Ep 33. First Home Buyer Choice with James O’Brien
In this episode, Michelle chats with James O’Brien from Shore Financial about the First Home Buyer Choice scheme in New South Wales.
Here’s what you’ll learn from today’s episode:
What is the scheme and how does it work?
Who can utilise the First Home Buyer Choice scheme
What type of properties are eligible to buy
James shares an example of stamp duty costs vs. land tax
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
James O’Brien - Shore Financial
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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Michelle May: Hi, and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter property buying decisions. Now, it's February, and the word on everybody's lips is the change in stamp duty, annual land tax, choices. All these things are so exciting for people trying to get in the market. And because I don't know everything about it, today I've invited James O'Brien from Shore Financial Services. Hey James, how are you?
James O'Brien: Very well, Michelle. How are you?
Michelle May: I'm very well. It's nice to have you back. This time we're recording as well face to face so I can actually see you, which is super great. I like how you dressed up. Thank you so much!
James O'Brien: Thank you mate, and likewise. You're looking wonderful.
Michelle May: Oh, thank you. We're back here to have a chat because you are the person who knows everything about grants and everything to do with borrowing money to buy a property. So I thought I'd pick your brain today to talk us through this great change in New South Wales, all to do with no longer, particularly having to pay stamp duty, but getting a choice on what you actually pay. When it comes to buying property obviously stamp duty has always played a massive cost. And it's a lot of money to cough up upfront. So do you want to run us through what the options are now? What are the requirements for people, et cetera, et cetera?
James O'Brien: So the first thing I'll touch on is I completely agree with you. It's always been seen that probably the biggest barrier to entry, particularly for first home buyers is that stamp duty component. I mean you can borrow up to 95% of a property's value. There are even ways that there are grants that allow someone buying a property up to the value of $900,000 a first home buyer to avoid the cost of the LMI, but that stamp duty has always been pretty crushing. So I think this program, it's called The First Home Buyer Choice, it is only for first home buyers, not every property buyer, but it allows first home buyers in New South Wales the option to pay up front stamp duty, or pay an annual land tax. And for a property of the value all the way up to $1.5 mil. Which I think is fantastic because in Sydney, realistically, there's umpteen numbers of first home buyers that are buying properties well above a million dollars and, finally, there's a program here that really, really helps them with those upfront costs.
Michelle May: Yeah, absolutely. It doesn't matter if it's a house or an apartment as long as the value is up to $1.5 million because I work in the 10k radius of the CBD and, good luck finding a house! They're there but there's not that many. So, having that eligibility for apartments that there isn't like a lower range for apartments is great as well. So who qualifies?
James O'Brien: Good question. So, eligibility criteria, it needs to be for people. It can't be for a company or a trust. You've got to be over the age of 18. You or one of the people that's buying the property needs to be an Aussie citizen or resident. And you've gotta be a first home buyer. You can't have received any first home buying grants before, or owned or co-owned residential property in Australia.
Michelle May: Okay, well that's pretty clear and quite inclusive.
James O'Brien: Yeah it's pretty broad. Other programs have been more kind of restricted so that I think is. Yeah, it's good. Pretty broad.
Michelle May: That's very good. What type of properties are eligible to opt into the property tax and which ones are not eligible? Just so that everybody knows what they can actually buy for this.
James O'Brien: Anything that is, $1.5 million or less. So it can be any sort of apartment, it's got to be residential property not commercial property. And otherwise it's just the only price cap is $1.5 million. So it can be apartments, houses, you know, semis, duplexes, what have you.
Michelle May: But it could also be, it could also be vacant land, right?
James O'Brien: It can actually, yeah, correct. It can be vacant land. The purpose of the property can be either owner-occupied or investment. But there are different rates of tax that apply.
Michelle May: But when it's vacant land, I understand that it's not $1.5 million, the threshold is lower, correct?
James O'Brien: Actually, ]you're absolutely right. You are on the ball. Look, you do know more than me!
Michelle May: I've done my research. Yes! So I think it's $800k, is that right?
James O'Brien: Yeah.
Michelle May: And then say you want to rent it out as a holiday home, I believe there's caveats on that as well. So it has to be your primary residence or an investment. Right. It can't just be a secondary home, even though I don't know how it quite works, but I think holiday homes are also not eligible for this property tax, from my understanding.
James O'Brien: Yeah. I believe that's the case. I don't think it can be a holiday or an Airbnb. Although how would they qualify that? How would they prove that?
Michelle May: So I think, if you are one of these buyers that are on the fringe of this, you might want to delve into this a little bit deeper. I'll add the link to the New South Wales government website that references everything that we are talking about today. So you can deep dive into it and definitely talk to your broker, just to make sure that you are on the right side of the law with this.
James O'Brien: I would say the real benefit is more for owner occupied than investor. So, the rate of tax is lower for the owner occupied. So the number of years that you would pay that annual land tax will be less than the upfront stamp duty, for an owner occupier as opposed to an investor.
Michelle May: So right James, I think everybody is interested to see what the rates and the numbers actually look like. So can you run us through what the difference is between the land tax or the property tax versus the stamp duty? What do the figures look like?
James O'Brien: Sure. So for stamp duty, generally speaking, upfront stamp duty comes to about 4% of the propertys value. For the land tax, for an owner occupier, you would pay $400 per annum plus 0.3% of the land value. For investors, it would be $1,500 per annum plus 1.1% of the land value. Something worth pointing out there though, is to actually opt in for the land tax, you need to live in the property for six out of the first 12 months.
Michelle May: Okay.
James O'Brien: So for an investor it would have to be owner occupied for a portion of that first year before converting it to investment, or vice versa. It could be an investment for a period and owner occupied for a period, and then you could convert it back to being investor. So for investors, it's a bit more complicated and a bit more expensive. And so the benefit I think is more clear for the owner. Having said that, even for investors, if you're owning the property for a shorter period of time, you would definitely be spending less by paying an annual land tax than the upfront stamp duty.
Michelle May: Yeah. Right. No, that makes total sense. Because you did a comparison for a client recently, I believe the purchase price of the property was $1,135,000. So run me through it. So what would be the difference in like say over 20 years? What would be the difference in price paid if you go for the property tax versus the stamp duty upfront? Are you still ahead 20 years is actually a long time, particularly for a first home. Most people would've moved on by then. Upgraded to a bigger home and et cetera. What would the cost be in terms over that period of time?
James O'Brien: It's worth pointing out that this particular property was an apartment. It was in Sydney's eastern suburbs. And it was in a smaller block, I think there were only about 10 or so apartments in this block. And the upfront stamp duty for this property would've been $46,625. The annual property tax is $1,619. So over 20 years, the total amount of the property tax would've been approximately $26,000 as opposed to the upfront stamp duty of $46,000. So still over 20 years, they're $20,000 ahead, so for me, it's amazing.
Michelle May: That's really good. But the flip side for an investment. That is no longer the case.
James O'Brien: No. So for investment, you're paying less than the upfront stamp duty or transfer duty, but that return on investment point gets reached sooner. So the upfront stamp duty would've been the same, $46,625. But the annual property tax would've been $5,969. So you'd reach an equilibrium after about seven years.
Michelle May: Right? That's a lot sooner. And the idea with an investment property is that you hold it on for as long as you can. So I would say, potentially then still consider paying the transfer of the stamp duty as previously.
James O'Brien: Exactly. Yeah. So it doesn't make as much sense for an investor that wants to hold a property long term to pay the annual land tax but or an owner occupier, I think it's a no-brainer, which makes sense. I mean, the program is to help out first home buyers. More than anything else. And so first home buyers generally, they're buying owner-occupier properties to live in.
Michelle May: Yeah. Do you have any tips around when you apply for this grant? When do you have to let them know that's what you want to do?
James O'Brien: Good question.
Michelle May: Is it when you go for your mortgage or when you sign a contract or when does that all happen?
James O'Brien: Yeah, good question. So when applying for the mortgage, we include it in calculations. So banks have now factored that in. When you apply for your home loan, the banks they'll approve you for a certain amount. They want to see that you've got the cash available in an account to cover that shortfall, so to cover any deposit and associated costs. If stamp duty is included, we have to factor that into the calculations and show the bank that the client has that money for stamp duty. If not, and the client is paying an annual land tax, then we actually need to factor that into the calculations as an ongoing expense, and ensure that they can still afford the loan amount that they're looking to borrow. So at the loan application stage, it's definitely factored in, and then with the actual Land Titles Office or New South Wales revenue, your solicitor or conveyancer would do that at the time of purchase.
Michelle May: Right. Okay. The people who do actually have the money saved up for stamp duty, but are now in fact saving this money. When they're contributing, so say for example, you would say on a million dollars, you would potentially have, say $40,000 extra. Does it actually make a significant change in what they can borrow? When you're putting in the application, having the extra savings, can you put that in maybe in percentages or does it make a significant difference to their application?
James O'Brien: So having the extra cash doesn't actually impact their borrowing capacity. All it does, it means that they could, if they were, let's say they were borrowing at 85% before, because the available cash they had they needed to put a chunk towards stamp duty, and they just didn't quite have enough cash to cover the 20% deposit and the stamp duty. Now, if they're paying the annual land tax they're only paying the 20% deposit, no longer the stamp duty. So instead of borrowing at 85%, they're borrowing at 80%, which means they won't have to pay lender's mortgage insurance because they're borrowing at 80% or less and they'd get lower interest rates. So actually, by having a lower interest rate on your loan, that would increase your borrowing capacity slightly, but the general principle of having cash at the bank doesn't help you borrow more.
Michelle May: Yeah, right. It just means you've got more equity in the property to start off with. Which is a good thing. Fantastic. Well, thank you so much, James, for running us through all these numbers and what it is that is actually available for first home buyers. I think it's a fantastic scheme, so run at it if you can. Because we all know that elections are coming. Please, please keep this option available for first home buyers.
James O'Brien: Not to get political, but I think what the Opposition is touting is no stamp duty for anyone. I think the problem there is that's going to create a huge hole in the budget and where would that come from? I think we'd all be getting more taxes in other ways. If the coffers aren't being filled with stamp duty, then they're going to be filled some other way, and so we are all going to feel the sting from that. Not just home buyers. So I think this program, which is really helping out first home buyers, I think is marvelous. And they'll work out a way to make it sustainable.
Michelle May: Yeah. Absolutely. Well, thank you again, James. I'll have you back very shortly, to discuss more financial and mortgage options, when it comes to buying property. But thank you for this episode. If you have any questions when you've been listening, Let us know. Contact me at hello@buyyourside.com.au. James, if they want to get in touch with you because they want to get on the property ladder and they need someone to talk to them about mortgages and everything like that, and how can they best contact you?
James O'Brien: Give me a call. My number is 0415 391 002. Or feel free to drop me an email jamesobrien@shorefinanical.com.au
Michelle May: Thanks James. And thank you for listening. Till next time.
James O'Brien: Thanks for having us.