NZ Herald 10 March 2007

AMany more councils are now offering rates postponement schemes than when I wrote about them a few years back, and good on them.

The schemes can bring relief — or spare cash for a bit of fun — into the lives of not only retired people but also younger cash-strapped people.

Under these schemes, people 65 and over can postpone paying part or all of their rates until they move or die — although they can repay partially or fully at any time sooner, without penalty.

Basically, you run up a debt with the council that is secured by your home, just like with an ordinary mortgage.

Current interest on rates postponement schemes is around 7 to 7.5 per cent, with annual admin fees of around 1.25 per cent, bringing the total to 8.25 to 8.75 per cent, says Peter McKinlay of McKinlay Douglas, public policy advisers that help councils to set up and run the schemes.

Typically, you don’t make any principal or interest repayments until the end, so you are charged interest on interest in the meantime. This means that, like HER loans offered by private companies, the debt grows quite fast. And if you keep adding rates to the debt year after year, it grows even faster.

However, like the HER loans we discussed last week, these schemes are not rip-offs. In fact, under the law, councils may not make a profit from their schemes.

They charge interest at the same rate as they themselves pay if they borrow money. And “all charges are set to cover the costs of administering the scheme, but no more,” says McKinlay.

If a council didn’t charge interest and admin fees, at compounding rates, they would be giving an unfair advantage to participants compared with other ratepayers. Participants get the use of the money they would otherwise have paid in rates. And in any financial system, they should expect to pay interest for that privilege.

Some councils also let those under 65 postpone their rates, but only for a fixed period of up to 15 years. At the end of the term, the full loan is repayable.

This can be useful for people who are short of money for a period but who expect to cope better later. Perhaps they are suffering from health problems or redundancy, or they might be a sole parent putting kids through school. When their loan expires, they might repay it by adding to a mortgage.

All participants in rates postponement schemes have to attend a “decision facilitation” meeting, to make sure they understand what they are getting into.

If they wish, they can take family members with them to the meeting. In any case it’s a good idea to tell anyone who might expect to inherit the house that the debt to the council will have to be paid when the house is sold.

The charge for this meeting and other start-up costs is usually around $400, which can be added to the debt and repaid later.

In some cases, a participant must have owned their home for at least five years.

Councils currently offering the schemes are: District councils in Ashburton, Far North, Gisborne, Kapiti Coast, Marlborough, Masterton, Queenstown Lakes, Rodney, Rotorua, South Wairarapa, Thames-Coromandel and Western Bay of Plenty. Also Nelson City Council and Environment Waikato.

For more info on each scheme, go to www.ratespostponement.org.nz or ask your council.

North Shore City considered adopting such a scheme recently, but instead decided to loosen its criteria for an older type of rates postponement scheme, available only to those in financial hardship.

Other councils also have schemes for hardship situations. Ask your council for details. You might even want to urge them to move to a broader-based scheme.

So far, only about 100 people nationwide use rates postponement, says McKinlay. It seems silly that more haven’t taken advantage of it.

While a participant’s debt will grow over the years, it will almost always remain a relatively small portion of the value of the house.

As our correspondent says, it’s an opportunity to spend a bit of the kids’ inheritance, and why not? It’s your money. For those without heirs, there’s all the more reason to enjoy some of the equity in your home.

AAn interesting list of reasons, and one that people weighing up whether to take a fixed or floating rate on their ordinary mortgage might consider.

On your first point: Nobody can really say, of course, what “the market” expects, as we can’t go out and ask everyone.

Still, whenever short-term rates are higher than over the long term — whether we’re looking at term deposits or loans — logic says that many people are expecting rates to fall.

For example, banks are currently offering one-year fixed rates at around 8.5 per cent, and five-year fixed rates at around 8 per cent.

Why would they accept a lower rate for five years? Because they expect that in five years’ time, the one-year rate will be, say, 7 or 7.5 per cent. At that stage, they’ll be glad to have money lent out at 8 per cent.

On your third point: I hope you do, indeed, pass along cost savings. Hopefully, the growing competition in the HER market will encourage that.

AThere are no dumb questions. The dumb people are those who don’t ask.

Basically, as long as you buy no more non-Australasian shares, you stay outside the new rules forever. You don’t have to do any more calculations in subsequent years.

But if you do buy more shares, you need to add the cost of those purchases to the original costs of your current holdings. If that total rises above $50,000, you will be taxed under the fair dividend rate rules.

Yours is one of many questions I’ve received about the tax changes. I will include more in the next few weeks. But even if we ran nothing else for weeks, I couldn’t answer them all in the column. And that would be a sure-fire way of boring most readers witless.

However, help is at hand. Inland Revenue has recently published two papers clarifying a lot of the issues people are asking about.

Go to www.taxpolicy.ird.govt.nz, and scroll down the homepage to 23 February, “More on offshore investment changes”. I hope many readers whose letters won’t make it into the column can find answers there.