Financial Update - August 2019
Welcome to the second edition of the Barwon Financial Planning newsletter. This month we take a deeper look at the US-China trade wars and what this means for investors. We also discuss changes to bank lending policies which should allow home buyers to borrow a lot more. Finally, we discuss changes to the way certain superannuation contributions (tax deductible) can be made and how this may help you save more tax each year.
Escalating US-China trade war
The US/China trade war has continued to worsen throughout the months of July and August with tit for tat moves by each side. This has seen share markets fall sharply with US, global and Australian shares down about 5-6% from recent highs on the back of worries about the global growth outlook.
What is so good about free trade? Basically, free trade leads to higher living standards and lower prices whereas restrictions on trade lead to lower living standards and higher prices. So then why is President Trump raising tariffs I hear you ask? In my opinion it’s basically about fulfilling a presidential campaign commitment to “protect” American workers from what he regards as unfair trading practices in countries that the US has a trade deficit with – notably China.
Ideally, President Trump wants China to lower its tariffs, allow better access for US companies, end US companies being forced to hand over their technologies and protect intellectual property of US companies. At a high level he also wants a reduction in America’s trade deficit with China.
Fears of a global trade war kicked off in March last year with Trump’s announcement of a 10% tariff on aluminium imports and a 25% tariff on steel imports. In late March, Trump announced 25% tariffs on $US50bn of US imports from China. Following Chinese retaliation, Trump announced a 10% tariff on another $US200bn of imports from China. If fully implemented this would take the average US tariff rate on imports to around 7.5%, which is significant.
Overall, we are of the view that a deal will be reached at some point between the US and China. However, share markets may need to fall further in the short term. We regard the fall in the share markets as another correction rather than the start of a major bear market.
Please let the team know if you have any question.
Changes to home lending policies - new mortgage serviceability guidance announced
APRA has made changes to its home lending guidance, in which it scrapped the 7% interest rate floor for mortgage assessments and increased the buffer rate to 2.5%
Effectively this means that during a home loan assessment process, the banks will now calculate existing loan repayments at a rate of 2.5% above a lenders actual rate instead of the significant inflated rate of 7%. We estimate this will allow significantly more borrowing capacity and may signal the bottom of the housing market decline.
The vast majority of credit providers have now revised their home loan serviceability assessment policies in line with APRA’s recommendations.
As we discussed in July’s newsletter, we encourage all mortgage holders to review their current loan and associated interest rates.
Carry-forward unused Concessional Contribution Cap (CC)
You may now be able to carry forward your unused CC for up to 5 financial years for use in a future financial year. Basically, this means that you may be able to make additional tax-deductible superannuation contributions over the next 5 years.
To do so, you must have a total superannuation balance of less than $500,000 at the end of June 30, 2019 and make the contribution into a complying superannuation fund.
We understand from discussions with many of you that making concessional contributions (salary sacrifice) into your superannuation can be difficult to organise and negotiate with your payroll departments. Additionally, the sheer inconvenience of trying to maximise your contributions up the $25,000 limit before 30 June each year can be a tricky game to plan. Therefore, we feel this legislative change, if used correctly will be of great benefit to many of you. If you’re interested in discussing this further, please let us know.
As always, thank you for your continued trust and confidence.