Irish Mortgage Brokers Blog

PTsb are going to take away investors tracker mortgages unless they go to capital and interest payments, that story was broken by Charlie Weston in the Independent today. That is a business decision by them, but for the business affected (landlords) it creates a new problem.

How can they do this? Isn’t it part of the new rules that banks can’t take your tracker from you? Yes and no, if you bought a property as an investment you are not covered by the Consumer Credit Act 1995 (you are not acting as a consumer) or the Code of Conduct for Mortgage Arrears. So any renegotiation can result in the loss of a tracker, staying on interest only (if you are with Ptsb - and others will follow suit) will require moving to a variable rate.

We’ll look at a standard example: Take Joe, he is married and earns €45,000 p.a. and his wife Kate makes €30,000 they bought an investment property with their SSIA’s (€30k deposit on a property for €300,000 in 2006). They have a child and a primary home with a mortgage of €250,000 on it. A generic family income statement is below

In this scenario - where the loan is on interest only, there is a a high ratio of costs to income at 62%, over 65% is where people tend to start defaulting. The savings tend to focus (in many families) in the area of General Expenses, cutting back on various day to day costs, so there is a little room for manoeuvre left in there.

Going to a repayment mortgage however, gives the following situation - and now these people are into ’struggling seriously’ territory. With only €310 per week to cover any expenses we have not accounted for and unforeseen events. Recent research by the British Building Societies Association has shown that about 1/3 of arrears occur due to ‘Financial Circumstances’ outside of job/income loss, ie: something comes up that uses your available income and you miss payments because of it.

If you both had to drive for work and your car broke down that might be what gets you, in any case, for these people (who would be considered middle of the road middle class) they would be at risk if they went to a repayment mortgage. It sucks to be a landlord (caveat: if you used finance to do it with)

Couple this with the economic fisting we are about to get and it means that this couple could be earning significantly less next year, if one of them loses their job or takes a significant wage cut then they will go under, 2011 will be a very testing year for a lot of people, and in particular it will be a year in which a second wave of mortgage shocks hits the banks, further deterioration in the regular residential loan book and the residential investor loan book will likely come to the fore.

I volunteer with a group called Smart Taxes who are a sustainable taxation think tank. This has post is taken from their site (original in link above), and it is well worth reading if you want to hear about the reasoning behind using site value or land value taxation as opposed to ‘property taxation’.

Site Value Tax is a taxation reform included in the Irish government’s current Program for Government. It levies an annual charge on the value of all developed and undeveloped zoned land including the site under every building in residential use.  It does not include un-zoned land i.e. agricultural land, forestry and peat-lands.  It does not include developed commercial property currently subject to local rates but it is expected that SVT will replace commercial rates in due course.  It does however, include land zoned for commercial uses not currently subject to rates.  Research by Smart Taxes and other groups has shown that SVT has clear benefits over other kinds of property taxes from a number of perspectives; macro and micro-economic, environmental and social. It will assist local and central government to plan and develop effectively while providing a sustainable income source. See below for key research documents from Smart Taxes. A book compiling these and additional research papers is forthcoming.

What is the Difference to a Property Tax?

It differs from a property tax in that the property tax is imposed on the value of a property (i.e. the building), while Site Value Tax is based only on the value of the land. Land value derives from location and service access, meaning that, for instance, a site in a central location with good transport will pay more than a relatively isolated site. It would also apply to undeveloped zoned land, empty building sites and derelict sites.

Land Value Taxation and other Measures for Raising Public Investment Revenue: A Comparative Study

What are the Economic Benefits?
Unlike other taxes, Site Value Tax does not impose a cost on economically beneficial activity, as VAT does on consumption or PRSI does on employment. Instead, it charges for the benefit that a landowner receives from the location of their land. This benefit is largely due to access to services and local social and economic capital created by the community (third party private  and public investment) not due to effort by the individual site owner.  Site Value Tax enables this benefit to be returned to the community rather than to the undeserving site owner so it can be used for further productive community investment.  Effort and investment by the site or building owner to  improve and add value to her property is not taxed however, in contrast to commercial rates or other property taxes.  Further, by taxing undeveloped land when zoned for a particular use, Site Value Tax discourages land hoarding and speculation.  SVT will replace or part replace onerous transaction taxes which prevent investment such as  Stamp Duties and other non-transparent and/or variable levies such as Development Levies and Part V type obligations thus creating a clearer market in development land and regular receipts for local authorities.

For more information on the economic benefits, see

Macroeconomic Case for a Land Value Tax Reform in Ireland

What are the Environmental Benefits?
Land is a finite resource. By imposing a charge on the ownership of land, based on its maximum permitted economic use, Site Value Tax discourages over-zoning of land and creates incentives for owners to use land as effectively as possible. This will ensure that land is used more efficiently in future and mitigate urban sprawl.

What are the Social Benefits?
Site Value Tax will encourage economic activity and will mitigate the under-use and dereliction of properties. It will also provide a revenue stream for local government investment in public services. As proposed, the tax will include temporary exemptions for home-owners who purchased their land at the height of the boom, while senior citizens will be able to defer payments until their land changes hands. The tax also helps infrastructure investment by allowing the government to capture the rise in land values caused by infrastructure creation. This prevents public expenditure serving to enrich private landowners at the expense of taxpayers.

What Needs to be Done to Implement this Tax?

Smart Taxes has prepared a comprehensive report on the implementation of Site Value Tax. This report has been submitted, and includes a Roadmap, outlining the key steps to be taken. The steps are clear and straightforward. What is needed is political will.

Implementation of Site Value Tax in Ireland and

Site Value Tax – Budget 2011 Submission

The government will be hard pressed to decide who to squeeze next, if you go after the poor (which we take to be people earning less than c. 25k - irrespective of knowing whether this suits them or if they have debt or not) it is politically explosive, they will have a hard time going after the elderly - who have a tendency to not take it lying down (remember the medical cards?), and those who are rich (we take as earning 100k or more p.a. irrespective of debts) have already been hit hard.

What group can you easily strike next? The simple answer is that the people who have money are the target. This doesn’t mean those who earn a lot, rather it will be against those who ‘have’ a lot. The savings rate has been steadily rising (last months 0.2% drop was the first of its kind in almost a year)

which could be due to seasonal factors or it could be a symptom of people not having enough to put by and save.

which could be due to seasonal factors or it could be a symptom of people not having enough to put by and save.

In any economy it is healthy to have money moving around, you get an acceleration effect (and with credit you get a multiplier) on transactions and GDP, one great blockade is if everybody is saving. Keynesian’s may be familiar with the ‘paradox of thrift’ in which you get a situation whereby people saving personally do so for individual reasons, but if everybody does it at the same time (aggregate) then you suddenly have a void left where spending was occurring and it causes stagnation or deflation.

You can’t force people spend, but you can disincentivize them, and for that reason I suspect we will see ‘progressive DIRT tax’ (DIRT stands for ‘deposit interest retention tax) and it is taken at source - which has the added advantage of making it almost impossible to avoid.

The best way (politically) to do this is to have DIRT at 25% up to the deposit protected limit of €100,000 and above that have different tiers that people reach depending on total savings held.

How many people would feel any sympathy for a widower or single parent with €400,000 on deposit who has to pay 80% DIRT on any interest earned on a sum over €250,000? Not many, which makes it politically easy to do. There are no ‘women and children’ to hold out in front of this policy, virtually nobody ever runs out in defence of the rich, particularly not in Ireland where it is almost seen as a sin to get too far ahead.

The politically viable nature of this, the inability to avoid it and the policy advantage of encouraging people not to save too much for too long mean that you can practically bet the family silver on a change in DIRT tax in the coming budget.

DIRT is levied at the time the interest is paid, and for that reason if you have a large deposit and feel this increase is likely (as we do) then it would be a good idea to use the PTsb ‘interest up front’ product right now so that you get your interest done and dusted at 25% rather than taking a bigger hit in the months after Decembers budget.

This would only make sense for people with very large deposits, if you want advice you can call us on 01 6790990, this is not scaremongering, it is merely looking at a situation for what it is, the state need to raise money fast and there is one group out there for whom there is little or no public sympathy who are prime targets.

We have long been critics of the taxation system in general, primarily on the basis that the tax base doesn’t make sense, it should be focused more on sustainable and easily interpreted taxation, Site Value Tax, taxes on any activity which takes away from another party (carbon taxes, pollution taxes etc.) and finally on consumption. The idea being to cut Government spending according to the cloth available rather than the current approach which is to tax until you find the money available to meet the budget.

Dan Mitchell of the Cato Institute has a video below which spells it out.

The aim of the new pensions framework is to deliver lasting security, equity, clarity and choice to the individual. To a degree we are taking on a system the Australians have used in which providing for your retirement is mandatory.

The aim is also to increase pension coverage, particularly among those who have traditionally had a lower level of uptake, as well as encouraging provision for retirement that is not reliant upon the state alone.

There is concept in finance of a ‘risk free rate’, and normally that is seen as being the rate of return on money by a sovereign entity (in our case it’s Ireland), so in a rational market it should always be the case that anything with an implicit state guarantee should pay far less than those without it, because those without it have to reward investors by offering more in order to attract them.

Oddly, in Ireland the institutions implicitly backed by the state are actually paying over the odds, and in effect that means a transfer is occurring from tax-payer to depositor, in short, we are being ripped off when our sovereign guarantee is not factored into pricing.

For example: Anglo Irish Bank are paying 3.1% for a demand account, this means you can take your money out whenever you want, BOI, AIB, INBS, NIB and many others are paying a mere 0.1% meaning that Anglo are paying a full 300 basis points or 3% more than competitors who are not state owned (albeit they are partially state owned). Rabo are paying 2% so what we are seeing from a deposit account perspective is that Rabo are a better institution in terms reliability than our own state is.

What a joke…. But it’s not so funny really.

Then we have An Post, an implicit state guarantee and you can lodge up to €120,000 with them and earn a TAX FREE rate of 3.23%, normally you’d have DIRT which would take 25% away from any deposit gains, but in this case you don’t, so in order to earn the equivalent elsewhere you would have to be making 4.31%. Again, this is an example of paying way over the odds for funds, the state should in fact be offering well below market rate levels of interest because their return is guaranteed in a way that no other institution can copy.

Are you angry? Don’t be, just make sure that you buy An Post savings bonds and instead make some profit on the errors made from on high, as a financial adviser I can’t believe this continues and nobody is pointing it out, in the USA bond income from Municipal Bonds is tax free, so you always make a ‘tax equivalent yield’ in which you show how much you’d have to make on a taxable bond in order to generate the same income it is as follows:

R(te) = R(tf)/(1- t)

Where: R(te) = taxable equivalent yield for the investor
R(tf) = return on tax-free investment (usually a municipal bond)
t = investor’s marginal tax rate

Bond income is taxed at your own rate of tax, we’ll assume that you had a good year and are on the marginal rate of 41%, and see what kind of yield you would need from any other bond to earn 3.23% after tax.

R(te) = 3.23/(1-.41) = 5.47%

So if you were to go out and buy a corporate or sovereign bond you would need to be earning 5.47% in order to just match the offering by An Post, and you wouldn’t get a return like that which is backed by a sovereign guarantee! (exception is perhaps a Greek bond).

So why are we paying so far over the odds?

That’s a question, I certainly don’t have the answer.

There is an interesting situation that we are seeing much more of lately, where people in negative equity or negligible equity are deciding that because they cannot now move up the ladder (which was the point in their initial purchase - as a stepping stone to trading up), they will instead rent out their home and then rent a house in the area they actually want to live.

While this is a working solution to a person in negative equity seeking mobility it can result in a tax liability that many people are not aware of, this is how it occurs, the portion of mortgage payment that goes against the capital is actually taxable, and if it is paid to the bank it doesn’t mean you don’t have to pay tax on it.

The finance act in 2009 brought about a change whereby only 75% of mortgage interest can be offset against Case 5 rental income as an expense, and this further exacerbates the situation even for those who have interest only loans!

However, we’ll demonstrate the position a person would find themselves in if they had a mortgage of €260,000 over 25yrs (costing €1,230 per month) and they rented the property out for c. €1,100.

Clients have told us they have gone ahead and done this, but that they don’t mind losing out on the €130 per month in order to live where they really want to be, that is when we have to explain the rest of the implication to them!

For a start, if you rent out your property within the first five years (if you didn’t pay stamp claiming First Time Buyer status) there can be a stamp duty clawback, but it doesn’t end there.

Within the €1,230 per month mortgage payment (TRS will no longer apply if you are renting the property out) there are two parts, €650 is interest and the remaining €580 is capital repayment. Only 75% of the €650 can be set off against the rent meaning that only €488 applies.

So your €1,100 rent minus €488 is the ‘profit’ you are deemed to have made which amounts to €612 per month and at c. 45%(ish) tax that means you’d have to pay Revenue €274 per month in tax on top of the €130 difference that it takes to make up the full payment.

This means that the monthly cost is actually around €400 (and this is made up of after tax income - so the gross cost is higher again- of course, we can advise people so that this doesn’t happen but often people don’t seek advice in advance and that means that even with our help they are facing a tax liability, for that reason we would hope that if you are considering this that you call first!

Other expenses that have to be considered are changing your home insurance to reflect that it isn’t a primary home any more, then there is the NPPR tax (non-principle private residence), as well as PRTB requirements.

If you have any questions call us, the main thing is to ensure that you don’t find yourself in this situation if you can’t sell your current home and want to move elsewhere!

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

I think that the introduction of postcodes will usher in the foundation for property tax, and that the gains to be had from postal efficiency are not at the heart of the move toward a comprehensive postcode system.

Just to give the background to this post, the Sunday Tribune reported:

Residents in Dublin’s coveted D4 addresses have only two years left until their exclusive postcode is renamed by the Department of Communications, as plans for the new postcode system are finalised by Minister Eamon Ryan. The department plans to issue tenders for the system by Easter, but a delay has meant the code will not be in place until the end of 2011, and not early next year as planned.

Under the new coding system, areas such as Dublin 4 and Dublin 6 will be renamed under a new six-digit system, such as D04123 and D06123. However Labour’s spokeswoman for Communications, Energy and Natural Re­sources, Liz McManus, said the latest estimates for the new system show it will cost a minimum of €40m.

McManus has also said businesses will suffer further financial hardships as they will be forced to change their address records and data.”This is not the time to be implementing this system, and it appears to be nothing more than a vanity project for the minister.”

What does this have to do with Property Tax?…

In the budget speech Lenihan alluded to the coming tax on property, this quote is verbatim ‘In the Renewed Programme for Government we have accepted the recommendations of the Commission on Taxation on the need for a property tax. Considerable ground work will need to be done before a Site Valuation Tax can be introduced. Work will shortly begin on the registration of ownership and the valuation of land‘ (emphasis mine).

The idea of a ‘Site Valuation Tax’ means that a property isn’t taxed on what it will sell for, rather it is taxed based on the value of the site it sits upon, essentially the footprint of the property, and this is where Liz McManus is missing the point - if we have comprehensive postcodes breaking areas down into small parcels then you can start to apply a site value with meaning.

I like to use myself as an example, I live in Donnycarney in Dublin 5, suffice to say the value of the site I live on is nowhere near as valuable as the sites of my not to distant neighbours in Beaumont or Raheny, so you couldn’t have a site value tax for ‘Dublin 5′, but if that were to change, and instead my postal code was me and every house within 100 metres then it would make absolute sense to value them all the same (from a ’site’ perspective).

It would also mean that maintaining a national database on property site values would be far more simple, without them you would have to figure out the actual transactions in an area, see if it was comparable or not and test for proximity and other factors, it would be a quagmire. However, with smaller parcels you can use the average for surrounding parcels as well as transactions and other measures to get a really accurate non-distorting site value (there would be marginal distortion such as where a less-desirable neighbourhood meets a desirable - my own neighbourhood being a case in point where Donnycarney borders Clontarf, it would be important to have some small tinkering to take account for circumstances, but by and large huge tracts of land could have a common postcode and broadly common value).

Far from postcodes being a ‘vanity project’ they are fundamental to a rationally and well working database that can be used to get a letter to you, but also to impose a property tax.

Doubt it? O.k., then be cynical with me for a moment and ask ‘Do we have a badly functioning postal service where letters are regularly lost?’ (if you are in debt collection you might believe that to be the case!), do we need to get post to people quicker than we used to? And with the new codes, will it speed up the process or increase efficiency? Is the post office going to do away with half of their work force due to some new found efficiency? And most importantly, in a year where every expenditure going is being slashed, would €40m not make one hell of a difference to some pertinent project?

Unless you have your eyes closed then the push for postcodes ought to be screaming out the obvious at this stage…. postcodes = property tax.

We don’t need a better postal system, we won’t get to send letters for less due to postcodes. In terms of function, I have tested it several times, it works, really well actually, in fact, if you get an envelope and write on it ‘Karl Deeter, Dublin’ I’ll still get it. That’s how good it is, fact, so why all the effort to re-invent the wheel? Unless it’s really about something else?

There was an interesting talk given by CFA Ireland on the topic of Islamic Finance and Sharia compliant financial products. The long and short of it is that there are no retail Islamic finance products widely available in Ireland at present, there are two or three Sukuks domiciled here.

So what can a Muslim living in Ireland do in order to remain Sharia compliant? The good news is that a person can essentially engineer their own Islamic Finance products at home, and this is perhaps the reason that there has not been a bigger uptake or creation of strictly Islamic products in both the west and in predominantly Muslim countries, even in Pakistan the uptake on Islamic Finance products is only c. 5%.

Part of the reason is that Islamic Finance products often come with a ‘Faith Premium’ which means the cost of being Muslim is significant if you choose to use products that are in strict compliance with your religion. It is important to note that it is in the area of ‘interest’ or ‘usury’ that Islamic Finance distinctly differs with run of the mill finance, usury is forbidden in the Qu’ran.

However, many Islamic Finance products can be engineered at home so we will look at them now.

1: Current Account that pays interest - In a current account or indeed, any interest paying account you can easily get around the usury laws by taking any interest and giving it to charity, using and utilising only our own money.

2: Mortgages - This is a little harder, but essentially you would need to rent and stay renting until such time as you can buy with cash. Having said that, with rents at all time lows and vacancies at all time highs it could be a good time to negotiate a ten year lease and start saving as much as you can so that you can afford the price of a house at the end of that time.

3: Investment - Equities are fairly compliant already, you can receive dividend which is a share of profit, and the values can go up, that is a market transaction, it is only when the element of usury enters that you have issues, so you could buy equities but not via a margin account. Equally, there are certain things that are banned such as alcohol company stocks etc. so it is important to look at any fund and consider the underlying stock if you want to invest via managed funds.

The fact that Ireland has an increasing Muslim population is without doubt, people often (mistakenly) think of Muslims as being from only Arab states, in fact, much of the northern half of the African demographic is primarily Islamic, that means people of all varieties be they black, or north African arab, equally, many of the emigrants from former Yugoslavia are Muslim, as are many Filipinos and Indonesians living here so the chances are that there are many more Muslims in Ireland than the average person easily realises, and this diversity in our national make up means there are new requirements in many services including finance.

The question is whether it warrants a specifically Islamic Finance approach and that is really the rock upon which potential business models here may perish because in the absence of a ready made product, many of the Sharia compliant concepts can be home made.

Islam internationally: Green - Sunni, Blue - Shia