Homeowners, businesses and farmers could be paying an extra $6.3 billion a year in interest if mortgage rates rise as the Reserve Bank expects them to over the next two years.

The Reserve Bank expects the Official Cash Rate, the mechanism it uses to push interest rates up or down, to have increased by 2 percentage points by the beginning of 2016, which it believes could bump mortgage interest rates up into the 7-8 per cent range. (However this doesn’t take into account how much effect ‘Baby Boomers’ will have on total mortgage interest rates as they pay off their mortgages over the next 20 years).

Therefore for someone with a $300,000 mortgage at the current floating rate of about 5.75 per cent, a 2 per cent rise to 7.75 per cent would likely increase their monthly mortgage payments by $398.

For someone with a $500,000 mortgage the increase in payments would be $664 a month and for a $700,000 mortgage it would be mean an extra $929 a month.


Landlords should work out the impact of possible interest rate rises now rather than try to increase rents after interest rate hikes have hit.

Landlords should do a cash-flow analysis now and ask themselves what if interest rates did rise by 2 per cent to 3 per cent, and what effect it would have on their investment, rather than waiting until it happens.

Forewarned is definitely forearmed in this case.

While the Reserve Bank's loan-to-value ratio loan rule might mitigate some of the worst effects of sudden interest rate rises, landlords might still find they cannot increase rents as fast as their finance costs increase.

If rents rise suddenly, tenants tend to react by moving in with each other and Landlords may see a rise in the number of tenants per rental property.

It's far better to adjust rents slowly in increments to meet the markets.

The NZ Property Investors Federation constantly monitors rents against average property prices. At present it is costing about $100 a week more to own a home than to rent it and at this stage in the cycle that gap should be narrower.

However, many residential property investors may benefit from the new higher deposit requirements, because this may keep many potential home buyers out of the market and in rental accommodation longer and reduce competition for the properties investors want to buy.

So it's an investor’s dream at the moment.

Mixed Use Assets - taking note

How is the asset used for each day of the year?

• Is it rented out?
• Are you using it for personal or private use?

Who used the asset?

• How many days was it in use?
• Who used it and what is their relationship to you?
• How much rent/hire cost did you charge to each person?
   

Were any repairs carried out?

• What was the reason for the repairs?
• Did you carry these out yourself? 
• Did you stay at the bach while you undertook these repairs?

You will also need to make a note of the following -

• The cost of advertising the rental
• The cost of repairs and damages to the asset caused by tenants
• The cost of insuring the bach, any mortgage interest and rates

Cashing up annual leave - some things you may not know

What are the rules when it comes to annual leave?

Employees can make a request to employers to cash in annual holidays, opting instead to take a lump sum payment rather than time away from work, but there are a few rules that need to be taken into consideration.

The request must come from the employee and not the employer.  Although the employee is entitled to leave, the employer can decline the request at its own discretion and does not need to give a reason for its decision.  However, the fact that employers owe a duty of good faith to their employees suggests that an employer’s response to a request should be reasonable.

In addition, there is a limit to the amount of leave that can be converted to payment.  By law, the employee can only exchange a maximum of one week annual leave for cash payment per annum.

An employer is entitled to have a policy that it will not consider requests from employees in its business or in a particular section of its business.
 

Achieve mileage from Mileage Rates

IRD’s approved mileage rate stays at 77 cents per kilometre for 2013 but employees (including shareholder-employees) seeking reimbursement from their employer can use AA rates if they are higher. Self-employed can use either but, quite unfairly, only if business use does not exceed 5,000 kilometres a year, otherwise actual costs must be used.

Here is an example of the 2013 AA rates, the bold font indicating that IRD’s 0.77 rate is higher (note use total mileage then apply the rate to business mileage):
 

Total Ks PA	Up to 1500cc		1500 – 2000cc		2001 - 3500cc		3501cc + over
(bus and pvt)	Diesel	Petrol	Diesel	Petrol	Diesel	Petrol	Diesel	Petrol
5000	124.62	107.40	147.40	132.3	172.00	166.8	235.73	234.60
7000	103.79	90.40	122.53	110.9	143.42	138.9	195.27	194.30
10000	72.55	64.80	85.22	78.70	100.55	97.00	134.57	133.90
15000	55.27	50.80	65.33	61.30	77.64	75.10	101.79	102.10
20000	46.36	43.40	54.51	52.00	65.24	63.30	83.87	85.20
25000	42.05	39.80	49.39	47.60	59.36	57.60	75.35	76.90
30000	37.74	36.30	44.27	43.30	53.48	52.00	66.83	68.60

 
Example:
Employee owns Ford Falcon XR6 and travels 20,000 Ks a year of which 50% is business use. Company can pay 10,000 Ks @ 85.20 Cents per K = $8520.00 tax free to shareholder but deductible to company.

Merry Christmas

As this is our last newsletter for the year we would like to thank our clients and business associates for their support in 2013.  We wish you and your families a safe and Merry Christmas and much success and happiness for 2014. 

Our office will close on Friday, 20th December 2013 at 5pm, reopening at 8.30am on Monday, 13th January 2014.