NZ Herald 12 October 2013

AThere’s no good way to outsmart the mortgage market.

As you say, most people are currently expecting mortgage interest rates to rise. A glance at the top table to the right of this column confirms that, with one-year rates being lower than two-year rates, which are in turn lower than five-year rates.

The naïve person will choose a one-year rate of, say, 5.5 per cent. But they could find that each time it expires, rates are higher. And by the time five years are up, they would have been better off with five years at 7 per cent.

You’ve realized that’s a possibility, and are eyeing the longer term. Trouble is, it’s really hard to predict five years out. Maybe rates won’t rise all that much, or they might rise then fall, and a one-year loan turns out to be best after all.

So what’s the sensible option or rule of thumb? It’s good old diversification, this time applied to types of mortgage. Have some of the loan floating, so you can repay it without penalty if you suddenly receive an inheritance, redundancy pay or big prize. And have some fixed, to give you some degree of certainty about your payments.

Diversification also reduces your risk of losing from interest rate changes. I suggest breaking up your loan into, say, one third floating, one third fixed for a year or two and one third fixed for five years. As interest rates change, you’ll find yourself annoyed about part of your loan but happy about another part. You sacrifice the satisfaction from making a really good decision to eliminate the risk of making a really bad one.

However, there’s a short-term issue for you, too. It sounds as if your lender will let you switch out of the 3.74 per cent loan before it matures. Should you?

Probably not. I’m sure the lender is being flexible because it would gladly get rid of such a low-interest loan — which is all the more reason for you to keep it! We don’t know how rates will change over the next six months, but it would be surprising if they rise enough to justify a move out of a 3.74 per cent loan in the meantime.

I suggest you stick with your current loan until it expires, and then spread your loan three ways.

And I take your point about Cantabrians. The rest of us promise not to envy your low-interest loan, given what else you’ve had to put up with!

AFirstly, well done on planning to move out of Auckland and cash in on the huge — seemingly ridiculous — difference in house prices around the country.

Basically you’re asking which is likely to grow more: the value of a property in central Auckland or one further out. We could also consider whether the CBD rent you’d have to pay would be higher than the after-tax rent you’d receive elsewhere. But that issue would probably pale into insignificance compared with the capital gains question.

So what’s going to happen to house prices? That’s always impossible to answer, and feels even more so currently.

In these situations, it’s best to look at your long-term goal, which is to own a central Auckland townhouse or similar. It’s probably better to go ahead and buy that property now.

If instead you buy a suburban rental, you might gain but you might lose. Why take an unnecessary gamble — to say nothing of the hassle and expense of buying and selling the property. And being a landlord isn’t always easy.

Look at it this way: you’ve sold in what feels like a high-price market, so buying in that same market is not such a bad thing.

AWe’re assuming you’re talking about a rental property or other second property. Under Labour’s proposal, gains won’t be taxed on people’s owner-occupied homes.

If the gain is made “after the date the CGT (capital gains tax) comes into force, then CGT would be payable at the rate of 15 per cent on the realised gain,” says Labour finance spokesperson David Parker.

“This is approximately half of the likely marginal tax rate of the taxpayer. It is lower as a proxy for not taxing inflation.”

You could argue that the whole $600,000 gain is just house price inflation. But in your example that’s much faster than general inflation — the consumer price index. So you really have made a gain, in that you could switch from home ownership to renting, or buy a house in an area where prices haven’t risen much, and you’d be much better off than when you first bought the house.

Parker’s comment: “It is fair that tax is paid on the real economic income, which the gain is. I believe it is unfair to leave this economic gain untaxed while lower income people earning via wages pay tax. It also distorts investment towards property assets rather than other industries or savings, which holds our economy back.”

I have particular sympathy with his point about comparing capital gains with wages. It doesn’t seem right to tax money that someone has worked for and not tax money that someone else receives simply because their asset has gained value.

Just to clarify what Parker says about taxing the gain made after CGT comes into force, you will be able to set the value of your property on that date by choosing from:

• The most recent government valuation for rating purposes.
• The purchase price in a recent arms-length purchase.
• A private valuation done at the owner’s expense.

You will also be able to deduct any capital improvements you’ve made.

ABreathe easy. “In general terms, money that is brought into New Zealand from the sale of a property overseas will not incur a tax liability,” says an Inland Revenue spokesperson.

“If the proceeds from the sale are put into a New Zealand-based bank account or shares, then resident withholding tax will be charged on any interest or dividends earned, but if the money is used directly to service debt, such as a mortgage, then there will be no tax liability.”

He does add, “However, this may vary depending on a customer’s circumstances, and they should consult their tax advisor.” But it sounds to me as though you haven’t got any worries.

Of course you might owe tax in your home country, if it has a capital gains tax or similar. But you probably already know about that.

AYou, your wife or anyone else can contribute to her KiwiSaver account. But she — not you — is the one who receives the government’s contributions.

If you can, contribute $20 a week or $87 a month or $1043 a year to her account. This will give her the maximum tax credit of $521 a year.

Can I just add that your grammar isn’t quite up to scratch? Not only is it correct to say “My wife and I” — think of the Queen’s “My husband and I” — but it also seems more polite to put the other person first.

Then again, half the world says it your way these days. And I suppose you could respond that I’m the rude one, for pointing this out.