Loan Calulator: Monthly repayment and interest breakdown

Wondering if your loan repayment calculations have been performed correctly this month, taking into account interest rate rises and extra repayments? You might be interested in giving my monthly loan calculator a go.

As my home loan provider doesn't show balances online, and only sends statements every 6 months, I like to ring up every month or two to make sure things are on track. I used to calculate interest, new balances etc in a spreadsheet / calculator but spent an afternoon writing a little Rails app to calculate it for me. Hopefully my little monthly loan calculator is of some use to you too.

14 04 2008

Naked Economics by Charles Wheelan

Just finished reading 'Naked Economics: Undressing the dismal science'. It was a present from a friend, and I've been meaning to read it for a while. Glad I finally got around to it.

From the title, I assumed the book aimed to point out the failures of economics as a science. Not so at all - it was written by an economist and provides a high level overview of capitalism in layman's terms.

Here's some interesting questions and explanations from the book:

  • Why do we have money? So that we can indirectly swap our labour or goods for the things we want, even if the person with the things we want is not interested in our labour or goods. Without money, we would need to barter. That's fine if you're swapping chickens for rice. But what happens if you do web design, and you want meat for dinner, and the butcher does not want a website?
  • Money has value only because we all believe it does. We have faith that if we sell something (ie, convert it to the common value unit), we will then be able to swap that money for something we want.
  • Why have markets anyway? Markets produce what people want - ie, what people are willing to pay for (or at least what we are convinced into wanting through advertising etc).
  • Why not set the price of everything rather than letting it get worked out in a market? Well, it would be an enormous job, and things would not reflect the cost of production. Eg, bird flu wipes out half of the chickens in the world. There are now less chickens to go around so chicken becomes more expensive. People who really want chicken can still get it, but it costs them more. People who don't care as much or can't afford it eat fish or beef instead. If the cost of chicken was a constant mandated by the state, chicken distribution would need to be mandated in some other way. If there's not enough chicken for everyone who wants it, who should get it? First come first served? Political clout? Personal connections?
  • Markets destroy. A new way to mechanize weaving may make thousands unemployed and destroy towns and communities. But according to Wheelan, the country as a whole is better off as we are able to produce more for less cost, hence increasing our standard of living. Ie, as a consumer, you may now be able to buy a shirt for half the price.
  • In politics, small motivated groups often drive policy. Eg, the general population does not care much one way or other on a subsidy on growing alfalfa. It might cost each person in Australia 0.01c per year. However, if the subsidy was to be removed, and the alfalfa farmers would care a lot. It may well mean their livelihoods so they would demonstrate, make campaign donations, vote as a block and generally make as much fuss as possible to make sure the subsidy was not removed.
  • Why do people work in sweatshops? According to Wheelan, the pay is generally better than for other jobs available - ie, sweatshops are not the cause of the problem, rather a symptom of the general poverty and lack of opportunity in the area.
  • Why is free trade good? So that everyone can do what they do best - ie, specialise to the max. The idea being that if everyone works on what they are most good at, then productivity overall is higher.
  • Why are tariffs bad? Because they support local industries that are not viable - ie, a poor uses of resources.
  • Why do we need governments? To provide the rails for capitalism. Eg, to enforce laws (so you can't just kill me and take my stuff), to regulate the excesses of the free market and to provide goods and services that people need but that free markets will never provide. Also, to do things that individuals cannot do alone, but are in the interest of the population as a whole - eg, build infrastructure.
  • Care for the environment is a luxury good - ie, if you and your family are starving, cutting down trees to sell for food seems like a pretty good idea.
  • Companies destroy the environment because the current monetary cost of environmental destruction is usually minimal. If the full cost of environmental destruction was factored into the market (eg, companies have to pay for pollution and destruction), then environmental destruction would slow dramatically.
  • Who can create new money? The reserve bank, and it does it by buying bonds from banks with money that did not previously exist.
  • How can the reserve bank change interest rates? It can sell government bonds at its target rate and it can buy bonds (with brand new money) or sell bonds from/to trading banks to influence the amount of cash the banks have to lend. Eg, lots of cash at a trading bank means they'll lower the interest rates so as to rent out the money.
  • How come the economy can go into recession for no real reason? If people are worried, they don't spend. If people don't spend, then companies can't afford new/current investment. People get sacked and then can spend even less. People get more worried and the cycle continues.
  • Why is the level of savings in a country important? Money in the bank means it can be lent out to people who want to use it to create new businesses or expand current businesses. Access to capital allows growth.

I wouldn't take these on face value, and I would certainly question some of the assumptions on which they are based. However, they provide some interesting areas for further thought.

3 04 2007

How to do Tax Deductions for an Investment Property in NSW, Australia

Last year I bought a house. Recently, I've been doing my tax. It is much more complex this year with the property, but there are a lot more deductions. Here's some tips:

Renting a out part of your property
If you rent some of your property, you are eligible for tax deductions for a proportion of your expenses. This proportion is based on the floor area that is rented, compared with the floor area which is not rented. Make sure you include common areas in your calculation.

Keep receipts and record all expenses
They then need to be classified into areas such as:

  • Interest on loan
  • Advertising
  • Insurance
  • Rates
  • Repairs
  • Postage
  • Cleaning
  • Garden
  • Borrowing expenses
  • Legal Expenses
  • Depreciation
  • Capital Works


Most of these are straight forward, and immediate write offs in the year they are incurred.
I'll go into more detail on the complex ones below.

Borrowing Expenses
Generally, you will need to spread these over 5 years, or the length of your loan, whichever is shorter. In most cases, this will mean you'll tax deduct 1/5 of them each year for the first 5 years of your loan. They include things like government stamp duty on the loan and bank charges.

Legal Costs
Unfortunately, these do not include the cost of legal fees in acquiring your property. They are for when you need to fight with tenants in court and similar. Hopefully you won't have any of these.

Depreciation and Capital Works
This is the most complex area. First, download the Rental Properties Guide 06 (NAT1729-06) from the ATO. This document is invaluable. I'd recommend you at least skim read it.

Capital Works
Okay, now, if your house has been built or had any significant renovations since 1979, you may well have capital works deductions. The conditions on these vary. Have at look at the guide mentioned above, page 23 of the PDF. In most cases, you will be able to claim construction costs at 2.5% for 40 years. If there was a couple of hundred thousand dollars of construction costs, 2.5% could be quite a bit of money every year. If you know the cost of the construction, this is easy to calculate. If not, you will need to get this estimated - you can't do this yourself. I used Depreciator. They employ quantity surveyors and meet ATO requirements. I was quite happy with them - see my post on the Somersoft investment forum for more details. They also estimate costs of assets such as hot water systems, stoves, blinds etc.

Deductions
You need to classify all your assets according to their cost and depreciate accordingly:

  • $1-300: write off straight away in the current tax year
  • $301-1000: put in low value pool (deduct at 18.5% for the first year when adding to the pool, 37% for assets already in the pool)
  • $1001 or more: depreciate with straight line or curved line methods over effective life set out by ATO. You can find these in the rental guide from the ATO mentioned above.

What is a asset (can be depreciated) and what is a capital work
There is a reasonably arbitrary seeming classification of items between capital works and deductions. A hot water system, for example, is a depreciable asset but a kitchen cupboard is a capital work. Check all your items with the rental guide mentioned above. If an item is an asset, you can estimate its market value, and you can depreciate it over the effective life in the guide. If it is a capital work, then you cannot depreciate it. It is part of construction costs - see above section on capital works for more details on claiming these.

Disclaimer
I'm not a tax professional. This post is my personal opinion and interpretation. No responsibility taken for an errors or omissions. Use at your own risk.

6 09 2006