Do your sums on FHOG

The Boost to the First Home Owners Grant has been extended until 30 September, 2009. After that it reduces by half until 31 December 2009. In the New Year, the grant returns to an ongoing amount of $7000 for both new and established homes for those buyers who are eligible.

However, being eligible for the grant doesn’t necessarily make buying a house achievable. Prior to the announcement of its extension, we were inundated with calls from customers who wanted to take advantage of the government’s generous offer, particularly for the $21,000.00 for the purchase of a new dwelling. While the $21,000 is still up from grabs for those whose construction commences on or before September 30, it might not be enough to get you into a home on its own.

This is largely because lending has changed significantly over the past several months. In the current environment, the great majority of banks will only lend you 90 per cent of the value of the property you are considering for purchase. This means you have to come up with the other 10 per cent yourself. In some circumstances you can still borrow 95 per cent but even 5 per of an average property is still a lot of money.

The other stumbling block is the fees. While state governments have come to the rescue on stamp duties (for example: first home buyers are virtually exempt from transfer and mortgage duties on homes under $500,000 in Queensland) there is still the matter of mortgage insurance. To get a loan where the borrowing amount is greater than 80 per cent of the purchase price, you have to get your loan mortgage insured and this comes at a cost - the lower the LVR the cheaper the premium. However, as we’re talking 95 per cent, these premiums are at the upper end and even with the discounts some insurances offer first home buyers, the amount can be several thousand dollars.

The last hurdle you need to overcome is the requirement to provide evidence of genuine savings. This means you have to demonstrate to a bank that the money you are contributing as 5 per cent has been saved over a period of time – usually 6 months.

Table 1. Estimate of Savings Required – Established Home

Costs
Purchase Price $350,000.00
Lenders Mortgage Insurance (approx)* $ 6,949.00
Government Fees (estimate) $ 676.00
Legal/Conveyancing (allow say,) $ 1,000.00
A Total Costs to Purchase $358,625.00

Funds
Borrowings from Bank @ 95% $332,500.00
First Home Owners Grant $ 14,000.00
B Total Funds Available $346,500.00

A - B = Your contribution (savings) $ 12,125.00


After December this year when the FHOG reduces, this same scenario will be $7,000.00 dearer. Trying to do the same thing with only a 90 per cent loan will be even more difficult. You should note that there are conditions surrounding your circumstances in qualifying for a 95 per cent LVR loan apart from the obvious issues of affordability.
In summary, if you are nearly in a position to buy your first home it might make sense to explore your options sooner rather than later. However, don’t put yourself in a situation where you can't afford your new loan just for the sake of the extended first home owners grant.

* Lenders Mortgage Insurance will vary depending on bank and Mortgage Insurer

Stupid, stupid vendor

Sydney newspapers are reporting that vendors are increasing the prices of their properties in anticipation of an increase in vlaue caused by the recent changes to the First Home Owners Grant Scheme (FHOG). The grant was recently increased from $7,000.00 to $14,000.00 for existing properties, and a whopping $21,000.00 for newly constructed homes. The Sydney Telegraph calls these sellers “Greedy” but I would be more inclined to call them Stupid.

In case you haven’t noticed, the property market is really depressed. Forget all the kybosh that the various real estate bodies are pedaling, nobody’s buying. In other words – it’s a buyer’s market. So it’s a bit of a surprise that some vendors would think to put their prices up. They haven’t been able to sell their properties at their current asking price so they think the best idea is to increase the price? Right - good idea. Not.

I wrote this off as a one off but last week I was helping a client to restructure their loan to assist them with an investment purchase. They had their eye on a renovator near the beach on the Sunshine Coast which had been on the market for a while. After we had finance in order our clients went back to the vendor to make a cash offer (subject to valuation and building inspection) but guess what? The asking price was now $30,000.00 more than it was a week ago. What had happened?

During the process of arranging the pre-approval, the FHOG went up. So somehow, in a severely depressed market where house prices are clearly falling, the seller thinks this house is now 12% more valuable. Our client, and their cash offer, walked away. Stupid, stupid vendor.

Merry Christmas Mr Rudd

The Federal Government has announced a $10 billion financial stimulus to help prevent the Australian economy from sliding into recession in the next six to 12 months. The package is aimed mainly at low and middle income earners, and includes five main planks:

1. $4.8 billion in new support for pensioners and carers, to be paid in the form of lump sums later this year.
2. $3.9 billion for low and middle income earners. Eligible families will receive a payment of $1000 per child.
3. $1.5 billion for first home buyers, with the first home buyer bonus to be doubled from $7000 to $14,000 on established homes and tripled to $21,000 for new homes.
4. $187 million to double the number of training places available to 113,000.
5. Fast-tracking of the Government’s $20 billion infrastructure program.

The package is designed to stimulate economic growth by boosting consumer spending, so retailers stand to benefit most of all, as pensioners, carers and families will all have around $1000 more in their wallets. Most payments will be made around 8 December so this should mean the Christmas trading period will be a lot better than previously thought.

The Government’s support for the property sector has also attracted approval. The Housing Industry Association is predicting a big jump in construction activity and an improvement in housing affordability. When the first home owner’s grant was doubled for new house purchases in 2001, the number of new dwellings built increased by 3000 per month over a nine month period. This time around, HIA is tipping new housings starts will jump by 15,000.

Time is of the essence for those wanting to take advantage of this initiative as the changes to the grants are only available unitl June 30, 2009. Because of this "urgency", a wide range of property services and construction businesses should feel immediate benefit, including real estates agents, builders and other trades, home maintenance companies and conveyancers.

keeping your previous home as an investment property

Our customers upgrade and move homes for all sorts of reasons and many of them keep their original home as an investment property. They are generally aware that in most cases, the cost of servicing the existing debt on their old home then becomes deductible for tax purposes. However, many have not considered the capital gains tax implications of this kind of arrangement.

The previous home was their principal place of residence, and if sold, would normally attract no capital gains tax (CGT). Now that the home is being used for investment purposes, any future sale of that property is most likely going to trigger a CGT event and some amount of tax will probably be payable. How this is calculated can be complex but it is important to note that CGT will be calculated on the difference in value of the property from the date it was first used as an investment and the sale price when it is finally disposed.

If you are considering such an arrangement it will be important for you to establish the value of your home at this time. To do this you should have the home properly valued by a quantity surveyor or a registered valuation expert.

As the amount of tax you will pay in the future depends on current and future values, it will be ideal to for your house to be valued at as high a price as the valuer can professionally allow. This will help minimise the difference in the sale price and the current price and therefore help minimise any future capital gains tax.

As always, before you make any decisions regarding investing your money, consult your accountant or financial advisor and get advice best suited to your individual circumstances.

What is negative gearing?

Negative gearing is when you borrow to invest and the income you earn from your investment is less than the interest and other associated costs. This loss is claimable against your other earned income – typically your salary or wages.

How does negative gearing work?

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. In simple terms, your investment must make a loss before you can claim the tax benefit. Negative gearing not works only for property, but also other investments like shares and bonds.

Claimable expenses

Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:

1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, and insurance.
2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once.
3. Claims for building allowances – Owners can also claim depreciation of capital works, specifically for building and landscaping. The current rate is 2.5% over 40 years. Commissioning a depreciation schedule from a qualified quantity surveyor is a good way to maximise your depreciation allowances.

Keeping it at arm’s length

In order to claim deductions your dealings with tenants and lenders must be at arm’s length. If you’re renting your property to a family member or a friend at less than the commercial value then you’re not acting at arm’s length, and you cannot claim deductions as you would in a purely commercial arrangement

Keeping records

It’s easier to get your tax right if you’re keeping good records, and this is very true of rental deductions. If you’re keeping good records, it’s much easier to understand which category your expenses fall into, and makes completing your tax return a much simpler task.

Risks associated with gearing.

There is an inherent risk associated with borrowing to fund any investment. While gearing can help you increase your gain on borrowed funds, the losses can be large in adverse circumstances.

As a general rule, only investors with the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.

You can minimise the risk of gearing by:

1. Choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period.
2. Having sufficient income to cover the interest repayments if your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to fund ongoing repairs and maintenance.
3. Taking out Mortgage Protection Insurance with your investment loan