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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.

Budget 2010

Published by Scott Miller on Saturday, May 22, 2010 in


There is a good chance you will be thinking - How does the 2010 budget affect me?

In this newsletter I will cover off some of the affects Thursday's budget will have in relation to owning property, both for owner occupiers and for investment property portfolio owners.

The Budget and what does it mean for property owners?

Owner Occupiers:

Basically not a lot has changed if you own your own home. Because home owners are exempt from claiming things like depreciation on their homes, losses against personal income, and don't usually derive an income from their home, most of the changes will not influence your day to day expenses (excluding things like the increase in GST etc).

The IRD still have their task force looking into owners who have placed their ‘principle place of residence’ (their own home) in an LAQC and are claiming loses as an expenses. This is illegal and the IRD/Government is taking this form of tax evasion very seriously. If you find yourself in this position I recommend you seek advice from an accountant immediately - putting one's head in the sand will not make it go away.

Investment Property:

In contrast there have been a number of changes (as expected) for those of us who own an investment property portfolio. However these changes are less dramatic than most of the pre-budget hype, speculation, and downright irresponsible dribble that was being circulated. So let’s cover of the main facts.

1)Depreciation on buildings has been removed unless the building’s life expectancy from new is less than 50 years. A list of such buildings is being made available and an application process for people who believe they fall under this criteria is being established. Personally when talking about residential property I cannot think of a reason where I would want to construct a property that would only last for 50 years. Its resale value for one would not be particularly high. There may be areas where sleep outs or minor dwellings are popular allowing for this kind of building and subsequent depreciation may take place?

2) One of the more annoying ‘the world is coming to an end’ forecasts around the changes to take place in the 2010 budget included ring fencing of losses within an LAQC. This would have meant that any losses incurred through owning a negatively geared property portfolio held in a LAQC could no longer be offset against your personal income tax. Although there has been some suggested changes (this is not law yet and is subject to change) to LAQC’s for the majority of us it will have no effect. This is due to the lenders of New Zealand making it compulsory for the directors of an LAQC to give personal guarantees for the loan the LAQC is being structured over.

 

The following is from Matthew Gilligan of Gilligan Rowe and Associates - one of New Zealand’s leading property accounting firms.


 Paragraph 5.11 states a member's interest (in the proposed new LAQC regime) would extend to include in the definition of equity the share of any debt guaranteed by the shareholder.

This means that if you are a guarantor, you get to claim losses up to the extent of your equity invested PLUS your guarantee. As shareholders will guarantee (most of the time) all of the debt, the structure will get full flow through of losses up to

100% of the value of the amount of debt they have guaranteed, or cash injected - the higher of the two.

 Therefore effectively existing LAQC users will get the benefit of losses flowing through, provided they are guarantors to the debt.

 Remember this is all subject to submission and not law yet.

The other major change regarding LAQC’s is around the tax paid when an LAQC starts making a profit. At present if you make a profit in an LAQC the maximum tax rate you will incur is 30% (company tax rate). However proposed changes will see this rate change to match your personal tax rate. So if you (under the new tax rate affective in October) earn $70,000.00+ you will be taxed at 33% and so will your profits from your LAQC. This is seen as making the tax system more fare and will limit tax avoidance through LAQC structures.

Please feel free to contact me if you have any questions or thoughts on what I have written above.

May's Newsletter

Published by Scott Miller on Sunday, May 09, 2010 in



The last two months have seen many interesting developments in regards to property and of course this years budget is just around the corner.

The Budget

 

 

 

 

The first quarter of 2010 has seen the growth of late 2009 slow quite markedly. The issue is understanding why and how long this slowdown will last.

House prices have flattened this year adding weight to the concept that the growth of late 2009 was driven predominantly by lack of stock on the market not an economic rebound. While this continues to be the case the 'fear' that John Key has generated in the residential investment market due to his proposed tax changes to residential investment property has had a ‘lead weight' effect on property investment.

Our belief is that until budget 2010 is released in May and it is clearly understood what changes are being made to the tax laws around residential investment property most investors are sitting on their hands (and their cash) which will continue to hold the momentum the market had in late 2009 back. As such the average days to sell a property has lengthened to its highest level since June 2009 and is quite indicative of the true state of the housing market.

One highlight was today's unemployment figures announcement. There was an unprecedented 1%+ drop in the unemployment levels in New Zealand for the month of April. This has increased the possibility of an interest rate rise in June 2010 instead of the more widely predicted July increase. However Dr Bollard has indicated that he believes interest rates will rise at a much slower rate in similar situations in the past. I personally don't see this so much as a negative influence as much as I see this as a necessary part of the property sectors recovery.

Kiwis continue to deleverage their asset position (repay debt while interest rates are low) and this puts us in a good position for growth in the not too distant future (as in 2011) as pent up desire to invest and grow will at some stage be unleashed stimulating the economy. We cannot help but believe that the 2011 Ruby World Cup will be a strong catalyst for our 'real' rebound.

Our recommended borrowing strategy has not changed greatly in the past 6 months and at the risk of repeating ourselves we cannot recommend anything else other than floating rates or six - twelve month fixed as a preferred option. Variable rates remain at record lows, while most fixed rates have fallen in the past month they remain very high in relation to floating rates and this is more a sign of the market ‘overpricing' long term rates in the back half of 2009 which was driven by the price war the banks created for term deposits and not improvement in market conditions. Stick with the shorter term funding but keep your payments above the minimum required to repay, perhaps assuming rates of 1% higher than today.

Please find this useful link below and make your vote - it is best your voice is heard.

Do you support tax changes to investment property?        

YES  /   NO

Interest Rates

So with the new unemployment figures and the direction in which they are heading together with the contents of the Budget (which is due to released on 20th May), will impact the Reserve Bank’s review of the Official Cash Rate early next month. The consensus is now that the Reserve Bank will start increasing rates as early as June. Increases are expected to be in small increments of around quarter of a percent.  How many we have will depend on how strong our economic recovery is. 

As mentioned above a drop in unemployment is a strong indication that the economy is improving. The other significant event that is severely affecting the international financial markets, is the debt crisis in Greece and Portugal and whether it will extend to other larger European countries such as Spain, UK and Italy. This crisis has been the cause of the rapid appreciation of our currency particularly against the Euro which is now up over 10% over the past month to 0.56.  This has had a major effect on world equity markets which are wobbling - some are down over 3% this week. Two years ago, as the global financial crisis was unfolding, individual governments were sorting out the banking system. Now the world bankers will have to focus their attention on sorting out some individual countries.

Tip of the month:

 

 

 

 

 

{tag_recipientfirstname} if your home loans are on floating I believe it is time to look at your fixing options. Interest rates are going to go up and although Dr Bollards intention is to increase them slowly you never know what might happen. Feel free to contact me or email me to go over the best interest rate solutions for your needs.


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