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Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald 13 October 2018

Q&As: Paying down mortgage beats adding to KiwiSaver
- Why it can be good to be in more than one KiwiSaver fund
- Will this work instead of a reverse mortgage?, readers asks
- Come on, KiwiSaver providers!

Question: I am 59, no dependants, have a $600,000 home with a $170,000 mortgage still owing. My gross salary is $80,000.

I have about $40,000 in KiwiSaver. As it stands, my contribution to KiwiSaver is 3 per cent. Should I increase my KiwiSaver contribution? If so by how much?

Answer: This is not a new issue for this column. But it affects so many people that it's worth looking at again.

The short answer to your question is that it's probably better to put extra money into paying down your mortgage.

If you were earning less than $35,000 a year - actually $34,762 - it would be good to raise your contributions to KiwiSaver. That's because at 3 per cent you would be contributing less than $1043 a year, so you wouldn't receive the maximum tax credit of $521.

But on your salary that's clearly not an issue. And of course you're also getting your employer's 3 per cent contribution. So you're already receiving the full KiwiSaver bonuses.

That means that any extra you put into KiwiSaver will grow by whatever the return on your fund is.

If instead you put, say, $1000 into reducing your mortgage, you would avoid paying mortgage interest on that $1000. And here's a key point: avoiding paying 5 per cent interest improves your wealth in the same way as earning 5 per cent on an investment.

So you need to compare:

- Your mortgage interest rate, which we'll say is 5 per cent.

- The likely future return in your KiwiSaver account - after fees and taxes.

If you're in a lower-risk KiwiSaver fund, the mortgage rate is probably higher.

In a middle- to higher-risk KiwiSaver fund, though, your after-tax and after-fee returns in recent years could well have been more than 5 per cent. The big question is will that continue? Nobody knows, but returns aren't usually that high for that long. In higher-risk funds they are quite often negative.

In other words, putting extra money into KiwiSaver, as opposed to paying down your mortgage, is riskier.

There's the psychological issue too. Most of us want to reach retirement with a mortgage-free home. It would be good to set that as your aim. If you get rid of the mortgage before retirement, by all means boost your KiwiSaver savings at that point.

Two points to consider about paying down the mortgage:

- If your mortgage is fixed, there may be penalties if you pay it off faster. But many lenders let you increase your payments to some extent without penalty. Ask your lender. If necessary, save the extra money in bank term deposits until the fixed term ends. And then reset the mortgage with at least some of it at a floating rate. You can then pay it down freely.

- Don't muck around - as most of us have a tendency to do. Set up extra mortgage payments now, perhaps as an automatic transfer the day after payday. Murder that mortgage!

Question: Last week a letter to your column read, "I have all my money in a moderate-risk (KiwiSaver) fund. I am thinking about splitting my money, putting a percentage in a higher-risk growth fund."

It is hard to see how investing in a second fund is any benefit. The alternative of simply switching everything to the next level of risk has many advantages:

- Simplicity.

- Possible saving of some fund fees.

- A person has invested through a provider they feel okay about - their performance, the management group, the philosophy. To mix and match funds is to mess with the carefully apportioned balance of investments the experts have decided is best.

I imagine that side by side risk funds would share very many of the same investments. So the funds have already split the money. To get into further splitting is probably getting too fine with the detail and is unlikely to be productive.

Answer: I agree with much of what you say - although the fees shouldn't be higher because you've split your money over more than one fund.

But you're ignoring the educational side. As I said last week, "Putting some of your money in a higher-risk fund is a good way to test whether you can cope with markets ups and downs."

You can watch your balance in that fund move, and sometimes fall, before deciding whether to move all your money into it.

Question: Following up on the Q&As on reverse mortgages for retirement, I am (finally) debt-free in my mid 50s and own my Auckland home, but I have very little saved for retirement. If I sold and moved pretty much anywhere else in New Zealand I could retire tomorrow. But I don't want to move!

Rather than close down my mortgage against my home I've kept it in place, with a revolving credit mortgage (approximately 20 per cent of the value of the house) available to me at standard mortgage rates.

What are your thoughts on drawing on this existing facility if I decide to stop working? It feels like the reverse equity option, but without all the legal stuff. Or am missing something? Would love to hear your thoughts.

Answer: We'll start with a couple of definitions for other readers:

- With a reverse mortgage, you borrow money in retirement and make no repayments, so the loan grows over the years. It is usually repaid when the last borrower permanently leaves the property - maybe when you go into a rest home or die.

- A revolving credit mortgage is like an ordinary home loan, but it's part of your everyday bank account. If you're using it to buy a home, it will have a large negative balance at first. It's like a large overdraft facility at a housing interest rate.

It's best to put all your income into the loan account and pay bills from there, so that any money that is sitting around - even for just a few days - is credited against the loan. Interest is calculated on the daily balance which, because of the sitting-around money, will be lower than if your mortgage was in a separate account.

You're expected to pay down the loan over time, but you can borrow again if you need to - up to a maximum limit. For this reason, revolving credit mortgages don't suit people who aren't disciplined about spending. But for others, they can work well.

For your plan to work, firstly check that you have the right type of revolving credit mortgage. With some, the limit decreases over time. Obviously it would work better if the limit stays unchanged.

Then there's the question of whether the lender would let you keep using the loan into retirement.

A mortgage adviser says a bank might withdraw the facility at some point after you retire. "Having said that, we have known of retired borrowers who have (themselves) negotiated a revolving credit facility (RCF) - or a loan and a RCF, with the RCF servicing the interest on the loan - with their bank, although our understanding is that banks are generally reluctant to offer such facilities.

"I don't think that borrowers would necessarily want to rely on the facility being available to them forever," he says.

The big problem is that if you borrow and make no repayments, the loan will grow at an increasing pace because of compounding interest. If it runs for several decades, you would end up owing way more than the amount you have borrowed.

"There is a risk that they reach the maximum limit available and cannot service the debt from cashflow - which is why, I believe, banks are generally reluctant to offer such facilities to borrowers that are unable to prove that they will be able to service the debt on an ongoing basis," says the mortgage adviser.

"The bank could demand repayment of its debt, and if the borrower is not in a position to refinance to a reverse mortgage (for whatever reason), they might find themselves with very few options."

His conclusion about your idea: "In theory, it is a simple and sound suggestion. However, in practice, it might not work as well as may be hoped. I think that some reverse mortgage options could provide more comfort to a borrower in the medium to longer term, despite the higher costs involved."

The comfort might include the fact that reverse mortgages usually come with the right to occupy the house for the rest of your life, and a "'no negative equity" guarantee, which means you won't ever owe more than house is worth.

These safeguards could really matter if, for instance, interest rates rise a lot.

If I were you, I would discuss your plans with the lender before you start running up the revolving credit mortgage balance. You don't want to discover later that you've created a problem for yourself.

COME ON PROVIDERS!

Many KiwiSaver providers are still not doing what I think they should - given that the scheme gives them a whole lot of business.

According to the newly released 2018 KiwiSaver Report from the Financial Markets Authority:

- The average fee is $117 a year per member - a huge 19 per cent higher than last year.

A major reason is that the average KiwiSaver balance, at just over $17,000, is 14 per cent higher than last year, largely because returns have been so good. And almost all providers charge fees that are a percentage of the member's balance.

Still, there's a considerable difference between 14 and 19 per cent. I had hoped the entry to the market of low-fee providers Simplicity and Juno would have pushed fees down.

- The number of people in default funds - they've stayed where they were plonked after being auto-enrolled - is the lowest since 2011. That's great. But still they number more than 400,000, or 15 per cent of all KiwiSavers.

And most default providers are still doing too little to help these people move to the most suitable fund for them.

Once again, Booster has done by far the best, with 15 per cent of its default members moving to a different Booster fund. Second best is ANZ at 10 per cent, then Mercer at 8 per cent. The others - ASB, BNZ, Fisher Two, KiwiWealth and Westpac - all moved only 3 to 5 per cent, and AMP gets the booby prize, at 2 per cent.

Those bottom performances are pathetic, given that the FMA has been working to get more action here.

- A huge number of members, more than 1.1 million out of the total 2.8 million, didn't contribute to KiwiSaver in the two months ending March 31.

Some would be non-employees who make a lump sum contribution in May or June, but many are on contributions holidays or otherwise not contributing.

While the non-contributors should take the main responsibility for missing out on KiwiSaver incentives, providers could do more to encourage their participation.

Similarly, it's ultimately up to KiwiSaver members to move to low-fee providers and to get themselves out of default funds - as I repeatedly urge. But many providers must be profiting nicely from KiwiSaver. It's well past time they used more of that money to help members also profit.

Footnote: Although I'm a director of the FMA, the views expressed here are mine, not the FMA's.

* Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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