#ASKDOM Q&A Session, Thursday 7th of May

Hi there and welcome to ASKDOM. So today’s the day where I answer your most pressing questions live. So we’ve taken all of the questions from the live streams of that daily huddles over the last week. We’re going to answer all of those live today, but just a heads up, type your questions in as we go. And I’ll answer them as we go along. Some people wait for the right time to ask the question, but just keep them coming and I’ll answer them in the order that they come. And then they get fed through to me. But it’s very interactive. I want you to partake, and this is just our Q and A session here.

So Tony has asked, will stamp duty be abolished? Depends what state we’re talking about, Tony, because stamp duty is a state tax, Whenever something of value is transferred. So they’re talking about definitely in new South Wales, getting rid of stamp duty. Whether or not that happens historically, it has been showing that whenever they abolish stamp duty or they have in the past, prices actually go up, whatever may be the cause of that. So yeah, there is definite talk of tax reform at a state and federal level post-Coronavirus. But I think where they give us one concession, they take it away elsewhere. So I wouldn’t rest on that. And tax reform will take a long time to come through.

Cornelia has asked us what are the new laws about the Commonwealth protecting accounts up to $250,000? I think that was laws that we may be thinking of that were brought in during the global financial crisis. So there was our banks, their credit rating dropped, their credit markets seized up globally in the GFC. So what happens normally is there’s just not enough money in bank accounts in Australia. So all the mums and dads and the little term deposits that we have, banks would normally take that money and lend it out.

But the demand for money and cash and borrowing in the economy is much greater than the money in the term deposit. So a lot of funds in Australia are sourced from offshore. So they borrow wholesale in the international money markets and lend it out here. And there’s an uplift. Obviously they pay low rates at a wholesale level and charge us a lot more. But what happened in the GFC was that banks stopped lending. That wholesale money wasn’t there anymore. There was a shortfall, there was a liquidity problem and credit markets just jammed up. And so that our banks didn’t collapse, Kevin Rudd, who was then prime minister stepped in and said, “No, everything’s all right. Our banks are totally solvent and the government will bail out the banks.

So anyone who had money in a bank, if the bank collapsed, the government would guarantee that money up to $250,000 per institution. And an institution wasn’t just the bank. So for example, Westpac owns St. George, any money in either Westpac or St. George account, each deposit holder would get $250,000 cumulative for both banks or any bank under the parent company. So what that means is that if you’ve got cash and you’re worried about banking collapse, take advantage of the bank guarantee, maybe split it up between different banks. That’s potentially what you may be referring to there.

Jackie said, “DOM, with all potential tenant issues right now, what is your opinion on Barclays MIS? Is it worth the outlay?” I can’t give actual financial advice. Just one of those things. Can we perhaps take that offline and I’ll have someone from our wealth management team, I’d personally take that question to them, but I can’t give speculative advice of a generic nature like that because it’ll depend on your situation, your wealth, your assets, those sorts of things. I think that right now, though, there is a lot of opportunity. So do your due diligence and it’s going to be horses for courses.

Some people will prefer something more speculative. There are a lot of people who are doing well, but will also… It’s a bit of a gamble, riding the volatility index of the stock market. So you can bet that the stock market is going to swing wildly and whether it goes up or down, it doesn’t matter. You’re betting on the change of the stock market. So, there are lots of investments now that people are considering and it just has to be right for your age and risk, appetite, your situation, all of that sort of stuff. I hate not being able to assist, but we can take it offline.

Sidath said, strategy to get the government job keeper for a company where I am the sole director. That’s still possible. So you have to register for job Caper first. So, see your accountant or see our accounting team, can help you here, but you have to first of all register and that happens via the ATO. So, that’s all that has to happen there.

Damaris, is it better to postpone buying a business at the moment or wait to see what happens in the economy? So, I wouldn’t worry too much about the economy or timing the market. Markets are so unpredictable. What I’d be doing is looking at the actual deal. We’re in a time of uncertainty and there’s pros and cons, both ways. I would say that you want to get in when a market is going from bad to less bad. They are saying that’s where we are now. There’s still uncertainties. Will there be a second wave of the virus? Will it mutate? How long will it take for us to bounce back?

So there’s still a lot of uncertainty. I would look at the cold, hard facts of a situation. I would assume the worst. Have your parameters. So best case scenario, we’re out of this in two months and it’s business as usual. I can tell you that’s not going to happen. But worst case scenario, the world goes to hell in a hand basket, the virus comes back even worse, economies destroyed we’re in lockdown for a year or more. What then? And plan for that scenario. So if you’re buying a business, for example, if the worst happened, what would I do? And what would I pay for it, if that worst would be the reality? And then weigh up the pros and cons.

Cynthia said, hi, Dominique, do you think the RBA will reduce the interest rates to zero? No, I don’t think that’s going to happen because the governor of the reserve bank, Phillip Lowe has come out and said, “No, we’re not reducing rates any further. There’s no point going to a 0%.” Maybe if things got a whole lot worse and they were out of bullets to fire and they didn’t know what else to do, we could go to zero, but I don’t think it’ll make much difference. Interest rates are so low, so cheap. They’ve just become a blunt tool for the reserve bank. There’s no point adjusting weights rates any further, because cause and effect, it just doesn’t have any reaction.

So next question is from June. $250,000 loan or overdraft over three years. So that’s for business owners, the government have said to the banks lend them money and the Australian Banking Association has said, “Yep, we’re going to be pumping money into banks.” The reserve bank has given the banks, the deposit taking institution really cheap money. So they’re able to go out and offer loans. So what has happened is the government has said, you can borrow up to $250,000. We will guarantee 50% of that so that the bank feels comfortable.

So it comes with the government guarantee and they’ll allow you to defer interest repayments for the first six months. Different banks are doing it differently. I would definitely take advantage of everything right now. So if you’re needing money or you want to have a war chest, I would definitely apply for it. Maybe structure it like an overdraft. Like you say, Jim, where you don’t actually pay, unless you need it, unless you actually take the money and it just sits there. So you’re only paying on what you use.

But definitely I’d be applying for everything that I can right now just in case. And not just because of the worst because of the opportunity. What if there’s a competitor to your business and there’s a good opportunity for you to take over or buy into that business. There’s just going to be opportunities everywhere because the shift and the change is so huge. And with change comes opportunity. Remember the Chinese have two characters for change, one denotes danger and the other opportunity. So JFK one said in times of crisis or change, be aware of the danger, but don’t miss the opportunity. So be ready and be cashed up with your war chest for the opportunities that are coming. Many of them are here now.

So next we had a question from Melinda, thanks for the update. I would love more information and data on where the distress properties are located. Also how will commercial property be impacted? So great question. So we covered distressed property yesterday, but I have had a lot of questions about distress and yes, there will be big opportunities in property to buy low. So if you’ve always said, why didn’t I get into that market when I caught off post-GFC, that opportunity is coming again and even bigger opportunity.

So I’m actually in terms of the granular sense where the properties are and that details. I’m not sure when you posted that question, Melinda, but I did do a live stream on that yesterday. So that will be on our website, dginstitute.com.edu. And if you go to our website top right, is a tab that says COVID-19. So we put all our resources, all our information recordings, online programs and courses are on that page. So if you go there, I’ve also posted the slides from yesterday and that will show you on a granular level, some postcodes and suburbs of the top areas for mortgage stress right now.

And I’m holding a live stream about that on Saturday, the 16th of May, just in the morning, where I’m going to get like Tim Lawless head of CoreLogic to come and talk about what’s happening in the market. And I’m going to share my insights as well, just on the distress property front. So I’ll put a link in the comment section for that. So you’re able to register for that? And your second question, part of your question was about commercial property. So, I think the world is going to be very different. My view, my personal view on that sector then is, and this is not financial advice either by the way, but I’m just feeling it and seeing it, people have faced the absolute worst, massive disruption. People working from home, massive barriers have been shifted at the moment and brought down.

For example, doctors have resisted technology for so long now for years, they said we could never, ever consult remotely. We can’t use video calls or anything like that. We have to see patients in person, whatever that takes. And now out of necessity, as they say, necessity is the mother of invention they’ve changed and shifted that. And commercial real estate investment trusts. So rates like big superannuation funds will invest in shopping malls and things like that, office blocks and real estate investment trusts are getting a hammering right now. Absolutely failing and burning and not giving any returns to their investors and those REITs rates hardest hit are commercial property. So it’s an indicator because they’re not getting the income from the rent. The new mandatory code for commercial tenants says that landlords have to reduce rent. So landlords are in trouble. The rates are failing and people are basically working from home and we have a broken down that barrier. People are making it work from home.

And I think now that whole paradigm is going to change of what we have to be in a big on level 30 and the CBD with a thousand people in the office. We’re going to be a whole lot more resourceful and nimble now about how we do business, because people are happy to be doing it this way and we’ve trialed it and we got by. And it wasn’t the worst thing. So we’re going to be a lot more flexible. It’s going to be really, really fluid and landlords are going to get really competitive. So I think commercial property, the yield is going to go down. Rents are going to go down. A lot of businesses are going to fail. There’s going to be a lot of broken leases, empty office space and how quickly that has changed because we were growing. We were looking for office space.

I feel personally very blessed because we would have been stuck with… We still got a lease on the current office and we were told off. The office space is so tight now in Sydney CBD that you can expand. Someone will take over your old lease because you’ve locked it in at a lower price. And the the Sydney office space is so tightly held right now that someone will easily be grateful to take over your lease. We would have been stuck with a double lease. So yeah, definitely rents have come down and there’s this already vacant space.

Kelly said with the bank bailing, will money in your mortgage offset account, be vulnerable. No, your mortgage offset account is debt. So that’s not actually your money. That’s not an asset. It’s not. If you had to fill in and a statement of financial position and your assets versus your liabilities, all that money in your offset account does is reduce the debt. So if you’ve got, let’s say a million dollar mortgage, and you’ve got $500,000 sitting in your offset account, then the debt is $500,000. But that $500,000 cash is not an asset unless you pull it out and you put it somewhere else, but then it’s balanced then by your debt is a million dollars.

ME Bank the other day, and I know we’ve got some clients in this category, but people had money in a redraw facility, which is like an offset. So they can pay down their mortgage more than they need to, but they can pull that money out again and use it. And ME Bank took money from people’s redraw facilities and pay down their mortgages without telling them without legally being entitled to and people now who had cash don’t have it anymore. So, there’s an uproar around that and we’ve got clients in that category. And it was simply the wrong thing to do and not legally entitled to do it. So, if your money in your offset account is not an asset and would not be taken in a bank bailing.

Rhonda said, “Many banks have failed in previous recessions and depressions. What are my thoughts? And should we put money under our bed or buried in the backyard?” No, our banks are actually quite liquid. So we’re lucky the GFC was a wake up call. We brought in the national credit code and our banks have actually in the scheme of things, not sailed too close to the brace. So we’ve got APRA, the Australian Prudential Regulation Authority. We’ve got ASIC, the Australian Securities and Investments Commission, and they have monitored our banks and made sure our banks have enough buffer. So that is money set aside in case there is a run on the banks or for the worst.

So banks do stress testing. They work out okay, what would happen if the housing market fell 10%? What would happen if there was 10% unemployment and the housing market and the value of the properties that were holding a security for mortgages, what if they dropped 25%? How would we cope? And they keep enough in reserve for that. What has happened recently and why you would have heard about the big fours and a bit of an uproar is that they had earmarked money to pay out dividends because they’ve made so many billions in profit, they were going to pay shareholders. They announced dividends. And then they actually said, “Oh, well, we didn’t actually expect this. So we won’t get like Westpac and we won’t give dividends.” NAB said, “Look, we’ll give them but not as much as we plan to give in the first place.” They cut it by a significant amount.

And the banks have said, “We’ve just got to keep a war chest just in case. Because we’re expecting a lot of pain. We know that there are going to be mortgagee repossessions. We know that the property market’s going to drop, we know businesses are going to fail and we need to just keep lean at the moment.” But not that they’re going to fail just that they’re not throwing money around and dividends and they’ve already revised their profits and announce their profits. And they’ve worked in worst case scenario, far lower profit with low rates and a lot of pain and economic contraction, high unemployment. They factored all that in. So, no, I don’t think you have to bury your cash in the garden. I think it’s okay.

Jim has said the credit market has diminished due to the banking Royal Commission. Let’s say we have a similar GFC situation with the current closed down. Is the government guaranteeing people’s funds savings in the bank? Rhonda is asking the same question. So that’s still in place. This is actually going to be worse than the GFC they’ve said. So they’ve actually come out and the reserve bank said on Tuesday, and the prime minister said, “This is going to be like being hit by a Mack truck.” This is the GFC was a little blip compared to this. So they’re expecting it to be long. They’re expecting it to be deep. And we’re talking a recession. And Australia hasn’t had a recession for 30 years. So, I think we should be prepared for the worst. In terms of our banks just collapsing, no, I don’t believe that will happen. But hey, I would never have expected this to happen.

But banks and publicly listed companies, their books are available, economists, I’m talking heads, reserve bank regulators like ASIC and APRA. Everybody looks at their levels of liquidity and APRA has the power to tell them, “Okay, this is what you have to do.” And they can lift requirements. They can lower lending. So they have power over them as deposit taking institutions. And yes, the government guarantees up to $250,000.

Simon has asked, I have two investment loans with a principal place of residence loan with the same financial institution, securities are standalone. So they are not cross-collateralized, Simon saying. Will my home be at risk under the all monies clause? Yes, it will. So the all monies clause, they get you two ways. First way they get you is your broker, your mortgage broker or lender would have said, “Oh no, they’re separate.” So cross-collateralized means both securities are considered together by the bank. So you combine two houses and they cost half a million dollars each.

The bank would lend you a million dollars, but they’ll take security over both properties together, sort of in a bundle, if you like. So if property prices fall say 20%, so you’ve got a million dollars worth of property. And suddenly the bank have linked you a million dollars. And suddenly property prices have fallen and those $2 million, well, $500,000 each properties and now worth 400,000 each. And you decide, look, I want to hedge my bets. I’ll just sell one of them for 400,000. The bank can say to you, when you go to sell it, “Okay, we want that full $400,000 to stay as security, gets the other house, or we’ll only release a hundred thousand of that to you, in case the market falls further.” So they have control over everything. Now the all monies clause says that if you own the money, they can take security over any property that you have.

Doesn’t matter whether in the loan agreement, they were bundled up together. If you sell one, the all monies clause says, well, they get their money back. So there’s a shortfall. They can take it from any other security they have with you. So it’s a way of getting round. They all money close gets round the lack of cross collateralization. So the bank will always win.

So Colin said, “Hi DOM, if I have money sitting in my mortgage redraw facility, is it safe? I don’t know if you’re with ME Bank. But can a bank change my facility and should I transfer it into asset protection account? It swings and roundabouts with that because from a commercial point of view, and this isn’t financial advice or any sort of advice, just putting it on entrepreneurs head on. Your money in an offset account, obviously reduces the amount of interest you pay.

So if you owe a million dollars example, we gave before there’s 500,000 in your offset account, you’re only paying interest on $500,000. So if you take that money and put it somewhere else, you’re going to be paying interest on the full million dollars. So if it’s just an issue of being protected, then it’s going to cost you for interest. If you take that money out, though, it definitely means that no one can get it. So whilst it’s sitting in the offset account, yes, they can take it. And that’s what ME Bank did last week. So they took money out of people’s offset account and just said, “Okay, your mortgage is now 500,000. We’ve paid it down.” Or, if they had a $500,000 mortgage and $500,000 in their offset account, they just took that money closed out the mortgage altogether. And the person went to borrow and it’s the money’s not there anymore.

So that’s a longer legal argument for those borrowers, but yes, it would if it’s in a bank account controlled by the bank. I figured it’s the golden rule. Golden rule is he who holds the gold, makes the rules. It’s sitting in a bank account, they’ve got you on a loan agreement and whether or not it’s fair. And whether there’s credit code laws around it, they’ve just taken the money. And by the time they take it, it’s too late. So if you’re needing that money or you’re wanting that redraw money, and you’re worried that then yeah, it may have to be a balancing act.

That’s it for the questions then you guys have got it nailed and sorted. Any more questions, just keep writing them in, write them in our live streams and then I’ll swoop back. But if I break out for Q and A in live streams, we lose our momentum. So, just type your questions as you go with sweep them up once a week and we’ll answer them live at Thursday session at one o’clock and I will see you at four o’clock for our daily huddle and our catch up there. So stay tuned. Thanks for being interactive. Love the live banter and we’ll talk at 4:02.

  • DGI Lawyers
  • DGI Accounting
  • DGI Finance
  • DGI Wealth
  • DGI Asset
  • DGI Debt

Get In Touch

DG Institute

Level 22, 31 Market St, Sydney NSW 2000

PO Box Q1868 QVB NSW 1230

P: 1300 658 653