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Mortgage Advice Blog

Get the latest news and tips about mortgage finance and the property market. Scott Miller, mortgage broker from Advanced Mortgage Solutions comments on housing and lending.

~November’s Property Newsletter

Published by Scott Miller on Thursday, November 12, 2009 in
Blog

Welcome to November’s newsletter.

This month has seen it fair share of property related news.

  • · NZ’s Official Cash Rate remains unchanged
  • · Australia’s Official Cash Rate increases for the second time running
  • · Associated person’s ruling comes into effect
  • · Debate of capital gains tax continues
  • · House prices continue to improve
  • · Mortgage interest rates continue to increase

New Zealand Official Cash Rate (OCR) has remained unchanged for the 4th six week period in a row, and Dr Bollard has repeated his intentions of leaving it unchanged until late 2010. Some economists were predicting that New Zealand would follow Australia’s lead and increase the OCR to offset any inflationary pressures due to the improved outlook of New Zealand’s economy. The reality is that Australia came through the recession in much better shape than New Zealand and it will take some time for the improvements in our economy to show through in any real terms of growth.

This unchanged status in the OCR however has not stopped mortgage interest rates from increasing. One factor (and there are many) attributing to these interest rate increases is lenders in New Zealand have been under increased pressure from the Reserve Bank to limit the amount of offshore borrowing secured for mortgage purposes, and to increase their local deposit funds to cover any shortfalls. This has lead to lenders around New Zealand offering better rates on term deposits thus pushing up mortgage rates to cover costs of the accumulating interest on these term deposits.

In fact the 3, 4, and 5 year rates are now above their ten year averages, making these rates undesirable to fix in unless under particular circumstances. I.e. parking an estate or your property portfolio’s cashflow allows.

Please contact me here if you have a fixed term roll over coming up for renewal as it is very important to have the best interest rate structure in place bearing in mind how volatile interest rates are at the moment.

Associated Peron’s Ruling

The associated persons ruling came into effect on 6th October 2009. This will have far reaching repercussions for those people who have both buy and hold and trading portfolios. The ruling (in basic terms) states that if you are trading property, it is deemed that you are a ‘trader’ and that this is how you go about making a living. So even if your intention when purchasing a property is to buy and hold, if you sell this property within 10 years of purchasing it, the property is tainted under this new ruling and you will have to pay income tax on any profits.

More importantly though, because you are considered a trader you will have to have claimed GST after purchasing the property and as such will have to pay GST back to the IRD when selling the property. This is very important to remember as it will make a big difference in your calculations when purchasing a potential property.

The old structures of setting up a buy and hold company or trust for buy and holds, and a separate company or trust for trades will no longer protect you from becoming tainted.

There are however a couple of things to keep in mind.

1) The ruling only takes effect on property purchased at the time of acquisition. So all property purchased before the 6th October is not tainted by this ruling even if you sell the property before owning it for 10 years.

2) If you do not trade property or sell a property within ten years of purchasing it (after 6 Oct 2009) you will not be considered a trader and as such will remain untainted.

House Prices

House prices continue to rise across the nation. The strongest growth continues to be in the major city centres however this is filtering down to smaller areas of population. With fears that strong house prices will ultimately cause another recession down the line there has been a lot of talk of introducing a capital gains tax to dissuade people from investing in property.

You might think I am bias but I think this is very short sighted and the long term effects of such a tax has not been thought completely through. Property investment has always been a large part of New Zealand’s economic landscape and to attribute the cause of the recent recession solely on property is ridiculous. To introduce a capital gains tax in order to reduce the pace of increasing house prices and making it more affordable for the average consumer makes little sense to me.

If the government increases the tax payable on petrol or cigarettes (or any other items) then it’s not the shop owner that bears the brunt of this increase in total cost of purchasing this item to sell. The extra expense incurred by increasing the tax levy is pasted onto the consumer, therefore allowing the shop owner to retain his margin. This type of on-flow effect will also take place if a capital gains tax is introduced on property. The net result in my opinion will be higher property prices (hindering the average first time buyer), resulting in less people owning their own home and more people settling for the rental option. Which in turn fuels the price of houses and further tilts the balance of home ownership in favour of the property investor, which I believe to be the exact opposite of what the intentions of bringing in a capital gains tax is suppose to achieve. Watch this space!

Summary

Gareth, a lot has happened in property over the last month. I have summaries the most important factors that may affect you. I do however strongly urge you to contact me directly if you are thinking about completeing any property transactions. My services and advice are largely free and I would hate to see any part of your property portfolio compromised.


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