Personal Finance

Personal Finance

Newcastle Herald
25 October 2007
Noel Whittaker

Q I have a mortgage of $100,000 on my home which is valued at about $350,000. Two years ago, I took an additional loan of $70,000 against the equity built up on the home. I used this loan to purchase a diversified portfolio of shares which have performed extremely well since 2005. However, now with the sharemarket going down and the interest rates going up, should I sell the shares or continue investing for the long term as originally intended? The investment loan repayments are interest-only and the rate is fixed until 2010. I am 44, contributing $500 a month to super in addition to employer contributions of some $600 per month total super fund is about $55,000. I have a dependent child of seven years. Am I taking too much risk by borrowing against my only asset the family home?

A You have a relatively low total loan against your home and should not fear being over-committed as long as you believe your income is secure. Remember, you should never invest in shares unless you have a seven to 10-year time frame in mind, so I suggest you stay in there and ride out the inevitable low points. You could consider using the distributions and dividends from the shares to reduce your non-deductible housing loan and at the same time, increase your investment borrowings by the amount that you pay back off the housing loan. This will gradually turn your non-deductible debt to deductible debt.

Q I am due to receive a large tax return at the end of this year. I am interested in buying my first home but already have about $15,000 worth of debt. Should I pay off this debt with my tax refund, or use it as a house deposit and roll any existing debts into a mortgage?

A I suggest you talk to a lender before you think about buying a property as you would be hard-pressed to qualify for a loan on the information you have given. Your immediate aim should be to build up your net worth and then talk to a lender when you have sufficient deposit for a home, and your income is such that you can afford the repayments on any mortgage you take out.

Q In general, a strong Australian dollar means we can buy more foreign goods. Does this rule apply to international shares in managed funds? What are the implications of the exchange rate on a managed fund's unit prices?

A A strong Aussie dollar means that a weaker currency, like the US dollar at the moment, will be cheaper in our terms. Therefore, the same amount of Aussie dollars will buy a larger portfolio provided that portfolio is expressed in the weaker foreign currency. If that currency starts to strengthen against the Aussie dollar, your investment in the overseas fund will gain value so you will have a double win.

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