DOCSLIB.ORG

Unlocking the Equity in Your Home

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Unlocking the Equity in Your Home 16 comment wenty years ago, National Mutual agents offered Australians a wonderful opportunity: they could all become rich, simply T by “unlocking the equity in their homes”1. Unlocking Your Home Is Your Future ● Your home is not just bricks and mortar . the Equity it’s dollars and cents! ● Saving won’t make you rich, but your home can! ● Your home is the pot of gold you have been looking for . ask us how. in Your ● Learn the secrets of wealth creation. Over the last 20 years, Dennis Jones and Company have Home shown thousands of people how to achieve financial peace of mind. Dennis and his team are now proud to present to you… the concepts that you can use to turn your most valuable asset, the family home, into your own pot of gold and in doing so, provide you with financial peace of mind. A CONTINUING OPPORTUNITY What was this amazing “secret of wealth creation”? It was National Mutual’s Negative Gearing Package. This was a double-geared TO MIS-SELL? investment strategy that had the following structure: ● Customers mortgaged their homes to raise investment funds. Normally, Citibank provided the funds via a variable-interest line of credit. ● Customers used the money to buy X units in National Mutual’s Australia Property Trust. ● Then they took out margin loans from National Mutual’s Mortgage Trust, to buy an additional 4X units in the Property Fund. ● All of the investor’s units in the Property Trust were pledged as collateral for the margin loans. The margin loans were usually set up with 80% leverage ratios. ACTUARY AUSTRALIA ■ July 2011 ▲ comment 17 This investment strategy did not turn out very well for the customers, who suffered substantial losses during the property crash of the early 1990s2. The value of property units fell; the income distributions fell; and interest rates on the margin loans hit historically high levels. And since the government imposed a 12-month freeze on unit trust redemptions in 1991, they couldn’t even bail out of the investment. As most of the customers were on low incomes, with limited resources, their debts blew out – and some were forced to sell their homes. This investment product did not turn out very well for National Mutual (NM) either. Customers complained to the Australian Securities Commission, which started an investigation. There was also a spate of negative publicity in newspapers and on TV (including a Four Corners program). In 1993, NM halted all further sales of the product. The insurer eventually paid about $19 million in compensation to their customers. Nor did Citibank escape unscathed. NM decided to sue the mortgage lender for a few million dollars3. This resulted in a rather This did not turn out very well for Storm’s customers, who suffered unusual court case. Usually a company accused of mis-selling substantial losses during the share market crash in 2008. Naturally, tries to prove its innocence. In this case, NM not only admitted its their debts blew out, and since many of them were low income culpability, but earnestly sought to convince the court that large earners with limited resources, the impact has been catastrophic. amounts of compensation should be paid to the customers. ASIC’s report indicates that some of these people are homeless, going without meals, turning off the heating in their homes and What led to such an unusual state of affairs? suffering stress-related health problems5. Prior to the commencement of this case, NM had already agreed This investment product did not turn out very well for the financial to pay compensation to the customers. NM believed that Citibank institutions either: deserved part of the blame and they wanted Citibank to pay its share of the compensation costs. NM sued Citibank, but in order ● The CBA set up a compensation scheme that is estimated to to succeed in this claim they first had to prove that there was, cost the bank at least $200 million. indeed, a legal liability to pay compensation to the customers4. ● The ANZ also offered compensation to its customers (although They were quite successful in this regard, the judge’s summary the ANZ had a smaller involvement with Storm). of the case was highly critical of numerous aspects of NM’s ● ASIC is suing BoQ and Macquarie for breach of contract, operations, finding that National Mutual was “wholly responsible unconscionable conduct, and liability as linked credit providers6. for the damage suffered by the Investors”. ● ASIC is suing the CBA, BoQ, and Macquarie for running an unregistered Managed Investment Scheme. Progress? Now this is all ancient history, isn’t it? The financial services industry In other words, it’s “déjà vu all over again”. has surely learned from past mistakes. Over the last 20 years, insurers have implemented much stricter controls over the sales and The Ripoll enquiry has revealed some unhappy similarities between marketing of their products. Nevertheless, despite all this burdensome the NM case and the Storm case. Highly geared strategies were regulation, the problem has obviously not been completely solved. recommended to people who could ill-afford to take on such risks; Just look at Storm Financial. It all looks depressingly familiar. the customers were repeatedly assured that the investment was safe and there was no chance that they would lose their homes; Storm Financial offered a doubly-geared investment strategy: loan applications were apparently massaged in order to maximise lending; and the intermediaries all benefitted from substantial fees and ● Customers mortgaged their homes to raise investment funds. commission (Storm charged 7% up front plus trailing commissions); The Commonwealth Bank (CBA) and Bank of Queensland (BoQ) usually provided the home loans. So what is different this time around? ● Customers used the money to invest in X units in equity trusts (usually from Challenger or Colonial First State). Risks for the Product Providers ● Then they took out margin loans to buy additional units. Usually 20 years ago, the financial advisors who pushed these high the margin loans were provided by subsidiaries of the CBA or risk, double geared products were working for a large insurance Macquarie Bank. company, which valued its own reputation and could afford to pay ● All of the investors’ units in the Equity Trusts were pledged as compensation for its misdeeds. By contrast, Storm’s advisors were collateral for the margin loans. working for a company that is now out of business and insolvent, ACTUARY AUSTRALIA ■ July 2011 ▲ 18 comment with insufficient funds to pay compensation7. Professional indemnity insurance has proved inadequate to meet this need. This appears National Mutual’s to be one of the side-effects of tighter regulation of insurers, i.e. Negative Gearing Package mis-selling of high risk financial products has not been completely stopped, but instead it has been pushed out to companies that are less tightly supervised. High Risk Complex Products The National Mutual Negative Gearing Package was high risk. The These financial-advice fringe-dwellers can only prosper by forging investors were borrowing at historically high interest rates. They links with the major financial institutions that provide the home were investing in commercial property – an asset class that certainly loans, margin loans, and unit trusts that are components of their cannot be classified as low risk – with 80% leverage ratios. package. In the Storm case, these links created three problems: Of course, just because a product is risky, does not necessarily ● Customers were comforted by the close relationship between mean that it is a bad product. It might be quite suitable for some Storm and the banks. If reputable financial institutions were customers. providing margin loans and managing Storm-badged unit trusts, surely this meant that Storm was trustworthy?8 Suitability to Customers ● As explained below, some of the financial institutions were, The NM Negative Gearing product was not at all suitable for many apparently, persuaded to relax their normal lending standards of its customers. A negative gearing package is suitable for people on behalf of the Storm customers. Storm’s financial advisors on high marginal tax rates; for people who can afford to cover the filled in the home loan application forms for their customers. negative cash flow in early years; who can meet margin calls without The Ripoll enquiry cited a disability pensioner with income of difficulty; who are experienced investors; and who understand the $800 per fortnight. According to his loan application (which risks. Unfortunately, the product was sold to people who did not was filled in by someone else), his income was $8300 per fit the profile. The customers included bricklayers, forklift drivers, month9. Also, it seems that property valuations were inflated labourers, mechanics, policemen and secretaries. None of them to maximise lending. were on high marginal tax rates10. They could not cover negative ● There may also be a blurring of responsibilities, i.e. confusion cash flows. For some investors, the interest charges on the loans about who was responsible for what. For example, in the exceeded their monthly after-tax income11. Many of the investors Storm case, who was responsible for informing the customers had virtually no investment experience – many had none12. about margin calls? The banks assumed that Storm would take responsibility, but Storm said that it was the banks’ Similarly, Storm has been criticised for its “one-size-fits-all” strategy. responsibility. Risk Warnings As a result of this confusion, many customers never received a It is perfectly reasonable to sell high risk products to suitable margin call but were only notified by the banks after their position customers, as long as the risks are fully disclosed. Unfortunately, the was closed out.
Load more

Recommended publications
  • Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform1
    Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform1 Research Note Ben Phillips Associate Professor ANU Centre for Social Research and Methods February 2016 1 This work was not funded by any external sources and is an independent analysis. The views are those of the author alone. Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform Contents Overview .............................................................................................................................. 3 Modelling Methodology ........................................................................................................ 4 Negative Gearing distributional analysis .............................................................................. 5 Negative Gearing – potential impacts on rents .................................................................... 8 Capital Gains distributional analysis .................................................................................... 9 Conclusion ......................................................................................................................... 11 The Australian National University | 2 Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform Overview In the 2012-13 tax year around 1.2 million persons were invested in negatively geared properties in Australia. Around 330,000 persons included capital gains in their taxable income where a 50 per cent discount was applied. Australian taxation
    [Show full text]
  • The Pros & Cons of Negative Gearing
    The Pros & Cons of Negative Gearing. A Snelleman Tom Whitepaper. Printed January 13, 2012 © Snelleman Tom © Snelleman Tom Page 1 of 12 www.snellemantom.com.au Ph 07 3871 0081 Contents Page Negative Gearing ................................................................................................................................................. 3 Background .......................................................................................................................................................... 4 Tax Advantages .................................................................................................................................................... 5 Political & Social Issues ....................................................................................................................................... 6 Does negative gearing work and should I do it? ............................................................................................... 7 Conclusion .......................................................................................................................................................... 10 About Snelleman Tom ....................................................................................................................................... 12 © Snelleman Tom Page 2 of 12 www.snellemantom.com.au Ph 07 3871 0081 Negative Gearing Throughout the last few decades, the negative gearing concept has had its fair share of promoters and naysayers which is often driven by various factors
    [Show full text]
  • Negative Gearing
    Negative Gearing 1. What is negative gearing – negative gearing is where the interest expense on the finance to ​ acquire an investment exceeds the income generated by the investment, and the surplus interest is available to be offset against other income, thereby reducing the overall tax liability of the person or entity 2. Where would you find assets that are negatively geared? Many types of investment assets can ​ be negatively geared – managed funds, shares and property are common examples, because lenders are prepared to lend against these assets. Not all assets have to be geared directly – you may have a line of credit which is separate from your home loan that you use for investment purposes – interest on this loan can be offset against the investment and your other income. 3. Why on earth would someone throw their money away by negative gearing? After all, even with ​ the tax concessions, you only get a percentage of your loss back on tax. The only way that negative gearing works is where the capital growth in the asset exceeds the loss suffered from the excess interest and other costs. While the asset is growing in value, you are not paying tax as the gain is unrealised, but you are able to offset your loss against your other income, which helps to fund the cash shortfall on the loan interest repayments. 4. When is it advantageous to negatively gear? Probably in two main scenarios – where the capital ​ growth is expected to be so significant that your short term losses will be well and truely recovered on the sale of the asset, and the other is where you can obtain a significant tax advantage, because your taxable income is at or close to the top marginal rate of tax.
    [Show full text]
  • Reforming Negative Gearing to Solve Our Housing Affordability Crisis
    THE McKell Institute Insti tute McKell THE MCKELLTHE INSTITUTE Switching Gears Reforming negative gearing to solve our housing affordability crisis JUNE 2015 Background1. Introduction This report has been funded directly by The McKell Institute and has not been commissioned by any of our sponsors or supporters. The authors of this paper have utilised a range of publicly available information and our own analysis in compiling this paper. About the McKell Institute The McKell Institute is an independent, not-for-profit, public policy institute dedicated to developing practical policy ideas and contributing to public debate. The McKell Institute takes its name from New South Wales’ wartime Premier and Governor–General of Australia, William McKell. William McKell made a powerful contribution to both New South Wales and Australian society through significant social, economic and environmental reforms For more information phone (02) 9113 0944 or visit www.mckellinstitute.org.au THE The opinions in this report are those of the authors and do not necessarily represent the views of the McKell Institute’s members, affiliates, McKell individual board members or research committee members. Institute Any remaining errors or omissions are the responsibility of the authors. Insti tute McKell THE Insti tute McKell THE MCKELLTHE INSTITUTE Switching Gears Reforming negative gearing to solve our housing affordability crisis JUNE 2015 MCKELL INSTITUTE Switching Gears | Reforming negative gearing to solve our housing affordability crisis The Author Richard Holden Richard Holden is a Professor of Economics at UNSW Business School and an Australian Research Council Future Fellow from 2013-2017. Prior to that he was on the faculty at the University of Chicago and the Massachusetts Institute of Technology.
    [Show full text]
  • Investment Property Tax Planning Free Booklet
    INVESTMENT PROPERTY TAX PLANNING CONTENTS Pages Introduction Negative Gearing - What is It? 2 to 4 Ownership Options 5 to 6 Joint Tenants or Tenants in Common 7 Rental Property Deductions 8 to 11 The Right Type of Loan 12 to 13 Buying or Selling a Rental Property 14 Capital Gains Tax 15 to 16 Negatively Gearing Investment Portfolios 17 Disclaimer Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances. 12 Aletta Street Shailer Park, Qld, 4128 umbrellaacountants.com.au February 2014 Umbrellaaccoutants.com.au Page 1 NEGATIVE GEARING - WHAT IS IT? Negative gearing is all about losing money (at least in the beginning). Why would anybody want to lose money - simple, to save tax! How does it work? Quite simply, something is negatively geared when the expenses paid (including interest) exceed the income earned. This difference (or loss) is what can be claimed as a tax deduction. Does this mean I get the entire "loss" back on my tax? No - like any other tax deduction this loss is used to simply reduce your taxable income. This means while you do get some back on your tax - this amount is restricted to your marginal rate of tax. For example, if you pay tax at the top marginal tax rate (i.e. your income is greater than $180,000 pa) then the most tax you can get back is 46.5% or $465 for every $1,000 lost.
    [Show full text]
  • Best Home Loan Rates for Investment Property
    Best Home Loan Rates For Investment Property When Brice badges his calypso harmonising not stunningly enough, is Hebert hydrogenous? Financed and unruly Shaughn never tabbing progressively when Hanford weathercocks his ocularist. Salomon acquaints her metis rousingly, she combating it ungently. Please tell us better idea to property for example, may have used on the use of purchasing endeavors There for investment planning to invest in rates are no larger living? Mortgages & Home Loans HFCU. Compare a Mortgage Rates Interestcom. What rate for property investments? But what makes a home front second home getting an investment property. You better realize that extra mortgage rates affect on real estate investments The silly way we understand medicine is by in a rental property. What environment your holy of service? Picking up less, kenny was extremely fortunate and investment home loan for property types, first lien holder to the time was much house you afford to. With a fixed rate mortgage group from PNC Bank you will provide consistent payments for large life come your aggregate loan. There had our home for those guidelines and discount points on interest and subject to. You sign also take out service type bank loan if ever expect rates to drop. Don't stress Our small mortgage experts can recommend the plan mortgage to. You the flexibility to access ram and manage hello home justice and property performance in NetBank and habitat the CommBank app. Each month in helping to get a blessing for you can help you should keep returning because there for retirement for years and answering questions below shows our best! If you adjust the best to everyone at the rate may need to have.
    [Show full text]
  • 5 June 2015 Tax White Paper Task Force the Treasury Langton
    Community and Public Sector Union Michael Tull – Assistant National Secretary 5 June 2015 Tax White Paper Task Force The Treasury Langton Crescent Parkes ACT 2600 Email: [email protected] Dear Sir/Madam Tax White Paper The CPSU believes that government has a crucial role to play in the nation. It is our view that, at present, the government does not collect sufficient revenue to meet the needs of the Australian people. The CPSU is committed to providing a strong voice for members in the big public policy and political debates. As the key union representing Australian Public Service (APS) employees, our members have a strong interest in the tax reform debate. Political and public policy decisions around reform of the tax system are central to our members’ interests as the tax system raises the revenue required to fund public services. Given the importance of tax reform, the CPSU recommends that the final Tax White Paper: 1. oppose any cap on Commonwealth taxation of a proportion of GDP; 2. focus on tackling tax avoidance to increase revenue; 3. support reform of negative gearing and the capital gains discount; 4. support the reintroduction of a carbon price and resource rent tax; 5. oppose a cut in the corporate tax rate unless accompanied by closing loopholes whereby the net effect would be increased revenue; 6. oppose an increase in the GST; 7. support introducing a Buffett rule; and 8. support greater resourcing for the Australian Taxation Office. The CPSU welcomes the opportunity to make a submission to this White Paper process into tax.
    [Show full text]
  • Financial System Lnquiry - Q &A
    1 Financial System lnquiry - Q &A RESTRICTED 1 RESTRICTED 2 The Inquiry notes 'the tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment in housing.' P 278 Should the government reform tax treatment in this area? o Tax reform is an issue for Government. o The RBA has nonetheless noted in the past that the concessional rate of taxation of capital gains might encourage leverage speculation, particularly in combination with negative gearing provisions. (Malcolm's remarks to Senate lnquiry, 2003 PC submission) o As we have made clear in our recent communications, the Council of Financial Regulators considers that some risk has recently been building in investor housing. lt is probably not a coincidence that this is happening at a time when some other asset classes have seen modest, and in some cases quite volatile, returns. 9 December 2014 RESTRICTED 3 2 NEGATIVE GEARING Negative Gearing Explained o Geared investment - lnvestment purchased with debt ¡ Negatively geared investment - lnvestment purchased with debt where the return on the investment (rental income, dividends) is less than the cost of owning that investment (including the interest on the loan) o 5o also opplies to other investments such os shares (though LVR would be smaller) . Current tax law allows the difference (the loss on the investment) to be claimed as a 100% deduction against wage and salary income*. o Effectively reducing the after-tax cost of holding a loss making investment o Only makes financial sense if the investor expects to make an offsetting future capital gain ¡ Originally introduced to increase the supply of rental properties Interact¡on with Capital Gains Tax ¡ The Bank has stated in the past that we are only concerned with negative gearings interaction with capitalgains tax.
    [Show full text]
  • Negative Gearing Explained
    Negative Gearing Explained By Zelko Maric What Is Negative Gearing? Negative gearing refers to the borrowing of funds to pay for a home which the buyer then rents out. As rental income is usually less than the cost of the interests and outgoings paid on the property the investment is considered to be “negatively geared”. The attraction of borrowing or ‘gearing’ is that you can invest in shares or property that might otherwise have been unaffordable. Negative gearing tends to be adopted as a financial strategy for two main reasons: A negatively geared property can offer immediate tax benefits while also offering the prospect of capital appreciation over time. Negative Gearing and Tax Benefits In Australia investors are allowed to offset an income loss incurred on a real estate investment against another form of income. An income loss takes place when the property holding costs are higher than the rental income from the property. The upside is that you are expecting a potential capital gain that will ultimately be worth more than a definite loss of income. Negatively gearing a property can be very complex. Some expenses are not deductible (stamp duty, initial repairs etc.) while other expenses such as borrowing costs and depreciation are generally claimed over a number of years. Interest on the investment loan is fully tax deductible. Hence if the rent you make on the property in the first year leaves you a couple of thousand dollars short, you can “save” money off your tax bill by deducting the interest spent from your total earnings (salary, wage or rental income).
    [Show full text]
  • Negative Gearing
    NEGATIVE GEARING WHAT IS ‘GEARING?’ WHY WOULD PEOPLE USE NEGATIVE GEARING? Gearing is the term used to describe borrowing money Negative gearing means that (i) you borrowed money to make an investment; to buy an investment asset. The term is used because and (ii) the costs of holding the asset exceed the income the asset creates. To borrowing increases the return of the investment for a compensate for the short-term losses, the investor will need to make a positive given amount of an investor’s money – much like the capital return on the investment – that is, the investment will need to rise in value gears in a car generate more output for a given over time. If that does not happen, then negative gearing is a bad way to make number of revs. an investment! Always remember that gearing makes both types of History shows that, over time, assets such as property or property often rise in investment return bigger – losses and gains. If you value. So many people who use negative gearing find that the eventual capital borrow money to invest and the investment makes a gain more than compensates for the short-term loss that they initially incurred. loss, you lose more of your own money. In addition, negative gearing is often a temporary situation. Typically, rent and dividends rise over time. The rising income means that a negative gearing WHAT IS ‘NEGATIVE GEARING?’ situation often becomes a ‘positive gearing’ situation over time - especially if interest rates fall and/or the investor repays some debt. Negative gearing is a situation where the person The Australian tax system usually allows an investor to offset investment losses holding the investment pays more in loan interest (and against other taxable income.
    [Show full text]
  • Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform1
    Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform1 Research Note Ben Phillips Associate Professor ANU Centre for Social Research and Methods February 2016 1 This work was not funded by any external sources and is an independent analysis. The views are those of the author alone. Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform Contents Overview .............................................................................................................................. 3 Modelling Methodology ........................................................................................................ 4 Negative Gearing distributional analysis .............................................................................. 5 Negative Gearing – potential impacts on rents .................................................................... 8 Capital Gains distributional analysis .................................................................................... 9 Conclusion ......................................................................................................................... 11 The Australian National University | 2 Distributional Modelling of Proposed Negative Gearing and Capital Gains Taxation Reform Overview In the 2012-13 tax year around 1.2 million persons were invested in negatively geared properties in Australia. Around 330,000 persons included capital gains in their taxable income where a 50 per cent discount was applied. Australian taxation
    [Show full text]
  • Tax Expenditure and Housing
    Tax expenditures and housing authored by Judith Yates for the Brotherhood of St Laurence Published by the Australian Housing and Urban Research Institute September 2009 ISBN: 978-1-921610-18-9 ACKNOWLEDGEMENTS This material was produced with funding from the Brotherhood of St Laurence. AHURI Ltd gratefully acknowledges the Brotherhood of St Laurence, without whom this work would not have been possible. DISCLAIMER AHURI Ltd is an independent, non-political body which has supported this project as part of its programme of research into housing and urban development, which it hopes will be of value to policy-makers, researchers, industry and communities. The opinions in this publication reflect the views of the authors and do not necessarily reflect those of AHURI Ltd, its Board or its funding organisations. No responsibility is accepted by AHURI Ltd or its Board or its funders for the accuracy or omission of any statement, opinion, advice or information in this publication. i CONTENTS CONTENTS .................................................................................................................... II TABLES ......................................................................................................................... III FIGURES ....................................................................................................................... IV BOXES .......................................................................................................................... IV EXECUTIVE SUMMARY ...............................................................................................
    [Show full text]