Your Financial Questions, Answered: May '19

General

May was a big month for change in Australia, with the result of the 2019 Federal Election surprising many.

As a result, there have been a number of recent announcement and developments that may impact on your financial world – or that of someone you know.

As your expert financial partners, we thought we’d break down two of these developments in order to help you better understand what they may mean for your financial world.

This Q&A covers the following topics:

Liberal’s plan to lower the percentage needed for a home loan deposit
Low wage growth and underemployment in Australia

Liberal’s Plan to Lower The Home Loan Deposit Percentage

On Mother’s Day 2019, the Coalition announced their proposal to lower the required percentage needed for a loan deposit from around 20% to 5% if they win the next election. They plan on doing this by covering the lender’s mortgage insurance, otherwise known as LMI, of home buyers with an income of up to $125,000 for an individual or $200,000 for a couple. At the moment, if a potential home owner isn’t able to save enough for the industry-standard 20% home loan deposit, the banks require them to take out mortgage insurance in case they aren’t able to keep up on their mortgage payments.

If either the Liberal party or the Labor Party – who have announced that they’ll match Liberal’s promise – win the next election, those with the prerequisite amount of income and a 5% home loan deposit will have their lender’s mortgage insurance paid for by the government. Scott Morrison said that the idea behind the scheme was to help provide support for young Australians to break into the property market, where before they had been boxed out by wealthy property investors.

Your Mortgage Insurance Questions Answered

Q - I’ve already saved up a 20% deposit and want to buy my first home. Should I still use the entire sum for my deposit?

For us, a home loan deposit is more than just a lump sum needed to get the banks to sit down with you. It actually has a dual purpose: the first being to show that you’re able to save a significant amount of money over the longer term, proving that you’re capable of keeping up with your mortgage repayments. The second is that by investing a 20% deposit you’ll automatically own 20% of your home, which means less money borrowed and less interest paid over the long term.

The Liberal party’s plan is also very new and should be taken with a grain of salt as it’s only a proposal at this stage. The Real Estate Institute of New South Wales has also expressed concerns over how new home owners with a 5% deposit may be treated by the banks in comparison to those with a 20% deposit. There is the chance that those with a 5% deposit may have a different risk profile assigned to them by the banks, which may result in a more expensive interest rate. Considering these factors, we believe that for the average first home buyer, if you’ve managed to save a 20% deposit on a home loan it’s still a smart decision to invest this amount into your future home.
Q - I’m struggling to save for a house deposit while paying rent. Is this plan beneficial to me?

The idea behind the Liberal party’s plan was to help those just like you find a realistic way to break into the property market. The Coalition believes that many everyday families are capable of paying off a mortgage but struggle to save up the significant amount needed for a 20% deposit while paying rent.

However, if this plan is made into law and you’re able to apply for a loan, that doesn’t necessarily mean that you should. It’s important to first speak to your advisor to determine whether buying a home is the right move for your particular financial circumstances. And if you’re struggling to save, your financial advisor can help you reassess your financial situation and design a way to save for your deposit as well as pay off a mortgage.

Low Wage Growth and Underemployment in Australia

If you’ve been paying attention to the media coverage of the May 18 Federal Election, you may have noticed that wage growth and underemployment in Australia has been a major platform for the Labor party. In fact, in the first leaders’ debate, Opposition Leader Bill Shorten claimed that there were a million Australians who were underemployed and a million working two jobs. Underemployment is a particularly topical issue in Australia, with the Australian Bureau of Statistics defining it as those who want and are available to take on more hours of work than they currently have but aren’t being given the opportunity to at their current position.

Underemployment and low wage growth have often been linked as a result of businesses’ seeking to lower labour costs. It’s no secret that wage growth in Australia has been worryingly slow in the last 5 years, reaching lows not seen since World War II on some scales (though, it’s important to note, not all). But while Australia has experienced low wage growth in the last 5 years and a million Australians are underemployed, this isn’t a particularly new occurrence. In fact, according to data from the Australian Bureau of Statistics, the number of workers holding multiple jobs has remained steady over a number of years and underemployment has fallen in recent months.

Your Wage Growth Questions Answered

Q - Is low wage growth a sign that Australia’s economy is weakening?

While in the past 5 years low wage growth has been something of a concern, a recent slight increase in wage growth has indicated that this aspect of the economy is on the rise. Boosted by an increase in the national minimum wage and new bargaining agreements designed to increase job numbers, we think it is fair to say that the recent growth in wages could be a sign that Australia is heading in the right direction.
Q - Is Bill Shorten’s claim that 1 million Australians are underemployed true?

Technically, yes. According to the Australian Bureau of Statistics, as of March 2019 there were 1,089,300 underemployed people in Australia. Overall underemployed workers represent 8.2% of the workforce. Underemployed workers are also the most likely to be working a second or third job, according to data from the HILDA Survey.

But while this might sound concerning, in truth this number is to be expected as Australia’s labor force grows in size. Professor Mark Wooden – of the University of Melbourne – put it best in an interview with the ABC, stating: “One day the number will be past 2 million, one day it will be past 5 million or 10 million. If the labour force keeps growing, all the numbers will go up.”

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