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Negative gearing, CGT and you: How legislative changes can affect your borrowing power

Negative gearing and capital gains tax (CGT) are terms that seem to be a constant of the property landscape. It seems like everyone is arguing about them, from politicians to property investors to first home buyers. 

However, new proposals from leading political parties have driven the debate to even greater heights. A new stance on negative gearing and CGT has ignited the question of whether these two 'constants' need to be adjusted and what effect there might be if they are. What will happen to property prices? Will housing supply be affected? How will it change how much you can borrow?

To that end, we present a brief primer on the current proposals and how they might affect your home loan. Whether you're reading in 2016 or 2050, arm yourself with the knowledge of how these kinds of legislative changes might affect your ability to obtain and maintain a mortgage. 

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What is being suggested?

Let's begin with what the proposed changes actually are. In short, one particularly drastic policy is one of reducing tax breaks obtained through property. Whether through offsetting losses from their property with negative gearing or getting a tax discount on capital gains, the new proposal aims to make sweeping changes to how taxation works with property investment.

The specifics are as follows:

  • Capital gains tax discounts on all property assets, owned for at least 12 months and purchased after 1 July 2017, will be reduced from 50 per cent to 25 per cent.
  • Negative gearing will be limited to purchases on newly-constructed property after 1 July 2017, though any negative gearing present on already-established properties bought before this date will continue to receive the tax offset.

Why are they doing it?

Everyone is concerned about housing affordability. Political parties, the Property Council, the Real Estate Institute of Australia (REIA) and the Housing Institute of Australia (HIA) all agree that home ownership and affordability should be the primary focus for Australia as a whole. With some capital cities seeing median value growth of almost 11 per cent over the last year alone according to CoreLogic RP Data, this concern is certainly justified.

Unfortunately, that is the extent of the agreement in regards to this new stance.

The actual outcomes are a matter of some debate.The actual outcomes are a matter of some debate.

Good for your mortgage?

You would likely find that you have to take out a much smaller loan in order to purchase a home.

Let's say it works the way that is intended. Negative gearing pushes investors towards new construction, driving up supply to meet the increasing demand. Homes become more affordable for the average Australian. Meanwhile, more capital flows into the construction industry and helps stimulate jobs and economic growth.

In terms of your borrowing power, you would likely find that you have to take out a much smaller loan in order to purchase a home. This would result in less interest paid over the course of your loan, or even the ability to reduce the lifetime of your loan itself if you're happy to keep up higher repayments. 

Greater supply would also mean increased buyer activity. As buyer activity increases, lenders will want to get as much of that capital as they can, leading to increased competition. This could take the form of better interest rates, more loan features, improved customer service, anything to make sure they get your business. 

It could even mean good things for people who have found it difficult to find a loan in the first place. If you've been rejected for financing in the past, it is likely due to you being too high a risk for lenders. However, as the financing environment improves and more people take out loans, lenders can afford to take on more risk, letting you get your foot in the door. You might even see the typical 20 per cent deposit begin to ease off, meaning you would have to save less for a deposit in the first place.

Bad for your mortgage?

Financing would dry up, buyer activity would slow down and the property market would stagnate.

But what if it doesn't work? The HIA argues that the CGT discount cut would result in investors turning away from property investment as profits drop, drying up supply and causing values to grow again. The Property Council supports this too, as CEO Ken Morrison says these kinds of changes would "distort the market, hit rents, hit jobs and make it so much harder for families to plan their economic futures at all". 

The increased housing values could flow on to rents, making it difficult for first time buyers to actually afford a deposit in the first place, let alone make the higher mortgage repayments. Financing would dry up, buyer activity would slow down and the property market would stagnate.

Clearly, this sort of legislation could have sweeping effects on the efficacy of your mortgage. But just what those changes might be are very much up for debate. To ensure that you get the right loan for your needs, make sure you talk to the mortgage broking experts at Premium Mortgage Group today.

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