- Should we blame the banks for soaring house prices?
- 2 Q&As on the new fair dividend rate tax on non-Australasian shares — the threshold, and trying to get around the rules
- 2 Q&As on home equity release — lifetime interest rates and break fees if you change your mind
QSomething I never see come up in the multitude of discussions about the out-of-control residential housing market is the part the money lenders play in exacerbating the problem.
The difference between a variable and fixed rate mortgage is that whenever anyone ‘re-fixes’ their mortgage interest rate the mortgage term is allowed to stay at a ‘never-never’ level. One re-fixes at the fixed interest rate of the day, and gets another 25-year term, so of course the monthly repayment remains ‘reasonable’.
However, if you were five years down the track on an initial 25-year mortgage and the lenders required the new mortgage term to be 20 years, the monthly mortgage repayment would become less attractive.
Also, why are lenders allowed to give people over 50 years old (45 even) 25-year mortgage terms? After retirement (say 65) most of these people are not going to be able to afford the mortgage repayment.
How too are they allowed to give interest only (never-never) mortgages?
Both cases are totally irresponsible in my view. Improve this lender behaviour and it’ll solve the out of control housing market.
AFirstly, borrowers don’t usually extend the term of their loan when the fixed-rate period ends. Usually, a mortgage originally set at 25 years runs for just 25 years.
However, if the interest rate rises, sometimes the term is extended to reduce the payments.
And you’re quite right, people sometimes get interest-only loans and 50-year-olds get 25-year loans. Should banks do that?
Let’s not blame the person who sells the candy, but rather the one who buys too much and gets fat on it.
Market forces and Reserve Bank regulations limit what banks lend. If they make too many bad loans, they will find themselves in trouble.
Sure, they can foreclose on mortgages. But that is costly, and not exactly great for customer relations. Banks generally try to avoid foreclosures by lending wisely.
Whether it’s wise for customers to take all that banks offer them is another question.
People who keep extending the term of their mortgage, or take an interest-only loan, will end up paying huge amounts of interest. But that’s their choice.
Hopefully, they do this for just a short period — tiding them over a redundancy or other cash flow crisis — and then get back to getting rid of the mortgage.
As for the 50-year-olds, they might work until 75, or get a big pay rise or inheritance or redundancy in the meantime, and repay the loan early.
If they come to a point when they simply can’t pay the mortgage, they can always sell down. Usually, though, if someone really wants to stay in a house they find a way to do it.
In summary, we never know about others’ circumstances. And I much prefer to see banks free to be flexible rather than heavily regulated.
You will probably be pleased to know, though, that the Reserve Bank is considering making life a bit tougher for banks by making them hold more reserves. This should reduce mortgage lending, “while at the same time ensuring that banks have an adequate buffer against a possible housing downturn,” the Reserve Bank said last week.
QWith regard to your Canadian writer who spent $60,000 on an investment in non-Australasian shares, am I correct to deduce that as the product cost $60,000 and eroded in value to $16,000, then the IRD expect the original value to be $60,000 yet will tax the person on their “gain” if it quietly grows back to $60,000, even though technically they have not made a cent of real “gain”?
If I may ask one more thing, if the value of one’s overseas investment fluctuates wildly due purely to currency changes (which is a big risk for the $NZ) will we be taxed on the gain but not be able to claim the losses?
And if the value of my investment is $49,000 on 1 April and then $49,000 the following 31 March, can I ignore the tax regardless of how much it goes up (and assuming I sold bits during the year) in between? Sorry for bombarding thee.
AOn your first question, that’s one way of looking at it. Predictably, perhaps, Peter Frawley of Inland Revenue has a different perspective.
“The new fair dividend rate method seeks to tax an amount approximating a reasonable dividend yield on a person’s investment each year,” he says. “This is set at a maximum of 5 per cent of the investment’s opening market value.”
Some argue that 5 per cent is not a reasonable amount, as dividends on non-Australasian shares are usually lower than that. In effect, then, part of the tax will sort of be on capital gains.
Nevertheless, strictly speaking the new tax is not a capital gains tax. And that means, says Frawley, “it is not appropriate to recognise capital losses.
“It is an inherent feature of the new method that no losses are carried forward as each year is treated separately. Any method which involves carrying forward amounts (whether gains in excess of 5 per cent or tax losses) would be much more complex than the new method.”
Frawley also points out that under the current law “people are still taxed on their dividends even if their shares go down in value, resulting in a net loss for the year. Under the new fair dividend rate method no tax would be payable in such an income year.”
There will be market crash years when we are glad we are in the new regime rather than the current one. It’s a swings and roundabouts thing.
On currency changes, the situation is the same, really. It won’t matter whether the value of your offshore shares changes because of changes in the share price in the home country or because of currency fluctuations.
But changes in New Zealand’s exchange rate with one country will to some extent be offset by changes with another country. And over the years, there’ll be ups and downs. Regardless of tax, any investor in offshore shares needs to learn to ride those waves.
The answer to your third question is “Yes, you can ignore the tax.”
The new rules don’t apply to individuals whose non-Australasian offshore shares cost less than $50,000. It’s irrelevant what happens to their value after purchase.
QI have a portfolio of UK shares over the $50,000 threshold and therefore due to fall prey to the new foreign investment wealth tax.
From what I’ve read it may be advantageous and legitimate to sell these on or before 30 March and buy them back in April. This way the opening value of offshore investment is zero.
But how are dividends on shares purchased during the year treated? Is taxable dividend income still capped at 5 per cent of the opening value of the portfolio (i.e. zero)?
There are also some costs for selling and buying and a risk of price movements in the meantime to take account of, but the benefits could outweigh these costs.
Does this investment strategy make sense for the first year, or is it too good to be true?
AProbably the latter.
“Any transaction that is done for the purpose of reducing tax could trigger the general anti-avoidance provisions in the Income Tax Act,” says Peter Frawley.
He adds that “individual facts and circumstances are taken into account.” But it might be pretty hard to argue that you had any other purpose.
And, knowing that people are thinking of using this strategy, I wouldn’t be surprised if Inland Revenue takes particular interest in share trading over the next few months.
Only you can decide if the strategy is worth the hassle, costs and possibly sleepless nights.
If you do sell and then repurchase your shares, under the new fair dividend rate rules shares bought during a tax year, and dividends on those shares, aren’t taxed, says Frawley. They come into the regime the following year.
By the way, if you sell and then buy back less than $50,000 worth, you would be under the $50,000 threshold. So you would be taxed under the current regime, which means your dividends would all be taxed.
QWe read with interest the public debate that is emerging in your column on the use of home equity release (HER) schemes, and in particular the challenge around what interest rate is most appropriate for these products.
Bluestone is a specialist reverse mortgage provider funded by Westpac, and offers its products with either a lifetime fixed interest rate, or a variable rate with a lifetime cap rate. The latter is for those who buy into the theory that over the long term, rates will be lower than today.
For an age group that is more susceptible to volatility in the financial markets, this protection makes good sense rather than taking the “just trust us” route.
Peter McGuinness, CEO, Bluestone Equity Release
AYour competitor Sentinel has had free publicity in this column lately, so I guess it’s your turn.
And it’s interesting that you offer lifetime interest rates. Whether they are a good deal depends, of course, on how high they are. But let’s not go there. Interested readers can contact you.
QWe have been following the recent coverage about home equity release (HER) offers and the commentary around the potential cost of break fees to clients if they repay early.
Dorchester Life was the first provider in New Zealand of a HER product. This was relaunched last year with increased flexibility, including a choice of fixed or variable terms.
We know many clients would like to have the security of a fixed term, but without the associated costs of break fees and other charges should they decide to change their reverse annuity mortgage or repay it early.
Therefore, Dorchester Life does not charge any break fees, providing we are given three months notice.
Henry Lynch, group general manager, Dorchester Life
AAnd another one! Clearly the bells and whistles on HER products vary widely. The message: shop around.
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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.