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Following the NSW government’s move to introduce an optional property tax next year, brokers are questioning how lenders will treat this in serviceability.
Last week, NSW Premier Dominic Perrottet confirmed that the state would be giving borrowers the option of paying stamp duty or an annual property tax from 16 January 2023.
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Under the new initiative, eligible first home buyers purchasing a property under $1.5 million would be able to opt to pay an annual property tax of $400 plus 0.3 per cent of the land value of the property, instead of a lump sum of stamp duty.
While the scheme has been tentatively welcomed (though further details and legislation to establish the property tax will not be introduced until “the second half of 2022”), brokers have raised questions over how this will feed into mortgage serviceability.
One broker commenting on The Adviser website explained: “A customer at time of pre-approval will need to indicate if they intend to defer stamp duty as the annual cost will need to be included in the servicing calc. If approx cost is $2,000 p.a. then add $180 per month as a cost. As land increases so too does this amount. Will be interesting to see how the lenders handle this...”
Speaking to The Adviser sister brand REB, Matt Lee, a mortgage broker and director of Honed Financial, stressed that the equation of opting into the land tax is a delicate one, and that while it might help some lower their upfront costs, it would not be the right option for those who are struggling to obtain the borrowing capacity they require.
“The new land tax option will only assist first home owners that had strong servicing capacity and were only restricted previously by the savings they had available for the purchase,” Mr Lee noted.
“First home owners who are restricted by their servicing capacity may actually be placed in a worse position if they take up the land tax option, as this cost will be added to their ongoing living expenses and will reduce their servicing capacity.”
However, he said he generally believed that deferring the stamp duty payment would particularly help those on the cusp of entering the market but were caught “chasing their tails, as property prices increased and forced them to save additional funds to meet minimum deposit requirements to access a property”.
A savings of approximately 5 per cent in upfront costs could certainly make the difference for some between being able to enter the market or delaying purchasing to save additional funds, Mr Lee said.
“Considering that the current stamp duty waiver for FHO was only up to $650,000 and concessions given up to $800,000, most FHO that we assisted were buying above this amount and not receiving a concession, adding around 5 per cent of the purchase price to the transaction that would need to come from saved funds,” Mr Lee told REB.
Similarly, Frederico Fraga-Matos, a real estate agent at Stone Newtown, suggested that the sticking point with the plan is the financial standing of the buyers in question.
He noted that most borrowers looking at properties around the $1.5 million mark would likely already be bringing in a high wage if they were to qualify for a loan.
He said “most people will want to just pay for it upfront. Especially now, with interest rates increasing and variable costs increasing, they don’t want to have to add on an extra thing. They want to get it over and done with and move on”.
But he acknowledged that some market subsectors might prove to be more welcoming to buyers with these changes in place, such as those homes that would qualify buyers for a land tax concession in Sydney.
“I think it’ll probably help the very entry level properties, probably smaller apartments, in Sydney – and that’s certainly a part of the market,” he acknowledged.
The Adviser had asked several lenders how they anticipate to utilise the NSW’s incoming property tax in serviceability calculations but had not received a response at the time of publication.
[Related: NSW confirms stamp duty reforms from 2023]
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