Mortgage duty refinancing concession - the $1 million

The NSW Government has legislated to cap the mortgage duty refinancing concession to $1million from 1 August, 2005.

However, it should be possible to use the refinancing concession without limit for settlements on or after 1 August, 2005 if mortgage documents can be signed before then.

The current refinancing concession

The current concession allows refinancing secured by a "refinancing mortgage" to occur without duty cost.

In summary, a "refinancing mortgage" is a mortgage that:

• secures the balance outstanding under an earlier mortgage that is discharged or to be discharged;

• is over the same or substantially the same property as the earlier mortgage or part of it; and

• secures an advance to the same borrower (which can include related borrowers and indirect borrowers).

A refinancing mortgage is taken to be stamped for the amount secured under the earlier mortgage in respect of the maximum amount payable under or secured by the earlier mortgage on which duty has been paid or exemption has been granted.

Effectively therefore there is no need to pay fresh duty to the extent that the "outgoing" mortgage was stamped.

2005 State Budget changes

The State Revenue Legislation Amendment (Budget Measures) Act 2005 has amended the Duties Act 1997 to limit the concession.

The concession for the "maximum amount secured by the earlier mortgage" has been replaced by a limited "duty free refinancing amount". Effectively this will cap the concession for refinancing to advances up to $1million. Beyond that amount, mortgage duty will be payable on the refinance. This will significantly increase the costs of changing lenders.

However, where the refinancing mortgage is over land used for primary production or land used for aquaculture, the limit does not apply.

When do the new changes take effect?

The transitional provisions in the amending Act state that the changes only apply to a refinancing mortgage that is "first executed" on or after 1 August 2005.

In the Duties Act "first execution" refers to the signing of the mortgage and not to its date or the date of settlement.

Our view is that the actual advance of monies need not occur before 1 August 2005 to be eligible for the full exemption over $1,000,000 provided the other requirements for the concession are in place before then including that the mortgage has been executed.

What does this mean for borrowers and lenders?

Where refinancing loans for more than $1million can be settled before 1 August, 2005, this should be the objective. However, our analysis is that the operation of the transitional measures offers the opportunity to ensure that the full refinancing concession applies even though settlement of the advance may not occur until after the end of July.

Borrowers or lenders involved in refinancing loans with other institutions who cannot achieve a settlement before 1 August, 2005 should aim at having the facility and security documentation executed before then.

We expect the Office of State Revenue will require mortgagors to show:

• that the mortgage submitted for refinancing concession was first executed before 1 August, 2005;

• that the requirements for the refinancing concession were met at the time the mortgage was first executed.