Fixed vs Variable Interest Rates? 

With interest rates always a topic of conversation, we thought it would be a great idea to explain further what type of loan you should go with – one with variable rates or fixed rates? 

This is a very common question that many of our clients ask who are looking to take out a loan.

The best option for you will depend on many personal factors along with various external factors.

Personal factors generally are those items that we have total control over.

Personal Factors may include:

  • Stage of our life; such as whether you are single, married, starting a family or looking to retirement, and
  • Purpose of loan; business &/or investment versus personal loan, and
  • Forecasting personal changes; such as jobs, your income or perhaps an inheritance.

External factors are the ones that you generally don’t have any control over.

External Factors may include:

  • The economy; such as a change in government policy or legislation, and
  • Cash rates; for example, an increase in interest rates, and
  • Lenders; banks changing their lending requirements.

Both personal and external factors are all quite dynamic, thus knowing how to get the best and perfect result that will last the life of the loan requires someone with the ability to accurately forecast the future – something we all wish we had!

With the ever-changing environment, we all live in, we can only go on what we believe is the best option for us at that point in time.  As a result, we must weigh up the advantages and disadvantages of each option.

Please find listed below both the advantages and disadvantages of choosing a loan with either fixed or variable interest rates.

Fixed Rates

Variable Rates

Advantages Security of knowing your monthly repayments will remain the same for a fixed period.

In a rising interest rate market, your rates will remain fixed and thus lower than variable rates.

 

Are usually more flexible than fixed loans. For example, the ability to pay extra of the principal or possibly redraw any monies paid in advance.

Variable loans may offer extra features; some of which could be attractive to your situation. The options will vary with different banks.

Disadvantages

 

Financial institutions may impose early exit fees if you try to switch from a fixed to variable loan.

With some fixed loans, financial institutions may charge on any extra repayments you wish to make. Please check this with your bank.

Repayments are based upon the variable interest rate. Because of this, if interest rates rise, the minimum monthly repayment will most likely rise also.

 

 

Split Loans

Many of our clients have also utilized a third option – split loans have a mixture of both worlds.

For example, Mr. & Mrs. Howard decide to invest in a commercial property and require a loan of $500,000.  The loan of $500,000 can be split 50/50 – with a $250,000 fixed rate and $250,000 on a variable rate. In this case, the borrower is still subject to changes in the interest rates, but the impact is limited to the repayments on the $250,000 variable part on the loan. This would also allow them to make extra repayments on the variable loan if it suited them.

Now that you have seen the advantages and disadvantages of both variable and fixed loans and understand that there is a chance to split a potential loan, how do you make the right decision? It’s important to ensure that the decision you make is in your best interest and suits you both personally and financially.

Being Financially Sorted

Our advice would be to talk to the experts, those that know the ins and outs, those that deal with the various financial institutions daily.  A loan broker will be able to sit down and discuss your personal circumstances, your requirements, both for today and in the future and then deal with the financial institutions on your behalf.  Generally, a loan broker will get paid by the banks only when they bring forward a deal, meaning it’s a free service to you as the client.

A great loan broker will consider and analyse the following for you: –

  • What are the best variable rates on offer today?
  • What are the best fixed rates on offer today?
  • How these respective rates will effect your cash flow?

Having such a discussion with a broker will certainly take some time out of your day but will also help you make the best decision for your personal situation.

Our clients use loan brokers every day.  Please contact us today to recommend someone suitable to your situation. 

Home Office Expenses

(www.ato.gov.au)

Currently, we are in the process of completing many client’s income tax returns, and we have noticed a common question around home office expenses & the deductibility thereon. Let’s have a closer look.

If you’re an employee who regularly works from home, you may be able to claim a deduction for expenses relating to that work. These are generally home office running expenses, and phone and internet expenses.

Expenses you can claim

Check out the table below for the expenses you can claim as well as the three ways you can work at home, which include:

  • home is your principal place of work and you have a dedicated work area that is unlikely to be suitable for domestic use
  • home is not your principal place of work but you have a dedicated work area – for example a study
  • you work at home but you don’t have a dedicated work area – for example you use a room with a dual purpose such as a lounge room.
Home office expenses you can and can’t claim
Home is your principal place of work and you have a dedicated work area Home is not your principal place of work but you have a dedicated work area You work at home but you don’t have a dedicated work area
Running expenses – cost of using a room (eg gas or electricity)

Yes

Yes

No

Work-related phone and internet costs

Yes

Yes

Yes

Decline in value of a computer (work related portion)

Yes

Yes

Yes

Decline in value of office equipment (eg tables and chairs)

Yes

Yes

No

Occupancy expenses – cost of owning or renting the house (eg mortgage interest or rental payments)

Yes

No

No

Running expenses

If you are required to work from home and have a dedicated work area, you can claim the work-related proportion of your running expenses. These include:

  • home office equipment including computers, printers and telephones. You can claim the full cost (for items up to $300) or the decline in value (for items $300 or more)
  • heating, cooling and lighting
  • the costs of repairs to your home office equipment, furniture and furnishings
  • cleaning costs
  • other running expenses including computer consumables (for example, printer paper and ink) and stationery.

Calculating running expenses

There are two ways to calculate your running expenses:

Fixed rate

Instead of recording all of your actual expenses for heating, cooling, lighting and furniture depreciation, you can claim a deduction of 45 cents for each hour you work from home.

This rate is based on average energy costs and the value of common furniture items used in home business areas.

To claim using this method keep records of your actual hours spent working at home for the year, or keep a diary for a representative four-week period to show your usual pattern of working at home.

You need to separately work out all other home work area expenses, such as phone and internet expenses, computer consumables and stationery, and depreciation on computers or other equipment.

Actual expenses

To calculate actual expenses:

  1. record the total expenses for lighting, cleaning, heating and cooling for your home for the year
  2. work out the floor area of the part of your home that you use for work as a percentage of the total floor area
  3. work out the percentage of the year you used that part of your home exclusively for work. For example, if you used it for work for six months during the year, the percentage would be 50%.

You calculate your deductions for decline in value by working out the amount of depreciation for each item for the year and claim the proportion of that amount which reflects your work-related use.

Example 1: a dedicated room for work

Julia is a lawyer who works as an employee for a large city firm. Julia’s employer has agreed that she can work from home two days per week.

She has a home office that she works in on the days she does not travel to the city. Julia and members of her family also use the home office for private purposes, including personal use of the computer and to store household items.

Julia can claim the running costs, but only the portion of the expenses that relate to her work-related use of the home office.

 

Example 2: no set work area

Alastair is a high school teacher. From time to time, Alastair works in the lounge room at home, for example, to mark tests and prepare end of term reports. He does not have a room set aside exclusively for work.

Alastair can only claim specific running costs associated with the work he does at home, such as the work-related portion of depreciation of the laptop he used to prepare the reports.

He cannot claim a proportion of other running costs, such as lighting, cleaning, heating and cooling as his lounge room has a variety of uses and is not an area set aside for work.

 

Example 3: chooses to work from home

Natalie is a web developer for a large company and usually works from her office in the city. While Natalie is not required to work from home, her employer supports it. Natalie is not provided with the work equipment to use at home, so she uses her own laptop, internet connection, mobile phone and thumb drive and completes her work in her study.

Natalie is entitled to claim running costs including the work-related proportion of depreciation on her laptop, her office desk and chair, and a percentage of lighting, heating and cooling that reflects her work-related use of the office. Natalie needs to apportion these expenses to take her private use into account.

 

Occupancy expenses

Occupancy expenses include rent, mortgage interest, property insurance, land taxes and rates.

Employees are generally not able to claim occupancy expenses. You can only claim the work-related proportion of your occupancy expenses in two very limited circumstances:

  • if the space in the home is a place of business, and not suitable for domestic use, for example, a doctor or dentist surgery or a hairdresser studio in the home
  • if no other work location is provided to an employee by an employer and the employee is required to dedicate part of their home to their employer’s business as an office – you can claim the portion of these costs that relate to a clearly identified place of business.

If you claim occupancy expenses, you do not qualify for the CGT main residence exemption for the part of your home that you use for work.

Calculating occupancy expenses

If you are eligible to claim occupancy expenses, you can work them out by calculating the:

Total expenses × floor area × percentage of year that part of your home was used exclusively for work

If the area you use for work takes up 15% of your home and you used it for work for the whole of the year, you can claim 15% of your occupancy expenses.

Phone and internet expenses

There are two ways to calculate your phone and internet expenses:

  • you can claim up to $50 without records, or
  • you can calculate your actual expenses.

Records you must keep

You must keep records of your expenses, such as:

  • a diary you have created to work out how much you used your equipment, home office and phone for business purposes over a representative four-week period
  • receipts or other written evidence, including for depreciating assets you have purchased
  • diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses you cannot get any kind of evidence for
  • itemised phone accounts from which you can identify work-related calls, or other records, such as diary entries if you do not get an itemised bill.

 

For Your Calendar…

  • 21 Sep Lodge and pay August 2018 monthly business activity statement

  • 30 Sep Lodge PAYG withholding payment summary annual report if prepared by a BAS agent or tax agent.
    If a payer has only closely held payees and their tax agent helps prepare their report, they may be eligible for a concession to lodge this report by the due date of their tax return.