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  1. #1

    Default Depreciation and advice please

    Hi all,

    I'm a total novice ! Please be patient....

    I'm in the process of purchasing a studio apartment in Auckland (yes - I understand it's a strange market). I'm a UK resident on a visitors visa - i.e. I'm in NZ at the moment. Basically I have a few questions that you may be able to help me with. First of all I was planning to buy this small apartment outright with cash - but after a quick visit to an accountant today I've been advised to try and take out a loan (mortgage) with a New Zealand bank for at least some of the cost. I'm told that this would be good in tax terms/depreciation terms. i.e. rather than use the money I've borrowed against my mortgage in the UK the accountant said I would be better off borrowing a percentage of the mortage in NZ. To be honest I was blinded by science - I don't have much of an understanding of depreciation etc. I'm told that my NZ bank will probably lend me 20-40% of the total cost and the accountant told me I should use the money saved (some of the cash I was going to use) to reduce my mortgage in the UK. The total cost of the apartment + furniture package comes to approx $155,000. Any help with depreciation etc would be really appreciated. I'm told the mortgage rate in NZ is about 8 percent if I fix it for 5 years or so. The mortgage rate in the UK is around 5%. I guess my big question is - how am I saving money by borrowing money when I have the cash in my hands to pay for this purchase outright ? I plan to go back to the accountant for more info soon, but any thoughts on my situation would be great.

    Regards,

    Husky1


  2. #2
    Join Date
    Jun 2005
    Location
    Auckland, New Zealand
    Posts
    82

    Default

    Husky1

    Depreciation in really basic terms is an allowance for wear and tear on an asset due to being used as an investment asset. The idea being the older the asset - the less it is worth. By claiming depreciation, which is treated as an "expense" item in your annual accounts, you are being given an allowance to build up a pot of money for when the asset needs replacing. You do not physically have to pay over any $$$ amounts to claim the depreciation as it is a "paper" transaction.

    Depreciation is just one of many expenses that can be claimed against your tax bill. However to be able to claim the expense you need to have an income stream in NZ to offset the tax deduction against.

    There are a number of accountants that contribute to this forum and hopefully they can clarify the matter for you.

    Regards

  3. #3
    Join Date
    Jun 2004
    Location
    Auckland
    Posts
    2,103

    Default

    Hi husky1, welcome to the forum

    If I understand you correctly, you are trying to figure out whether to borrow from UK or NZ. Now, apart from the difference in mortgage rates, you also need to take the exchange rate into consideration. At present, the NZ$ is at the peak of its cycle. It may cost you more if you pay down a UK mortage in the future when the NZ$ drops.

  4. #4

    Default

    Hi Fudosan/Warren,

    Thank you for your comments !

    I opened up a savings account here 12 months ago and transfered the money required back then - at a better rate than today. So I have the cash to pay for the apartment in a NZ savings account. When I leave NZ - in November I plan to rent the property out. I presume this is the income stream you are looking for Warren ?

    The accountant I have spoken to says I should keep a chunk of my own money - use it to invest in another property or pay off part of my mortgage borrowing in the UK (I own a property in the UK with quite a large mortgage). As you say fudosan - It may well be a good idea to ship money back to the UK while the NZ$ is strong. The accountant says I should borrow some money from my bank here (40% or so) in NZ instead of paying with my cash. Obviously mortage rates are more expensive here than in the UK but at the end of the day I would still have a lump sum to play with.

    I have spoken to my NZ bank and they are willing to lend me 60K over 25 years but hold part of this sum - 20K-30K - in a term deposit as security. Is this standard practice ?

    My question is - Do you think I should pay for the apartment up front with my own cash or borrow a percentage of the money in NZ. I guess once I start letting the apartment out (after I return to the UK) the mortgage would look after itself and interest from the term deposit would act as a buffer.

    Any thoughts on this ?

    Regards,

    Husky1



 

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