By Milan Chetkovich

In other words, as penned recently by The Economist :

“Even a global recession may not crush inflation”

What we are hearing in Australia at the moment is the Reserve Bank of Australia (RBA) saying that they are focused on getting inflation back to their target range of 2 – 3%.

The Question: Is adherence to this target range still valid at the moment? This target range was set many years ago. It served Australia well prior to the Covid pandemic, the Ukrainian war, energy supply issues (including the east coast electricity/gas price hikes), general supply chain problems and more recently the persistent east coast rain and consequential floods which are restricting food production and supply.

Normally the initiative by the RBA of primarily increasing the official cash rate (OCR) provides a handbrake on galloping inflation. What an increase in the OCR does is prompt lenders to recognise their cost of funds increases. Therefore they then pass on the increase to consumers – which could be variable rate home and business borrowers.

The resultant effect is that households have to pay more for their home loan and consequently have less to spend on other goods. And this usually means cutting down on the discretionary ones!

That takes money out of the system and reduces general spending/demand for goods.

What happens then? Retailers to make the same level of sales would need to drop prices on the consumer goods they are marketing. Subsequently, general prices (the CPI measure) would decrease.

The other effect is that business lending is then more expensive which may prompt business decision-makers to delay any planned expansion, or equipment replacement and limit workforce employment. This involves a lagged effect – nothing immediate to curb inflation.

So why right now is inflation non-compliant with these measures of rapid interest rate rises? Take the example of the east coast gas and electricity supply. We see some component of our cost base is currently non-compliant where there is no evidence of a price drop on these goods and services by these large gas and electricity providers.

The energy price increase has not been affected by the many consecutive months of the RBA’s rapidly increasing interest rates. So where to from here? Do we, therefore, say now we have a new core underlying inflation component on top of our standard 2-3% range?

Is the target range now to be 4-5%? Will the RBA be happy if, in the new year, they see the annual inflationary rate in this range and consequently abate from further OCR action? Let’s see, but if we’re at an annual rate of 8% in December 2022 – it’s a long way to get back to 4-5% let alone 2-3%.

“Keeping Up With The Joneses”

At the moment all the noise is that the RBA is still very serious about getting to the lower range. Especially when a new RBA report discusses how some Australians may be extending themselves financially just to keep up with those around them. It’s a warning by the RBA to say be careful and curtail commitments as they may become unsustainable. They are going to keep plodding along into the new year with their current focus!

Reserve Bank of Australia

Any person seeking to undertake an investment strategy or a change in their retirement planning should always consider seeking professional legal or financial advice and seeking the expertise of a qualified tax accountant.

Good luck with the investing strategies.

moneymanagement #wealth #goodmoneyconversation #savings

It will be interesting to see what unfolds when the RBA meets on the first Tuesday in February 2023.

Milan Chetkovich is a licenced finance broker, operating mortgage services business – Essential Financial Services – Finance Broker Licence – 392928. Milan is a Certified Practicing Accountant and holds an Accounting degree and an Economics degree from the University of Western Australia.

Tracey King is an experienced brand, product and marketing senior executive with industry experience in financial services, banking, aged care and retail industries. Tracey holds a Bachelor of Business in Marketing from Edith Cowan University, Perth Western Australia.

The information in this Blog is general and has not taken into account your personal objectives, financial situation, or needs. It is not personal advice. You need to consider whether this advice is right for you, having regard to your own objectives, financial situation and needs. You may need it is important to check any product information directly from the product provider. Ensure you consider the relevant Product Disclosure Statement (PDS) or any other applicable product documentation before making a decision to purchase, aquire, invest in or apply for a financial or credit product. You may wish to seek financial advice from a suitably qualified adviser or finance broker. The writers of this Blog may receive a fee for referring you to a credit or banking provider.

By Tracey King and Milan Chetkovich

PART TWO – THE COST OF ACCOMMODATION IN RESIDENTIAL AGED CARE

In the second of a two-part opinion series on aged care homes, we seek to explain how the costs of moving into or living into a care home could have implications for your finances and family home. If you want to refresh yourself on the costs of aged care nursing and other services, you can toggle back to the previous blog.

An aged care home is a good choice if you are unable to care for your family member, and often this is identified when you find that your quality of life and that of the person you are caring for has become too much.  This is recognised as carer stress.  

The first step is to arrange for an ACAT assessment through My Aged Care.  An aged care assessor can come to your home and help you work through your options.  If you need to arrange an assessment, you can apply at any time.

If you are faced with the difficult decision to put a parent or your partner into aged care because they have been assessed as having high care needs, you may also be wondering how you might afford to make this decision.

The Commonwealth Government funds aged care homes to provide accommodation, hotel-type services and care to elderly Australians.  All people entering an aged care home will need to consider the accommodation costs.  This is an amount of money that you may need to pay towards the costs of a room.  Prices of rooms are set by the aged care home in line with Government regulations.

Your financial situation doesn’t affect your eligibility to live in a government-subsided aged care home.  However, it may impact the amount you have to pay.  How much you can afford to contribute to the cost of care and accommodation is determined by a means assessment through Centrelink.  

The subsidies aim to make aged care more affordable.    If you are eligible for government assistance toward your accommodation costs, your provider cannot ask you to pay the agreed room price.  You can only be asked to pay an accommodation contribution which is determined by Services Australia.

Whilst there is flexibility in how you pay for your accommodation, it’s important to choose a room within your budget.  Look around your local area and research the costs for different homes.  You should also arrange to tour the facility and meet the manager during your research process.

There is generally two types of subsidised placements:

1. If you or your partner are the first person in a household to enter an aged care home (known as a protected person), and the other person is still living in the family home, then the person going into care would be eligible for a subsided aged care place.
   
   You will find in this situation that you will not be required to fund the Refundable Accommodation Deposit (RAD) provided the home has a subsided (concessional) aged care place available.
   
   Each home has a percentage of subsided (concessional) and fully paid places so you are best to check with the provider directly.  
2. If you are on a full or partial aged care pension, then you may also be eligible for a fully subsided aged care place.

Do I have to pay the full cost upfront?

You have three options as to how you can pay for your aged care accommodation:

• a refundable lump sum amount (Refundable Accommodation Deposit – RAD);
• rental-style daily payments (Daily Accommodation Payment); or
• a combination of both (RAD/DAP).

You should undertake the Centrelink assessment estimator on My Aged Care to see whether you are eligible for a subsidised aged care placement.   

For detailed information about the different accommodation payment options, how each option works, and how to work out your costs, visit the understanding aged care home accommodation costs page.

Means Assessment Guide:

Note on Asset Calculation – If a protected person is remaining in the family home (partner, dependent child, carer or close relative) then the home is not included in the assets test.

Once the assessment is completed, you will receive a fee advice letter.  It will outline your care and accommodation costs, (if any) and your means-tested care fee if any.

The financial factors are important, but the decision on whether to sell or keep your home is also based on emotional and personal factors, as well as who else calls it home.  Make sure you look at the full picture and seek advice from a financial planner who is accredited and experienced in aged care advice.

The information provided in this article is general in nature and not intended to influence any decision about the costs of aged care or be viewed as personal advice. This information is our own personal opinions and are not to be construed as the opinions of Southern Cross Care (WA) Inc. (my employer) or any other aged care provider. You need to consider whether this advice is right for you, having regard to your own objectives, financial situation and needs. It is important to check any product information directly from the provider. Ensure you consider the relevant residential care accommodation contracts, Product Disclosure Statement (PDS) or other applicable product documentation before making a decision to purchase, acquire, invest in or apply for an aged care, financial or credit product.  You should always seek your own professional financial and legal advice prior to making any decisions regarding your financial situation and the costs of aged care.

Further information about the costs of aged care can found on My Aged Care. Consider consulting with your local Centrelink Office. https://www.myagedcare.gov.au/aged-care-home-costs-and-fees

By Tracey King and Milan Chetkovich

PART ONE – THE COST OF CARE

In this two part opinion series, we seek to explain how the costs of moving into or living in an aged care home have recently changed.

How do the costs of care work in aged care? Put simply, it is broken into two categories. The first is your care costs (living costs such as nurses, carers, food, laundry etc), and the second is your accommodation costs (the roof over your head, the building).

For this article we will only focus on the first category, which is the costs of your care. In our next edition we will explain how the accommodation payment system works.

The Royal Commission into Aged Care discussed many recommendations, including improving funding to enable a greater amount of care hours per resident.

If you are in a situation where you are contemplating the costs of aged care for a family member or even for yourself, there are some important changes that you should know about. You should also be aware that these changes also affect those already living in aged care. The costs of your care have now become more expensive, as the new government funding model to achieve the greater amount of care hours is implemented.

From October 2022, residential aged care facilities moved to a new funding model called the Australian National Aged Care Classification, or AN-ACC. This model is designed to align funding with the costs of delivering higher care hours.

So, why does this matter when it comes to the cost of aged care? The costs of your aged care are shared between you and the government (Medicare). The government applies a means tested care fee as an offset to how much government funding you will receive for your care. So if you can afford to pay, you will be required to pay the means tested care fee.

You should consider completing a means test using the calculator on the My Aged Care website so you can understand if you would need to pay a means tested care fee. Many people complete their financial assessment after they have decided to enter an aged care home. The risk with this approach is that you may be entering into the situation without clarity of your costs and obligations.

The new funding model has meant that both the government contribution and means tested care fee contribution have been adjusted. Explained another way, if you are a self-funded retiree or choose not to disclose your income and assets, the means tested care fees that apply to your contribution for aged care would have changed. If you are in care or your loved one is in care, you will soon receive an update from the Department of Health and Centrelink regarding the fee changes. So, this means that if the government funding increases, so will your means tested care fee.

Here’s a simple overview of how your care costs are calculated.

The government contribution:

Under the new AN-ACC model, there are three components to the government contribution to your care fees:

1. A one off entry payment – approximately $1,150 paid by the government to the aged care home when some one first enters
2. An individual care component (AN-ACC classifications – there are 13 levels from low to high care need) which is funded between $41.19 and $216.80 per day and;
3. A fixed or shared care component (Base Care Tariff) which is based on the aged care homes location, size, specialisations of care and ranges between $106.23 and $390.24 per resident per day.

So if you add it all up, it puts the maximum daily government funded component under this new model to a staggering $350 – $600 per day.

So why does this matter? Firstly as tax payers we should have an interest in how our taxes are being spent. The Government has allocated $5.4 billion to deliver an average of 200 minutes of care per resident per day, including 40 minutes of care delivered by a registered nurse. This additional funding will be distributed across the new AN-ACC funding model (nickname pronunciation “Anac”).

The consumer contribution for your care:

There are three components to aged care charges as a consumer for your residential aged care (your contribution) and this framework is the same as the pre AN-ACC model:

• Basic daily care fee – currently charged at $56.87 and it’s adjusted twice a year. The calculation is based on 80% of the aged pension. Everyone must pay this fee and it covers day-to-day services such as meals, cleaning, facilities management, and laundry.
• Means tested care fees – the maximum will be up to $358.41 per day (based on your income and assets as assessed by Centrelink) and this is an offset you are required to pay depending on your asset and income position. The government funding reduces for every dollar you are assessed for under the means tested care fee.
• Additional or extra services fees which are charged by some aged care homes – this covers things like a broader menu, wine with your meals and other hotel like services.

Here is a scenario for a self funded retiree. If you and your spouse or partner need to go into care, and you jointly earn $100,000 in income from superannuation and say hold $2M in assets, then based on this scenario, you could be paying per day:

• $186.30 for the means tested care fee
• $56.87 for the daily care fee
• In total you may be required to contribution $129.43 per day for the cost of your care

For a self funded retiree in this situation, the government will reduce the funding they pay to the aged care home by $186.30 per day as it is covered in the means tested care fee.

You should also note that there is an annual cap on the means-tested care fee of $30,574 and a lifetime cap of $73,378. The new funding model will affect existing and new residents, and if you are paying a means-tested care fee in September 2022 of $265, you could see a jump up to the new $358 per day from October 2022. That’s approx $93 per day extra.

It’s important to note that quality care in any aged care home can only be delivered if there is the appropriate financial model in place to cover the cost of the clinicians and other care and maintenance staff. The new funding model is a step forward to ensuring Australian’s in aged care can receive the direct care hours they need for a good quality of life in their last years.

Next week in this two part series, we will delve into the costs of accommodation in aged care.

The information provided in this article is general in nature and not intended to influence any decision about the costs of aged care or be viewed as personal advice. This information is our own personal opinions and are not to be construed as the opinions of Southern Cross Care (WA) Inc. (my employer) or any other aged care provider. You need to consider whether this advice is right for you, having regard to your own objectives, financial situation and needs. It is important to check any product information directly from the provider. Ensure you consider the relevant contracts, Product Disclosure Statement (PDS) or other applicable product documentation before making a decision to purchase, aquire, invest in or apply for an aged care, financial or credit product.  You should always seek your own professional financial and legal advice prior to making any decisions regarding your financial situation and the costs of aged care.

Further information about the costs of aged care can found on My Aged Care. Consider consulting with your local Centrelink Office. https://www.myagedcare.gov.au/aged-care-home-costs-and-fees

Hello. How has the past couple of weeks treated you? It has been a big one, with the Reserve Bank of Australia (RBA) announcing the cash rate increase last Tuesday.

In case you missed it, the RBA have increased the cash rate for a second month in a row – this time by 50 basis points. This brings the cash rate from 0.35% to 0.85%.

All four major banks have passed on the full rate hike to home loan customers, however the good news is that for some who have funds on deposit (savings) in the bank, then rate rises are being passed on to these customers.

There remains considerable discussion in the market on whether the RBA is acting prudently regarding rate rises, and who it is really impacting. For many economists it was a shock. The RBA is hoping rate rises will make a quick impact to the high costs of living expenses and slow inflation.

If you have a home loan, now is time to start thinking about what your finances may look like over the next couple of years. If a rate rise doesn’t look like it will fit your budget, you should take time to act now. This means you may need to also start to cut back on regular expenses or consider a salary increase from your boss!! If you are thinking about refinancing, then probably better to seek that out now rather than wait.

Not all lenders have increased variable and fixed rates at the same price, so you may want to check out if it is a good idea to refinance.
Will rates stay as high as they are or even increase further? There is talk that next calendar year rates may need to decrease due to worldwide stagflation effects. If so then it may be a good time to refinance to a lender offering a lower introductory rate say for one year and then as that term expires see where fixed rates are sitting.

Read more here about the rate rise:

9 News
Canstar
RateCity

Any person seeking to undertake an investment strategy or a change in their retirement planning should always consider seeking professional legal or financial advice and seeking the expertise of a qualified tax accountant.

Good luck with the investing strategies.

moneymanagement #wealth #goodmoneyconversation #savings

Financial Literacy Month

• April is a good month to do a personal stocktake on how you are going against your own personal financial goals.
• Whether it be for saving for a house, saving for a special holiday or perhaps getting on top of your credit card, consider using a spreadsheet or a personal planner document to review your goals.
• This month, we will talk about inflation because it is on the tips of many market commentators’ tongues.
• Inflation could impact your personal budget so it’s a good time to familiarise yourself with the concepts., especially if you have a home loan.

A look at the economy

• The world has been in a disrupted state for 2 years with the COVID circumstances which is being further accentuated by the Ukrainian situation triggered by Russia. There has also been the consequential economic financial sanctions imposed on Russia by the West. Globally we see experienced uncertainty in labour force markets and supply chain issues which has fuelled inflationary expectations. There are further pressures on inflation due to the commodity and energy crisis precipitated by the Ukrainian situation. Therefore there is a lot of factors colliding and pushing together and so the general economic feeling is that there is going to be ongoing pressures on the global financial situation.
• What this means for the Australian economy is that we have already seen fixed rate home loans increase over the past 4 – 5 months. Remember that fixed rates are priced off the long term expectation of inflation, which has been priced into the 3 and 10 year US bond rate.
• Whereas variable rate home loans are influenced by the RBA deliberations regarding inflationary effects within the Australian economy. That is why the RBA has a range of inflationary targets it manages.
• If in Australia there is a feeling that inflation is on the rise due to the energy supply issues and labour force shortages, the RBA will use an increase in interest rates to curb total aggregate demand (eg this included fuel, commodities and general household goods).
• An example of what the RBA is trying to achieve here is to influence each household in Australia’s expenditure on discretionary items and redirect that money into their mortgage. It could be seen as a penalty for many households who already operate on a tight budget.
• With these global issues and now a the Federal election on the 21 May 2022, there are a number of market commentators in Australia at present who are suggesting that the RBA may decide to wait and see the inflationary effects in the economy. This is suggesting that there may not be a change in the official cash rate, which may delay flows into rising variable interest rates on home loans until possibly August or later.
• The alternative to this commentary is that the RBA retains a very conservative approach to managing inflation and does in fact go ahead with lifting the official cash rate around or before the Federal Election.

Case Study

Average home loan $500,000 – the current variable rate being paid by major lenders is around 2.75% – monthly repayment on a 30 year loan is approximately $ 2041 per month.

If the RBA lifted the official cash rate by 0.25%, your home loan rate could be increased by the banks to 3% per annum. The monthly repayment on a 30 year loan would then be approximately $2108 per month.

For the average family this means a monthly mortgage payment may increased $67 per month. This could mean reducing your takeaway coffees during the working week to 3 or 4 of the days or cancelling a few subscriptions.

Does this mean I should consider fixing my home loan?

If you take a look at fixed rate home loans at present, you will find that many of the banks have already accounted for the global expectations of inflation. In comparison to a variable rate loan, a principal and interest fixed rate home loan for 3 years could already be approximately 1% higher than the current variable rate.

If you have a large home loan on your family home, and want to provide you and your family some certainty over your home loan repayments, you might consider fixing a portion of the loan.

Bearing in mind, doing so means you pay upfront each month for that “insurance” against interest rate rises. This would be more than you would be paying on a variable rate owner occupier home loan. The amount of the extra repayments depends upon the timing and extent of future RBA official cash rate rises. Often, the banks will have conditions on a fixed rate loan that prevents or restricts additional loan repayments. You may not be able to have a mortgage offset account or pay a large lump sum in this scenario.

If you are needing some help to review your home loan, then you should always talk to a reputable lender or licenced mortgage broker. There are also some good websites to look at to compare interest rates, such as Canstar.

#moneymanagement #wealth #goodmoneyconversation #savings

Milan Chetkovich is a licenced finance broker, operating mortgage services business – Essential Financial Services – Finance Broker Licence – 392928. Milan is a Certified Practicing Accountant, and holds an Accounting degree and Economics degree from the University of Western Australia.

Tracey King is an experienced brand, product and marketing senior executive with industry experience in financial services, banking, aged care and retail industries. Tracey holds a Bachelor of Business in Marketing from Edith Cowan University, Perth Western Australia.

The information in this Blog is general and has not taken into account your objectives, financial situation, or needs. It is not personal advice. You need to consider whether this advice is right for you, having regard to your own objectives, financial situation and needs. You may need it is important to check any product information directly from the product provider. Ensure you consider the relevant Product Disclosure Statement (PDS) or other applicable product documentation before making a decision to purchase, Aquire, invest in or apply for a financial or credit product. You may wish to seek financial advice from a suitably qualified adviser or finance broker. The writers of this Blog may receive a fee for referring you to a credit or banking provider.