An initial public offering (more commonly referred to as an “IPO”) refers to the process of a private corporation offering shares to the public on a stock market for the first time. Colloquially this process is sometimes referred to as “going public” as once a company goes through an IPO their shares may be bought by any investor on the stock market for which the company is listed. In Australia the stock market is called the Australian Stock Exchange (ASX), but stocks can also be listed on the New York Stock Exchange, the London Stock Exchange, the Hong Kong, or the Shanghai Stock Exchange, to name a few.

The issuing of public shares to new investors allows a company to raise capital– generally a very significant amount, with some large companies raising upwards of 20 billion USD. The growth of a corporation from a private to a public company is an important transitional moment for the company itself, for public investors, company employees, and for the private investors to fully realise their gains from being the first investors in the company. 

Before a company is permitted to list as a publicly listed entity however, there are rigorous audit and compliance checks that must be completed. The company must prove to the regulator that they are fit and proper, able to provide value to their prospective new shareholders.

So, what is the process for a company to go from private to publicly traded on the stock exchange? For this example, we’ll use the ASX process.

The Process

Prospectus

In order to list on the stock exchange, and raise equity capital through having an IPO a company must first prepare something called a “prospectus”, and lodge it with the Australian Securities and Investments Commission (ASIC). ASIC is a key regulator in the financial sector in Australia, and has the power to approve or to block an IPO from occurring. The prospectus is a key document in the process of a company going public, as it is one of the first major documents regarding company financials, sustainability, risk management, and other important information to be released somewhat publicly. In short: the company prospectus is required to contain all of the relevant information investors would require to make an informed decision before investing in the company. 

Applications

The next step of the process, once the company has provided a sufficient prospectus and gotten the nod from the regulators, is for the company to decide to whom they intend  to offer their shares to. Some companies may opt to allocate a portion of their shares issued to existing company customers, institutional investors, or to the general public. If you are entitled to apply for shares in the company, you are able to do so by completing the application form that is included in the prospectus, or via your broker. 

Allocations

Once all share applications are received, the company and its team of advisers will confirm the share allocations. This basically means that the company will confirm if you are able, or not able, to purchase the shares that you applied for. If an IPO is ‘oversubscribed’ (meaning that the company has received more applications for more shares than it has to offer investors) then applications may be “scaled back”. Scaling back shares means that you may ultimately receive fewer shares than you originally applied for, or perhaps even none at all- although the latter is not a common occurrence.

The IPO

Once all the share allocations have been finalised and the required application money has been received by the company, the new shares are ready to go public. The new shares are then  listed on the selected share market, which down under is the ASX. This is the IPO- the initial offering of shares to the public. 

Once the company is listed, their shares can be traded as per normal, with fluctuating share prices depending on the supply and demand for the shares, as well as the evolving market conditions.

Significant Recent IPOs

Despite the grim economic outlook brought on by a season of bushfires, and COVID19 a total of 11 companies hit the ASX in 2020. A few generated a significant amount of buzz and capital. 

Adore Beauty

Popular online beauty retailer Adore Beauty was listed on the ASX on October 23rd, 2020. The retailer was one of the most anticipated IPOs of the year, due to the surging popularity of its products across the country and year on year profit increases from product turnover, retained customer groups, and some smart acquisitions. Adore Beauty raised a total of $269.5 million from its IPO in October.

Aussie Broadband

Aussie Broadband held their IPO on October 16th, 2020. The IPO was so anticipated that it was oversubscribed for the $40million in shares that it had to sell to the public.

Special mention: AirBnb

Although not listed on the ASX, AirBnb’s IPO gets an honourable mention, due to the sheer amount of capital it raised during its IPO- despite listing in the thick of the pandemic. The company listed on December 9th, 2020- and raised a total of $3.5billion USD with their IPO with shares sold at $68. The following morning, once the stock exchange opened, their share price shot up to $165 per share.

So, a company has had their IPO- what’s next? Well, a company can sometimes opt to offer a second round of shares to their investors…

Secondary Offerings, post-IPO

Sometimes companies can host a second round of public share offerings. This can be motivated by a number of reasons however it is primarily  done in order to generate additional capital for significant changes or upgrades that the company plans to undergo. There are two main types of secondary offerings- a Rights Issue, or a Placement.

Rights Issue(s)

A Rights Issue is where a company seeks to raise additional capital by offering new shares to their existing shareholders. The existing company shareholders are offered additional shares in the company on a predetermined basis, which is generally a discount for the public market price. Participation in Rights Issue(s) is optional for company shareholders.

A recent example of an ASX company that went through a Rights Issue is Sydney Airport, raising capital to combat their failing income due to COVID19.

Placements

A Placement is similar to a Rights Issue in that it is the issuing of new shares to raise equity, however it is more targeted- the company selects a number of key investors to which they offer the new shares. The company will generally target more institutional investors like fund managers for Placements. Placements, like Rights Issues, are generally offered at a discounted price.

Investing in IPOs

Participating in an IPO can be a riskier investment than buying shares in an already-publicly traded company. This is for a number of reasons, however the most prominent is that the company does not have a history of share price reliability (as in – will the share price drop once you’ve purchased the stock?), nor a history of capital growth or paying out dividends to their share-holders.

It is important to always consider the risk vs the rewards when considering purchasing stock in an IPO, and best to consult a financial advisor or stockbroker to get a professional opinion. 

Interested? Come speak to us!

We hope you found this article informative. The team at Pursue Wealth are on hand to answer any questions you have about the IPO process, investments, or this article itself! Whether you are in the position to be looking into investing in IPOs, or just starting your investment journey-  our team is always happy to have a chat! Book in for a ‘Quick Chat’ with our dedicated team here, and we’ll see how we can help you work towards your financial goals!

The post Everything You Need to Know About Initial Public Offerings (IPOs) appeared first on Pursue Wealth.

From the bushfires that ravaged through Australia in early 2020 that threw climate change into the forefront of discussion, to the Black Lives Matter movement taking centre stage for systemic racism and social injustice, and the COVID pandemic that emerged from animal wet markets: ethics is on the table for discussion. More and more, ethics and sustainability have become common topics of enquiry, and wide-spread discussion, both within the financial planning world and broader. Driven by numerous factors, such as those mentioned above, the global awareness of the need to know where your money is invested, and what those investments potentially cost the earth, or impact human rights, is on a steady incline. 

Investors have the power to direct funds towards  where they are needed. For example, it is possible to invest in managed funds that are sustainability focused, and have your superannuation funds more consciously invested in companies that align with your personal values.

This article discusses ethical investing with a view to combating climate change, and protecting human and animal welfare- however these are illustrative suggestions and opinions- not advice.

Ethics in Investments

Ethical investing can also be referred to as:

• Socially responsible investing,
• Impact Investing,
• Sustainable Investing, and/or
• ESG (environmental, social and governance) investing. 

The term “responsibly managed investment” can sometimes be used interchangeably with “ethical investments” (or one of the above) however there are nuances between the two types of investments which we will discuss further below in the article.

So, what is ethical investing? How do you invest ethically? How do you know your investments, and/or your Super is invested sustainably? Why should you even care? We’ve unpacked this, and more, in the below blog post.

What is Ethical Investing?

According to an article published by Canstar in 2018: “Ethical investment (or responsible investment)… is when an investment is selected to complement views on moral, environmental or political matters.”

Ethical Investing is an investment strategy option that considers the social and environmental impact of a company or fund as well as their financial returns. An ethically conscious investor is someone who seeks to use their funds to support companies that operate to a high ethical standard, whether it be creating renewable energy sources, paying equal wage to all workers, and/or operating a carbon-neutral business, amongst others. Ethical investing seeks to stop supporting businesses that are harmful to the planet, to people, and sometimes to animals too. 

Companies often rely on funding from investors to expand their operations. As an ethical investor, you can help shape the future of our world by being more selective of the businesses you support. To date, companies in the fossil fuel industry, and conglomerates invested in gambling and tobacco were seen as the major financial drivers in Australia’s economy. As a result, many of our super funds are by default heavily invested in these industries that may no longer align with the ethics of Australian people, especially in our Gen Y and Gen Z demographic. In other words, Ethical investing allows us to “put our money where our ethics is” so to speak! 

What Matters to You

Ethical investing is a very personal choice; as the matters you consider most important may not be reflective of what another considers most important. For example: one investor may care deeply about investing in renewable energy but not mind so much if their super fund invests in gambling businesses, or horse racing. For another investor, animal welfare could be front and centre of their ethical values, while combating climate change is less so. Other investors may want to ensure they aren’t supporting companies connected to child labour; or want to avoid forestry logging or mining. 

For the average Australian, there are three key areas in which they are able to select ethical investments: with their choice of banking institution, with their choice of Superannuation fund, and with their choice of investments/investment funds.

Ethical Banks

The hard fact  of the matter is that many banks in Australia do business with mining companies, gambling businesses, logging companies, and companies that can be connected to alleged child-labour allegations. It can be hard to know who exactly your bank of choice does business with as banks don’t publicise this information. However, in recent years a number of banks have taken a stance against unethical investments and business practises, and have publicly published who they do, and do not invest in, and do business with.

An example of one of the banks who have done this is Bank Australia. Bank Australia is a customer-owned bank with a strong commitment to being carbon neutral, operating on 100% renewable energy, and not investing in any fossil fuels. Bank Australia states that their money is ‘clean’ because it is never loaned to industries (eg coal, nuclear weapons, gambling, tobacco, live animal export) that do harm to the planet, animals, or humans. 

Bendigo Bank, ME Bank, and Suncorp Banks are other examples of banks also moving towards more ethical operations, and avoid investment in fossil fuels.

As always, however, it is important to consider your individual circumstances and other factors as well when choosing the best bank for you – e.g. customer service, administration fees, interest rates, and so on.

Ethical Superannuation Funds

Did you know that Australia’s collective pool of superannuation funds is the third largest pool of retirement monies in the entire world? As at June 2019 the total number of funds under super management totalled $2.9 trillion Australian dollars.

2.9 trillion.

While most funds offer a “greener” or “sustainable” option to investors, many of them still invest in companies that could be perceived as unethical, such as livestock exports, gambling businesses, logging businesses, fossil fuel companies, or uranium miners. It is important to understand the investment framework of your fund, and explore alternatives if it doesn’t align with your own set of personal values. This is a very personal choice for you, and the options your fund has on offer can differ from fund to fund. 

Some superannuation funds that may be of interest to ethical investors are Australian Ethical Super, Future Super, Good Super, and Verve Super. Over time, the universe of ethical super funds will grow and change, so it is important to do thorough research or speak to your financial adviser before making any significant changes. 

Ethical Investments

Whether you are a first time investor or a more experienced investor, there are many ethical options to choose from.

Although past performance is not indicative of future returns, many ethical funds have been demonstrating strong returns over the last few years; growing with the momentum of increasing awareness and need for sustainable initiatives and businesses.

What is the difference between Ethical and Responsibly Managed?

A term one might hear used almost interchangeably with ethical is “responsibly managed” (RM). However, the use of this term as another description for ethical could be considered completely subjective. Many large banks and industry super funds state that they are responsibly managed due to their investments in items such as, for example,  clean water projects, however simultaneously still invest in coal. The Responsible Investment’s Associationof Australian (RIAA) published a Benchmark Report in 2018. In this report the RIAA noted that over half (55.5%) of Australia’s professionally invested assets are responsibly managed- which includes funds that may consider ESG (environmental, social and governance), exclusions, sustainability-themed and impact in their approach- to varying degrees. While responsibly managed assets can include ethical and sustainability driven companies, it is important to note that not all of these RM investments could align to your personal ethical investment approach.

Investing your money ethically

How do you know what to look for, when selecting a bank, or a superannuation, or an investment fund? Here are some topics you may want to consider:

Search for investments in:

• Clean energy
• Sustainable products
• Medical solutions
• Universal healthcare
• Innovative technology
• Education
• Responsible Banking
• Recycling
• Aged Care

Avoid investing directly into, or in funds that invest in:

• Coal/gas usage and expansion
• Oil firms
• Forest logging
• Weapon manufacturing
• Tobacco industry
• Gambling
• Exploitation
• Harmful products
• Human right abuses

Our Ethical Investment Principles

At Pursue Wealth we have recently had an influx of new members wanting to learn more about Ethical Investing and we are absolutely here for this movement towards a more sustainable future. We feel it is crucial that we support you, our members, in living by your values and if this can be facilitated through investing their money ethically, then we will do our best to facilitate this. Our business mission statement is “providing innovative financial advice that inspires our members to achieve financial freedom whilst balancing a fun and fulfilling lifestyle”- and we understand that knowing your financial freedom comes from ethical, sustainable sources is inspiring to many of you.

If you have read through this article, and you feel passionate about preserving our planet, cultivating sustainable practices for animals and/or supporting better human rights, you can now use your money mindfully to support the causes you care about- and we would love to help you do this!If you want further guidance on how you can get started with ethical investments, you can book in to chat with one of our advisers through this link.

The post Our Top 3 Tips on Investing Ethically for 2021 appeared first on Pursue Wealth.

Disclaimer: Before we dive into this article it is important to note that the below information contains opinions and facts only, not personal financial advice. Before you take any action it is important to consult with a qualified financial adviser or mortgage broker who can appropriately assess your unique situation. For a discussion personalised to your needs, reach out to us here! 

This article also contains opinions regarding the state of the Australian property market in 2021, however, it is recommended that you consult with a qualified professional before making any decisions to invest in real estate.

The Goal

Owning a home is one of the biggest financial milestones one can achieve in their lives. For many Australians, their own home will be the biggest financial asset of their lifetime. Many people view being a property owner as a marker of personal, and financial success and security. Unfortunately, over the last few decades the steadily rising prices across metropolitan Australia have made it much harder for Australians to break into the market. Property prices across the last few decades have far outstripped wage growth. For many young Australians, the prospect of home ownership became much more daunting. 

Enter COVID…

COVID has devastated much of the world. Globally we are nearing record unemployment, and debt levels are soaring. Mental health is suffering, borders are closed, and nobody seems to really know when we will be back to “normal”, or settled into our new “normal” again. For those affected by any of the above, it can be difficult to maintain optimism during these times. 

However, it may not all be doom and gloom. For those keeping an eye on the property market, the current circumstances could potentially be considered a great opportunity. If you are fortunate enough to be securely employed and financially ready, the current economic situation also represents the potential to finally get on to, or take that next step up, the Australian property market.

So, could a potential tumble in the Australian property market across 2021 create an opportunity for hopeful first home owners and investors  to break into the market? Let’s take a look at what the 2021 Australian property market could look like…

The Doomsday Predictions

Since early in 2020, some of the largest banks and most recognised economists have been predicting staggering crashes in the housing market. There have been claims that the prices of homes could crash by up to 40%, although most estimates appear to be within the 10-20% mark. Has this happened though? Or is our property market more resilient than these banks, and economists give it credit for? Or, here’s a thought, will some property markets crash while others remain steady?

To look into the 2021 property landscape and achieve a comprehensive understanding, it is first important to understand that there is actually no single Australian property market.  In fact, what is commonly referred to as the “Australian Property Market” is an interwoven network of hundreds of smaller property markets across the country, each operating with their very own set of unique growth drivers, supply and demand. The micro-climate dynamics in each area, and across each type of dwelling fuel demand from different types of investors and owners. There are also the external economic factors to consider. 

Each little sub pocket of the property market will react differently to the economic conditions. Currently, the 3 markets most negatively impacted by Coronavirus are:

1. The outer-lying suburban fringes of bigger cities, which are predominantly made up of newer settlements;
2. The high-rise apartments pockets in the CBDs of big cities; and 
3. The more high-end luxury market – where houses are priced above $3m.

The Numbers

Confused? Let’s look at how property prices performed in different markets in June 2020. According to popular Property Investment information site PropertyUpdate.com.au, since our international borders closed on the 22nd of March 2020, 

• The median Sydney house price dropped 1.9%,
• The median Melbourne house price dropped by 4.4%,
• The median Perth property value dropped by by 2.2%,
• The median Brisbane home value dropped just 0.3%, and
• The median Adelaide house price rose 0.6%.

It is clear that there was a drop in the market. 

However….

There are certainly many challenges ahead for our economy and for our property markets, but there are also many reasons to be optimistic about certain segments of the Australian property market, particularly in the long term. Westpac economists  recently publicly stated that they believe property prices will climb steadily over the next two years- from a predicted 14% in Sydney to a staggering 20% in Darwin, despite the pandemic!

 While not in line with the predicted growth trends pre-COVID, the evidence presented by Domain shows the Australian property market as a whole is resilient, and will continue to prosper. Domain recently published this article, where they stated that they believe property prices will bottom out in mid-2021, but already be rising by the end of the year. Contributing factors to this is the extension of the JobKeeper payment, the record low interest rates, and the fact that Australia’s debt levels aren’t too high relative to other countries. Thanks to the RBA deciding to reduce the interest rates to a record low of 0.10%, many banks have lowered their interest rates for Aussies- which has freed up cash flow for some homeowners.

Another reason house prices may not drop as drastically as anticipated is due to the Federal Government’s recent HomeBuilder Grant, which we have dissected and discussed in our previous article Understanding the Home Builders Grant, Construction Loans and How They Interact. Although applications for this grant are wrapping up now, the support for the construction industry means many more first home buyers have opted to be first home builders instead.

Disclaimer: It is important to note here that other websites have reported different numbers, so please use the above as a general guide. 

So- how does one make sense of this? On one hand there are those saying the market could crash by up to 40%, driven by record unemployment and debt levels. On the other hand, others are predicting growth. 

So… where does this leave us? 

It can be hard to make sense of all the media headlines coming at you hard and fast. There are so many conflicting opinions and voices saturating the market place, it is easy to get lost in the fear. However, it is important to remember that demand for Australian property will continue to stay strong, especially for residential property, according to this article published by the Australian Financial Review. If we take how the Australian property market(s) recovered after the 2008 GFC as an indication of how resilient they are, then the recovery looks to be steady, and predictable. It may take a number of years, but the return to norm is likely. 

If you are financially secure and are currently in a position to buy into the property market, 2021 could present a real opportunity to take your very step on to, and next step up, the property ladder. How do you know if you fit the bill as “financially secure”? Having  an emergency fund, a deposit saved up, and have at least one strong, stable income stream are all good markers of how financially secure you are.

If you are financially secure: Property prices in Australia have soared over the last few decades, and any slow down in the market presents investors, or prospective home-owners with the opportunity to buy their slice of the Australian home-owning dream. Not to mention the record low interest rates currently on offer by the banks, which could help make the repayments a little easier on your cash flow.

So, You Ready?

Thinking you might be ready to take the first step into owning your first home? Check out our comprehensive article regarding all you need to know about being a first home buyer here. It’s also worth checking out our article on the First Home Loan Deposit Scheme, to see if you could qualify for this really useful tool in fast-tracking your deposit !

At Pursue Wealth, it is our job to keep a pulse on the economic climate and understand the ins and outs of benefits available to our members. We understand that every person has a unique financial situation, and we pride ourselves in offering tailored financial advice for millennials and wealth accumulators.

If you are in a fortunate position to be taking advantage of the current market, book in for a consultation! And if you are not yet  in the financial position to be considering stepping into the market, but want to make a plan to get there- we’ve got you too! We’ve pulled together some useful tips for how you can stay on track of your budget, and savings during COVID- check it out here.

We hope this article has shed light on Australia’s property outlook in 2021. For more information, please follow this link to book in for a 15-minute complimentary chat with our property specialists.

The post 2021 Australian Property Market Outlook appeared first on Pursue Wealth.

Three years ago we published (one of our first!) blog posts Covering Your Six, where we talked briefly about insurance, and some of the aspects to be considered when deciding if it is time for you to take out insurance cover. This article is a continuation of that article, and a more in-depth exploration of four common  types of personal insurance, their payment structures, and how your super fund could help you cover the costs of your insurance. Please be aware that this is an informative article; it provides general advice only, not personal financial advice. 

Each year thousands of Australians are injured, suffer a serious illness or die unexpectedly. Statistics from the Australian Institute of Health and Welfare show that 1 in 3 men and 1 in 5 women die before the age of 70. Some other pretty hairy health statistics are:

• Around 1 in every 2 Australian men and women will be diagnosed with cancer by the age of 85;
• In 2017 there was a stroke every nine minutes; a total of 56,000 over the calendar year;
• Around 65% of stroke survivors will suffer some type of disability after their stroke, which will hinder their ability to carry out daily living activities without help;
• Every year, around 54,000 Australians suffer a heart attack; that’s one every 10 minutes; and finally
• More than 100,000 Australians who have had a heart attack are under the age of 65.

All of the above statistics have been written in reference to this article, these exact numbers may have changed since the publication of this article.

Statistics like these are quite confronting, and while it is all too easy to think “it won’t happen to me” – insurance is there to ensure that, in case something does happen, you have financial security.

Think of insurance as a layer of financial protection against these types of life events. Having the correct insurance cover in place is an especially important consideration if you have a mortgage, or dependents-even more so if those dependents are young. 

There are four main types of personal insurance protection cover; these are income protection, life/death cover, total permanent disability cover, and trauma cover.

Let’s Break Down the Different Types:

Income Protection:

Perhaps one of the most common types of insurance cover is Income Protection, or Salary Continuance Insurance, as it is also known. This insurance is designed to provide you with a percentage of your monthly income for a period where you are unable to work. For most policies, it doesn’t matter what illness or injury you are suffering from, or whether it is short term or long term- if your ailment stops you from working and earning an income you can receive monthly payments that replace up to 75% of your income until you are able to return to work. 

We previously wrote an article on this subject here: Is Income Protection Insurance Important?

Death:

This type of insurance, also sometimes referred to as “Life” cover, gets paid as a lump sum and helps your dependants fund your funeral and legal expenses, clear any outstanding liabilities, and helps your partner maintain their standard of living on one income. Some policies are structured so that if you are diagnosed with a terminal illness and have less than 12-24 months to live the insurer may pay you the benefit early. 

Total Permanent Disability (“TPD”):

This type of insurance cover is paid as a lump sum, and is designed to cover you in case you become totally and permanently disabled. This could occur in any manner of incidents or accidents; through a spinal cord injury, the loss of your leg in a car crash, even the onset of Motor Neurone Disease. This type of insurance is designed to cover your expenses should you suffer a condition that prevents you from returning to work ever again. 

Trauma:

This type of insurance cover is also a lump sum, that has been designed to protect you should you become critically ill with conditions such as back injury, cancer, heart attack, or most ailments that require extensive medical treatment to recover. We will cover this in more detail later, but this type of cover isn’t often available through superannuation funds.

TPD and Trauma cover kind of sound like the same thing…?

While this is quite a common misconception, no, total and permanent disablement (TPD) cover and trauma insurance are not the same. Although both types of insurance cover can help to support you and your family financially with a lump sum benefit upon a successful claim, the payout is subject to different terms and conditions. For example, if you are diagnosed with cancer and have a trauma insurance policy, you will generally receive payment upon receiving surgery. However, if you have a TPD policy, your claim may only be paid out if the cancer renders you totally and permanently disabled and you are unable to return to work.

In a nutshell, Trauma insurance cover funds the costs associated with improving your health and getting you back to work, whereas TPD insurance cover will ensure you and your family maintain your quality of life should you be totally unable to return to work.

Paying for Your Insurance

The amount that you are charged for your insurance cover is called your insurance “premium”. You can generally choose to pay for your insurance with either:

• Stepped premiums: These premiums are recalculated at each policy renewal; which means that the price increases (steps up) each year. This is based on the higher chance of you placing in a claim as you grow older.
• Level premiums — These premiums are fixed. They charge a higher premium at the start of the policy compared to Stepped Premiums, but the annual changes to your cover aren’t based on your age so the premium increases happen more slowly.

Your choice of stepped or level premiums has a significant impact on how much your premiums will cost now and in the future

What you need to tell your insurer

A common reason for claims not being successful is not disclosing your honest circumstances to your insurance provider. You need to tell your insurer everything that could affect their decision to provide you with  insurance cover when you go through your personal statement.

Some information to be disclosed includes:

• Your age;
• Your employment type;
• Your personal medical history;
• Your family history, such as if there is a  a history of disease;
• Your lifestyle; for example, if you’re a smoker or heavy drinker; and
• If you partake in high risk sports or hobbies, such as skydiving. 

Depending on your responses, your policy might have specific exclusions which narrow the medical definitions you can claim on, or a medical loading which increases the cost of your premium. It is a good idea to chat to your financial planner to ensure you are taking out a policy that is suitable for you.

Insurance in Super, or Out?

A common method of funding insurance policies, is to have all or part of your premium funded from your superannuation. This is an attractive option as the premiums are taken out of your super account balance rather than your cash flow, and it also allows the life insured to receive a 15% tax rebate within the super’s tax friendly environment. However, it is important to note the long term effects this can have on your retirement savings. Your adviser can assist you in creating a well balanced plan which may offset this effect while still allowing you to meet your other goals and cash flow needs.

Benefits of Insurance in Super:

There are a number of potential advantages to holding life insurance through your super fund.

Life insurance through super may be more convenient 

As premiums for insurance in super are deducted automatically from your super balance you will not need to be concerned about ensuring your designated bank account has the right amount in it when your premiums are due.

Less Cost to your Bank Account

When you have life insurance through super, the premiums for that insurance cover will be deducted from your superannuation account balance, rather than out of your own bank account. While it does still cost you to pay for those premiums, if you have other financial commitments such as a home loan, then having the premiums deducted from your super account may make it easier on your immediate cash flow.

Potential tax benefits to holding life insurance in your Super

If you opt to have your insurances paid on an ‘annual rollover’ basis from your superannuation, you may be eligible for a 15% tax rebate on the cost of your premium due to the tax efficient environment of super. 

Along with the advantages outlined above, there are also some potential drawbacks of holding life insurance through superannuation. These can include the following:

Erosion of your retirement balance

The premiums paid from your super contributions will mean there is less money available for your super fund to invest for your future. This will affect the amount of money that you will have in your super fund at retirement.

Trauma insurance not available

Trauma insurance, as we previously discussed, provides a lump sum of money to cover your immediate medical expenses and other financial needs when a critical illness or injury occurs. Oftentimes, meeting the eligibility criteria for a trauma claim is not equivalent to meeting a ‘condition of release’ for your superannuation funds. As a result, having trauma cover within super can lead to the funds being ‘stuck’ or inaccessible until retirement. Therefore, insurance providers have structured their trauma products entirely outside super to allow the life insured to access their funds shortly after claim.

So, when is a good time to review your insurance cover, or lack there-of?

Any time is a good time to review your personal situation. However there are certain life events which should prompt consideration or review of your cover:

• Starting full time work;
• Getting married;
• Having children;
• Buying property or any other asset involving debt;
• Starting your own business; and
• Putting together a Financial Plan

When determining what type of insurance you need, you may want to ask yourself the following questions:

• How much would your family need to live off if you weren’t around?
• Is the process easy for them to be able to collect the death benefit? Or could the process be difficult and cause additional distress?
• How will your retirement funds be affected from paying premiums out of your superannuation fund? Do you have the means to offset this effect?

Taking out insurance is a highly personal process based on your individual circumstances. Usually this requires a balancing act of deciding what level of risk you are willing to take on, versus, the expense to give you and your family peace of mind and more financial security. If you are unsure, feel free to book in a chat with one of our advisors who can help you work out which cover and at amounts you need, as well as the most appropriate ways to structure your insurance policies.

Don’t wait till it’s too late to think about your insurance

Your current attitude towards your insurance could shape your future and that of your family’s. You should review your insurance needs at least annually to take account of changes in your circumstances. If you are ready to start securing your future or would like to chat with one of our advisers about this topic in more detail, you can use this link to book in for a 15-min consultation.

The post Understanding Personal Insurance Cover appeared first on Pursue Wealth.

Disclaimer: Before we dive into this article it is important to note that the below information contains general advice only, not personal financial advice. Before you take any action it is important to consult with a qualified financial adviser or mortgage broker who can appropriately assess your unique situation. For a discussion personalised to your needs, reach out to us here!

Let’s Strip it Back

Money is a deeply personal topic and has very often been cited as a leading cause to couples splitting up. In many societies and group settings, talking about money can be considered a taboo topic, however, this should not stop you from having a serious chat with your partner about your financial circumstances, and how you each like to spend and manage your money. 

Let’s start by delving into why this is such a sensitive subject in the first place. We know that money plays a pivotal role in our lives and many people make major life decisions based around money e.g. what job to choose, where to live, which school to send the kids to, etc., so why is it difficult for some couples to have a frank conversation about it? 

After advising many couples, we have observed common reasons to be fear of judgment, social conditioning, and unhealthy money habits that lead to stress and a natural instinct to avoid talking about the problem. People also tend to equate money with particular values, such as, security, power, or success, and it’s very common to adopt our parents’ financial mindset and money habits without assessing whether they are productive. All of these factors can lead to misunderstandings and incompatibility if couples don’t put in the effort to actively and openly talk about money. 

Many external research studies show that the earlier you start discussing your finances with your partner, the better. In particular, the Australian Securities and Investments Commission (ASIC) emphasises the importance of understanding each other’s general attitude to money, and being able to clearly articulate your short, medium, and long term financial goals together. Doing this will help you build a strong foundation for both your relationship with each other and with money.

1 ) Understand Your Money Mindset

The first step in achieving a calm and rational money conversation is to understand that you and your partner may very well have differing views on how to manage your savings and spending. For example, you may prioritise saving cash while they prefer to invest extra money in the stock market; you may want to go on a nice vacation, while they would prefer a new family car. It’s not uncommon for your financial goals to be different, especially if you have never talked about money together before. Approaching this conversation with an open, understanding mindset is integral for the conversations to be a success, and compromise is likely needed on both sides.  

Before having this conversation together, it is worthwhile having a moment of reflection by yourself to evaluate your own money habits, preferences and goals so you can clearly explain what they are to your partner. We previously published some helpful articles to our blog which could assist you in working out some of these things –  Building Good Habits for Everyday Financial Success. Even after you have done this, you and your partner may still be struggling to navigate this topic on your own. Our experienced advisers are more than happy to act as an objective third party and help guide you in this discussion, to ensure both perspectives are heard and a productive outcome is attained at the end. Remember that in a committed relationship, this conversation will need to happen regularly as things are constantly changing, which may impact your broader goals.

2 ) Complete a Financial Health Check

See where you both stand financially

It is always important to know your state of financial health. Aspects that contribute to your overall financial health are your income, your assets, your debt or liability levels, your regular expenses, if you have a budget, and your superannuation fund (technically also an asset). This article on starting your Personal Financial Journey we previously published on our blog can help prepare you for this step.

There are pretty high chances that you and your partner have different incomes, asset values, and debt levels. Maybe one of you budgets and the other doesn’t. Once you are both comfortable with being honest about the state of your respective financial situations, sit together and make a list of where you both stand in terms of:

• Income (if you have multiple sources include them all);
• Your regular expenses;
• Your budget;
• Your assets, including your house and car;
• Your Super fund balance and any investments you hold; and
• All of your outstanding debts and loans. 

This level of honesty can often be the most daunting, difficult step in the process. If you and your partner have been able to have this conversation, celebrate it as a win! 

3 ) Decide on Your Goals

The next step is determining your goals. Consider the next 5, 10, 20 years of your life. How do you want to live it? Do you want to travel every year? Do you want children? How many? When do you want to retire? Do you want to live overseas, or perhaps build your own dream house? Have you thought about investing in shares or real estate?

All of these questions could have a significant impact on your financial future and may take some time for you to think about. Try to be as detailed as possible and set S.M.A.R.T goals – they should be specific, measurable, achievable, realistic, and have a timeframe in which you want to achieve it. A common downfall we see with our members is trying to jam pack the next 3 years of their life with ambitious financial goals (which can be unrealistic) and not having a longer term outlook for their future (don’t forget you need money to retire!)  

There is a chance you and your partner won’t have the same goals, and that is okay, it’s important to agree on the fundamentals first. At this stage, the greatest benefit of having a financial adviser on your team is receiving expert guidance around what is realistic and achievable, as well as helping you prioritise your goals.  

4 ) Structuring your cash flow

After discussing your money habits and joint financial goals, it’s time to structure your cash flow in a productive manner that you are both comfortable with. There are three different methods of approaching, and managing  this. 

The first is to have joint accounts for everything including earnings and expenses. This method can be great for couples that want to keep it simple. 

The second is to have your main accounts joint, and discretionary spending separate. This provides a level of autonomy over your personal spending whilst still having joint accounts for ease of paying bills and saving towards common goals.  

Lastly, you may be most comfortable with having everything or most accounts separate, and only creating joint accounts for specific expenses and goals. This option is great for couples that are still early in their relationship, or couples that have very different outlooks on money management, 

This part is very personal to each couple and it’s important to know that you have options. Just because your parents or your friends do it a certain way, doesn’t mean you have to do the same!

5 ) Moving in Together?

Making plans to move in with your partner or share finances can be a very exciting process. As with many big changes in life, this can come with some level of stress, however, knowing your financial responsibilities can make your life together run more smoothly. 

There are so many financial aspects to consider when moving in with a partner, and it is best if they are had upfront. Here are some topics you may want to run through together before you make this commitment:

1. How will you split the grocery shopping?
2. How will you split the rent, or the mortgage repayments?
3. Who pays for what utilities? (Think water, electricity, internet)
4. Are you going to purchase brand new furniture, or up-cycle second hand items?
5. Are you going to want to pay for a cleaner, weekly or fortnightly?
6. How energy and water efficient are your appliances? 
7. How often do you run your washing machine? (if your appliance isn’t very water or energy efficient this could rack up the utility bills!)

It is important to be clear with your partner about what you are comfortable with, and to find compromises that work for you both.

6 ) Always Be Honest

Stay honest with your partner about your finances. If an unexpected expense comes up, be open about it. If you decide your goals have changed, communicate it. Budget not working for you? Sit down and discuss it with your partner. A financial journey is a constant evolution, and it is good to check in with each other along the way. 

7 ) Consider a Binding Financial Agreement 

If you have pre-existing assets (e.g. property, an inheritance, investment portfolio, etc) that you wish to protect in the unfortunate event of separation, consider setting up a binding financial agreement with your partner. Although this may not be an easy conversation, this is an important part of discussing your finances as well. Some people may find this process to be helpful in solidifying a healthy foundation to the relationship. 

ASIC outlines a financial agreement as an “agreement [that] sets out how your assets and money are divided if your relationship breaks down. It also explains what financial support you or your partner gets.” Note that you do not need to be married to have a binding financial agreement set up. 

It is important that you seek legal and financial advice before signing this document. If you find this prospect daunting, we are happy to help out in the capacity of financial advisors.

Interested in further research? Check out the ASIC’s MoneySmart website.

Consider seeking a financial adviser before taking your next step…

We hope you found this article informative. The team at Pursue Wealth are on hand to answer any questions you have. Whether you are in the position to begin the process of combining your finances, or you and your partner want an objective person involved in your discussions, our team is always happy to have a chat! Book in a 15 minute consultation with our dedicated team here.

The post How To Talk About Money With Your Partner appeared first on Pursue Wealth.

Walking you through the process, and the considerations.

Disclaimer: Before we dive into this article it is important to note that the below information contains general advice only, not personal financial advice. Before you take any action it is important to consult with a qualified financial adviser or mortgage broker who can appropriately assess your unique situation. For a discussion personalized to your needs, reach out to us here!

So, without further ado- let’s dive in! 

First off, what is a construction loan?

A construction loan is a very specific type of loan that has been designed to help fund the building of a new home. Given its specific nature, these loans are a bit more complicated and structured than your standard home loans. Interest may also be charged at a higher rate, as the home doesn’t exist yet- making it harder for a lender to assess the value of the property.

Typically, you would only pay interest-only repayments for the duration of the build, which is usually set at 12 months, however, this needs to be discussed with your lender. Once your construction has been completed your repayments will revert to principal and interest for the duration of the mortgage term, which is the period known as the ‘end loan’.

How Construction Loan Progress Payments Work

Lenders will typically make progress payments throughout the different stages of the construction project. It is quite normal for these payments to be made directly to the builder upon the completion of each stage. Although it can vary from project to project, the stages of the development and payments generally follow the below 5 steps:

• The Base, or Slab Down: This payment will go to cover laying the foundations of your property. It could cover the plumbing and waterproofing of these foundations too.
• The Frame Stage: This payment will be to cover the costs of building up the frame of your property. It can cover some of the brickwork, roofing work, and windows
• The Lockup Stage: This payment will go to help cover the costs of putting up the external walls, the windows and the doors- all the things to make sure you are able to “lock-up” your home
• The Fixing, or Fit Out Stage: This payment will cover the costs to install your internal fittings and the fixtures for your property. Examples of what this stage’s payments can cover include the plasterboards, part-installation of your cupboards and benches, plumbing, electricity and any gutterwork you may need done.
• Completion: This is typically the final payment for the building process. It generally goes to cover the costs for the end of the contract, which can be anything from the final builder and equipment payments, plumbing, electricity or the overall finishing clean for the property.

Construction loans are structured so that the interest is calculated based only upon the funds withdrawn at that stage. For example, if you are on stage 2 and have drawn down $85,000 of your $500,000 construction loan you would only be charged interest on that $85,000. However, this can vary from lender to lender so it is important to discuss this with them, or with your broker.

What is the Home Builder Grant?

Potentially one of this year’s most discussed Government stimulus packages is the HomeBuilder Grant, announced in early June 2020, as one of the responses to the COVID-induced economic decline. But what exactly is this Grant, and why has it generated so much attention? How can you potentially leverage this grant, in conjunction with a construction loan, to build or renovate your home?

First, let’s cover off the basics of both the HomeBuilder Grant, and a Construction Loan. Put simply, the Home Builder Grant is a federal government grant of up to $25,000 that is payable to eligible homeowners to either build a new home, or substantially renovate their existing home. This grant is only eligible on building contracts signed between 4th June 2020 and 31 December 2020, and it is a compulsory requirement that the construction must begin within 3 months of the contract signing date, in most states.

Due to the Stage 4 restrictions placed on metropolitan Melbourne and the Stage 4 restrictions across regional Victoria, there has been a blanket extension of 3 months to the construction commencement requirement for the grant. This means that all applicants for the HomeBuilder Grant that are based in Victoria have up to 6 months from the date of signing of their building contract to commence construction. The time-frame for signing the contract (before December 31) remains the same, however. For more information, please head over to Victoria’s State Revenue Office grant informational page here.

So, if you are looking to complete $200,000 worth of renovations to your home in Victoria, and you sign your building contract on September 30th 2020 you would have until March 30th to begin construction. However, there are always last minute hitches so it would probably be prudent to err on the side of caution, and begin well before the six months is up!

Homeowners will need to build a new home that is valued under $750,000, or spend between $150,000 to $750,000 on renovations for a property valued up to $1.50M. Renovations under $150,000, or properties valued above $1.50M do not qualify for this grant.

This HomeBuilder grant and construction loans are closely linked together and operate in the same space, as construction loans are quite often the preferred financing method for renovations over $100,000 and the construction of homes. Many customers prefer using a construction loan over a line of credit for renovations or building projects as they are structured specifically so that the payments cover the costs of the building or renovations in staged releases, as negotiated between the homeowner and the builder. This additional structure in the staged release of payments can offer more security, oversight (and maybe spending discipline!) around the payment process than if the homeowner had simply taken out a line of credit.

It is important that you secure the construction loan finance most suitable to you before you apply for the HomeBuilder Grant. All necessary plans and contracts between the homeowner and the builder need to be finalised before December 31st in order to qualify for the $25,000 grant.

Qualifying for the Grant

So, how do you know if you’re eligible for the grant? As briefly outlined before, there are a number of criteria that you must meet before you qualify for the $25,000 HomeBuilder payment. These requirements are laid out below in more detail.

To be eligible for the HomeBuilder grant you are required to:

• Sign your building contract after 4th June 2020 and before 31st December though a licensed or registered builder. If you signed a building contact on June 3rd then you do not qualify.
• Begin the construction of your new home, or commence your renovations within 3 months of the building contract date. For example, if you sign the construction/building contract on September 1 2020, your builder needs to have commenced his construction work before December 1st 2020. Unless you are based in Victoria, where, as covered off before, you have six months from the date of signing the contract to commence building.
• Be earning below a specific income cap. If you are applying for the grant as an individual then your 2018-2019 tax return must be an amount below $125,000. If you are applying for the grant as a couple then the combined income on your 2018-2019 tax return must be below $200,000.
• Own, or be in the process of buying the property in your own name. The property cannot be owned by a company or a trust.
• Be an Australian Citizen. The scheme unfortunately is not available to anyone who is not an Australian citizen.
• Be buying an off the plan apartment or townhouse that you have signed a contract to buy on or after 4th June 2020 and on or before 31 December 2020 and construction needs to start on or after 4 June 2020 (and no later than 3 months after the contract is signed). This means that even if you are wanting to purchase an off-the-plan property and have signed the contract after June 4th, if the construction started before June 4th then you are not eligible.
• Be substantially renovating the existing home that you live in. The value of your house and land (collectively your “home”) is not more than $1,500,000 and the renovations will cost between $150,000 and $750,000. It is a requirement that the renovations are being undertaken in order to improve the accessibility, livability and/or safety of your home. You cannot use the grant to build things outside of your home like a swimming pool, tennis court or sheds.
• Be building a new property that you will live in as your home, where the total value of the property (house and land) is not more than $750,000. You cannot use the HomeBuilder grant for an investment property.

When do I get paid?

The timing on when your grant will be paid is dependent on both your successful application and the type of construction work you will be doing. If you are intending to:

• Complete a new build: the grant will be paid after foundations have been laid and the first progress payment has been made to your builder.
• Undertake a substantial renovation: the grant will be paid after construction has commenced and evidence is submitted showing that payments of at least $150,000 have been made to the builder.
• Sign an off-the-plan home/new home contract: the grant will be paid after evidence is submitted showing that the property has been registered in your name on the certificate of title; and you have to be registered on the certificate of title as the owner of the property by no later than 31 October 2022.

Once all eligibility criteria have been met and the required supporting documentation provided, the grant will be paid into your nominated account. It is a requirement that the nominated account be an Australian cheque or savings account.

Do I have to be a first home buyer to qualify?

Good news for existing homeowners with more than one property, no- you do not need to be a first home buyer to get the $25,000 HomeBuilder grant, as long as you are able to meet the eligibility criteria above. Also as outlined above, the property for which you are applying for the grant does need to be your principal place of residence, however, (meaning that you are living there), not an investment property.

So, should you purchase an existing apartment, or should you use this grant?

The short answer is, that really is up to you. Your financial situation is completely unique to you, and only a qualified financial planner will be able to provide some insights into whether or not it would be appropriate for you to leverage this grant opportunity. For some, this grant could be an excellent opportunity to complete renovations or builds they have dreamt of and planned for years. For others, the stress of building is simply not worth it, and the idea of purchasing an existing property is a much more attractive option.

Let’s look at a comparison…

Tom is looking to purchase a property and has just found an apartment worth $600,000 that he is interested in. Tom has completed his due diligence on the apartment and wants to secure his finance, in order to put in an offer. Tom has saved up $120,000 for a deposit. This is 20% of the purchase price, which means Tom will not have to pay for Mortgage Lender’s Insurance (LMI). As this home already exists, and Tom isn’t planning to complete any major renovations, Tom is able to apply for a standard home loan. Pending the application submitted, and speed at which the mortgage broker and bank operate, Tom should be approved for his loan within 3-6 weeks. Tom has no need for a construction loan, or eligibility to apply for the HomeBuilder’s grant.

 Alex, on the other hand, wants to build her own home. Alex has saved up $90,000 and currently owns a piece of land worth $500,000 with existing approval to build a residential dwelling. Alex’s builder has quoted her $350,000 for the end-to-end build process, from laying down the base to final finishings. These numbers mean that Alex is eligible to apply for the HomeBuilder’s grant, however, first, Alex requires an additional $260,000 to be able to fund this build. As the house does not yet exist, Alex cannot apply for a home loan and instead must apply for a construction loan. Her application for a $260,000 construction loan is approved, and Alex’s builder commences. As Alex is building a new house, her HomeBuilder grant will be paid in full once the foundations of her home have been laid, and she has made her first payment to the builder. As her first payment costs $30,000 to lay the foundation the $25,000 grant will be paid in full once she makes this first payment to the builder, meaning that Alex only has to pay $5,000 herself.

 By purchasing an existing home, Tom is saving his time and not taking on any building-related stress. By opting to build her new home, Alex will save up to $25,000 on her renovations. While opting to build or substantially renovate a property instead of purchasing a new dwelling could cost you less financially, it may cost you more both in time and energy. Bear in mind that construction loans tend to charge a higher interest rate as well, so if the building is delayed through the stages the interest payable that you accrue could put a dent into the savings you had predicted you’d make by going down this path.

For the purposes of these examples, both characters are Australian citizens who are single and earn below the single’s income cap.

Renovation Exclusions

If you are renovating a property, the work is required to be completed by a registered or licensed builder. You cannot employ your mate who’s dabbled in some handiwork at home to complete the renovations for you. And, as outlined previously, the renovations or building work that the grant will cover needs to improve the accessibility, livability and safety of the property.

The HomeBuilder Grant Exclusions

As briefly mentioned before, the grant is only available for building contracts, with licensed builders. The other exclusions that apply to this grant include:

• Any building or renovation work done on an investment property
• Any building or renovation work done on a home with a value of over $750,000 (land value inclusive)
• Building a Granny Flat
• Doing your own building or renovation work. All work must be done through a licensed builder
• Anyone who is not an Australian Citizen
• Building or renovating a swimming pool, tennis court, outdoor spa, sauna, shed, or garage.

Resources:

• Treasury’s Frequently Asked Questions; and
• State Revenue Victoria’s Office Guidelines.

Consider seeking a mortgage broker or financial adviser before taking your next step…

We hope you found this article informative. The team at Pursue Wealth and Pursue Property are on hand to answer any questions you have. Whether you are in the position to begin this process, or you are still unsure if it’s the right move for you, our team is always happy to have a chat!

Book in a 15-minute consultation with our dedicated team here.

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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.

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