The Reserve Bank Governor, Alan Bollard has today held the OCR at 2.5% but adjusted his earlier statements that he was determined to hold them at this level until “late 2010″. There is the feeling that the economy is picking up quicker than expected but caution remains. The juggling balls of interest rates, exchange rates, and inflation are obviously difficult to keep in the air at the same time especially when the juggler is wearing a blindfold. Who would have guessed six months ago that the economy would have picked up like it has, especially in the urban centres?
Though I’m not an economist, I do have an interest in watching the juggling balls flying through the air. My gut feel is that the window is closing on historically low interest rates for the time being.
Fix or Float?
I am putting my mortgage bet on a quicker rise in interest rates than expected and therefore, two year fixed rates below 7% are looking quite attractive to me at this moment. I have a mortgage coming up for renewal in 4 weeks time, and though I have missed the best of the rates, the 8.95% that I am currently paying will drop a of couple percent and save me a trip to the gold coast a year in interest.
The banks seem to have already factored rate rises into the fixed rates past 2 years so I would rather take my chances on the floating rate or an 18 month to 2 year rate now than definitely pay more interest from day one on the 3-5 year rate.
I have learned a lesson about fixing interest rates for long periods of time on the backs of many burned mortgage holders trying to lower their interest repayments. Namely, the huge wad of cash the bank charges you to break a fixed rate. I wonder how many other home owners have learn’t this lesson, and whether or not there is enough of us to change the way NZer’s choose to fix or float.
Flexibility vs stability.
It certainly has made me more wary of fixing for more than a couple years.
I bet Mr Bollard hopes that we’ll become a nation of floaters rather than fixers because it gives his remote control OCR shark more bite!
October 29 2009 | General Real Estate | 2 Comments »
Capital gains tax, Land Tax, Increase in GST, and now Mr Bollard comes out with a Speculation Tax. It seems that this talk is not going away and again landlords are being picked on as money hungry speculators. Mr Bollard hopes that balance will be brought to the force by neutralizing our obsession with real estate and introducing disincentives to purchase houses for trading and profit making.
I wonder if Mr Bollard thought that one up on the spur of the moment?
I wonder if he realizes that we already have a so called speculation tax in NZ, it is called Income tax. If you are seen by the Inland Revenue Department to be buying and selling homes too regularly then you may be classed as a trader and have have to pay income tax on any profits in the house trading that you are undertaking.
My understanding is that it can come down partially to your motive (the IRD calls it “firm intention”) for purchasing the property in the first place. How does the IRD prove motive? Good question!
When you purchased the property, did you make verbal or written statements to your accountant, solicitor, bank, real estate agent, valuer, or the IRD, that you were buying the property with the intent to hold or long term or to do it up and make some quick cash? What if you bought it with the intent of renting it out long term but found that you couldn’t sustain it financially and decided to sell within a year or so? What if you did this over and over again?
The Inland revenue website provides a decision tree for helping you work out whether or not you should pay tax on the sale of a property.
There is a process called Tainting (Andrew King talks a little about this here) by which you could become classed as a trader and, therefore, have to pay income tax on the profits from the sale of ANY real estate you own including the house you have lived in for many years. This tainting can also affect you if you are seen to be trading in shares.
I have been informed rightly or wrongly that to be safe,you should write a statement of intent that you give to your solicitor, accountant, bank, etc when you first purchase a property. This could read something like, “I David Garratt am purchasing this property as part of a buy and hold strategy to rent out in order to build wealth for my retirement and to pass on to my children”.
Try to avoid anything that would suggest you are purchasing a) for capital gains b) to minimize the tax you pay, or c) to sell as soon I have dropped a new kitchen into it and given it a paint through cos it was a bargain when I bought it and it will be easy to find some young couple who will pay too much for it once I’ve finished.
I have also been told rightly or wrongly that to be safe, you should hold a property for ten years before selling because by then it is rather obvious that you bought the house as an investment rather than a quick flick.
I’m not sure if I have the whole picture because I have never been able to get a definitive answer out of any accountant, solicitor or Tax man.
Your comments are welcome!!!
September 11 2009 | General Real Estate and Investing | 4 Comments »