Tuesday, 21 October 2014

What is a normal home loan interest rate?

When you look to buy a house, chances are the first question you will ask is "how much can I afford to pay" which is really asking the question "how much can I borrow?".  Once you know how much you can borrow, you can go out house hunting and buy that perfect home.

Unfortunately most people just Google one of those home loan calculators or go into a bank branch and ask them how much they can afford to pay and don't look at the biggest assumption that will determine the answer to the original question...the interest rate on the home loan.

The interest rate is the biggest unknown factor when it comes to taking out a loan

In Australia, most loans are variable rate.  If you are lucky you may be able to lock in a 5 year fixed interest period but for the majority of your loan you will be paying an unknown rate of interest.  Why is this a problem?

The problem is that most 'affordability' calculators assume the prevailing interest rates or they may have a small buffer in there if rates move.  In Australia the current rate of interest is ~5% on 30 year mortgages but will it stay like this forever...and will you be able to afford the interest bill if the interest rate moves?

The question we should be asking is: What is a 'normal' home loan interest rate?

The problem with this question is that there is no right answer.  Economists will argue until the cows come home what a steady state 'normal' interest rate will be but the fact is that it will all depend on the economic conditions and government policy in the future and there is too much uncertainty around that question.

So how do we deal with the uncertainty associated with unknown future interest rates?

The simple answer is to

Tuesday, 7 October 2014

I did my own taxes...and it was great!

I am usually terrible at doing my taxes on time.   I always have the receipts sorted out and spreadsheet done well in advance however when it actually comes to seeing the accountant and submitting my taxes I tend to procrastinate for weeks or even months.  Last year I submitted my taxes 6 months late.

This year I swore I would be different.  But not only that...I also decided to do my taxes myself

Why did I do my own taxes?

There are a whole host of reasons I decided to do my own taxes this year including:

  1. I virtually do them for my accountant anyway!
    • The spreadsheet I give my accountant is so detailed it means he never has to look through any of my documentation and I generally only have a few questions that I need to ask him
  2. I value my time less than my accountant charges me
    • My accountant charges $120 per hour to do my taxes and given the work I normally do on them I generally only get charged for 2 hours of work (i.e. $240)
    • I wasn't exactly sure how long it would take me to do my taxes but I was pretty sure I would be ahead if I did them myself
    • As it turned out it took me 4 additional hours to do my taxes (i.e. the time taken to do what the accountant usually does) 
    • I value my personal time at less than $60 per hour so it was a great trade for me
  3. I hate taking time off to go to my accountant
    • I normally have to take a bit of time off work to go to my accountant who works in the suburbs (while I work in the city).  Work doesn't have a problem with this but half the reason I generally procrastinate for so long is that I find it such a waste of time to go out there
    • I thought about getting an accountant that was more convenient but this one knew my personal financial situation rather well and I didn't feel like having to explain it to someone new all over again

Would I do my own taxes again?

Thursday, 2 October 2014

September 2014 Net Worth: $509,000 (+0.1%) and Expenditure Tracker

I managed to get back into positive growth with my net worth this month but it was a close run thing. There were a range of factors which influenced this outcome which I will go through below.  This post also includes my expenditure tracker which helps me track my financial goals for the month.

September 2014 Net Worth: $509,000 (+0.1%)

Value% Change
Net worth$509,000+0.1%

What drove my net worth performance this month?

There were a range of factors which influenced my net worth this month.  The share market was a significant negative (and although I felt that a correction was coming I didn't alter my portfolio in time) however a range of small factors all combined to ensure that I was still slightly ahead for the month (although I did miss my target of $510,000 for the month).

  • Positive factors
    • My restricted bonus vested
      • Part of my bonus every year is restricted and vests in portions over a multi year period.  I count this restricted amount in my net worth so this did not move the dial significantly however it did help pay off some of my large, engagement ring driven credit card bill
    • Continued contribution to superannuation and my employee share plan
      • The power of automatic savings cannot be underestimated and my continued contributions to my superannuation and employee share plan helped incrementally improve my net worth performance this month
  • Negative factors
    • A weak share market performance
      • The sell off in the share market towards the tail end of the month caused a ~$5,000 decrease in my share portfolio and consequently my net worth
      • This would have been much worse if the exchange rate hadn't fallen as well.  A significant part of my portfolio is in US$ denominated investments and these benefited from the falling A$
    • High personal expenditures for the month
      • I will discuss this more in my expenditure tracker below but as I have written about before this year is a year for large one off expenditures on things or experiences that you only do once in a lifetime
      • A lot of these expenses (such as my large overseas holiday, my sports car and proposing to my girlfriend) were tail ended in the year - i.e. I have been building up cash for these expenses and now I am making them
      • The expenditure of this cash on both credit and from savings has started to hit my net worth and will continue for the foreseeable future

What is my outlook for next month?

October is likely to be another flat to negative month for me.  I have several large swing factors hitting in this month including