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 12 August 2017
Q&As: 47-year-old in strong position on house market sidelines
- Tips from an expert on getting the best type of mortgage
- Questions about KiwiSaver not dumb
- Money Week coming up
Question: I am somewhat risk averse and wish I owned my own home. I wish I had bought years ago when there was an opportunity and would be in a far better situation than now.
A few people at work have taken on interest-only investment properties, and the capital gains they have made have been massive. It looks like the government is geared up to allow more immigrants in, and I have missed out many a time to people from overseas and investors.
Life feels it has slipped away from me. I'm now 47 and have nothing really to show for myself except a new car ($60,000) and large screen TV ($5000) - none of which is considered a good investment. I earn around $130,000 a year and live alone renting.
I avoided taking holidays to save more and more, and do other work when opportunity arises. I have healthy savings by hard graft - estimated at $900,000 - and I am somewhat nervous with the cost of housing, and there seems to be no slowdown in sight. Even with those saying house prices will slow or back off, they have only accelerated.
I feel I am now in no man's land. I have no-one to turn to for advice. When I do get advice I analyse this, as I'd hate to lose what I have worked so hard for all my life.
I have a trust where I am still gifting at $27,000 a year. Is there any wise advice you can offer, or direction one should take in my situation?
Answer: No man's land? Hardly. You're in good territory.
When I first read your letter, my heart sank at the bit about having just a car and TV. On your pay and at your age, that's unimpressive. But then you happened to mention savings of close to $1 million, and my judgement completely changed. You're better off than the vast majority at your age. Well done!
I understand your reluctance to buy a house, especially if you are in the Auckland area. Prices, as multiples of the average income, are mad. But since you wrote to me, there have been more signs of prices slowing, and even falling in some areas.
I suggest you keep saving with the idea of buying a house if prices fall more, or stay level for a long time. It's hard to imagine that won't happen some time in the next few years.
If it doesn't, buy anyway. You can easily afford to, and you would like to own a home, so do! Your happiness is more important than the price you pay. It seems likely you will stay in that house - or trade it for another house - so it doesn't really matter if house values fall after you purchase.
Some other suggestions:
- It's not clear why you have a trust. Unless there's a good clear reason for it - not some tax dodge or plan to get a rest home subsidy, which is less and less likely with government changes - you might want to get rid of it, or at least stop gifting to it. Ask whoever helped you set it up.
- Stop beating yourself up about missing out on the house price boom. We all get these things right sometimes and wrong sometimes. Some of your workmates might end up taking too much risk and losing lots. In the meantime, you've been great saver.
- Please take some holidays. You've got plenty of money, and it's important to have some fun.
Question: In a recent column, you responded: "...One more tip: once your mortgage fixed term expires, consider making some of the loan a revolving credit mortgage. That will enable you to put all your income to work reducing your mortgage interest payments."
I think that was sound advice. However, as a specialist mortgage adviser with extensive experience with a range of lenders' products and policies, I feel there was an opportunity to go further.
Revolving credit facilities are usually recorded on the borrower's main transactional account. For many borrowers such facilities can be confusing and counter-productive (particularly those with facilities with non-reducing limits, who reach their limit and remain thereabouts).
Some lenders offer redrawable variable rate home loans. These are loan accounts, completely separate from the main transactional account, that borrowers generally make payments to. However, borrowers can also apply surplus funds or increase the regular loan payments to any level. They can also reduce the regular payments to the minimum required level at any time, whilst retaining access to the overpaid funds.
Also, lenders differ on lump sum repayments or regular loan instalments to fixed rate loans. At least one lender will allow significant overpayments if set at the time of fixing/refixing, or a lower level of overpayments - for example minimum required instalments plus 20 per cent - if set during a fixed rate term.
Others will allow overpayments of $1000 per month to regular fixed rate loan instalments, as long as the borrower commits to such overpayments for the term of the fixed rate.
I also note that the borrowers in your column appear to have all of their $400,000 debt on one fixed term. There are risks associated with exposing all debt to the market at a given point in time - the fixed rate expiry. Splitting the fixed rate portion of the debt across perhaps a couple of terms is something they could have considered.
We don't know enough about the borrower's circumstances. However, they should be receiving mortgage advice.
I suggest that banks do not want their staff to spend much time analysing their customer's circumstances and objectives, and providing advice. I also think that banks usually suggest a 30-year loan term, which is often not in the borrower's best interests.
It seems to be difficult to get the point across to borrowers that they can have their mortgage structure reviewed, at no cost to them, and it could result in significant repayment time and cost savings. Many borrowers believe that it is all about interest rate, and don't understand the differences a well-considered loan structure can make to their loan term and total interest bill.
You might have the opportunity to raise this issue, and many borrowers would pay more attention to your impartial advice than any promotional activity by a mortgage adviser.
Answer: Your letter certainly could be viewed as drumming up business for you and your colleagues. But it also contains useful information, so I'm not only publishing it but giving it lots of space.
Some comments on the two mortgage variations you discuss:
- Revolving credit mortgages. With these loans, your mortgage is part of your everyday account, so it may have a balance of, say, minus $500,000 - which can look alarming at first.
The idea is that all your income is automatically deposited into that account, and all your bills automatically paid out of it on the last payment date. In the meantime, that money is credited against the mortgage. The mortgage balance is therefore lower, so you pay less interest.
As you say, some revolving credit loans have reducing limits, which force the borrower to pay down the loan over time.
But some don't. This is fine if you're disciplined, and reduce the balance anyway. But if you're the kind to repeatedly add to your mortgage to go on holiday, it won't work well.
- Redrawable variable rate home loans. These are more like ordinary mortgages. But as you say, payment amounts are flexible, and you can park money in the account - reducing your mortgage interest for that period - and withdraw it when you need it.
These require less discipline than a revolving credit loan. But you won't have every dollar that passes through your bank working to lower your mortgage interest.
You make a further important point about splitting a fixed rate loan into, say, two portions.
Let's say your options include paying 4.5 per cent for one year or 6 per cent for five years. The one-year deal looks better. But by the time you renew it, rates might have risen. Five years down the track you might end up having paid more than if you'd gone with the longer term.
On the other hand, if interest rates don't rise - or don't rise much - you'll wish you had stuck with shorter terms.
There's no way to predict rates. So it's best to have a portion of the loan each way. That way you'll be content with at least some of your loan.
I also agree with your final point, that many borrowers could benefit from guidance about their mortgages. And the services of mortgage advisers are generally free.
Readers should keep in mind, though, that advisers are paid by the lenders they do business with. So it's important to ask which lenders they work with. And when they give you options to consider, ask how much they will receive if you take those options.
Don't be embarrassed. You need to know if their advice might be biased towards lenders that pay them more, rather than the best ones for you. If a mortgage adviser is not happy to be upfront about this, give them a miss.
Question: I Googled "How does KiwiSaver compare with other investment funds?", but didn't get an answer.
I get that the government makes a contribution each year of $10 a week, and there is the kick-start.
Do I have to declare my KiwiSaver earnings on my IR3, or are they separate from my total earnings because I don't have access to it?
I'm 58 and have attended seminars and read about this stuff. But I still don't know how we will get an income stream when we retire. Just plain dumb, or are there other confused people like me? Haha.
Answer: The only dumb action is to not ask questions. So good on you.
The main differences between KiwiSaver and other investment funds are:
- The government contributes of 50 cents for every dollar you contribute, up to a maximum of $521 if you put in $1043.
- If you are an employee and contribute 3 per cent of your pay, your employer matches that - although employer contributions are after-tax, so a bit smaller than yours.
- You can withdraw the money only for a first home or after you reach NZ Super age, unless you suffer serious financial hardship or illness.
The $1000 kickstart is no longer available.
You don't have to do anything about tax. Your KiwiSaver provider pays it for you.
And finally, when you retire many KiwiSaver providers will set up regular payments to you. If your provider won't, you can switch to one that does.
The Commission for Financial Capability's Money Week starts this coming Monday, and ends on Sunday August 20. This year's theme is: What does debt do for you?
Free events have been organized throughout the country. The Commission has also joined with the Reserve Bank to produce a series of videos featuring well-known New Zealanders talking about debt.
For information see the Sorted Money Week website moneyweek.org.nz.
* 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 email@example.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.