Breaking your fixed rate – is it a good thing?

Breaking a fixed-term mortgage comes with a cost, but you may find it’s worth it.

How do break fees work?

The way banks calculate break fees is a complicated process.

An extremely simplified version is this: The bank looks at the interest rate you are committed to, the amount of your loan and the term you have left to run. Then it looks at what it could charge someone else for the same amount of money.

If you have $500,000 fixed for another year at 6.5 per cent, the bank will consider that the most it could get for the same chunk of money lent to someone else for the next year is about 5 per cent. So it might ask to be compensated for the difference of 150 basis points, or about $7500 for the year.

The key then is to refix at a much better rate so that the interest savings make the break fee worthwhile.

The difference in repayments between a $500,000 loan at 6.5 percent and a loan at the current cheapest two-year rate of 5.65 per cent is about $895 a fortnight so you would save the cost of the break fee in 10 months.

Banks also apply administration fees. The break fee can vary day by day.

If you would like an opinion on whether it is worth breaking your fixed rate please get in touch.

Bright line Test -New LVR rules for property investment?

The government announced that it would introduce a bright line test that would tax sales of residential land made within two years of acquisition. On 24th August 2015 the new Bill (Bright-line Test for Residential Land) was introduced in Parliament. It contained a number of important changes to what was included in the original proposal.

The bright-line test is in conjunction with the existing intention test and only applies to residential land – non-residential land is excluded.

There are also exclusions for residential land that is the owner’s “main residence”, is inherited land, or is land acquired as a result of a relationship property agreement. There are also special rules relating to Trusts.

The bright-line test applies to land acquired on or after 1st October 2015. To confirm if the application date of 1st October applies, the date the sale and purchase agreement is entered into is relevant. For agreements entered into before the 1st October the new rules will not apply.

For agreements entered into on or after 1st October 2015, the date of acquisition for calculating a start date for the two year period of ownership will be the date of change of ownership registered on the title. This is different to the current legislation, which provides that the date of acquisition is usually the date the contract is entered into.

Just to confuse matters, when determining if the sale is within the two year period, the sale date is the date that the sale and purchase agreement was entered into, and not when the title changes.

There are a number of rules covering a raft of related matters but the glaring omission is rules relating to sales of residential land between associated parties.

The easiest way to avoid any of these capital gains taxes is to hold the property long-term. Money planners would normally recommend you hold property for 7 to 10 years it should be seen as a long-term investment.

In conjunction with the bright line test as from 1 November any investment property in the Auckland area will require a loan to value ratio (LVR) of 70%. This means for existing property an investor will need to provide a minimum of 30% deposit.

A way to mitigate this is to look to buy new property under construction as the LVR requirements apply only to existing property.

As time goes by we will become more familiar with the new rules surrounding the bright line test – LVR requirements in the meantime, if you need advice regarding the sale and purchase of residential land, please contact Miles at Moneyplanners Ltd.