Author: Noah

Paying off your mortgage is getting more expensive, with Westpac becoming the latest of 17 banks to hike their fixed rates this year.

Westpac, including subsidiaries St George, Bank of Melbourne and BankSA, raised interest rates for owner-occupiers and investors by up to 0.2 percentage points on Friday.

The changes will add hundreds of dollars ever year to the average borrower’s repayments – and RateCity research director Sally Tindall said Westpac won’t be the last of the big four banks to hike rates in 2022.

“We expect other banks to follow within days on the back of sharp increases to the cost of wholesale funding,” Ms Tindall said.

“Mortgage holders who were fortunate enough to lock in a record-low fixed rate over the last couple of years are immune to these hikes, but only for the duration of their fixed-rate term.

“Anyone who fixed at the start of the pandemic for two years should start thinking about what their next step might be. When they come off their fixed rate, they’ll be looking at a very different market.”

Ms Tindall said it made sense to prepare for future interest hikes by getting ahead of repayments now.

“The lower your loan size when rates do rise, the less pain you’ll feel,” she said.

Although Australians can expect further rate hikes this year, economists are divided on the reasons why.

Why are banks hiking rates?

Independent economist Saul Eslake said banks were hiking fixed-mortgage rates because the bond yields associated with their funding costs are rising.

These yields are rising largely in response to expectations that the US Federal Reserve will lift interest rates after the country’s inflation reached a 40-year high in December.

Mr Eslake said economists, banks, and investors in Australia also think the Reserve Bank of Australia (RBA) will be influenced by the US Federal Reserve and hike interest rates as well – which would lead to higher variable rates.

Although Mr Eslake believes the RBA will chart its own course, he said it’s understandable that banks are passing on increases in fixed-term funding costs to customers in the same way that petrol stations pass on higher crude oil prices to motorists.

But he said whether the banks should pass on the costs to borrowers was a “commercial decision” for the banks’ management – one that would need to weigh up the competing interests of its customers, its stakeholders, and the effects on public opinion.

Commonwealth Bank head of fixed income and foreign exchange strategy Martin Whetton said banks were also hiking rates because the RBA ended a pandemic funding facility in 2021 that gave them access to cheap money.

But he said he didn’t think the actions of the US Federal Reserve were affecting either the RBA or banks’ rates decisions.

And although higher repayments may be bad news for borrowers, he said rising interest rates were a sign of a strong economy.

“Historically, when the economy is strong, interest rates go up,” Mr Whetton said.

“The way of slowing down demand is to lift interest rates.”

If you’ve just started your first job there’s something you need to know about your super that could earn you hundreds of thousands of dollars.

Workers may not realise it, but unless you’ve chosen otherwise, you are now being stapled to your boss’s default super fund under laws passed last year.

In most cases, that means you’ve been put into a balanced fund with an allocation towards growth assets (such as shares and property) of between 60 to 80 per cent.

The problem: That might not be the best option for younger people.

Mano Mohankumar, chief researcher at Chant West, said young workers may benefit more from a more aggressive growth option than the default.

“There is a really long time horizon for someone who is joining the workforce at 21 and they’re going to be working for 40 years in most cases,” he said.

“They can be less concerned about living through periods where there is sharemarket weakness.”

Higher growth super options

The difference between a high-growth and balanced super strategy can be worth hundreds of thousands of dollars by the time you retire.

With that in mind, it’s worth considering whether you could benefit from a more aggressive investment position.

To find out, look at fund performance over time.

For example, high-growth options with between 81 and 95 per cent of funds in growth assets have delivered significantly higher returns over the past 20 years.

The percentage differences in the below table demonstrate this.

In 2021, high-growth funds performed 26.1 per cent better than the balanced option, and over five years the difference was 17.6 per cent.

That means that every year over five years you would have made 17.6 per cent more if you were in the high-growth fund.

That is a huge figure when you consider that “there is a compounding effect at work meaning your money is earning a return on a larger balance each year”, Mr Mohankumar said.

Even over the longer term, the out-performance in high-growth was 6 or 7 per cent, Chant West found.

Figures like that make, “a massive difference over 30 or 40 years of your working career”, said Antoinette Mullins, principal of Steps Financial.

“Just as the level of fees make a big difference over time so does an extra one or two percentage points in your return,” she said.

High returns are abnormal

Beware though: Although those high returns are great, many people have been lulled into thinking they are normal because over the past decade sharemarkets have been so high.

If you go back to 2015, many member accounts were still recovering from the dramatic losses felt during the GFC (global financial crisis).

A look at the table above shows just how dramatic those falls were.

Between October 2007 and February 2009, balanced funds fell 26 per cent and high-growth options lost a dramatic 33 per cent.

“If you have a high-growth portfolio and it does really poorly because there are multiple bad years then you will feel that,” Ms Mullins said.

There are some steps you need to take to determine whether high growth is really the option for you.

“You really need to compare whatever your employer option is with what the market can offer,” Ms Mullins said.

That means doing some research into what other funds are available and what their returns have been.

Finding something that has performed well is not the be all and end all of investment choice, as your decision “has to pass the sleep test,” Ms Mullins said.

You should review what fund you are interested in actually invests in and get a sense of whether you are comfortable with it.

That’s not necessarily a complex process, as funds will have details of their investments on their websites, but it means doing a bit of work and “not settling for an easy option,” Ms Mullins said.

Although the declines of the GFC are frightening, Mr Mohankumar said super funds have learned from that experience and redesigned investments to make them less vulnerable to a sharemarket crash.“Portfolios are better diversified today than they were going into the GFC, absolutely,” Mr Mohankumar said.

That diversification has come through reducing overall exposure to listed investments like shares, bonds and listed property and infrastructure.

To make up the difference, funds have put more money into unlisted assets and alternatives like hedge funds and private equity.

Although those things aren’t unaffected by market crashes and weak economies, they do give funds exposure to an asset class that is separate from the sharemarket.

This means they are more likely to hold value in a weak market. The overall sum of the post-GFC super changes is listed above.

The most significant change has been in shares, particularly Australian shares, which now account for 24.7 per cent of a balanced portfolio compared to 32.2 per cent before the GFC.

But investing isn’t a set-and-forget game and you need to review your decisions “every two or three years”, Ms Mullins said.

“Big life events like getting married or having kids can really change your risk profile and the way you view money,” she said.

That means if you have chosen a high-growth option when you are young and single, it won’t necessarily feel right when things change.

“When I had kids it was a completely different phase of life,” Ms Mullins said.

“Suddenly I didn’t want to take on so much risk so I scaled it back.”

The New Daily is owned by Industry Super Holdings

Sure, $17.6 million is peanuts in the general scheme of the Morrison government’s multibillion-dollar grants corruption, but given the historical significance of a bowling club stunt lighting the fuse for blowing up the Coalition’s industrial-scale rorting, let’s go bowling.

(Of course there’s bias in lawn bowls, but having avoided most golfing terms in our examination of the astonishing level of grant corruption in that sport, I’ll resist mentioning jack/kitty, ditch, rink etc.)

The good news is that the government allocation of your money to bowling clubs over the past four years has not been as outrageously, unbelievably lopsided as its golf club politicking.

In bowls, the government money has only favoured Coalition seats over Labor by about two to one.

Or, if the raw numbers are “seasonally adjusted” for the usual oddities we’ve come to expect in grant skewing, it’s more like three to one.

By comparison, the ratio of government to Labor seats in the House of Representatives is 76 to 68 – 53 per cent to 47 per cent, ignoring the minorities. That’s not a great deal, just three percentage points away from 50-50.

Readers should know the form by now.

For 20 months, The New Daily has been collaborating with spreadsheet sleuth Vince O’Grady and his IT support in harvesting grant data from government websites, from the $4 billion Community Development Grants scandal down to, well, bowls.

Trawling the grants hub found 684 gifts to bowls clubs totalling $17.6 million over the past four year via various grants schemes, rorts and wheezes.

And that’s without including Georgina Downer’s infamous $127,373 Liberal Party novelty cheque for the Yankalilla Bowling Club during the 2019 election campaign. The sitting member, Rebekha Sharkie, Centre Alliance, did not get a look in – but Ms Downer still failed to win her father’s former seat anyway.

That cheque was part of the $100 million #sportsrorts disgrace which, being funnelled through an acquiescent “independent” Sports Australia, doesn’t show up in the grants hub.

The neat thing about the bowling club grants is that most are quite small, barely worth the administrative time required to grant them – but they still give the local member the chance to be seen to be supporting the older crowd that are bowls clubs’ members and who vote – and older folk skew conservative.

Larger grants of six figures or close to it are rare – and stand out even more when they go to an apparent Labor electorate.

As usual, the grants to Labor seats are inflated if only judged by the postcodes of the recipients.

For example, the second-biggest bowls club gift last year, $165,000,  seemed to be to Ged Kearney’s Labor electorate of Cooper – but it was for the sport’s top body, Bowls Australia Ltd, which happens to have its office in Cooper and has a much broader ability to appeal to government members.

More obviously intriguing from the viewpoint of politically targeted use of taxpayers’ money is all the cash rolled into the bowls clubs lucky enough to be in the electorate of Corangamite – $612,833 in grants for eight clubs.

Corangamite shows up as a Labor seat, but it was only won in 2019 when the electorate said no to the Liberals’ Sarah Henderson, subsequently rewarded by being plopped into the Senate.

Those various grants were in the works before, during and after the election – it seems the Liberal Party was working hard to try to keep Corangamite and hasn’t given up on winning it back.

$93,899.30 was approved for an upgrade of the Lorne Bowls Club in March 2019.

The Torquay BC won $451,000 in December 2019. Drysdale, Apollo Bay, Inverleigh, Bannockburn, Belmont and Herne Hill all received a serving from the barrel to make up the rest.

It seems bowlers are mighty thick on the ground down Corangamite way – or they’re judged to be worth duchessing in a marginal seat.

Particularly fat grants stand out among the bowls clubs, more so if the postcode indicates a Labor seat. Thus the need to look closer at the  $649,000 to provide shade for the Aspley Memorial BC in Brisbane.

The postcode indicates the Labor seat of Lilley, but it’s actually just over the border in the LNP’s Petrie.

And the biggest bowls-related grant of all during the four years examined was $4.7 million approved in December 2018 for the Devonport Country Club.

It happens to be in the Tasmanian seat of Braddon, an electorate showered with federal money that paid off for the Liberal Party when it took the seat from Labor in 2018.

The biggest mystery for me among all the bowls grants though is the $2.4 million approved for the Thornie BC in 2018 “to provide a function venue and facilities”.

The club is in Perth’s safe Labor seat of Burt – that doesn’t make sense.

The best explanation I can imagine is that it is situated very close to the border with Liberal Andrew Hastie’s Canning.

Indeed, Burt is mostly surrounded by Liberal seats but it still doesn’t quite make sense. Or maybe, to use Scott Morrison’s stated reasoning for such things, maybe Matt Keogh is “a very good member”.

Or maybe, just maybe, there was a balancing of the ledger.

Burt stood out in the Morrison/McKenzie #sportsrorts for being the only electorate not to receive a single cent – and that despite a City of Gosnells application scoring 83 points on the Sport Australia assessment, a score that without political interference would have landed the money.

That’s the fascinating thing about analysing the grants corruption, the way different grants schemes can be used for political advantage.

La Trobe’s Liberal MP Jason Wood won a mention in our golf club story for the $429,000 he was credited for delivering to the Berwick Montuna club, but he’s far from a single-sport MP. His electorate’s Pakenham BC scored $550,000, but that’s far from all.

There’s no better example than Mr Wood’s website of how taxpayers’ money can be used to pitch political advantage through numerous grants to various groups in an electorate – right up to and including a share of #carporks.

Never mind the school funding, “community facilities”, road upgrades and hospital funding that Mr Wood gives the impression of claiming credit for, there are 28 sports clubs copping $16.6 million in La Trobe – and he doesn’t seem to have included the Pakenham BC’s half million yet.

It looks good for the local member, but with grants skewed so heavily with a political bias, it’s hard to see how it is the best outcome for the Commonwealth.