The pros and cons of negative gearing

The pros and cons of negative gearing

With one in every seven Australian taxpayers owning a property investment, it is hard to deny the prevalence of this type of investment in Australia. Could negative gearing be responsible for this widespread investment practice, and what does it mean for the non-investors among us?

A tax benefit available in only a handful of countries including Australia, negative gearing allows investors to offset losses from their investment properties to reduce their taxable income, effectively “saving” money on their tax bill.

Great if you’re an investor, but a growing number of economists argue that negative gearing is making property unaffordable for potential homebuyers by encouraging speculation in the property market and therefore pushing up prices. Quite simply, whether you’re a seasoned investor or about to sign up for your first mortgage, negative gearing is having an impact on your property purchase.

In recent months, there have been renewed calls on the federal government to tighten the negative gearing system, but supporters argue changes would cause investors to abandon the market and drive up rental prices as a result.

The president of the Real Estate Institute of Australia President (REIA), Peter Bushby, is against any changes to negative gearing, saying it would adversely affect renters – particularly those on low incomes. “Recent chatter suggesting there are changes in the wind is extremely concerning and would negatively impact on the supply of housing and the level of rents in an already tight rental market,” Bushby said.

“We need to remember what happened in 1985 when the Hawke Government abolished negative gearing for property, only to bring it back in 1987. During that period rents increased by 57.5 percent in Sydney, by 38.2 percent in Perth and by 32.0 percent in Brisbane.”

According to REIA, the view that negative gearing only benefits wealthy investors is not accurate with ATO data showing that around 80 percent of people who claimed a tax deduction on property earned less than $80,000 per annum.

Critics of negative gearing, such as investment adviser Scott Pape, contend it makes it harder for first home buyers to compete against property investors. Writing on his Barefoot Investor blog, Pape argues: “Contrary to real estate rhetoric, it does little to increase the supply of new homes, since the majority of investors buy established properties. What’s more, it costs the Australian taxpayer billions of dollars in forgone revenue.”

The recent federal budget left negative gearing provisions untouched, but there is no doubt its benefits and drawbacks will remain a hot topic. For potential home buyers, the best advice remains to do your homework on everything from property prices to comparing home loan interest rates and everything in between.

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Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

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Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

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The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

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A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

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There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

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If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

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The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

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A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.

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The money you pay back to your lender at regular intervals.