchasing the family home has always been most people's dream. However, with house prices on the rise, owning a home is becoming just a dream for many people.

The main advantages of owning a home include:

The home provides people with stability (not having to move when your lease is up etc);
Paying off a mortgage is a form of disciplined saving;
There is no Capital Gains Tax (CGT) applicable when you come to sell your home;
The home can be used to fund retirement if you decide to downsize your home and use the excess funds to purchase an income stream;
Any improvements to the house will not be subject to CGT; and
You can change your house to suit your personal style.

Disadvantages to home ownership include:

The costs associated with purchasing a home can be quite significant;
Home ownership may provide significant capital growth, but in retirement the investment will not provide income;
If the home is your main asset there is a lack of diversification in your portfolio; and
Property tends to be an illiquid asset.

Step 1. Decide on whether to buy or rent

You need to decide on whether being a homeowner makes more sense to you than renting. Home ownership can stretch your finances significantly. If this is the case you may be better off renting until you have a larger deposit.

Step 2. How much can you borrow?

The general rule when you are considering a mortgage is that your repayments should not be more than 35% of your gross income.

Some institutions allow you to borrow up to 95% of a property. But in these cases the institutions will most probably make you take out mortgage protection insurance. This insurance protects the lender against you defaulting on the repayments, it does not protect you!

If your home loan is variable then you need to make sure that you can afford any increases in interest rates as your repayments will increase as the interest rates increase.

You also need to factor in the associated costs when considering the purchasing of a home as you may need to borrow more than you thought. Solicitor's fees, application fees, property valuation fees, stamp duty, building and pest inspections etc. all add up and must be taken into consideration when looking at how much you can borrow.

Step 3. Getting the finance

There are currently over 3000 different home loans available so choosing the home loan that is suitable to you can be quite a daunting task. The choices you have are:

Choosing a lender. To do this you should always compare the real rate of interest that is being offered by the different providers. You also need to check the flexibility that the lenders give you – how often can you make repayments,
Variable or Fixed? Your decision to have a fixed or variable rate depends on whether you think the rates are going to increase or not, or, whether you want some certainty about your repayments over the term of the loan. If this is the case then you might be better off with a fixed rate loan. If you want to have more flexibility in your repayments then you are better off with a variable loan as you can usually make extra repayments on a variable home loan.

Step 4. Finding the right home

Consider what type of home you would like (unit, townhouse, semi-detached or freestanding home), where you want to live, check recent sales in that area, work out what you can afford, attend open inspections and auctions and talk to local real estate agents.

Step 5. Making an offer on the right home

Step 6. Paying off your mortgage

Obviously, the more repayments you make the quicker the loan will be paid off. If you switch to fortnightly repayments you are now making 26 repayments, which means you are effectively making an extra month's payment each year.

During the early years of loan repayments, only interest is repaid so any extra payments will reduce the principal.

Many lenders are now advertising offset accounts as an effective way to pay off your loan earlier. An offset account is one where you deposit all your salary into your mortgage and then make all your everyday purchases with your credit card. The theory is that you are reducing the interest on the loan while the money is in the account.

Home Insurance

Home insurance

Many people do not insure their home or contents and do not realise the consequences of this until it is too late. Another problem is that people tend to underinsure which also can prove costly. A guide to home insurance is discussed below.

1. Compare different providers

It is amazing the difference in cost between quotes of different providers. Therefore you should always shop around before paying your premiums.

2. Assess your needs

Building insurance

A costly mistake with building insurance is that people often confuse market value with replacement value as you may be paying more than you need to. It is a good practice to have a professional valuer value your home to give you a good indication of how much it would cost to replace your home.

Contents insurance

The best way to assess your needs with contents insurance is to go through each room and itemise everything you own.

3. Types of policies available

With building insurance there are two main types of insurance available:

Defined Events Insurance

This insurance will cover your building only under certain circumstances. The policy document will provide you with a list of the specific events that are covered.

Accidental insurance

With contents insurance most policies offer a new-for-old replacement policy so if your contents are damaged or stolen you will receive a new item of the same type.

The alternative to new-for-old is an indemnity policy. With this type of policy you receive a depreciated value of what you lose. This is a cheaper form of insurance but you are liable for any shortfall in cost.

4. Checklist

Some things to check on your insurance policy:

What fixtures are covered in the fixtures and fittings of the building cover?;
Are guests' belongings covered?;
Are you covered for loss of your credit card?;
Are you covered for replacement locks if you should lose your keys?; and
If it is a new for old policy how old do your contents have to be before this policy stops?

5. Ways to reduce your premiums

The more security you have on your home usually the cheaper the insurance will be. Smoke alarms, window locks, deadlocks and burglar alarms all help reduce your premiums. For example, you may be able to receive up to a 15% discount on your premiums by having a back-to-base alarm.

Your claims experience also has a bearing on your premiums. The more you claim, the higher your excess may be.

Family Trusts

A family trust is set up by a trust deed for the benefit of all the beneficiaries. The beneficiaries are usually members of the one family.

What are the advantages and disadvantages of a family trust?

The advantages of having a family trust include:

The trust makes provision for the whole family;
It provides children with the benefits of family wealth without losing control over key assets;
Creates a legal framework for the family assets which will last for a long time;
The trust protects assets against actual and potential creditors;
Creates a tax effective structure;
Avoids any problems with probate; and
Helps with estate planning by easy intergenerational transfer of assets.

The main disadvantages of a family trust include:

The costs involved, such as the cost of setting up the trust and the ongoing fees; and
Loss of flexibility – all transactions are governed by the trust deed.

Baby bonus

Parents may be in for a pleasant surprise. The baby bonus was introduced by the Government to provide families with a bonus of up to $2,500 per year for five years. It is available to new parents and families who already have children. The bonus is paid for the first child born or adopted after 1 July 2001 and is payable until that child turns 5 years of age.

It is designed to return some of the tax paid by the "primary person" (normally the mother) in the year prior to the baby's birth.

To be eligible, the mother must be an Australian resident for tax purposes at the time the child is born or adopted and for the period the bonus is payable. As there is no maximum income threshold which precludes entitlement to the bonus it is available to high-income earners.

How to get the maximum baby bonus

As the amount of taxable income in the base year determines entitlement over the 5 year period, the amount of the bonus can be maximised by increasing taxable income in the base year by:

increasing the number of hours worked;
transferring income producing assets;
claiming deductions in a year other than the base year;
realising assets that incur a capital gain; and
increasing distributions from private companies or trusts.

Government Payments Available to Families

What other government payments are available to families?

Family Tax Benefit Part A

To be eligible you must have a dependent child under age 21 or a dependent full-time student aged between 21 and 24 who does not receive Youth Allowance.

Family Tax Benefit Part B

To be eligible you must have a dependent child under 16 or a dependent full-time student under age 18 who does not receive Youth Allowance. You can receive this benefit in addition to Family Tax Benefit Part A.

The amount payable is determined by the age of the youngest child and whether the family is a single income family. Sole parents are not income tested and automatically receive the benefit.

Child Care Benefit

To be eligible you must use approved or registered child care and have your children immunised.

Approved care has been approved by the government and the child care benefit will be paid directly to the service to reduce the fees payable.

Registered care is generally provided by relatives or friends. In this case the child care benefit is paid directly to you to offset child care costs.

Maternity Allowance

To be eligible you must be eligible for Family Tax Benefit Part A. Maternity Allowance is a one-off payment

Maternity Immunisation Allowance

To be eligible you must be eligible for Family Tax Benefit Part A and fully immunise your children. Maternity Immunisation Allowance is a one-off payment


		© 2010 Mortgage One Pty Ltd - Financial Advisors - Home Loan & Mortgage Brokers \| Personal Insurance Guide \| Disclaimer \| Privacy \| Site map