Kiwi Saver, Mary Holm financial writer and columnist

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Weekend Herald

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 14 April 2018

Q&As: Should couple - with a possible baby soon - sell their rental?
- What about another couple with teenagers, and an offer for their rental unit?
- Real estate agents advises against quick sales, among other things
- Government considering change to KiwiSaver employer contributions after 65
- Reader is disgusted with teacher's letter
- Don't overlook tax when comparing debt repayment with investing

Question: I have our family home with a $200,000 mortgage and I also have a rental property with approximately $200,000 of equity. I'm considering selling the rental property to get mortgage-free on the family home, with the idea being to put my future savings into index funds and bonds.

I'm 34 years old, married with a household income of $200,000 per year (although likely to halve within 12 months if we are successful in having a baby).

With the increasing likelihood of rising interest rates, would this put me in a better financial situation for our future?

Answer: Your situation really boils down to which investment will grow faster in future - the rental or savings in index funds and bonds? And nobody knows the answer.

I assume most of your index fund investments would be in shares, and both property and shares have done so well in the last few years that we might expect their growth to slow in the next while.

A rise in interest rates could not only push up the costs of running a rental but also reduce its price, as it would be less attractive to a new investor. Then again, share markets don't tend to like rising interest rates either. They make it harder for companies to invest in growth.

In such a situation, it's good to look at relative risks, and what you want to do. With a baby and a drop in income on the horizon, it's not a bad idea to get rid of debt. It will put you in a stronger position if, for example, you lost your job. So unless you love being a landlord, I vote for selling the rental.

Question: I'm 55, married with two teenagers and living in a nearly mortgage-free home in Auckland. I know what you're thinking - "shut up already"'!

The house needs some renovation, mostly to modernise and maintain. No pools or extra wings added. We're told that it will cost around $160,000 to $180,000 and will require us to take out a loan or re-mortgage to finance it.

A couple of years ago we bought a small rental unit as a kind of retirement savings plan, and it's almost paying for itself. We chip in for rates and body corp. Now somebody has come forward with an unsolicited, private-sale, cash offer for the unit that would see us make around $140,000 profit if we sell. Not bad for two years!

We don't have much in the way of savings - $20,000 in KiwiSaver and $25,000 in Simplicity funds, but I contribute to both weekly.

So do we sell and take the money to put into the renovation, thus avoiding further debt, or hold on to the unit to help fund our retirement? If it remains fully tenanted it should be paid off by 2033.

Answer: No need to shut up! While I do particularly like letters from people who are struggling financially, it's great to hear from everyone.

Your situation is pretty similar to the previous correspondent's - although with your children in their teens you're perhaps in a stronger position to take on more debt. But I sense that you would quite like to sell. And that would work fine as long as you put at least the money that would otherwise have gone towards mortgages and the rental into KiwiSaver or other retirement savings.

I wouldn't just accept that offer, though, without checking to see if the property is worth more. Perhaps ask a few real estate agents to assess the value. True, if you sold through one of them, you would have to pay their commission, but you still might come out further ahead. Note what our next correspondent says about quick sales!

Question: I have been in real estate over 25 years, and am pleased to say most clients who I have had an initial dealing with have returned when they needed real estate advice. The best compliment I have had is from buyers who have said, "When we are selling we are using you, but I hope I never have to buy another property through you". This is because I work for the vendor, the person who pays me, and make sure I achieve the absolute best price every time.

Many people don't understand what they are paying an agent for. Anyone can bang up a sign, write an advert, run an open home etc, but very few know how, or are confident enough, to negotiate. So many times I have heard agents ask a manager to call a buyer because the owner wants more money!

The best way to ensure the best price possible is to create competition and urgency. This can only be achieved with one competent agent managing all the prospective buyers. If a property is listed with multiple agents and one of these agents receives an offer, that agent will present it to the owner ASAP and most likely suggest "it's a great offer". They will not contact the other agents before presenting the offer in an effort to create some buyer competition.

If it's unacceptable and the owner wants to counter sign it, they will want it done with urgency and suggest something like "the buyer is anxious, and unless we deal with this now they will be looking elsewhere" - which prevents the owner from contacting the other agents.

Effectively each agent is working for themselves and not the owner. Imagine in any job if three people were told to go to work for three months by the boss and he would 'maybe' pay one of them at the end of it. Only the very desperate and inexperienced will work under these conditions.

Many sellers think that by listing with multiple agents they will get all those agents and their colleagues working for them. The reality is the actual agents may be excited for the first few weeks, but very quickly they will lose their focus. Their colleagues, especially experienced proven performers, will have little or nothing to do with it as once again they are potentially working for nothing.

An experienced agent can add hundreds of thousands of dollars to a sale, but unfortunately very few have this ability and accordingly, premiums are not a common occurrence.

I could go on, but I will finish with this. As recently as late last year we were continually told there were far too many buyers for the few available properties, it was an 'epidemic'. Yet still we saw agents who gloated "listed and sold in two days". Now how did all those buyers get through that property in two days? Simple - they didn't. But the agents didn't even understand what market they were working in and how to extract the best price, and hence many properties went under-sold in a booking market!

Answer: I - and hopefully lots of readers - learn more each week from letters from agents. For one thing, I've always wondered if people should be happy when they sell a house really quickly. I suppose it depends on the market, but you make it clear it's not a good move in a sellers' market.

It sounds as if you might be an agent who would react well to my recent proposal to change the commission structure so that an agent who gets a really good price receives very high commission, while one that does poorly gets a low commission.

Question: I was surprised by your disparaging response last week to the teacher's letter re Ministry of Education stopping KiwiSaver contributions when he reached age 65. This is effectively a pay cut of 3 per cent.

If the Ministry of Education does not wish to continue to contribute to KiwiSaver once employees reach 65, the right thing to do would be to increase their before-tax pay by 3 per cent.

The KiwiSaver legislation needs urgent amendment on this point.

Answer: Disparaging? Oh dear. I thought I was just presenting both sides of the argument. Anyway, there's hope for legislative change.

"The Minister of Finance and I will soon begin a formal consideration of this very issue," says Minister of Revenue Stuart Nash.

The original thinking about this feature of KiwiSaver was that the scheme is "designed to facilitate savings for retirement," says Nash. After turning 65, a person could take out their employer contributions on the same day the money is put in. "This is against the fundamental philosophy of KiwiSaver when it was set up in 2007."

"Of course," he adds, "once someone reaches 65, they are eligible for NZ Super - which is more than 3 per cent of their salary unless they earn over $700,000." A person over 65 who is still working and doesn't need NZ Super to supplement their employment income could invest the Super in KiwiSaver, says Nash.

"There is an argument that the problem isn't so much that those over 65 miss out on the 3 per cent employer contribution, but rather that it is cheaper to employ someone over the age of 65 than it is someone under 65 (and over 18, as the employer contribution is not compulsory under the age of 18). There is a suggestion that this is distortionary in terms of the employment market," he says.

In fact, though, Nash says 83 per cent of employees over 65 continue to receive contributions from their employers. Watch this space.

Question: I write to express my disgust with the "miffed teacher" who had the first letter in your column last week.

It seems to me that receiving NZ Super more than compensates for a loss of the KiwiSaver top up. And to compare his situation with groups (like lab technicians) who are poorly paid relative to teachers shows a lack of gratitude for just how fortunate he really is. Perhaps he could reflect on his good fortune rather than moan about his losses.

Answer: In case you hadn't noticed, teachers are not particularly well paid. I've got no idea what a lab technician earns, but it might even be more than a teacher.

Still, your point about NZ Super - also made by me last week and Minister Nash above - is fair.

Question: Last week you discussed paying off debt versus saving.

Is it fair to say that paying off debt is equivalent to tax-free saving, and therefore that the returns on saving need to be higher than the interest you pay on your debt to account for the tax you pay on your savings?

Answer: It is indeed correct. I should have been more precise last week. For saving to be more effective than paying off debt, you need to get an after-tax and after-fees return on the savings that's higher than the interest rate on the debt.

If, for example, your mortgage interest rate is 5 per cent, to beat paying that off quickly you need to get a return after fees and tax of more than 5 per cent. As I said last week, that can be done, but only by taking some risk. Paying down a mortgage is a great idea.

I like your way of putting it - that reducing debt is like tax-free saving.

* 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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