In this issue ...

A quality education is a lifelong resource and a powerful launching pad for young Australians. But with education costs rising at more than twice the rate of inflation, it’s more important than ever to plan ahead for the investment you’re making in your child.ⁱ 

Grandparents may also like to help their family by investing money for the future school and university costs of their grandchildren. This is becoming increasingly common with 29 per cent of grandparents wanting to draw down on their super to pay school fees.ⁱⁱThis can be done in the grandparent’s name or the child’s name, depending on your individual circumstances. 

The actual cost of your child’s (or grandchild’s) education will depend largely on whether they are enrolled in a public, systemic (e.g. Catholic) or independent private school.ⁱⁱⁱ 

The ASG survey found that the cost of private education in metropolitan areas – from preschool to year 12 – ranged between $360,000 and $550,000. Private schools in regional areas are slightly more affordable. 

In contrast, Melbourne public schools, even at 12 percent above the national metropolitan average, will still only set you back $75,000. Regional areas, again, cost less on average at $50,000. These estimates include the ‘voluntary contributions’ in lieu of fees that most public schools ask for. 

Systemic schools, such as religious and other alternative institutions, sit between the two extremes. Here the national metropolitan average is an estimated $230,000 and $172,000 for regional areas. 

Of course, fees aren’t the only cost you need to budget for. There are the traditional outgoings of uniforms, books and extracurricular activities. It’s also becoming increasingly common for schools to require students to purchase laptop or tablet computers. 

ASG estimated that in 2016 families were spending an average of $1000-$3000 on these ‘extras’ per child every year. It was also found that these costs increased as the student aged, whether they were private, systemically or publicly schooled. 

And let’s not forget the cost of higher education. An undergraduate degree currently costs between $6000 and $10000 each academic year, depending on the course chosen.^iv Most students choose to defer payment via a HECS-HELP loan, but many families would like to help their children or grandchildren pay some or all their fees upfront to avoid a large student debt. 

Where students live away from home, parents may also need to factor in the cost of student accommodation and other living expenses. 

Explore your savings options
Like any major investment, the sooner you start saving the more options you will have. You could open a dedicated savings account, but the interest rate is unlikely to keep pace with inflation. Here are some popular strategies for long-term education savings:

• Education Funds. These are specifically designed to lock money away for your child’s education. They offer some attractive tax concessions, but there are restrictions and fees to consider. 
• Term deposits. Are simple and virtually risk free, but interest rates may not keep pace with inflation. 
• Managed Funds. You don’t need much money to get started, you can make regular contributions and you get the benefits of diversification and professional management. 
• Insurance Bonds. Like a managed fund, these offer a diversified investment menu but with additional tax advantages. Earnings are taxed inside the bond at the company rate, which may be less than your marginal rate. If you withdraw your money after 10 years, all investment earnings are tax free.^v

Investing in a child’s education is a long-term commitment, but the satisfaction that comes from knowing you have given them the best possible start in life is priceless. Call us if you would like to discuss an education savings strategy for your child or grandchild. 

i Trading economics, http://www.tradingeconomics.com/australia/inflation-cpi 
ii http://www.smh.com.au/national/education/grandparents-stumping-up-for-private-school-fees-20160225-gn3hst.html 
iii https://www.asg.com.au/doc/default-source/Media-Releases/Planning-for-Education-Index-2016/ASG_EdCosts_SchoolCosts_2016_NAT_Metro.pdf 
iv http://www.gooduniversitiesguide.com.au/Support-Centre/Funding-your-education/Degree-costs-and-loans/Commonwealth-Supported-Places#.WCtxAOErKRs%20 
v https://www.moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds

 

Glenn Ingram, Principal and Chartered Accountant

With interest rates on the rise, now is the time to look at ways to fast track your mortgage. After all, the sooner you pay off your mortgage, the less you will pay in interest. 

That’s probably why nine out of ten Australian mortgage holders told a recent finder.com.au survey that they try to pay back their mortgage ahead of time.ⁱ 

So what are the ways you can fast track your mortgage and minimise your interest payments? 

Increase your repayments
The most popular strategy is to make extra payments. Rather than paying your designated monthly repayment, why not pay more? Not only does this reduce your interest charges but if rates should rise you will be able to absorb the increase. 

You can also make extra payments if you get a windfall or a bonus at work. But if you have chosen a fixed home loan, you may find you can’t make extra payments, so check with your lender. 

More frequent payments are also a good strategy. Instead of paying your mortgage off monthly, pay half the monthly amount each fortnight. After all, there are only 12 months in a year, but 26 fortnights, so you effectively end up paying an extra month each year. 

Most home loans are structured so you pay mostly interest in the first five to eight years without making any inroads into the principal. If you can manage to pay some principal off too during that period, then you can cut the interest you’ll pay on an average 25-year loan. 

Consider an offset account
An offset account can also prove useful. With your salary going into your mortgage account, the principal will drop and that means you will pay less interest. For instance, if you had a 100 per cent offset account with $30,000, on a home loan of $400,000, you would see interest only calculated on a balance of $370,000 instead of $400,000. 

If you’re looking at a honeymoon rate on a new home loan, do your homework and make sure that the rate you pay at the end of the honeymoon period is not substantially higher. If that is the case, it could eliminate any gains you may have made in that first year of lower rates. But be aware that switching to a cheaper loan might incur a high exit fee. 

It’s always a good idea to review your home loan annually to make sure it’s still working for you. For instance, do you really need all the bells and whistles that are on offer? Often, you’ll be paying for these extras through higher interest rates. 

Negotiate a better deal
If you are unhappy with your current rates, then talk with your existing lender to see if you can negotiate a better deal. But make sure you do your homework first and check out what other lenders are offering so that you are in a better negotiating position with your current lender. Most lenders would rather hold on to existing clients than lose them to a competitor. 

When negotiating your home loan, you might be able to access a package from the lender giving you some beneficial extras such as discounted home insurance, fee-free credit cards or fee-free transaction accounts. Or you might be able to waive the fees associated with the loan. 

When you initially take out a loan, consider making your payment before the due date. That way you are always ahead of the game. 

With interest rates expected to rise in 2017, this may be a good time to consider fixing part of your loan to cushion yourself against future rises. 

If you want to make sure that you are doing all you can to minimise interest payments on your loan and fast-track your mortgage, call us to discuss the financial strategies that might work best for you. 

i ‘Aussies go above and beyond to pay down home loan sooner’, Nov 2016, finder.com.au

Ian Mein, Director and Certified Financial Planner

Macro-Economic Snapshot

Inflation
The annual rate of inflation across developed economies rose for the sixth straight month in December to reach its highest level in over two years. The pickup in inflation is largely attributable to a rise in energy costs, and with further hikes in energy costs yet to hit consumers, the pickup in inflation is set to continue over coming months. Over time, higher energy costs will also have a flow-on effect causing price increases in other goods and services.

After years of fighting against deflation, the pickup will be welcome news for central bankers in developed economies, whose primary goal is an inflation rate of around 2%. Higher inflation will also be good news for savers and investors. For savers, it should lead to higher interest rates and for investors, higher inflation should improve the growth rate of business profits and therefore should support higher share prices.

Higher inflation expectations have caused a spike in long-term government bond yields with the yield on the 10-year US government bond rising about 1% over the last six months, and those in Australia, the UK and Canada rising about 0.8%.

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Fred Strauss CA CFA Director, Waterways Capital Pty Ltd

If you would like to get more of Fred's insights, contact our financial advisors on 03 5144 5207 or fp@phillipsons.com.au

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