welcome home loan

[Hwight]

Hi all
my name is hamish
im 24, occupation excavator operator.

Im returning from working over in Canada and i can use the welcome home loan for a first home,

if i was to buy an investment property first would i still be able to use a welcome home loan for my own home??

my options

buy my first house with the welcome home loan, live in it apply some tlc after 6 months move out and rent it out, build up equity. use the equity to buy a house in an area i would like to live in, buying in the next down cycle.

buy a lower priced investment property with 20+ deposit, let time pass, use equity and welcome home loan package to buy in more expensive area,

any useful links and help would be much appreciated.

[Anthonyacat]

The benefits of owning your own home over an investment property are significant and often unquantifiable. In pure financial terms, you will often be better off owning only rentals, and buying your own home. But that is perhaps outside the scope of your question.

Only one of your 'options' is an option. The welcome home loan can't be used to buy an investment property, and buying an investment property first will exclude you from access to the Welcome Home scheme.

So by default you are left with your first option of buying a cheap house and moving out after six months. This is allowed under the rules, strictly speaking, but it wouldn't surprise me if there is an 'intent' clause in there somewhere that might disallow you if you go into the loan with the expectation to move out soon afterwards.

You will then have to restructure the property into another ownership entity, or your interest will not be deductible, as the borrowing was made to finance a personal property.

[gavinc]

<You will then have to restructure the property into another ownership entity, or your interest will not be deductible, as the borrowing was made to finance a personal property.>
That's not correct.
If he has a mortgage and lives in it as a personal property and then moves out and the property becomes a rental then the mortgage interest is an expense against a rental property and will be tax deductible.

[Anthonyacat]

No, trust me here. People think that, but it's totally incorrect, and you'd better hope the IRD never audits you in detail.

Whether loan interest is deductible is all about the intention at the time of borrowing. Without going into it in too much depth, this requires you to 'sell' the property to a trust, company, etc, whose borrowings are then for the purpose of deriving income.

This causes huge problems for people who buy their own house, then rent it out and move into a new house, as technically nether mortgage is deductible.

Of course, if you have a case decision or binding ruling from the IRD to the contrary, I'd be happy to be wrong, the current rule is grossly unfair.

[gavinc]

I would like to hear from Rosco on this - are you out there?
I hear what you are saying and I agree with <Whether loan interest is deductible is all about the intention at the time of borrowing> but lets say there is no mortgage and you move out - all other expenses like rates, repairs, insurance etc are tax deductible - so following on from that a mortgage would also be tax deductible as it is just another expense.

[gavinc]

This is what it says on the ird website

http://www.ird.govt.nz/property/property-rental/deductions-you-can-claim/

What you can claim

The following expenses can be deducted from your rental income:

• rates and insurance
• interest paid on money borrowed to finance your property

Seems pretty clear to me

[Anthonyacat]

Does seem pretty clear. Problem is that very few things are ever 'pretty clear' in tax law!

From the IRDs perspective, you never borrowed any money to finance the 'rental property', nothing to deduct.

The rates, insurance, etc, are all holding costs of the property. You can't have a rental without those expenses. They are directly related to the derivation of income, what the tax legislation calls the nexus test. The mortgage was a loan to buy the asset, and when you bought the asset, it was private. What you have is a loan, for a private purpose, that you are then trying to claim against your tax.

What if, for a more complicated example, you had not taken out a mortgage on your own house, but instead secured a loan against your parents home, to buy your personal house. Then later you decided to rent it out. Now there is no direct link of the loan to your rental, would you still claim that? You certainly could have if it had been a rental the whole time...

What if you had finished paying off the mortgage on your home, but then decided to take a trip around the world, but secured it against your house by way of a new mortgage, and rented your house out while you were gone. You borrowed money to go on holiday. Surely, that isn't deductible...

By all means wait for your trusted PropertyTalk tax experts to comment, but my plan is to slowly cement myself as one of those experts. I'll try to be wrong as little as possible.

[gavinc]

<What if you had finished paying off the mortgage on your home, but then decided to take a trip around the world, but secured it against your house by way of a new mortgage, and rented your house out while you were gone. You borrowed money to go on holiday. Surely, that isn't deductible...>
That I agree with - not tax deductible.
<By all means wait for your trusted PropertyTalk tax experts to comment, but my plan is to slowly cement myself as one of those experts> What makes you an expert? "on the job training" or some professional training/experience.

[Anthonyacat]

Not that credentials should matter, if the knowledge is there, but I'm an accountant with experience in small business and property. Expect to be a CA early next year, having just passed my professional exams. I've been through multiple tax courses, and of course the "on the job training", but in a CA firm the value of on the job training should never be discounted.

But anyway, if you can agree that the holiday-mortgage isn't deductible, you can see it is all about the intent of the borrowings. Would you mind messaging the people you trust to here, to confirm or negate what I've said? I'll leave it here, to prevent derailing the thread with non-useful information.

[Craig Pope Mortgages]

Hi all
my name is hamish
im 24, occupation excavator operator.

Im returning from working over in Canada and i can use the welcome home loan for a first home,

if i was to buy an investment property first would i still be able to use a welcome home loan for my own home??

my options

buy my first house with the welcome home loan, live in it apply some tlc after 6 months move out and rent it out, build up equity. use the equity to buy a house in an area i would like to live in, buying in the next down cycle.

buy a lower priced investment property with 20+ deposit, let time pass, use equity and welcome home loan package to buy in more expensive area,

any useful links and help would be much appreciated.

Hi Hwight, you cannot use the Welcome Home Loan for investment purposes. You can only use a Welcome Home Loan (assuming you fit the rigid criteria) at the start of this process for owner occupied purposes. That also means you cannot buy a rental property now and then try to use a Welcome Home Loan down the track as the scheme is only for first home buyers. Apart from that your choices are all valid, it comes down to where you want to live personally and what your investment property strategy is.

[Hwight]

Thank you Craig will have to think more of my strategy , want to end up living at red beach, but looking at ways to get there by my own means not relying on my family to put there free hold property in the banks hands , as they have done so much already. Cheers, any ideas

[spaceman]

Not that credentials should matter, if the knowledge is there, but I'm an accountant with experience in small business and property. Expect to be a CA early next year, having just passed my professional exams. I've been through multiple tax courses, and of course the "on the job training", but in a CA firm the value of on the job training should never be discounted.

But anyway, if you can agree that the holiday-mortgage isn't deductible, you can see it is all about the intent of the borrowings. Would you mind messaging the people you trust to here, to confirm or negate what I've said? I'll leave it here, to prevent derailing the thread with non-useful information.

Gavin is correct.....you are wrong.

Anthonyacat
You will then have to restructure the property into another ownership entity, or your interest will not be deductible, as the borrowing was made to finance a personal property.

GavinC
That's not correct.
If he has a mortgage and lives in it as a personal property and then moves out and the property becomes a rental then the mortgage interest is an expense against a rental property and will be tax deductible

The original use of the loan was to finance a personal property and was thus not deductible, however the use of the property has changed. The property becomes and IP and produces income, expenses incurred in generating that income are deductible.

Cheers
Spaceman....EDIT ....PAGE 10 of IR264

For example, you own a property which you lived in for the first three months of the year, then you rent it out for the rest of the year. When you work out your rental
income for the year, you can only deduct the ongoing costs for the nine months that the property was rented out, that is, 9/12 of the expenses.

[speights boy]

If they have large enough term deposits, the bank will use these as security for a loan.
Not very cost efficient, but at least it keeps the house mortgage free.

The westpac scheme shows both options, (using your parents home or their term deposit as security)
With the mortgaging both properties options, at least it puts a firm limit as to your parent's risk in case you default.

www.westpac.co.nz/home-loans/your-home-loan-options/family-springboard-/

[gavinc]

<Not that credentials should matter, if the knowledge is there> Try telling a customer of a brain surgeon or a gynaecologist that.

< Would you mind messaging the people you trust to here, to confirm or negate what I've said?>
Sure no problem. Everyone Anthonyacat was wrong.

[Craig Pope Mortgages]

Thank you Craig will have to think more of my strategy , want to end up living at red beach, but looking at ways to get there by my own means not relying on my family to put there free hold property in the banks hands , as they have done so much already. Cheers, any ideas

It can be a dilemma using family. Every bank is different with their guarantor policy. Doing it under your own steam is always the best way to start however if there is a guarantor option, its about having a plan to release it as soon as possible helped by:
1. Buying under market value if you can, thus creating immediate equity
2. Paying down principle as quickly as possible
3. Adding value with renovations
4. Normal capital gain (if any) in the market
Using a guarantor will mean you will have access to cheaper rates (helping pay principle quicker) and cash contributions.

You could aim to release the guarantee in 12-36 months time if one or all of the 4 points above has come to fruition. Even if you have created 10-15% equity of your own there could be a chance to release the guarantor, whether with the existing bank (preferred) or refinance.
The guarantor angle is always a tricky one and the guarantor needs to have a stable financial position. You want it limited to whatever % equity they are covering ie max 20% - less if you are putting in some cash as well.
cheers