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 25 July 2015
Q&As: Couple's rental property plans riskier than they might think
- What happened at Milford, and how are KiwiSaver members placed?
- Bank adviser may regret lack of interest in man in his 90s
- Hard to be a young, independent adviser
Question: We live in a small yet growing town an hour away from Auckland. We have a mortgage of $190,000. We need to borrow an additional $100,000 to finish renovations. Once completed our property would be worth around $500,000 in the current market. Total combined income averages approximately $100,000.
My question to you is: we would like to buy an investment property using the equity in our home. But whenever I do calculations the mortgage is never covered by the rental payments, let alone rates and insurances. We have no deposit saved as money has been going into our house.
How are people doing it? Are they all paying interest-only mortgages? Or topping up the shortfall? Or simply finding that bargain buy? I am calculating mortgage payments at 6 per cent and looking at all areas of New Zealand.
Answer: How people are doing it, I suspect, is by taking some pretty big risks. And I don't think you're in a strong enough position to do that yet.
The situation is, of course, very different for landlords who bought their properties years ago. But assuming you're correct - that rents don't usually cover mortgage payments on newly bought properties - owners must be topping up the shortfall, as you say.
Even if they are using interest-only mortgages, that doesn't make all that much difference to the cash flow. For example, repayments on a 30-year, $300,000 loan at 6 per cent are $1800 a month. If it's interest-only, they would be $1500 a month - and you would be going nowhere in terms of getting rid of the loan.
So why do it at all? There can be only two justifications:
- The situation will change. Rents will rise and/or mortgage rates fall. Maybe they will and maybe they won't.
- You'll make a big capital gain when you sell - more than enough to cover all the top-ups and the returns the top-up money could have made elsewhere over the years. Again, maybe prices will rise that much, and maybe they won't. In places like Auckland a price fall is certainly not out of the question.
In the meantime, it's really important to be comfortable you can keep making the top-ups. Could you cope, for example, if one of you lost your job? Or let's do a worst case scenario, and both of you are out of work. And your tenants stop paying. And the property needs expensive maintenance. And ... It happens.
You must be sure that you won't find yourself forced to sell the property at some point - which is when people tend to lose in a big way.
It sounds as if you've heard people say you can prosper by "using" the equity in your property - the difference between the value and the mortgage - by borrowing more, usually to invest in further property. It's as if your home is a money box, to be emptied every now and then.
The people who do really well with this strategy tend to make a lot of noise about it. The ones we don't hear from are the big losers. Borrowing lots to invest is a high stakes game.
A much saner way to use equity in your home is to acknowledge it gives you security. Rather than increasing your home mortgage, get it down to zero. Then you're in a strong position to take on a higher-risk investment, such as a rental property - without borrowing against your home - or an investment in a diversified share fund.
At that point, if you strike a run of bad luck, you'll probably be able to easily raise a mortgage on your home to get you through the crisis.
By the way, you will have noticed that mortgage interest rates are falling. But anyone doing calculations like yours should probably keep using 6 per cent, and also look at how they would manage at higher rates. Property is usually a long-term investment, and there's no knowing what future interest rates will be.
Question: Can you please explain what has happened at Milford Asset Management lately?
They are a KiwiSaver provider, and I'd like to know whether savings with Milford are safe and secured?
Many of us are pouring our savings into KiwiSaver schemes but are also wary after the collapse of many companies in the past.
What guarantee is there that our savings are secured with Milford or any of the other providers?
Answer: Here's an explanation of what happened at Milford from a Financial Markets Authority (FMA) spokesman. It's based on the facts of the case already published in the settlement agreement with Milford.
"Following a referral from the NZX (stock exchange), FMA conducted an investigation into whether a portfolio manager at Milford, who conducted trading for certain funds managed by Milford, had engaged in market manipulation.
"Market manipulation is where a person trades in circumstances that create a false or misleading appearance as to the volume or price of the traded stock. It is prohibited conduct under the Securities Markets Act."
My comment: the prohibition is because manipulation can be unfair to other people buying or selling shares. It affects everyone's confidence in the way our markets work. If people think things may be rigged, they'll stay away.
The FMA also looked into "the management oversight and systems and controls in place at Milford over its trading activity."
It concluded that:
- Between January and August last year, the portfolio manager "had conducted trades that had, or were likely to have had, the effect of creating a false or misleading appearance as to the extent of active trading, supply of, demand for, price for trading in, or value of certain stocks in NZX listed companies. The individual has been notified and the enforcement process with respect to that person is continuing."
- "The Milford Board failed to ensure there was adequate monitoring of the trading activity that would enable Milford to identify and intervene in the trading activity."
Milford has since "accepted responsibility for the inadequate oversight and control of the trading conduct and its failure to intervene. It has conducted a review of its systems and controls and has implemented a programme of improvement," says the spokesman.
"Following a settlement agreement with the FMA, Milford has undertaken to implement changes to its internal systems and controls, has contributed to the FMA's cost of the investigation and has made a payment in lieu of a penalty, of $1.5 million."
What does all this mean for investors in Milford's KiwiSaver funds?
The FMA's investigation didn't relate to the security of Milford's funds. It was focused on trading conduct and the systems and controls of management oversight.
But more broadly, investors in KiwiSaver funds with any provider should note that there are no guarantees from either the government or the provider.
However, says the FMA spokesman, "KiwiSaver investors are protected from the collapse or failure of a provider because KiwiSaver funds must be held in a trust, with a custodian, keeping the funds separate from the provider's balance sheet."
Me again: If a provider fell over, that shouldn't harm investors, because their money is not invested in the provider's company but in a range of investments with many different companies. Investors would be moved to a new provider and their money should still be intact. If they didn't like the new provider, they could switch to someone else.
The people who make sure KiwiSaver money is where it's meant to be used to be called trustees. They're now called supervisers, who are licensed and monitored by the FMA. All providers themselves must also be licensed by December 2016.
So there's increasing monitoring. While fraud or other undetected misconduct within KiwiSaver is always possible, it seems unlikely.
In the end, though, being in KiwiSaver is a bit like driving. Most of us will risk a serious crash because of the advantages of getting around easily. If you take no risks in life, you don't get far.
Two final points:
- There is, of course, no protection from the value of your KiwiSaver account falling. In fact, if you're in a higher risk fund, it will fall quite often, but it will almost certainly rise again in time. I just can't picture a KiwiSaver investment falling to zero.
- Good on you for taking an interest in what's happening to your provider. Despite everything written above, every investor should watch developments and, if you feel uncomfortable about something your provider is doing, consider switching to another provider.
Question: Our experience was the opposite of your young (20s) person in last week's column, who had trouble getting good financial advice from older advisers.
I booked my father an appointment with an adviser at his local bank branch. We showed up but the adviser did not. We were then told at the branch that my father (early 90s and in perfectly good health) was too old! Ok, most of the grey hair has gone.
The bank not only did us a disservice but itself too. My father has considerable cash assets (about $200,000), and tax-free income of over $2000 every four weeks, on top of NZ Super and other investments. He also has a large property in a sought after (certainly by real estate agents) location.
I own ten properties and have other investments (diversified in shares, forest, funds etc). My daughters have been taught to save, have KiwiSaver, a personal super fund and shares too.
So we have generational wealth and are financially literate. The bank has made no effort to gain long-term inter-generational clients.
Answer: There are two issues here. One is an ethical one. After being a customer for probably quite a few years, your father deserves a bit of help from his bank.
At his stage, the financial issues might be quite simple, but that just means that it wouldn't take the bank long to discuss them with him. As for not showing up for an appointment, that's plain rude.
The other issue is that, as you point out, the bank's behaviour is self-defeating. They have alienated a couple of generations - people who sound like good future clients for them. As a child might say, ha ha!
I would love to see your Dad move to another bank.
Question: The problem is, younger advisers are few and far between. And what there are, are usually working for a bank or institution where independence is compromised by a requirement to promote in-house products.
It's hard and expensive to get into the business and stay there.
Answer: You're a financial adviser, so you would know. Maybe the government's review of financial advisers will come up with some ideas on how to encourage young people into the business.
In any case, there's no reason why an older adviser can't work with a young client. It just seems that last week's correspondent couldn't find one who could do that.
* Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and 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 email@example.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.