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 21 May 2016
Q&As: Rates postponement a good option for couple
- Fraud investigator writes about scams ...
- ... And so does a victim
- Vanguard not the only US index fund option
Question: We are now on a very low income in our mid 50s, but have no family other than siblings and their children to leave our property to. We like the area we live in and want to stay for the rest of our lives.
Our Auckland small home is currently worth over $600,000 (with no mortgage) and likely more over time, as it is in a desirable area.
I am looking at the council rates deferment option, whereby our approximately $2,000 a year in rates is added as a debt to the property when we pass on or sell.
Assuming we live for another 30-plus years, that will eventually reach $60,000 plus 3.5 per cent a year compounding interest, starting at our initial $2,000.
This will give us an extra $2,000 per year we can spend on other more essential items.
A concern we have is should the council policy change, will we be forced to sell our home to pay this accumulating debt at a later date? Or does what we have signed up to stay in place regardless of policy changes?
Answer: My first suggestion for anyone whose rates are high relative to their income is to check whether they are eligible for a rates rebate. That reduces rates, which is clearly better than postponing them.
The maximum rebate is $610 a year, and the maximum income is basically $24,440. But you might still be eligible on a higher income, "depending on the rates amount and number of dependants," says the Department of Internal Affairs.
For nationwide info, see www.tinyurl.com/nzRatesRebate. And for specific Auckland info see www.tinyurl.com/AuckRatesRebate. Non-Aucklanders should ask their council how to apply.
However, even if you get a $610 rates rebate, you'll still have lots to pay. That's where rates postponement comes in.
Under the scheme, you put off paying part or all of your rates until you sell the property or die. It's as if the Council has lent you the money in the meantime. You pay upfront costs as well as interest, which will compound over the years. The rules:
- You have to live in the property, and have owned it for at least two years.
- Your postponed rates, plus interest, can't exceed 80 per cent of your equity in the property. Equity is defined as the capital value of the property in the Council's most recent revaluation, minus any mortgages or other "encumbrances".
If your total debt did exceed 80 per cent - perhaps because property values fell - you couldn't postpone further rates. But it's highly unlikely that you would be forced to sell your property.
"The council would only consider the last resort of a rating sale if a ratepayer with postponed rates refused to pay future rates," says Andrew Duncan, manager financial policy at the Council. "A rating sale is a last resort after all other options have been explored. This ensures that everyone is paying their fair share towards the running of the city and not placing a burden on other ratepayers who are meeting their obligations."
The upfront costs of rates postponement currently total $130. No big deal. The worry is whether problems could arise from future changes to rates and interest.
Says Duncan, "The value of postponed rates will be small in relation to property value even after 20 years. For example, after 20 years the value of postponed rates on the average-value property would be around 6 per cent, assuming normal growth in rates and property values."
He assumes rates will grow at 3.5 per cent a year, as per the council's Long-term Plan 2015-2025. He also assumes property values will grow at 3 per cent a year, and interest will stay at the current 3.5 per cent a year.
But what if rates or interest rise faster?
Rates postponement interest is adjusted yearly. "The interest rate is based on the council's cost of borrowing," says Duncan. "The policy doesn't set a maximum value (of the interest rate) as the council is only passing its costs on to the customer so these don't fall on other ratepayers."
That's fair. But it means you could face much higher interest in future. Let's do a few calculations.
Firstly, we'll go with Auckland Council's assumptions. Your rates start at $2000 and grow by 3.5 per cent a year. Interest is 3.5 per cent. After 30 years you owe $168,000. And after 40 years - which might apply to you two in your mid 50s - you owe $317,000.
That's probably not a big concern, though. If house values grow by the Council's assumed 3 per cent a year, your house would be worth about $1.5 million after 30 years, and nearly $2 million after 40 years.
However, given that inflation and interest rates were in their high teens in the 1970s and 80s, it's not stupid to look at a scenario in which rates and interest zoom back up.
We'll stick with the Council's assumptions for the next ten years. But - to keep it simple - from then on we'll say rates rise by 10 per cent a year, and interest is also 10 per cent.
After 30 years you would owe $408,000. And after 40 years - brace yourself - it would be more than $1.5 million.
Still, house values under the same scenario would be more than $4.8 million after 30 years and more than $11 million after 40 years. You're still fine.
The only real worry is if property prices stagnate or fall. While that could well happen for a while, it's unlikely over the long term. In any case, you can watch the trends, and perhaps suspend your rates postponement - so you at least slow the pace at which your debt grows.
While I would rather see you postpone rates from your 60s or older - because there's less time for your debt to compound - it's probably still safe to do it now.
You also asked about policy changes. No current council can guarantee a future council won't make changes. But if you didn't like a change, you could always stop postponing your rates. You'd still have the debt you had run up so far, but it seems unlikely a future council would treat hard-up ratepayers too roughly.
For more info on Auckland Council's rates postponement, see www.tinyurl.com/AuckRatesPostponement. Some other councils also offer similar schemes.
Final points from Duncan:
- "The Council encourages ratepayers to seek independent financial advice before entering into an agreement to postpone rates."
- "Aucklanders still have time to apply for a rates rebate for the current rates year (2015/16), up until 30 June 2016, even if you have paid your current year's rates in full.
- "If you have questions about your rates, we encourage you to give us a call on 09 301 0101 so we can talk through which options may be suitable or for further information on rates rebates."
Question: You were correct to warn the correspondent last week of the risk of investing in shares through unsolicited calls from Hong Kong.
Financial advisers in Hong Kong are required to be registered with the Securities & Futures Commission, and it is an offence to make cold calls selling investment products.
It is highly likely the persons calling are bogus stockbrokers who sell shares that are worthless or non-existent. Boiler room frauds have operated from Hong Kong and other Asian countries, although most scammers are not Asian nationals.
It is almost impossible to recover investors' money once it is sent. As a former fraud investigator with the Hong Kong Police, I have seen numerous cases of people defrauded in this manner.
Answer: Thanks for writing. Readers should note that whatever country people say they are from, it's foolish to even listen to a stranger's sales pitch.
And you're quite right. Once someone has sent money overseas they should kiss it goodbye. Almost always, there's nothing anyone in New Zealand can do to help recover it.
Question: Further to last week's column warning investors to be wary of some overseas investments.
About four and a half years ago I kept getting pop-ups online suggesting I invest in UK storage units. I kept looking at the photos of the newly built complex, and it all looked very well managed and kosher. The guaranteed return was 10 per cent for the first two years, and with every rent increase it would rise.
I ended up buying two of these airport storage units costing, with legal fees and currency fluctuations, about $NZ40,000.
As promised the 10 per cent return was paid for the first two years, then nothing for the third and fourth year.
Late last year I got an email saying the tenants had relinquished their tenancy so there were no more returns forthcoming. I am still liable for the annual ground rent.
I have since found out that thousands of UK pensioners had put their retirement savings in this investment. Many have tried to sell, but naturally no one wants to buy.
Answer: Indeed. A few comments:
- Be wary of guarantees. What could you do if they don't stick to their word? Write angry letters? Sue an overseas company that might not even exist any more? Good luck.
- It's quite common to receive what you're promised for the first year or two. That's how scammers get you to recommend the "investment" to friends and family. Then it turns to custard, leaving you not only ripped off but contributing to others' being ripped off. That must feel terrible.
- Before considering an investment, do an internet search on the name of the company plus the words: review, scam, feedback and problems. Far better to learn about the UK pensioners at that point.
But instead of bothering with all that, simply ignore any investment suggested by a stranger - local or overseas. As I said last week, I've never heard of such an investment that worked out well.
Thanks to you, too, for writing and warning others. For more on scams see www.tinyurl.com/scamsnz
Question: I know you are a fan of index fund investments, because of lower fees.
Recently a correspondent mentioned he was thinking of investing in Vanguard, a name that comes up frequently in your columns. But I never hear of Dimensional Fund Advisers (DFA), another passive investment option.
It is possible to invest in these funds in New Zealand, through accredited brokers (see DFA's website). Additionally, you can invest in a portfolio of largely DFA funds through Synergy Investments.
I am a private investor and am not trying to promote any particular product.
Answer: Hmmm. Mentions of Vanguard in just six Q&As in more than ten years isn't all that frequent. But your point is fair enough.
You included a link to a comparison between DFA and Vanguard, which favoured DFA. But a Google search for other comparisons gave me 168,000 results - including many that favoured Vanguard. It seems DFA funds do better in some periods, but are probably riskier.
Suffice to say people interested in directly investing in the huge US-based index funds might want to look into both.
However, as authorised financial adviser and Herald columnist Brent Sheather said in this column recently, New Zealanders with less than $100,000 to invest in index funds are probably better off using Smartshares - either directly or via SuperLife. The fees are higher but it's much simpler.
* Mary Holm is a freelance journalist, member of the Financial Markets Authority board, 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 firstname.lastname@example.org 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.