How the new rules could affect your decision
At the tail-end of COVID-19, home loan interest rates are historically low. Kiwis are desperate to get their foot on the property ladder – and the housing market has gone crazy.
In that house-hunting hustle, thousands bought to rent and flip for a profit. And while this was attainable for some people just six months ago, the government has just tightened the rules, making it even harder to begin the investment game.
If you’re buying a home to live in (an owner-occupied property), you won’t be affected. But if you’re looking to invest, there are a few extra hoops to jump through.
Here’s everything you need to know about owner-occupied and investment properties – and how the new rules could affect you.
Lending criteria for investment loans
Home loans aren’t one-size-fits-all – your intentions for the property will inform the type of mortgage you apply for. The new legislation doesn’t affect owner-occupied properties, but investment lending is more complex than ever.
Even before the new rules came into force, investment loans were harder to secure. They’re a higher risk for banks because there’s usually debt associated with another property. You’ll need strong records of your savings history and financial affairs, and proof of how you plan to pay the additional mortgage back. That might not seem too bad – but with new changes from the Reserve Bank, buying an investment property is much harder.
Bright-line rule
Pre-2015, there was no specific tax rule on investment properties. In theory, you could buy as many properties as you could afford, sell them a week later and keep the entire profit tax-free.
But on 1 October 2015, the bright-line property rule was introduced. Now, if you sell an investment residential property within a certain period, you’ll have to pay tax on any profit you make. Properties acquired before 1 October 2015 are exempt – but what does that mean if you’ve bought after that date?
The bright-line property rule will apply to you if you acquired your property:
• Between 1 October 2015 and 28 March 2018 and sold it within two years
• Between 29 March 2018 and 26 March 2021 and sold it within five years
• On or after 27 March 2021 and sell it within ten years
As for new builds, the government has indicated that a five-year bright-line property rule will apply at some stage but hasn’t made it into legislation yet.
To avoid paying capital gains tax, you’ll need to hold onto your property for longer than the bright-line period.
The bright-line property rule also doesn’t apply if you sell a property that has been your main residence, an inherited property or if you’re the administrator of a deceased estate.
Loan to value ratios
A loan to value ratio (LVR) refers to how much you want to borrow compared to the value of the home you want to buy. If you had a $200,000 deposit on a $1,000,000 property, your LVR would be 80%.
To purchase an investment property in the past, you’d need a 30% deposit – a 70% LVR. That’s a huge amount of money – but it was doable for some people.
But that’s changed as of 1 May. Now, you need a 40% deposit for an investment property – a 60% LVR. Unless you have a spare $500,000 lying around, buying an investment property is unattainable for most people. There’s an exception for new builds, where only a 20% deposit is needed.
Claiming interest as an expense on existing properties
In the past, property investors could claim 100% of interest paid on their investment properties. As of 1 October 2021, you’ll only be able to claim 75% of interest, from 1 April 2023 that’ll drop down to 50% and by 1 April 2025, you won’t be able to claim a cent. This will cost property investors thousands in tax every year – and possibly make people think very carefully about their purchasing decisions.
Claiming interest on new builds – 20 years
With the governments imperative and incentivising new builds, it has encouraged the development of investment properties with a focus on new builds and the rules concerning tax. New builds will be exempt for 20 years.
So what does this mean?
The Government proposes a property be considered “new” for 20 years from the time its code of compliance certificate is issued.
The NZ Government has said that the exemption applies to properties that received this certificate on or after March 27, 2020, and the exemption applies to both the initial purchaser of the new build and any succeeding owner within the 20-year period. Essentially giving the owner of a new build purchase the ability to deduct interest payments as a taxable expense.
Investment property – is it worth it?
Investing in property is a great financial move that could set you up for the future. But with new criteria in place, very few people are in a position to afford a second property. If investment is within your reach, just remember you’ll need to hold onto the existing property for more than ten years to avoid being taxed on your profit. As always, consulting a mortgage advisor is crucial – understanding how you can work around the bright-line rules could save you thousands.
Whether you’re wanting to buy a home to live in or an investment property, we can help secure your loan and get you on the right track. Contact us today for a no-obligation chat.
**These are general guidelines and are by no means a reflection of bank or lending policies