NEWS

Your Money & You

December 2010

Thinking About Making the Mortgage Switch

Switching your home loan could save you thousands, just make sure you consider all of the costs and features and use ASIC’s new mortgage switching calculator to decide whether switching is worth it.

If you have a home loan you might be feeling the pinch of rising interest rates. Advertisements for home loans with lower interest rates may be tempting you to make the switch.

You will normally be charged a fee for breaking your current home loan and a fee to apply for the new home loan. You need to work out whether you will recover these costs by paying less in interest with the new loan.  You can do this by using ASIC’s mortgage switching calculator.

ASIC’s mortgage switching calculator shows borrowers:

  • How long before a cheaper loan will be an overall saving after switching costs;
  • Which loan will be paid  off faster; and
  • How much can be saved in minimum monthly repayments.

Remember that comparing the cost of your home loan is only one part of the decision to switch. You should also compare the features.

If you are thinking about switching follow these four steps:

Step 1: Shop around
Find information about different loans on comparison sites such as www.RateCity.com.au or call a few lenders and ask them for details of their best rates.

Draw up a table with the interest rates, fees and features of your current loan and compare this with a few other home loans.

Talk to your current lender and tell them you are planning to switch to a cheaper loan offered by another lender. They may offer to reduce the interest rate or suggest a cheaper ‘no-frills’ loan. This could save you significant switching costs.

Consider taking the best deal to a mortgage broker, to see if they can do better.

Step 2: Work out the potential savings from switching
Work out what fees you will be charged if you change loans. Use the Mortgage switching calculator.

Brad and Jan have a $250k home loan with 20 years remaining and are considering switching to a loan with a 0.3% lower interest rate. Their exit and entry fees total $700. The calculator shows it will take Brad and Jan 12 months to recover the cost of switching. They could save $40 per month in repayments or pay off the loan 10 months earlier.

The calculator is available at www.fido.gov.au

You will need to decide whether the lower interest rate with a new loan outweighs the costs of switching from your existing one. The lower the exit and start-up fees, the more you stand to gain by switching. If the fees are high, you may be better off staying with your existing loan.

Step 3: Compare features
Look again at your list of potential loans. Compare the features such as:

  • ability to make extra repayments
  • offset account
  • redraw facility

You may pay more for a loan with extra features and flexibility. Will these features be important to you?

Step 4: Decide and take action

Weigh up the potential cost savings and differences in features between loans.

You will only get the potential savings if the new loan stays cheaper over the long term. The longer it takes for a switch to save you money, the greater the chance that the interest rate savings may fade.

If you decide you would be better off switching, take action!

You can either use the savings to pay off your mortgage quicker, or make lower monthly repayments.

For more information on home loans and to use the mortgage switching calculator visit ASIC’s consumer website, FIDO at www.fido.gov.au or call 1300 300 630.

Tony D’Aloisio BA LLB (Hons)
Chairman
Australian Securities and Investments Commission

Financial Planning as a Profession - An Impossible Dream?

This article was written by the Council’s Independent Chairman, Group Captain Robert Brown, B.Ec., Chartered Accountant. It was published in The Australian newspaper in 2010 in response to extensive public debate concerning the role of financial planners/advisers and the legislative controls that being considered to control their activities. 

“The true hypocrite is the one who ceases to perceive his deception, the one who lies with sincerity”. Nobel Prize winning author Andre Gide offered this observation about the human capacity for self-delusion in his ‘Journal of The Counterfeiters’ (1926). The message is timeless, but what’s it got to do with financial planning?

The industry’s leaders have proposed for many years that the descriptor ‘profession’ should be applied to financial planners. They point to improvements in standards of practice and to the many well-intentioned and qualified people who populate the industry. And yet paradoxically, society does not appear to accept their proposition.

If any proof is needed that society does not trust the industry as a whole, and perceives the industry’s claims of serving the public interest to be insincere and even hypocritical, one need go no further than the government’s recent paper ‘The Future of Financial Advice’. This paper foreshadows a ban on commissions and other tough legislative controls over planners.

It’s easy for the industry to react to such criticisms with claims of unfair attacks by politically motivated and ignorant vested interests. Instead, the industry’s leaders should think about whether the criticisms might have some merit. A good starting point in this thinking process is to analyse the meaning of the word ‘profession’; and then to judge the financial planning industry’s claims about itself against that analysis.

Psychologist and ethicist Suzanne Ross wrote “the concept of a profession relates to the contract that professionals make with society. They agree to conscientiously serve the public interest, even when the public interest conflicts with self-interest. Based on this agreement, society in return allows the profession certain privileges….self-regulation is one of those privileges” (2000).

American legal scholar, Roscoe Pound, defined the term ‘profession’ as “a group pursuing a learned art as a common calling in the spirit of public service, no less a public service because it may incidentally be a means to livelihood. Pursuit of the learned art in the spirit of public service is the primary purpose” (1953).

The Australian Council of Professions proposed that “a professional must at all times place the responsibility for the welfare, health and safety of the community before their responsibility to the profession, to sectional or private interests, or to other members of the profession” (1993).

On the concept of a profession’s obligation to serve society, Dr Simon Longstaff of The St James Ethics Centre wrote “The point should be made that to act in the spirit of public service at least implies that one will seek to promote or preserve the public interest. A person who claimed to move in a spirit of public service while harming the public interest could be open to the charge of insincerity or of failing to comprehend what his or her professional commitments really amounted to in practice … if the idea of a profession is to have any significance, then it must hinge on this notion that professionals make a bargain with society in which they promise conscientiously to serve the public interest, even if to do so may be at their own expense” (1996).

Discussing the idea of a professional’s obligation to society, Michael Davis and Frederick Elliston suggested “one of the tasks of the professional is to seek the social good….doctors seek it in the form of health; engineers in the form of safe and efficient buildings; and lawyers seek it in the form of justice. Each profession must seek its own form of social good. Without such knowledge professionals cannot perform their social roles” (1986).

Longstaff concluded “that professionals need to develop a particular appreciation and understanding of some defining end….it is as much for this and the disinterested pursuit of these ends that the community looks to the professions for assistance”.

In the light of this brief analysis, what are we to make of the financial planning industry’s desire to be treated as a profession?

The industry would certainly claim that it has developed its own version of ‘social good’, in the form of advising citizens on the achievement of financial independence. Unfortunately, the behaviour of many of the industry’s participants and the conflicted structures within which they operate send ambiguous signals to society about whether financial planners can be trusted to engage in a sincere commitment to the ‘disinterested pursuit’ of that social good.

As a result, society continues to doubt the industry’s sincerity, suspects it of hypocrisy and has not been willing to make a ‘contract’ with it. Therefore, instead of allowing the financial planning industry to self-regulate in the way that traditional professions have been allowed to do (to a greater or lesser extent), financial planning has been heavily regulated for decades, with little prospect of that external control ever being significantly reduced.

Consequently, at this stage in the development of the financial planning industry, there is no basis for it to be treated as a profession. Certain actions can be taken to achieve the professional status to which the industry aspires, principally involving the building of trust by the removal of the remuneration-based conflicts of interest that control the actions of most of the industry’s participants.

In the meantime, it seems that government is determined to legislate for the removal of commissions, and that much of the industry will respond by simply replacing commissions with other forms of conflicted remuneration such as percentage-based asset fees (while calling them ‘fees for service’); thereby substituting one fundamentally conflicted remuneration model with another. All that will do is reinforce the conflicts of interest, emphasise the hypocrisy and confirm the need for more regulation; thus destroying any prospect of the industry’s acceptance as a legitimate profession.

It seems that most of the industry’s leaders simply don’t accept this analysis. They have ceased to perceive their own deception. Until that hypocrisy is overcome, the creation of a profession of financial planning will remain an impossible dream.

Capital Gains Tax on Inheritanced Real Estate

If you inherit someone else’s principal residence and want to sell it, you have two years in which to do so before incurring capital gains tax on the sale. For example, if you inherit your parent’s house that was bought prior to 20th September 1985, it’s called a pre-CGT asset, but it will lose its tax exemption in your hands if you sell it more than two years after your parent’s death. In that case, the cost base for calculating CGT becomes the market price at the time of your parent’s death.

If the house is post-CGT (that is, bought after 20th September 1985) the cost base depends on whether it was inherited before or after 20th August 1996. If inherited before that date, you also inherit your parent’s cost base, which is not so positive if you’ve held the house for a long time, have rented it out and are sitting on big gains.

If inherited after that date, the cost base is market value at the time of death.

One word of warning on selling within the two year deadline; the property must be settled at that time, not just “under contract”.

This information should not be treated as professional advice. Before you decide about the disposal of any asset, ask about the tax consequences specific to your circumstances. Consider consulting a tax agent/accountant and go to www.ato.gov.au.

Free Seminars anywhere in Australia

In addition to its commitment to financial education programs in ADF training curriculums, the Consumer Council is happy to provide expert speakers free of charge on a range of financial topics to any ADF unit in Australia.

For more information contact us via our website at www.adfconsumer.gov.au. (www.adfconsumer.gov.au).