Kiwi Saver, Mary Holm financial writer and columnist

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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 June 21 2008

Q&As: 2 Q&As on whether homeowners should sell and be renters for a while, to cash in on falling house prices?
Should 62-year-old buy a rental property or join KiwiSaver?

Question: My house is my biggest investment and it is my lifelong saving. Allan Bollard has said that house prices may fall 13 per cent.

Would I be better off renting a house than owning one? Should I cash out and keep the cash in banks and invest in Aussie dollars?

Answer: This is a question many are, no doubt, asking. But the answer isn't simple.

Clearly renters are in a strong position these days. If you were already renting and could afford to buy, I would suggest you either wait a while or make low offers on houses. But is it a good idea to turn yourself into a renter?

For some people, clearly yes. If you have a large mortgage and are struggling to meet payments - or would struggle if you lost your job - consider selling now.

One of the basic rules of investment is: Never get into a position in which you are forced to sell. You will often end up accepting a horribly low price.

If you foresee possible trouble ahead - particularly if your mortgage is close to the total value of your house - it's better to get it on the market before you are desperate, so you can hold out for a reasonable price.

But that doesn't sound like you. If you can cope with your current housing costs but would like to optimise your situation, you need to weigh up some pros and cons.

I'm guessing that you, like most people, would like the security of owning your home in retirement. Whether you would be better off financially selling your house and investing elsewhere in the meantime depends on:

• The costs of selling your house and later buying another one - real estate commission, legal costs, and moving expenses. You can probably estimate that.

• How far house prices fall. Forecasts are all over the place. Some still say prices might dip only a little or even just plateau for years.

• What return you make when you invest the proceeds from selling your house. If you invest in Aussie dollars, or any other foreign currency, the results are anyone's guess.

• How much more cheaply you can live as a renter. You could estimate that now, but what about a few years down the track? Current rents are really low relative to house prices, but market forces are already changing that, with rents rising and house prices falling. You might face stiff rent increases later on.

There are a lot of question marks. I'm not saying your plan wouldn't pay off well. With our current knowledge, it looks as if it might. But if there's one thing we've learnt - all over again - from recent economic developments, it's how wrong forecasts can be.

Like so many of these situations, then, it comes down to non-financial issues. Do you fancy a change of scene and a period with no worries about maintenance? Or do you love your home and garden? Would having your house on the market, perhaps for months, bother you? Would moving be a hassle or an adventure? I suggest you decide based on those factors.

If you do sell up and rent, where you should invest the sale proceeds depends on how long you expect to tie up the money. If you think you might buy another house in less than ten years, I would invest fairly conservatively - perhaps in high quality corporate bonds or a bond fund. When you get within, say, three years of buying again, bank term deposits are good.

I wouldn't recommend taking on foreign exchange risk. A big fall in the kiwi dollar has been predicted for years, and it hasn't happened. Foreign exchange movements are notoriously hard to forecast. And it can be costly to get it wrong.

This is your "house" you are investing. Play safe with it.

One further point about being forced to sell, which doesn't apply to our correspondent but may to others in the current environment. People who buy a house unconditionally before they sell their old house - particularly in a slow housing market - can end up desperately accepting a pathetically low offer for the old house. If you buy before selling, make your purchase conditional on getting a certain price for your old house.

Question: I am a 38 year old single mum, working fulltime with two children. I own a freehold property in the Bay of Islands worth $1.5 million and an Auckland home which I live in worth $650,000, with a mortgage of $240,000. I have very little savings and earn $100,000 a year.

I intend to retire at 50 and run a tourist business from my Bay of Islands property, which will ensure an annual income of $50,000+ (before tax) in today's financial terms - which will be plenty to live comfortably on. Do I:

• Sell my Auckland property now and rent, to wait for the predicted further property slump, and then pick up something with less of a mortgage?

• Sell now and invest the $400,000 in bank term deposits for the remaining 12 years with the compounded interest to be added to the total?

• Keep both properties, wait it out and sell the Auckland property in 12 years time?

I realise this question may require a bit of crystal ball gazing but I was wondering what you would do?

Answer: Do whatever suits you best.

You are in a strong position financially. It would be silly to make your life less pleasant now in order to be in an even stronger position later. In any case - as indicated in the previous Q&A - we don't know which option would make you better off.

Having two children is likely to tip the balance towards staying put. If you sell your home and rent, you never know when your landlord might sell up, forcing you to move right in the middle of a child's exams or something. In your own home, you're the boss.

Question: I am now 62 years old and live alone. Seventeen years ago, through a combination of circumstances, I lost almost everything I had saved and had to start again.

I now own, mortgage-free, a small house with a market value of possibly $280,000. I have $25,000 on term deposit and a few thousand dollars in a retirement scheme, which I stopped contributing to when I went to the UK three years ago. I returned to live in New Zealand in January, and while I was away KiwiSaver was born.

My salary is $50,000 a year, and I have not resumed contributing to my retirement scheme.

Although I enjoy good health I now have only a limited time in which to try and create some sort of retirement nest egg for my old age.

Friends have suggested I buy a rental property, using the equity in my home, but the market does not seem right for that at present. Others have suggested I join KiwiSaver. Any suggestions you have to make will be much appreciated.

Answer: Borrowing against the equity in your home to buy a rental property is somewhat risky at any age in any market conditions. In your situation and - as you say - given the outlook for the property market, it wouldn't be much short of madness.

Your rental income almost certainly wouldn't cover your mortgage interest and other expenses, so you would have to contribute extra out of your pay.

Sure you could get a tax break out of that. Still, it only ever makes sense if you end up with a large capital gain on the property, big enough to more than make up for all the earlier losses. And in the current market, such a gain might be a long time coming.

And what if you lost your job, had trouble finding another one and were forced to sell the rental property in a down market?

As I said above, a basic aim of many New Zealanders is to retire with their own mortgage-free home. You've got that, so let's keep it that way.

The KiwiSaver idea, though, makes much more sense. People over 60 get a particularly good deal from it. Your money is tied up for only five years, and you get thousands of dollars from others.

Firstly, the government gives you a $1,000 kick-start, $40 a year towards fees and a tax credit which, on your pay, would be the maximum $1,043 a year.

Secondly, your employer will put in at least 1 per cent of your pay - which equals $500 a year - until April 2009, rising gradually to 4 per cent from April 2011 on.

And if your employer has an accommodating payroll system, they might put in $1,043from the start, as they can get that fully reimbursed by the government.

In a conservative KiwiSaver account earning 3 per cent a year after fees and taxes, you would have about $26,000 after five years if you keep working - more if your employer puts in $1,043 at first. That's not bad given that you've put in only $10,000. It doubles your savings.

Your friends may scoff at this, saying you could make much bigger money in rental property. And certainly some people have done so in recent years. But you can't make big bucks without taking risks, and while the risky aspect of rental property wasn't obvious during the boom, it certainly is now. A KiwiSaver conservative fund, meanwhile, is low-risk.

By the way, if you retire during the next five years, you can keep contributing to KiwiSaver if you wish, and I strongly recommend you put in at least $1,043 a year so that you keep getting the tax credit of the same amount.

Even if you have to take the $1,043 out of your term deposits or retirement scheme, it will be well worth it. After all, you can't double your money in a year in those alternatives.

* Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her 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, Business Herald, PO Box 32, Auckland. 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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