Back when Bank Managers roamed bank branches, finance was far less complicated. (yes, it’s true, there were these people who you could meet IRL at the local bank!) You would have visited your bank branch to apply for your home loan or credit card or to open a new savings account. There wasn’t too much more to think about and often people banked with the same bank for their entire working life (I know, a crazy concept!). Now, we have to deal with student loans, “buy now pay later” options, whether we want tap and pay through our watch, should we have a credit card with a low rate or rewards points, how to get bonus interest on our savings every month and everything can be done online without ever talking to a person. And that’s before we even think about superannuation (don’t worry, I won’t go down that rabbit hole – I know we don’t have time!)
Last week we talked about young adults and tax. This week we take a look at finance and more specifically, debt and loans.
Let’s face it, any young person who wants to buy a home is going to have to have a large loan, but that’s not all there is to think about and if you’re new to this crazy world called “adulthood”, it’s probably a ways off yet, so what else is there to know about debt?
What’s the deal with HECS-HELP debt?
For many young adults who have been a student, the HECS-HELP system is their first encounter with debt. Most students will finish their studies with a debt. This includes university and vocational study. The debt arises because all students are required to contribute to the cost of their tuition. The result is a HECS-HELP debt which accumulates throughout your study. The debt must start being repaid when your income exceeds $45,881 (2019/20) financial year. The rate of repayment increases as your income increases. For example, in 2019/20 it starts at 2% of income and maxes out at 10% if your income exceeds $134,573. Repayments are made through the tax system. When you lodge your tax return, the Australian Taxation Office (ATO) will calculate how much you are required to pay. You are required to notify your employer that you have a HECS-HELP debt and they will deduct tax at an appropriate rate to ensure you do not have tax to pay at the end of the financial year. The maximum debt you can hold in 2019/20 is $106,319 (or $152,700 if you are studying medicine, dentistry or veterinary science). You can’t get out of repaying the loans if you move overseas. You must inform the ATO of your world wide income and pay at the same rate as if you were living in Australia. It is however cancelled on death. While it may seem like a hefty burden to bear, it’s important to remember that no interest is charged on the debt although it is indexed at the rate of inflation (in 2019, this was 1.8%) which at the moment is not a bad deal. You can check your loan balance at any time through your myGov account.
Afterpay, zipPay, Openpay – can I really have it now?
It’s so tempting – buy now, pay later. They all offer a short term loan with no or minimal interest and easy convenient approval processes done almost instantly on line. But make no mistake, they’re still loans and there will be a cost. It might not be paid directly by you, but retailers are paying a commission, so we have to assume that those costs are built into the retailer’s margin. If you don’t pay on time, there are also varying levels of late payment fees and interest charges depending on who is providing you with the facility. As with all forms of credit, there’s nothing inherently good or bad about any of the providers, but you do need to enter into any arrangement with your eyes wide open. Know how much you can afford, assess whether you really need what you are buying and most importantly, whether you will still want that thing when you’ve finally finished paying it off.
Credit cards – old fashioned or still useful?
The original kind of buy now, pay later. But now there are so many options. Do you pay off your card every month or do you need a low interest rate? What about rewards points? Annual fees? Introductory offers of 0% interest? So many options and it’s so easy to compare and apply on line. Only you can assess your circumstances to know what kind of credit card you need. For example, you may be able to get a card with an interest rate of 9.89% but pay an annual fee of $69. Or you can get a card with a rate of 11.99% with no annual fee. It all depends on how you use the card.
The same warnings apply – know how much you can afford, know what your repayments will be, know what interest you will be charged if you don’t pay in full or on time and look for the number of days between purchase and payment (the “interest free period”) and what the annual fee amount is. And never forget that if you don’t pay on time your credit rating will be affected. This could affect your ability to borrow in the future.
What’s the difference between a loan and a mortgage?
Both are borrowing money from someone else, usually a bank or financial institution. A mortgage is a loan that is secured against an asset (usually property). This means that if the borrower fails to repay the loan, the lender has the right to foreclose on the property (or other secured asset) and require it to be sold to settle the debt.
Why should I have a mortgage?
The reality is, if you want to buy a house, you are going to have to have a mortgage. If you’re happy renting or living with Mum and Dad, then you don’t have to have a mortgage. But if you want to accumulate an asset, sometimes it makes a lot of sense to have a debt and the discipline that comes from having to make repayments every month. You need to make sure that you are able to afford the repayments – and not just at today’s record low interest rates. Have a buffer so that if interest rates rise, you are still able to afford to make repayments.
While for many young adults a house and a mortgage seem a long way off, the reality is, you’ve probably already had or still have a loan and you may not even realise it. Debt is neither good nor bad, it’s about how much you can afford, how it comes about, your attitude to it and what you do with the proceeds that count.
If you’re a young (or a less than young) adult, I’m more than happy to chat with you about your tax and finance and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your taxes!