Two new changes that could get you into your dream home faster!

Property Markets are going to crash!!  Well, that was the prediction for last year that never happened.

 

Calmer heads have now prevailed and can finally see what any sales agent or broker will tell you, the markets are BOOMING right now.

And for good reason. Property has shown to be virtually rock solid through Covid and in some places like Newcastle the market has gone up.

Even though Property is kicking goals right now the rest of the economy is still struggling and there is no better place for the government to pull some Macro levers than in the property and construction sectors.

To get the economy firing again people need to be in jobs and to spend money so the federal and state government of NSW have come to the party with a couple of very important changes.

If you are a FHB (First Home Buyer) and purchasing under the NSW threshold of $650K for existing or $800K for new builds then you already get a onetime free pass on paying SD (Stamp Duty).

The NSW government finally announced that for the rest of us (Not FHB’s) it was going to change how Stamp duty/transfer duty was collected.

Currently Stamp Duty is collected when a properties title is transferred or purchased and is determined by the value of the property. The higher the property the higher the stamp duty.

For new builds that purchase the land portion first you will only pay SD on the land value.

E.g., a $300,000 property will require a $8,935 payment of SD where as a $900,000 property will set you back $35,835. Or a $400,000 block of land will be hit with a $13,335 in SD.

What many are claiming to be a “long overdue” change to an “outdated tax” this could be the chance many buyers have been waiting for to upgrade or to purchase their next “stepping stone” property on their way to their dream home.

The NSW government has announced they will allow buyers to decide if they pay the full SD up front in one go or if they choose to pay a land tax style fee each year.

This will have drastic consequences to the property markets. There is no question about that.

The first of which is the extra cash that buyers will now have to increase their deposits. Previously buyers always had to keep enough for SD aside which often decreased what they could purchase. Now with the option to make your repayments incrementally once a year, buyers get an automatic Borrowing Capability boost.

Your Borrowing Capacity (BC) is not determined by your deposit but is directly tied to it. Even with a $2 million dollar BC if you have no deposit you could not purchase a property.

Let me show you a scenario using a 10% deposit.

Joanne has $70,000 deposit and wants to purchase a property to live in. She is not a FHB so will be required to pay Stamp Duty. Previously Joanne would be restricted to a property value of $512,000.  $18,735 would go to Stamp Duty leaving only $51,265 of her $70,000 deposit.

With the new changes Joanne can choose to pay the land tax version once a year and if she has the Borrowing Capacity can now afford a $700,000 property. Almost $188,000 in extra borrowing capability is going to mean that market distortions could take affect very quickly in 2021.

There is one other little quirk regarding the new change. It has been mentioned that if a property is transferred once and the buyer chooses the land tax option that property will continue to have land tax paid yearly if it is sold in the future. Again, potentially creating two different types of markets. This “quirk” still must be clarified by the government as it is only speculation at the moment.

 

So, who will benefit from these two types of Stamp Duty payment methods?

For investors paying your Stamp Duty as a land tax makes sense as any land tax is currently tax deductible though that has not been determined yet and you should speak to an accountant for any tax advice.

Paying your Stamp Duty all in one go as it is currently may be beneficial if you were entering your retirement years and are purchasing your final home. It may be more beneficial to pay all you Stamp Duty up front, so you are not paying Land tax yearly as you grow older and your savings/super diminish over time.

The second big change is the “relaxing” of the responsible lending legislation. The federal government has said that it intends to reduce the onus on the banks when buyers complete a loan application.

Currently the sole responsibility is on the bank or lender. The new changes will mean that if you say your living expenses are $3,400 a week then the bank will accept that they are as you have claimed. Currently they will assess 3 months of your bank statements to gain an average of your spending and then if it falls short of what an average family of your size and income would spend then the average is still used.

This can detrimentally affect customers Borrowing Capacity as the higher your LE (Living Expenses) the lower your BC. If you happen to be a great with your budget, then you can be unfairly limited due to the bank using a higher LE amount than you really do.

The suggested changes will allow the banks to use the living expenses amounts that you have claimed and could mean you can afford a more expensive property.

Depending on your situation it could increase your Borrowing Capacity by $50-$60K.

2021 will see some massive changes to the property industry all of which are designed to fire up the lagging economy.

Speak to the professionals at Open Plan Finance today and run your scenarios, dreams and goals past our team.

 

Written by:
Jason Hare
Mortgage Broker & Finance Consultant
Co-Founder and Lending Specialist
CEO | Lending Specialist
0400 805 206
jason@opfinance.com.au