It is without question that COVID-19 and its associated lockdown restrictions have caused huge impacts on many individuals’ financial circumstances. With the financial year coming to a close in just a few weeks, editor Belle Kwan asks finance expert and founder of advice platform Women With Cents, Natasha Janssens, for her tips on investing, building savings and making the most out of tax deductions.
Q: Many property investors may be tempted by current low real estate prices to add to their investment portfolio. What are some important factors to consider when investing in today’s unusual environment?
NATASHA JANSSENS: The biggest consideration right now should be your ability to successfully obtain finance and to settle on that property purchase.
It is not unusual at the moment for valuations to come in lower than what you have agreed to pay for the property, as banks try to factor in further market downturns. This means that there is a risk that the bank won’t be willing to lend you as much, therefore you would need extra cash reserves or equity to bridge that gap, or otherwise face losing your deposit.
Banks are also very nervous about lending to certain sectors that have been significantly affected by COVID-19 (such as retail, hospitality and tourism), so even though your employment may be stable right now, there is the risk of the bank getting cold feet and revoking the approval prior to settlement.
The second consideration is particularly relevant for those approaching retirement – how will your retirement plans be affected if property prices decline further and do not recover by the time you retire? What COVID-19 is teaching us is that unexpected events can take place that can have a significant and lasting impact – therefore thinking long-term and strategically is key.
While most investors are focused on the upside, more care needs to be taken to consider the worst-case scenarios and whether you can really afford to take on that risk.
Q: With the risk of rental income drying up, put on pause or reduced, is it still recommended that investors hold onto their rental property investments, or is this a good time to consider freeing up property assets and building up savings?
NJ: It really depends on the investor’s strategy and investment timeframes. Hopefully, those who have invested have obtained professional advice before doing so to understand the risks associated with buying property – such as economic downturns resulting in tenants defaulting on their rents, drops in rental demand, increases in interest rates, fall in property values.
For these reasons, when buying property, it is important to make sure that you have sufficient cash reserves to withstand any market downturns, precisely so that you aren’t forced to sell out of the investment at a less than ideal time.
In my opinion, a market downturn is not the time for panic selling unless you were already planning to exit that investment in the near future (and cannot afford to wait for the market to recover, which could be months or could be years).
If, on the other hand, you are concerned about continuing to afford to pay the mortgage on the investment because your tenants are struggling to pay their rent, it is important to know what support is available.
Speak with your bank about obtaining a home loan repayment deferral so that you aren’t forced to sell your investment due to cash flow issues – a home loan repayment deferral of up to six months is available with most lenders to assist those who are in financial hardship due to COVID-19
Q: What are some simple ways that people can look at cutting costs and building up savings?
NJ: 1. CUTTING COSTS Asking your bank for a better deal on your interest rate or considering refinancing is a sure way to save a good sum of money – the less you pay in interest, the more money goes towards paying off the mortgage.
The same applies to reviewing all of your other bills (both related to any investment properties and your own home). Savings are there to be made on energy bills and insurances, but if you don’t ask, you don’t get. A commonly overlooked area can be the cost of life insurances, which is significant over the age of 50.
This is the time to make sure that you are not over-insured and that you are taking advantage of available options to reduce your insurance premiums. For example, if you have a solid cash reserve, you can choose to reduce your income protection premiums by increasing the waiting period.
Life insurances are notoriously complex so I strongly recommend seeking professional advice before doing anything with your policy.
- BUILDING UP SAVINGS Over 55s should speak with their financial adviser about deploying a transition to retirement strategy (TTR) which allows them the opportunity to minimise their income tax and in doing so boost their superannuation savings without affecting their cash flow.
Finding additional savings on bills and putting those towards making extra repayments on your mortgage or putting into super will also help boost retirement savings (but do make sure you don’t breach the contribution caps).
Q: With tax time coming up, what are some clever and often overlooked avenues where property investors can benefit?
NJ: Depreciation is the most commonly overlooked deduction, especially for those who try to prepare their tax returns themselves. So amortising the costs of borrowing expenses, claiming decline in value of fixtures and fittings and the capital works deduction.
If you are seeking to increase your rental losses this financial year (for example to offset a capital gain), a good strategy can be to prepay the interest for next financial year so that it can be claimed this year.
This requires two things: strong cash flow so that you can afford to do so, and second, for the loan to be on a fixed-rate contract (you cannot prepay interest on a variable loan). Keep in mind, of course, that while this will increase your tax deductions for this year, it will result in less deductions next year (you choose to do the same again).
Also remember that the cost of obtaining a professional depreciation schedule is tax-deductible, as are your tax accountant’s fees.
If you have a home loan, then putting extra cash towards paying off your mortgage rather than the investment loan will also help maximise your tax deductions.
Making additional super contributions (within the $25,000 cap) or spousal contributions into your super can also offer the benefit of tax relief while also boosting retirement savings.