The OCR Gone Up, but that's not the big news

With Auckland now in some sort of twilight zone indefinite lockdown (but hey, you can see friends for a picnic), the long-anticipated and much predicted Official Cash Rate (OCR) hike has finally happened, with an increase 0.25% and banks have already signaled rises in their interest rates in response.

But whilst you were focused on that…

The Cost of Property Insurance is going up!

The Government has announced the building cap on EQC cover will double to $300,000 (plus GST), meaning the state insurer will cover the first $300,000 of building damage caused by a natural disaster, leaving residential property owners’ private insurers to cover anything above this level.

The cover is provided for earthquakes, tsunamis, volcanic eruptions, hydrothermal activity and natural slips.

The move will see private insurers transfer a significant amount of risk to the state insurer. Accordingly, EQC levies will increase from a maximum of $345 per dwelling per year to a maximum of $552 per dwelling per year. The Levy is calculated based on the insurable value of your property, therefore those with higher valued property will pay more for the same insurance cover! However, insurers won’t necessarily cut their premiums by the equivalent amount. Transferring more risk to EQC could see higher-risk property owners with lower property values pay lower premiums, while lower-risk property owners with higher property values will pay higher premiums. EQC levies are included in your Home and Contents insurance premiums

Changes to the Credit Contract and Consumer Finance Act (CCCFA)

These changes were set to come into force on October 1 but were delayed due to Covid and will now apply from 1 December, however banks are already enforcing the new rules.

Banks will now be required to scrutinize mortgage applications in more detail to ensure the client can afford the new lending and will avoid any potential hardships. They will be looking closely at your financial habits and banking history, the reason the funds are required, and also at anticipated expenses over the next 12 months following the drawdown of the loan. They have also increased the amount of surplus income they require you to have after paying the mortgage and living expenses.

This will also make it harder for older clients to get finance as banks will need convincing that your income will last past the age of 65.

I have already seen applications being turned down / or the total amount of lending approved being reduced than I would have experienced 6 months ago.

Banks will not stop lending money; however, it will be harder to borrow and for some clients this may mean prior to application planning will be required to present the client in the best possible light.

The Government has now clarified the New Tax rules for Residential Property Investors

• Existing properties purchased between 01 October 2015 and the 28 March 2018 are subject to a 2-year Bright Line Test

• Existing properties purchased between 29 March 2018 and the 26 March 2021 are subject to a 5-year Bright Line Test

• Existing properties purchased after 27 March 2021 are subject to a 10-year Bright Line Test Existing properties purchased before 27 March 2021 will lose interest deductibility over a 4-year period starting October 1 2021

• Existing properties purchased after 27 March 2021 have zero ability to deduct interest as an expense.

• If you sell the property within the Brightline period you will be liable to pay tax on the capital gain, which is the different between the Purchase and Sale price. However, you will be able to deduct any interest paid that has not already been deducted against the capital gain. This “Net Gain” will then be added to your income in the year of sale and taxed at your marginal rate of income tax.

• A property is classified as a New Build if its Code of Compliance Certificate was issued on or after 27 March 2020. Properties built before this date are classified as existing property.

• New Builds are subject to a 5-year Bright Line test.

• New Builds retain tax deductibility of interest for 20 years

• This interest deductibility can be transferred from one owner to the next within the 20-year period.

• Prefabricated houses and the conversion of existing dwellings into multiples dwellings are also considered as New Builds.

I would recommend that you have a good chat to your tax adviser about this.