Prospect of property slump adds to risk
Rising property values have increased our equity in our Hong Kong home. We are thinking of increasing our current home mortgage to buy a property in Britain or Canada. We are in our mid-50s and plan to repay the loan from the sale of our Wan Chai investment flat when we retire at 65. This flat is mortgaged to about 70 per cent of its value. What do you think?
You need to carefully identify and manage a number of risks. These include working out your new debt level as a percentage of the value of your Hong Kong home.
If property values in Hong Kong drop by 20 to 30 per cent, as some are forecasting, your loan-value ratio may increase to an uncomfortable level. If property values drop even further, the bank may require a top-up of the mortgage and you would need to consider whether you have liquidity to enable this.
Given the Wan Chai property is in the same market and likely to be similarly affected by a downturn, don't rely on being able to sell this to generate any equity, especially given it's already leveraged to 70 per cent of its value.
Second, although interest rates in Hong Kong are still historically low, they've risen significantly in the past 18 months, and this climb will continue. Third, you anticipate repaying the loan from the sale of your Wan Chai property. This assumes the property appreciates by the time you want to repay your loan.
Finally, as you are buying overseas, if you are planning to use rental income from the offshore property to support your Hong Kong mortgage, currency risk needs to be managed. Also, you haven't said where you plan to retire, so future currency risk may need to be considered.
You are effectively putting your home - and possibly your retirement date - at risk, so you need to be clear as to whether this is necessary, desirable and manageable. Given you have about 10 years to retirement, it's a bit of a tight play.
I am a permanent resident and solely own our mortgage-free family home. We are planning to rent this and take a mortgage to buy a larger home. I like your comments about gifting property to my spouse to halve stamp duty on a new property. Is it also true that mortgage interest costs can only be fully claimed if I solely own the new flat?
Yes, as sole owner of your new home, and assuming you pay tax at the standard rate, you are eligible to claim the full allowable deduction for home loan interest. If the property is owned jointly, you would only be able to claim a deduction for your 50 per cent share of the home loan interest.
Note, too, that the number of years of eligibility to claim a deduction for home loan interest has been extended from 10 years to 15 years of assessment with effect from the 2012-13 year of assessment.
The extension cannot be claimed in retrospect but you can claim any balance to take you to a full entitlement of 15 years from the 2012-13 year of assessment and onwards.