Credit Scores, The First Home Loan Deposit Scheme and a Savvy Student Investor.

WeMoney
Dan & Blaize take a look at changes to the Australian credit score system, the First Home Loan Deposit Scheme and talk saving & investing with Royce, a 21 year old student Investor.

The following is a transcript taken from episode 3 of the We Talk Cents podcast. If you’d prefer to listen to this episode, you may tune in here.

SPEAKERS

Dan Jovevski, Royce Mathew, Blaize Pengilly

Blaize Pengilly  00:09

Personal finance, budgeting cash flow, and investing don't have to be scary words. The Money Bites podcast is here to help you learn more and take control of your personal finances. The Money Bites podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation, you should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor.

Dan Jovevski  00:43

For more information, please check it out wemoney.com.au slash disclaimer.

Blaize Pengilly  00:54

Hello, you're tuned into Money Bites, a podcast presented by way money. I'm your host Blaize your resident spendaholic,

Dan Jovevski  01:01

and I'm Dan, your resident finance expert.

Blaize Pengilly  01:03

This week on money bites, we are talking about credit scores and the changes to the way they work in Australia.

Dan Jovevski  01:08

You will get tonight Royce, a 21 year old uni student he's got his head screwed on in regards to responses.

Blaize Pengilly  01:14

And we'll take a look at what's happening right now. If you're a first time buyer, is it a good time to buy? Why Why not? So should we get into it?

Dan Jovevski  01:22

Let's do it Blaize.

Blaize Pengilly  01:28

All right, Dan, time to talk credit scores.

Dan Jovevski  01:32

Hit me Blaize.

Blaize Pengilly  01:34

Okay, Dan, I'm gonna be completely honest. credit scores, you know, you know, I haven't had a credit card. I haven't had a loan. I don't know much about credit scores, except that it's something important, and I don't know much about it. So what is it?

Dan Jovevski  01:48

Blaize, it's a great question. And you know what, you're not alone, there is roughly around seven out of 10 Australians that don't really understand what a credit score is and what that number means. And hopefully today what we can do is demystify what the number is and more importantly, what it means to you. So to kick things off, you know, what is a credit score, you know, you often hear about, you know, a number being thrown out, like 500, or 600, more of the school name, let's firstly start opening up by saying what a credit score is, is the odds that you will end up in a situation where you default on a credit product in the next 12 months. So for example, if your credit score is say, 500 out of 1000, then you've got one in 500 chance of potentially defaulting on a credit product. Now, what this means more sort of practically is that if your credit score is a number from zero to say, 1000, then the higher the score, the better and a lower chance the banks think, or other financial institutions and your chances of defaulting. So really, that is the credit score number in a nutshell. Now, there's plenty of different other factors that go to contribute to what a credit score means. And so what are those? Well, firstly, and foremost, your credit score is made up of a few pieces of information. Number one, it's all the credit inquiries that you make to say credit cards or credit providers. And the trick is here is that the more credit cards you have, the more likely your score is actually to be long.

Blaize Pengilly  03:12

So even if you're just inquiring, so say I needed say I wanted to get a loan, a personal loan, and I went to four different banks and inquired, but only took out one loan, the four inquiries alone would impact my score, is that what you're saying?

Dan Jovevski  03:25

Absolutely Blaize. And so what becomes really important when when you're going through that process of credit selection, is trying to minimise the amount of requires that you make so having the best chances or you finding out doing all your research before you apply is critically important rather than willy nilly going applied to say for credit card websites, at some late nights that have been done when you're really sort of rushing out to make an application and actually really harm your credit file and decrease that school.

Blaize Pengilly  03:53

Alright, so in relation to credit cards and loans and everything, I understand that, but what about if I miss payments on my bill or my phone or my, if I want to sign up for a postpaid phone? Did those payments affect my credit score as well? Or is that something entirely different? No,

Dan Jovevski  04:08

That's right. There's key different providers that reporting a credit. So you've just raised two of them. There's telecommunications, utilities, and also lending products. rasam other classes there as well around leases, but the main three, telecommunications you know getting that postpaid phone, connecting house electricity and gas wire utility provider, and also applying for credit providers that check your credit file before you take out a loan, for example.

Blaize Pengilly  04:32

So if I had a postpaid phone, and I missed a couple of payments or defaulted on a couple of payments, we you know, when I'm 19 when I'm 30 and wanting to buy a house, would that be impacting my credit score? And what do you think that would impact the kind of loan that I would get?

Dan Jovevski  04:49

Absolutely Blaize. So thinking about credit scores is that any type of credit event last year your credit file for a period of up to five years, so say for example, you went down to Telstra or Optus and made inquiry to get a postpaid phone, that particular inquiry would stay on your credit file for five years after your fifth anniversary, that credit file would change, and that inquiry will disappear. So you've got a five year rolling history of all your credit information appearing on your credit file.

Blaize Pengilly  05:16

So after five years, I can bring out the streamers pop the champagne, have a little party and celebrate because I'll have a cleaner credit score.

Dan Jovevski  05:23

Absolutely. That's that's definitely right. I think your question earlier around what happens if you don't make repayments on top of products. So focusing on maybe credit products, one really big change that's happened in the credit score industry in 2018, was there was an amendment to the Privacy Act that now allows banks and financial institutions to start reporting on every single time that you make a payment, your credit products. So prior to 2018, the banks and financial institutions could only know who you inquired with and whether or not you had a default. But what I can see now is every single month you make your payment on say, your credit card or your personal loan that gets reported to the credit bureaus. So it's becoming increasingly important to make those on time repayments to ensure that you've got an increased credit score over time.

Blaize Pengilly  06:10

Yeah, well, so there's a scale let me I'm trying to understand so zero, terrible, terrible credit score 1000 the best credit score? What were the most Ozzy's See? And where is good on the scale? Like, is 250 really awful? Is 800 really good? Wait, can you talk me through I guess the stages of the scale,

Dan Jovevski  06:31

Absolutely. Most average Australian credit scores around the 600 to 700 mark. And that sort of sits within the middle of the of the bell curve. If you have a really bad credit score, it probably is a number less than 500. And this would mean that there is some type of history on your credit file like a missed repayment, or a default, there wouldn't be the numbers probably lower than 500. Really great credit scores are probably numbers in excess of 800. And so if you're at 100, at the moment, that's absolutely great. And you should do everything that you can to maintain that that credit score.

Blaize Pengilly  07:02

So what can you do to make your credit score better? Obviously, not missing payments, but is there any anything else that you can do to improve it or to make sure that it, I guess increases over time?

Dan Jovevski  07:16

Absolutely. So there's a few things that you can do. One of the more important factors, and that's probably unknown about credit scores, is that your credit score naturally goes up over time. So the best piece of advice is to have more birthdays, because the more time you have an active credit file, the more likely that the banks will have more information about how you performed over time, and therefore your score should technically increase to a point million, you know, making or reducing the amount of credit inquiries that you have, and also reducing the type of credit inquiries that you make. So one of the more sort of unknown things about credit files is that each and every single inquiry is treated very differently. And it's personalised to you. So for example, if you're taking, say, a home loan or a car loan, most banks and credit bureaus would see this as a positive sign indicator that you're looking to advance yourself in, say homeownership or in asset ownership in terms of buying a car, but may look at your credit file differently, if you say make an inquiry with payday lenders, that may significantly decrease your credit file, because that's only as a sign of distress.

Blaize Pengilly  08:19

Now, okay, so you talk to mortgages, but what happens is, is there a hard and fast rule about how your credit score is affected if you refinance your mortgage?

Dan Jovevski  08:29

It all depends on your own individual credit file. But more often than not, it probably doesn't have a bigger impact, because once indicating is that you're making a really positive, you know, inquiry for things like an asset. And there may be circumstances where that goes down. But I think more often than not, for a lot of people it's seen as a positive sign that, you know, saving money or refinancing your loans to get a better deal can put you in a better financial position. And that can really do wonders for your credit file over time as you can pay down your debt faster.

Blaize Pengilly  09:00

Yeah, great. And if I wanted to find out my credit score, how would I do it?

Dan Jovevski  09:04

There was plenty of free ways you can get access to your credit information these days loans, if you want to check. There's actually three different credit bureau providers in Australia. So the biggest one is Equifax formerly known as VEDA advantage, Experian, and also Elian, which was formerly known as Dun and Bradstreet, and you can go to all those three providers and get your credit file updated. And get that sent to you once every year for free.

Blaize Pengilly  09:28

Yeah, great. So Dan, I'm really curious, a lot of people that put their mortgage repayments on hold due to the COVID-19 crisis. Now, how does that affect credit score? Will people's scores be affected by having their repayments on hold or what's happening there?

Dan Jovevski  09:45

Blaize, traditionally, a lot of the times when people can't make the repayments on their credit products, they would fall into a state of having the credit files marked as being in behind, but given the extraordinary set of circumstances that we find ourselves during COVID The banks have actually teamed up and given people an extension or an amnesty on any reporting on their credit file up until March 2021 of next year. And just to put this in context, in terms of the size, there's almost one in 10 mortgages, which is, you know, roughly about 100 and $60 billion worth of deferrals of mortgages currently in place in Australia. So we probably know it, somebody now lives that's going through this process of having to defer their financial commitments until they get back into some degree of stable employment.

Blaize Pengilly  10:34

So nothing to worry about credit score wise, if you put your mortgage on hold for the moment, you don't have to worry about it affecting your credit score until much next year. Is that right?

Dan Jovevski  10:42

Yep, Blaize! That's right. So I think it gives people enough time to kind of really get themselves into a position where they can sort of address their own financial circumstances, but just being real, there are going to be some people that end up coming off that repayment holiday, they'll have a pretty tough decision to make, right? They keep their homes do they sell them? Or how they're going to get themselves out of the situation they're currently in?

Blaize Pengilly  11:06

I guess time will tell.

Dan Jovevski  11:08

Absolutely.

Blaize Pengilly  11:10

So Dan, you've touched on why having a good credit score is important, and it can affect your ability to get a loan or not. But I've heard recently that we're moving Australia is moving toward more American style system of credit scores. Now, what does that mean? And how does that impact me or the consumer, and what do we really need to get a loan?

Dan Jovevski  11:29

Blaize, that's a great question. And to touch on that sort of earlier point about the changes in legislation, and how that will affect people in terms of the credit scores, is that if we look at the American system right now, basically, everything that you do in your life is wrapped around the credit score, you know, there's dating websites like match.com, that will effectively use your credit score to match you with people that are, you know, the same sort of financial bucket as you are way I know, I told Tinder, maybe not yet. And we also see a lot of say, pre employment checks, done your credit score to kind of check whether or not you're a trustworthy person. And I think the Australian context, this is a really big change that not too many people are aware about. And so some of the more practical sort of impacts are that your credit score now will not only determine whether or not you can get a loan, but will also determine what interest rate that you pay for a loan. So let's just take you through an example case, you know, Blaize, you've got a phenomenal credit score, your credit score is 100,000. As a my credit score is say, 400,000. If we would have both, say walk into a bank right now, and get a personal loan, you may be paying a rate say lower than 10%. And my rate might be closer to 20%. And that could mean hundreds of dollars of repayments each every single month by their mere credit score number alone.

Blaize Pengilly  12:54

so the bank is charging you a higher interest rate because they deem you a more risky consumer. As a result, they're giving you a higher interest rate. Whereas for someone with a better score, they'd be paying less. So having a good credit score can be rewarding in the sense that it can really save you money when it comes to getting a loan out as well as helping you get a loan in the first place.

Dan Jovevski  13:15

Absolutely Blaize. And what we're seeing now the starting of this and the Australian Financial ecosystem, particularly around personal and lenders that have entered the market around two or three years ago, there really used the credit scoring mechanism to start segmenting customers into different risk buckets, and therefore giving them an interest rate depending on their degree of own personal risk plays. This is just the beginning, we think this will probably morph over time where one factor is personal loans. But a may affect the biggest debt that you have in your life, which is your home loan. So just imagine, you know, the difference of say paying, you know, two and a half or 3%. And those factors being influenced on whether or not you've got a good credit score, over the course of your whole life, save 25 years, that could be hundreds of thousands of dollars with additional interest that you'd be paying by having a potentially reduced credit score.

Blaize Pengilly  14:07

Wow. So it's really important.

Dan Jovevski  14:09

Absolutely. And I think a lot a lot more people if they can just get an understanding of where their credit score is at the moment. And more importantly, what are some of the factors that contribute on improving their credit score, you know, over time, and one of those little hints and tips are is that if you do have remaining residual bills that you haven't paid off, or anything like that is to get those cleared up and get them into a state where they appeared a credit file was being paid. And that will increase your chances of potentially improving your credit score over time.

Blaize Pengilly  14:42

When does your credit score start becoming important? Is it like a it turns 16 and then your credit score opens up? Or is it like it? Does it sit with you your whole life is that when you get your first bank account? Where does credit scores start for someone? Hmm,

Dan Jovevski  14:58

that's a really, really great question. Blaize for a lot of people, the credit file doesn't exist until you make your very first inquiry. And so for a lot of people, when they think about what is that very first inquiry, it typically starts with either a mobile phone that you get on a plan or a contract, or utility bill, when you go through those two events, if you've never had credit before your credit file will be opened by the mere fact that you've been quiet for those credit products.

Blaize Pengilly  15:25

Okay, and what's Is there a starting score? Does everyone start out on the same level? Do you start with zero when your credit file is opened? When you do make that first inquiry? Where does it sit? Where is your where's the meter?

Dan Jovevski  15:39

The meter starts in very different places, depending on a number of different factors. So it goes down to your age, or when you made your inquiry, it also goes down to maybe your suburb, so your suburb can have a really big impact on what the average of that credit score is safe for your suburb. So there might be some factors outside your control about where you start. So living in a really sort of good suburb, you might actually start off at a really good credit score, as opposed to say, you know, a credit score that's lower into a suburb that has really bad credit scores in general. And so these are some of the, you know, important considerations when you first start off is to really understand where you sit in terms of your starting score, and more importantly, how you might be able to improve that over time.

Blaize Pengilly  16:25

Wow, that's fascinating. I had no idea so many different things tied into your credit score, which can have such a fundamental impact on on the kind of money that you're paying back through loans for the rest of your life. Fascinating.

Dan Jovevski  16:37

That's it. Absolutely. And I think Blaize one of the other important things, for people to be made aware of is changes almost all the time. So people have to stay abreast of all these changes that the credit bureaus make to their own models on how their score is calculated. And I think we're probably ahead for some pretty interesting times in the next couple of years, as more and more banks rely on the information that's provided by credit bureaus in order to assess your creditworthiness.

Blaize Pengilly  17:05

Very interesting. Today, we have a special guest joining us, it's Royce Matthew is from wha now Royce is a 21 year old nursing student currently studying at Curtin uni. Royce is someone that I look at with envy because he has his shit together when it comes to finances all way better than I did at the age of 21. And probably better than I do now. And I'm 27 so Royce does Disability Support work and some cash jobs on the side to drum up some extra day.

Royce Mathew  17:44

Welcome, Royce, thank you very much for having me.

Blaize Pengilly  17:47

Now Roy's tell us a little bit about yourself.

Royce Mathew  17:50

So, um, yeah, as you said, 21 nursing student, I'm a support worker and a bartender at the Ritz in the city. I'm a big fan of traveling. And so at the moment, that's a bit on hold. And so as I was growing up, all my money would just go towards traveling. But saving up for trips was where I actually learned ways to save and, you know, on shopping and other things like that. And I would be able to, you know, make my expenses so low that I was able to put roughly 80% of my paycheque towards my traveling account, which is in a separate account.

Blaize Pengilly  18:26

80% that's phenomenal. Whoa, Royce, what is it that makes you so good about your finances? What are you doing differently that I definitely am not doing?

Royce Mathew  18:36

Oh, first of all, making sure you pay off the credit card, making sure I split my pace, so I can cover all my bases. So savings, and then also leave some for investing. And so I can continually maintain a monthly investing in my portfolio. So it can certainly grow over time. And just monitor it accordingly.

Blaize Pengilly  18:58

So you say you got into finances from budgeting for travel? What Why are you so passionate about personal finance? Is it purely to travel? Did travel lack an interest in finance?

Royce Mathew  19:12

Essentially, I throughout school, I always wanted to travel. And I was you know, how can I make this happen. And so I was always really motivated to take a gap year and to travel. And so and I wanted to leave straightaway and I wanted to make it possible. And so I started working and just saving and making sure that I was always shopping for deals or making sure that I could put the majority of my paycheque away. And so keep it like living with my parents as well. I really wanted to move out but I know that would have made my expenses jump to the roof. And that Yeah, just making sure that my expenses were just as low as possible.

Dan Jovevski  19:52

Royce down here I'm going to join the jealousy club along with Blaize I think in my 20s I was really concerned about going to all the latest nightclubs and wearing the most fanciest clothes, but it seems like that you've taken a much more frugal path in the early 20s. Where did you find it was information about managing money and saving? Did that come to you naturally? Or did you get inspired by something along your travels?

Royce Mathew  20:16

Well, my stepdad was always, you know, really struggling with money in terms of living week to week. And I just thought that, I'd never wanted to do that and put myself in a position where I have to worry so much. And so on my gap year, all I worried about was whether I could make enough hours, so I could put this much away for traveling, and then I could live off, you know, this amount. And so I went through that stage of, you know, nightclubs, and things like that. But you can always, you know, you go to the happy hours that you go to places you know, that are cheap, you don't have to go to, you know, the fancy bars or try and flex and get all the expensive drinks service.

Blaize Pengilly  21:00

It sounds like you have something that I do not have the ability to sacrifice, and have self control when it comes to spending,

Royce Mathew  21:10

It can be very challenging, because a lot of people don't really have the mindset, and you can get dragged into it very easily. You know, you finish work in areas that are you know, let's go for dinner and drinks. And it's already midnight, and everyone's going or people you know, just want to catch up for breakfast when you you can make eggs on toast for $3. at home.

Dan Jovevski  21:32

So, watch this is fascinating. And do you think this is really pervasive in your generation? Do you think you're kind of on your own here on this journey of you know, living a frugal life? Or do you think other people are really sort of joining this movement of really living conservatively and managing the money better?

Royce Mathew  21:51

Well, I've been, you know, following the, you know, the minimalists, they have a really good podcast on you know, it pretty much incorporates all aspects of life, but essentially living with what you need. And so with the clothes and the drinks and everything, you don't need that you can just in a hoodie, and sweatpants now. And so whereas people you know, like to wear Gucci and things like that, and I just can't see a point. And so I do feel a little bit different in a sense of trying to find good deals or, you know, eating before you go out for dinner, so you don't have, you know, an entree main to set and everything else. So just trying to find ways that are cheaper. And so people do look at me as a little bit cheap, but I don't mind because I'm just you know, they're enjoying it with friends. People are probably looking at you cheat when you're out at dinner, but probably looking at you with envy when they checking Instagram, and you're traveling all around the world. Yeah, and that's why I like to spend my money because when you travel, things are so much cheaper, you gain so much more, you know, you got for Chinese in Perth, and it will cost you $24 25 a dish, just a single dish. Go some friends who share you know, three or four dishes. Whereas you go somewhere like China and the industry is $2 or Thailand or Singapore or something and it tastes so much better.

Blaize Pengilly  23:13

Yeah. $24 here versus $24 there one meal vessel a week of meals for you and your friends, isn't it?

Royce Mathew  23:18

Yeah exactly. So I started saving to go on your first to go on your first holiday. Now. How old were you when started saving? How did you do it? How much did you save here? That's where the figures. Okay, so my first trip was to India, and that was funded by my parents. But that's what sparked the traveling. So ever since I was 15. I knew I wanted to take a gap year and go to Europe. And I didn't know for how long. And so I just wanted to work and save as much money as I could. And so I ended up saving. You know, I I didn't weigh that. I bought my flights first. And then I bought, you know my first little bit of accommodation, and then everything else was just savings on a traveling card. And so I took about $28,000 with me

Blaize Pengilly  24:01

$28,000?

Royce Mathew  24:03

Yeah, and came back with 20 grand was

Blaize Pengilly  24:05

what 20 I think I need I think I need a breather. I've never saved that much money in my entire life. He did it for your very first holiday Rockies

Royce Mathew  24:17

is so nice. I've never had anything like that since

Blaize Pengilly  24:21

How did you do it? How did you how did you save such a phenomenal amount of money?

Royce Mathew  24:26

Well, I've always worked in hospitality, but I started working at a hotel when I was 15 and just made my way up. And so I would work on the weekends, you know, go to school Monday to Friday and then work Saturday Sunday. And then I could put pretty much all of that away and I would try and save you know I would get to like a checkpoint or a milestone you could call it so five k you wouldn't go into that 10 k you wouldn't go into that. But then it started becoming small increments. I'd get to seven and a half k I'd be like no no, no, can't go into that no matter what. Even if I had to you know eat two minute noodles or something. And so Nothing wrong with eating two minute noodles we've all had, we've all had those times. Exactly. And so it just started jumping up and jumping. And you know, this was before the government introduced a 40 hour week. So a casual can only vote 48 or 38 hours. And so before that I could work, you know, I was trained in breakfast banquets bar, like multi trained over all areas of the hotel. So I would just pick up shifts wherever and I could do you know, 5060 hour weeks just at the hotel, but it wouldn't feel so draining because doing something given that the worst job I've ever done was minibar at a hotel. And it's the most lonely thing ever. And what got me through that it's just, you know, this is an extra six hours that I can put towards channeling. And I did that for two years was, this is fascinating. And one thing that I think a lot of people listening right now is how did you go about tracking all your money, your finances? And did you set yourself goals? You know, how did you sort of week by week, month by month help achieve or, or achieve the goals that you set yourself out to achieve? How did that happen for you? Well, at the moment, I'm much more structured than I was now. Because back then I had the mentality of just as much money as possible is going into this trip. And I'm gonna make it unforgettable. And so that was really my drive. And so if I was going with 20, I would go with 20. If I went with 40, I'd go with 40. And I had every intention of that's what that money is for. Now, my priorities have changed. I'm just about to graduate and looking for jobs. I, I have a girlfriend now and everything sort of getting a little bit more serious. And so it's kind of taken a mindset of like me, and my best mate would just get back from a trip working capital then booked flights. And then we have when I went to Southeast Asia, I was just trying to get incrementally more and more and more open. I got you know, speeding tickets, parking tickets and all that. And so I just had to start selling for, like, I had to sell my drum kit, ps4, all these different things. So that made that amount of money. So it just all comes down to Yeah, as you said sacrifice. Right now I try and work on percentages, because I don't always make the right like the exact same amount of money. And I'm never going to with being a nurse and shift work. It's all going to be different. So I just try and work on percentages. But I have different accounts, so it's hard to transfer the money over.

Blaize Pengilly  27:21

Can we talk more about working on percentages? So race you do Disability Support work and bar work, which I would say that's Barwick is just another type of support Where? Oh, yeah. And you also said that so you do some cash jobs on the side as well was a labouring?

Royce Mathew  27:36

Yes. So my stepdad and his best friend, run a business doing the colour for concrete poles. And so we did the I made the colour for you know, the pool at current towers, that's that colour is called Blue Lagoon. So essentially, you would just be on a pipeline, you know, someone fills a bag, someone fills a bag, someone stacks the bags, and it was just, you know, grunt work manual labouring under so thankful for that job, because I made heaps of friends, because when we can find someone, my mate would find his mate to do it. And so, yeah, we've always, it's always been really nice to have that. And just any work I can pick up as well, just you know, if whether it's helping me move some furniture or my neighbour gardening or something like that saris, with all your casual work and the cash jobs, you sometimes pick up on the side up changing income, and you say you work off percentages, could you dive into a little bit more detail about how you figure out the percentages and what the percentages go to when it comes to your budgeting. So the first so when I start from, like, when I get paid, I get paid every foreigner, so I'd probably be around maybe 15 1600 dollars a night, immediately, whatever my credit card is, because I have all my expenses on my credit card. And so I'll just pay that off, straight away, not even thinking about it. And now all those expenses are monitored, and it's sort of the same every week. But that's just paid off straightaway. And then from that, that's kind of just my final net. And so then I'll put 50% of that away for savings. And then the other 50% I kind of try and put you know, 20 to 30% away for traveling. But then that's changed because we can't travel and so I've just been putting more into savings or using that money to invest so I invested quite a lump sum into my from my savings early this year on the March, April time. And so I've just been watching that go and yeah, so now it's just 50% and savings 50 on and then on the card and then maybe 10% now for traveling because I'm not doing much and trying to save my you know, holiday a cure for when I can actually take it and then the rest of it just goes to I'm saving up to invest.

Dan Jovevski  29:51

Royce. This is a phenomenal insight. I think a lot of young people right now are getting inspired by investing in particularly COVID it's taken a life of its own When, what do you think about investing now? And how did you get into it?

Royce Mathew  30:05

Well, a lot of my friends throughout high school, they were their parents were involved in it. And then that obviously went down to them. And we started talking about it. And one day, my dad came into my room and he saw, you know, I started looking these companies and data, and then I just, without reading anything research, I just threw some money into it. And I lost it all. And I was just or most of it. And I was like, that's not that. Exactly, I put now that lesson has taught me put in what you can afford to lose, do your quantitative and qualitative research. And also just follow the story. Because at the end of the day, if you're following that story, you can kind of and you get to know you get to know it. And so, and also focus in on your specific area, I know nothing about gold or anything like that. I'm studying health. And so I focus on the medical side of things, or I'm in hospitality, I'll focus on you know, food, beverage, or retail things, I understand things I can be like, Oh, this is actually a really good idea, not just going, Oh, this is a speculative gold stock, and it might be going up to gold price going up.

Dan Jovevski  31:12

Royce, you're a person ahead of your time, spoken very eloquently. That is almost the exact same quote, as Warren Buffett, only invest in the things that you know, that's an incredible lesson there to impart to the listeners of the show.

Royce Mathew  31:27

So Royce, it's just about time for us to wrap up. But before we go, what would your advice be to young people for investing or starting out in the money saving game? What tips do you have, it's just really important to say, because that gives you the freedom to you know, travel, it gives you the freedom to move out, it gives you the freedom to do anything you want to do, it doesn't really matter. You know what clothes you're wearing, or where you eat or what your phone is, at the end of the day, if you save your money, you can do anything you want with it, which is essentially being financially free. And that's what we all aim to do. So definitely just save and invest and research.

Blaize Pengilly  32:03

save, invest and research, very wise words. And Dave,

Dan Jovevski  32:08

Thank you so much Royce for joining the program.

Royce Mathew  32:10

Oh, man, thank you for letting me be a part of it.

Blaize Pengilly  32:17

Okay, Dan said last week, we took a deep dive into the Australian budget and the winners and losers the impact it would have on us and our listeners. And there's something that we didn't cover that I'm really interested in. And this is the government's announcement that they're extending the first home loan deposit scheme by another 10,000 places. Now this rolled into effect on the sixth of October. So can we take a look at what the scheme is how it started and where it's currently at?

Dan Jovevski  32:45

Absolutely Blaize? Well, let's break it down. You know, what is the first home loan deposit scheme? It's an initiative by the Australian Government to support first time buyers to purchase their first home sooner. The scheme started with 20,000 places in January 2020.

Blaize Pengilly  33:00

Sit down this game started with 20,000 places. And the announcement is that they've extended it by another 10,000. So that means 30,000 people Australia wide will have access to this scheme. Now, understand that the government wants to help support first homebuyers buy their first home. But how does it actually work? What's the breakdown of this game?

Dan Jovevski  33:21

Quick question blows usually for most people, as they go to buy the first time they have to come up with a deposit. Usually that's about 20% of the total purchase price. So for example, if you're looking to buy a home for say, $500,000, you need to come up with $100,000 deposit or 20%. In order to avoid paying Lenders Mortgage Insurance. I know it's pretty big. But with the first time loan deposit scheme buys, what happens is that the government subsidises your costs of purchasing that home and avoiding paying the Lenders Mortgage Insurance with as little of his deposit as 5%. Avoiding the need to pay that very, very costly Lenders Mortgage Insurance.

Blaize Pengilly  34:03

So 5% if you were buying a house for $500,000, is that 25 to 25,000 breaks? Yeah. Okay, so with this game, if I wanted to buy if I have an intern before, so I could be eligible as a first time buyer. And if I wanted to buy a property for $500,000, instead of having to save up $100,000 which to be honest, just sounds ridiculous. But I don't know if I if I would ever be able to achieve that. Instead of saving up for $100,000 I can just save up to 25,000 which to be perfectly honest, also doesn't sound that attainable for me, but it sounds a lot closer than $100,000.

Dan Jovevski  34:40

Absolutely Right Blaize and I think this is a great government incentive that avoids people paying very costly mortgage insurance and really getting to the most minimum level of a deposit in order to buy the first time and can save young people in particular, potentially hundreds of thousands of dollars when you look at the costume or Insurance not only for what you pay for the very first time when you online, but more importantly, what the banks do by capitalising that into your loan and you having to pay that cost over a period of 30 years, which can compound to be a huge number after that period of time. So this is an incredible scheme for those who are lucky enough to pick up the sports players and pick up this awesome incentive the government has to offer.

Blaize Pengilly  35:25

So forgive me, Lenders Mortgage Insurance. Now, can I make an assumption that that's insurance for the bank that you will pay the loan? So is that just more money on top of the money that you're already borrowing?

Dan Jovevski  35:40

That's right Blaize, there's a lot of warts in banking. But this is probably the biggest roar of the mall. Lenders Mortgage Insurance is an insurance premium that you, the borrower will pay to the bank to protect the bank. If and when you can't pay your home loan. It is absolutely ludicrous.

Blaize Pengilly  35:59

But if you can't pay your home loan, then how can you pay the insurance. So is it just extra money from the get go? So they they're getting extra cash in their pocket. So they're a little bit satisfied. If we do, for whatever reason, default on your headline,

Dan Jovevski  36:14

those precisely correct blows. So it's an insurance that protects the bank in the event that if you can't make your payments in your home loan, the bank is recouped the difference of say, if they would have set up your home, they basically are not left with less money in their coffers when they gave you that loan to begin with. And one really important thing to know about the lenders mortgage insurance premium, that you pay just like a regular insurance, you have to pay a premium. This premium is paid up front when you get your home loan. So there's no escaping it for a lot of people as they go by the first time if they don't have that 20% deposit, they'll have to pay that Lenders Mortgage Insurance at the time of when they get the home loan. And the way that most young people pay for the Lenders Mortgage Insurance is not stumping up with the premium which could be, you know, in some cases 1020 or even $30,000. This premium is added onto your loan. So let's just say for example, that you're buying a property again, it's worth say $500,000. And you have only got a 10% deposit or 50,000. Your Lenders Mortgage Insurance premium may be to the tune of say 10,000. So your loan would be the $450,000 plus the $10,000 of Lenders Mortgage Insurance, meaning that in the end, you're borrowing $460,000 to get that loan. So the way this ties back into the first time line deposits game blows, is that the government is saying that will protect you in the event that you can make your repayments and take care of that Lindsborg insurance premium. So that's basically elamite in a nutshell.

Blaize Pengilly  38:00

Okay, so by the government, they're essentially acting as guarantor then so the government's taking the position of what would sometimes be for some people, the Bank of mum and dad, and they go in Don't worry if they can't pay, we've got your back, we'll cover it. Is that what's happening?

Dan Jovevski  38:16

That is spot on Blaize

Blaize Pengilly  38:18

Okay, so how do you apply for this scheme? And how are you eligible? So I know it's for first time buyers, but is there anything else that we need to keep in mind when if you want to apply for this?

Dan Jovevski  38:29

Yes, Blaize, you can make applications directly to one of the 27 participating lenders in Australia. Keep in mind you also have to adhere to the lenders linie criteria so you have to have stable employment have that 5% deposit to make on the purchase plus any other credit criteria that the bank imposes on you as you apply for that loan. They're also price caps The government also wants you to buy a modest home and not imagine

Blaize Pengilly  38:59

I knew there would be a catch I guess what a hassle the hot tub so government once he had a house but nothing crazy nothing no lifting your house nothing like that. A motor so he does. So. No, really bad. No pool, no helicopter that doesn't come with a house and with the government wants you to buy a modest home, not a mansion. Now, who determines what a modest home is? Is it a price so you said price cap. But how what what's the price cap does it vary depending on where you live?

Dan Jovevski  39:36

It does Blaize it is state base caps. So depending on where you live in may be different. The government's also announced price caps that have increased with the additional 10,000 places and so if you're living in major capital cities, some of these price caps have gone up quite dramatically. So for example, if you're living in Sydney, the price cap is now 950,000 up from Sydney. 700,000.

Blaize Pengilly  40:01

up from 700,000, who is buying a new home in Sydney for $700,000? If you lived in been died, that's a shoe box. If you're lucky. That's it. That's a pretty ridiculous cap. I'm glad to hear that it's gone up at least it sounds a little bit more accessible.

Dan Jovevski  40:16

Totally. I mean, he's up there. For example, in Victoria, the price cap is 650,000. In other capital cities, like down, it's 550, along with Perth, and look, they've done they've done their best to make it more accessible, that some of these prices are just really, really high. So I think we'll just have to wait and see on whether or not all these 10,000 spots get snapped up from people say living in inner cities or whether or not people say, you know, what, are we buying a property in it in a city location, maybe out of reach, particularly for a lot of young people today Blaize.

Blaize Pengilly  40:53

So the government's committed to providing this opportunity to another 10,000 people, which is awesome. So that's 30,000 people in total in Australia that could potentially benefit from this scheme. How do they decide who gets it? Is it we like the look of you you can get the scheme or does the bank decide or how does it work?

Dan Jovevski  41:13

Blaize quite thankfully, we've moved along from the 1960s so we don't have to dress up in Sunday's best anymore, please a bank manager. I'm very pleased to say that it's a much more democratic process, but time is obvious and and it's on a first come first served basis.

Blaize Pengilly  41:29

Okay, so if you want to take the most make the most of this opportunity, you've got to get in quick. Absolutely. Right. Now gig escape Simon's jam to buy a house if you're a first time buyer.

Dan Jovevski  41:41

That's it also known as well. The scheme can be used in conjunction with any other government grants, schemes, concessions and waivers you qualify for, for instance, any first home owners grant or any statute decisions also.

Blaize Pengilly  41:55

That's awesome. So you can get the first time loan deposit scheme and the first time it is grant or stamp duty things if you qualify. double whammy that's a total win for first home buyers

Dan Jovevski  42:06

Absolutely Blaize.

Blaize Pengilly  42:07

Well the first type is grant sounds like there's a lot of information attached to it say Shall we chat about that in detail next week. Dan?

Dan Jovevski  42:17

Absolutely Blaize.

Blaize Pengilly  42:30

Thanks for tuning in to the Money Bites podcast presented by WeMoney. If you enjoyed the show, please do us a favour by liking, subscribing and reviewing us wherever it is that you listen to your podcasts. This helps other people to find us too.

Dan Jovevski  43:17

Catch you next time on Money Bites.


Disclaimer:

The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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