Negative gearing: Aussie homebuyers ignorant about tax facts

A THIRD of owner-occupiers with interest-only home loans think they can take advantage of negative gearing — despite the fact the perk is not available to them, according to startling new research.

ONE in three owner-occupiers with interest-only home loans believe they can take advantage of negative gearing — despite the fact the perk is not available to them.

And almost one in five borrowers with such loans opted against principal-and-interest mortgages because they couldn’t afford them, according to startling new research.

The findings come from a survey by investment bank UBS, which has forecast a further slide in house prices.

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In a report for investors, UBS analysts say there is a growing risk Australia will suffer a credit crunch over the next two years.

The UBS team, led by banking analyst Jonathan Mott, says the housing market is slowing as credit conditions tighten “and sentiment turns increasingly negative”.

Bank directors are becoming increasingly risk averse and the banking royal commission is taking “a much more rigorous” approach to responsible lending laws, Mr Mott says.

They are among factors weighing on the outlook for the property market, he says.

UBS analysts say there is a growing risk Australia will suffer a credit crunch over the next two years.

“Given these headwinds, we expect a sharp slowdown in credit growth,” the report says.

“Whether this turns into a more disorderly correction remains to be seen.”

Between mid-July and early August, the UBS Evidence Lab — a division of the investment bank that specialises in surveys — polled 1008 Australians who had recently taken out a mortgage to buy a residential property.

Among owner-occupiers with interest-only loans, a large cohort falsely believed they could take advantage of the negative-gearing perks available to investors.

Negative gearing is a tax concession available to investors who are paying higher costs for their assets than the income they collect.

“We were disappointed to see that 32 per cent of owner-occupiers believe they can benefit from negative gearing when this is a tax incentive that applies only to investors,” Mr Mott says.

One in three owner-occupiers with interest-only loans believe they can take advantage of negative gearing — despite the fact the perk is not available to them.

“This indicates that many mortgagors do not fully understand the product they have chosen.”

Across all borrowers with interest-only loans, 18 per cent said they opted for such a mortgage in part because they could not afford to pay both principal and interest.

Eleven per cent said a key motivation for an interest-only loan was their expectation that their property price would rise — and they could sell before the interest-only period expired.

Among owner-occupiers only, 16 per cent said they could not afford to pay both principal and interest.

Banks typically allow mortgage customers to pay interest only for no longer than five years. They are then generally expected to refinance their loans or begin repaying their principal.

The UBS polling also found 5 per cent of all borrowers did not know whether they were paying interest only or also repaying their principal debt.

One in three owner-occupiers with interest-only loans believe they can take advantage of negative gearing — despite the fact the perk is not available to them.

Across all borrowers, 44 per cent with interest-only loans said their main motivation was to reduce repayments so they had more financial flexibility.

Those surveyed were allowed to choose more than one option on their motivation for taking out interest-only loans.

Mr Mott has previously raised concerns about the widespread prevalence in Austarlia of what he terms “liar loans” — home loans given to people who have not been factual in their applications.

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