|
Beware
of split loan promotions
| Calculated
approach required
I
REFER to the financial article ‘Putting your house in
order’ by George Fredrickson in Army, August 29.
I have no dispute with the thrust of the article.
However, in his calculation comparing whether it is better
to rent or purchase a home over the long term, he seems to
assume that rent remains constant over the period, as do monthly
loan repayments for a home which, by and large, remain constant.
I believe this is not the case, as rents will rise to a level
greater than that of the home purchaser’s monthly repayments,
which means that the end figure projected by the author for
renting versus purchasing is inflated.
Can I suggest that Mr Fredrickson be asked to clarify this
point?
Peter Allerhand
Peter’s
comment is quite true.
For simplicity’s sake I have assumed all figures to remain
constant.
Is this a legitimate assumption to make? In fact, rents have
risen over the course of nearly any 20-year period. So you
would expect your rent to rise.
Interestingly enough, during these times of oversupply of
rental accommodation, in some areas we are finding rents are
dropping (one client whose DHA property has not been renewed
has found the weekly rent has dropped from $250 to $185),
and many landlords are offering incentives.
Similarly, in times of rising interest rates mortgage owners
will find their repayments increasing if they have a variable
loan.
A fixed term will not increase or decrease until such time
that it comes up for renewal.
All these examples are really swings and roundabouts.
In the article we were trying to explain the concept in general
without heaps of numerical details. I believe the emotive
issues will prove most important in the long run.
– George Fredrickson
|
|
|
You
have your own mortgage you are paying off ever so slowly. And you
hear you can get an investment property and make all repayments
off your own mortgage.
The
concept behind this split loan is that your own mortgage is not
tax effective and there are not any deductions allowed.
Whereas
for an investment property you can have lots of tax deductions,
such as interest on the loan, rates, maintenance, agents’ fees,
etc. If your deductions are greater than the income (rent) received,
then you are negatively geared and the Australian Taxation Office
(ATO) will give you a refund.
The
Federal Court recently gave the green light to these split loan
style of repayments. So prepare yourself for a flood of advertisements
to tease and tempt you into renegotiating any and all current mortgages.
But
there is a major issue you should be aware of – the ATO is
appealing the decision and taking it all the way to the High Court.
At
stake could be billions of tax dollars going back to property investors
to pay off their home mortgage.
If
the appeal is not successful, investing as we now know it could
be turned on its head.
To
understand more about the split loan concept, look at the following
example.
You
have a $100,000 mortgage at 7 per cent for 25 years. You will pay
$707 a month (most of which will be interest in the first few years).
If this is on your own house, then repayments are made with after-tax
dollars.
You
then go out and purchase a $100,000 unit at the same interest rate
and receive rent of $500 a month. You will find yourself in a negatively
geared situation and perhaps receive nearly 50 per cent of that
shortfall back from the ATO (easily more than $100 a month when
you take into consideration other deductions).
With
a split loan you can have both repayments taken off your home mortgage,
effectively eliminating this one as quickly as possible.
Your
tax deduction-laden investment property mortgage is actually increasing
during this time- however, the interest provides a larger tax deduction.
And, in theory, a greater tax refund.
So
repayments on your home mortgage would double to $1414 a month,
and that $100,000 mortgage would be gone in roughly 7½ years
rather than 25 years. By that stage your mortgage on the investment
property would have ballooned to some $170,000.
However,
up to 50 per cent of that increase would have been funded by the
ATO’s generous tax refunds while you were wiping out your non-deductible
home mortgage ASAP.
Sounds
too good to be true?
Negatives
exist. As with any negatively geared investment, you should only
be interested in capital growth and any taxation benefits should
be viewed as a bonus. It is the asset that is of supreme importance.
And
also remember the other problems associated with investment properties
– too many properties on the market, the expense of buying
a property, rents might not go up like the prices of property, a
whole class of renters have bought their own homes using the First
Home Buyers Grant, tenants will haggle for lower rents and incentives,
and so on.
Until
the ATO’s appeal is settled, it would be advisable not to enter
into one of these split loan schemes.
- George
Fredrickson is an authorised representative of Ray Carnall Financial
Services.
|
