- Many elderly, and others, could benefit from rates postponement schemes.
- Why floating interest rates might be better — for home equity release schemes and ordinary mortgages.
- A not-so-dumb question about the $50,000 exemption for international tax changes, and a new source of info on the changes.
QYour readers may not be aware that many local authorities offer a home equity release (HER) alternative for property owners to pay their rates.
The option is very rarely used, although it seems quite sensible for those aged, say, over 75, asset-rich, income-poor, with less than 20 years to go (probably). It is merely a further extension of SKI (Spend the Kids’ Inheritance!)
Councils provide this option at a very reasonable rate, perhaps better than private enterprise who need to show a profit.
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.
QYou mentioned quite correctly in last week’s column that, with the current New Zealand yield curve, fixed mortgage rates are lower than variable.
Reflecting this, Sentinel does indeed offer a 5-year fixed rate option on home equity release (HER) loans at a rate lower than our variable rate.
But very few borrowers opt for the lower fixed rate product. There are 5 main reasons:
- Fixed rates are lower than variable because the market expects that over time variable rates will fall from today’s relatively high levels. This could be costly, particular when you take into account the compounding of interest.
- There is a much closer correlation between house price inflation and variable rates than with fixed rates. Imagine how a borrower would feel if New Zealand experienced Japan-style deflation with very low interest rates and minimal growth in house prices, and they were locked into a long-term 10 per cent fixed rate.
- Costs are likely to reduce as the home equity release (HER) market matures. Such savings are likely to be passed on to the borrower unless they are locked into a fixed rate.
- Our experience is that around 5 per cent of borrowers will move each year for a range of unexpected reasons — death of spouse, health, family move etc, and as a result they want to repay their loan.
- If interest rates have fallen, those on fixed rates could face significant break fees. For example, if they borrowed $100,000 on a lifetime fixed rate and repaid at age 70, when their life expectancy was deemed to be 15 years, and long term interest rates had dropped by 2 per cent, they could face break fees of 15 x 2 per cent x 100,000 = $30,000.
- Fixing rates for the life of the loan does not afford certainty of outcome, as house price inflation and longevity will be key determinants of remaining equity in the property.
There is a strong reason for providers to fix for life of course, in that it effectively locks clients in, economically.
Perhaps this explains why we strongly recommend a variable rate, even if it does look a little more expensive today.
Chief executive, Sentinel
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.
QI follow your columns on taxing of overseas shares because I have shares and unit trust investments in Canada.
It seems that on April 1 we can look at the original purchase price of things to determine if we are under the $50,000 for tax purposes. My holdings would come under $50,000 on purchase.
However, what will happen on April 1, 2008? My holdings will probably then be well over $50,000 (I’ve had them a long time).
Do I have to revalue on April 1 2008 or does the $50,000 exemption last forever?
Sorry if this is a dumb question, but I would like an answer.
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.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.