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 18 November 2017

Q&As: The financial education that the banks don't choose to give us
- Will the KiwiSaver access age stay fixed to the NZ Super age?
- Reader wants bigger grant for single daughter
- 2 Q&As on tiny houses

Question: Whenever I see an advert from a certain bank on TV, it grates with me, because while they seem to promote financial education for their clients and the public, they leave out the most important bits.

Albert Einstein is said to have remarked that, "the most powerful force in the universe is compound interest". It divides the rich and the poor.

Lenders, whether banks or "non banks", presently rely on ultra-low interest rates to hook their customers into using credit for all their wants and needs. This exposes the most vulnerable people to the horrors of compound interest once debts pile up, or when interest rates rise.

Sometimes debt is for appreciating assets like houses, but often it is for wasting assets like cars and holidays, where all that endures is the debt and the interest rates - and the certainty of an ongoing reliance on financiers.

The rich (who inexorably get richer) always benefit from the power of compound interest. The poor often become lifetime slaves to it.

Without an understanding of the true power of compound interest, a bank's clients can never have an adequate financial education.

Answer: I quite agree. Compounding interest is great when you're earning it, but impoverishing when you're paying it.

And while credit card providers might entice people with low initial interest rates, we don't need to wait for market rates to rise to see rapid compounding. Many credit cards currently charge around 20 per cent, and some around 25 per cent - rates that can't be justified. But sadly, many people pay those rates.

A survey written up in the Herald recently found that 11 per cent of New Zealanders are comfortable with credit card debt of up to $10,000. That's scary.

There's an irony here. Presumably people with long-term credit card debt get into that position because they really want to buy stuff. But - because they will pay huge amounts of interest and penalties over their lifetimes - they will be able to buy a lot less stuff than if they had developed a habit of saving up before buying. The lovers of stuff end up being stuff-deprived.

And that's not all. Those people are likely to find it harder to borrow in the future. It could affect, for example, their ability to get a mortgage.

Who are the worst credit card abusers? Men are responsible for 56 per cent of credit card defaults, according to credit scoring company CreditSimple.co.nz, which did the survey.

And the young are much worse - which is a big worry because they have more years in which to run up huge debt. People aged 21 to 37 made up half of all credit card defaulters, while those aged 53 to 71 made up just 16 per cent of defaulters.

Credit cards are useful if you pay what you owe every month. A good way is to set up an automatic payment from your bank. If you're not confident you will have the money in the bank at the time, please don't use a credit card.

Someone paying 20 per cent interest, and making no repayments on $10,000 debt, will see it double in four years, and double again in the next four years. After 12 years, it will total more than $80,000.

That's the sort of financial education I think you have in mind. But let's not hold our breath waiting for the banks to offer it.

Question: Do you know if the inevitable increase in the age for pension eligibility (to say 67) will affect access to KiwiSaver funds at 65?

Answer: The KiwiSaver Act says people can access their money when they reach NZ Super age. So KiwiSaver access and NZ Super should move together.

However, when National said last March that it would gradually increase the Super age to 67 - taking effect from July 2037 to July 2040 - it added that the KiwiSaver access age would stay at 65. It would have to change the KiwiSaver Act to enable that.

Who knows what a future government might do?

Question: I read with interest your last column regarding the couple who appear to have done all the right things to get ahead, only to be turned down for both the first home grant as well as withdrawing their KiwiSaver contributions.

I do wonder at times how much common sense those people empowered with making the rules in cases like this were born with.
I also question the limits of the amount of grants available and how they are applied.

In our case our youngest child - a daughter in her early 40s, one of five children, single, no dependants, very good job - is about to apply for the KiwiSaver grant to help fund the purchase of a new house. She has been in KiwiSaver for six years, but is only eligible for a grant of $5000. A couple can get $10,000.

It is much harder for a single person to save towards a home plus pay all the outgoings than a couple. Should not the same grant be available regardless of being single or a couple? Once again common sense.

My wife, 75, and myself, 80, have decided that the only way our daughter is going to get a home of her own is to help her financially. We have signed a contract to purchase a very modest home yet to be built, and come to a financial arrangement with her.

She is at present paying $250 a week in rent for what I would call a hovel.

In the event she gets turned down for a KiwiSaver grant, we will fund the total purchase ourselves. We are by no means wealthy but cannot stand by and see her getting nowhere in the quest to own her own home because there is a lack of common sense amongst those that make the rules.

Surely those that make the rules must never have been in need of help or they would be more practical and assist, not hinder.

Answer: "Those that make the rules" are the legislators. The people at Housing NZ who administer the KiwiSaver HomeStart grant have to follow what the law says - regardless of their own personal histories.

Asked for comment about the fact that a couple can get twice as much as a single, a Housing NZ spokesman says, "The grant is not doubled just on the basis that you are a couple. The KiwiSaver home ownership options, whether it is the HomeStart grant or the savings withdrawal, are assessed on an individual basis. And when it comes to the grant, each eligible member can receive between $3000 to $5000 if buying an older/existing home, or between $6,000 and $10,000 when buying a new home.

"Obviously, where eligible KiwiSaver members buy a home together, they can pool their grants and savings withdrawal to maximise their overall deposit.

"However, there are maximum grant cap payments per dwelling - $10,000 for an older/existing property and $20,000 for a new property. Therefore, if you had three members buying an older home together and all were pre-approved for $5,000 each, the maximum that can be paid out for one property is $10,000.

"Therefore, it is a misconception that a couple can get twice as much - it is purely a case of them pooling their grants together," says the spokesman.

Still, I take your point that it's much tougher for a single person to save to buy a home. But giving singles a bigger grant would surely open a can of worms. The government already has enough trouble working out who's in a couple when it comes to benefit payments.

There is, however, some good news for your daughter. Did you notice the spokesman's reference to grants being twice as big when you buy a new home? It sounds as if your daughter might qualify for $10,000 - if she meets the criteria.

First, though, I was concerned when you said, "We have signed a contract to purchase a very modest home yet to be built, and come to a financial arrangement with her."

And so was the spokesman. "If the parents are buying the home, then the daughter cannot qualify for the grant or the savings withdrawal as she is not buying an estate in land," he says. "To qualify for both, the KiwiSaver member must be named as a purchaser on the agreement for sale and purchase.

However, he adds, "There is nothing to stop the daughter from buying the property from the parents, and then applying for the grant and savings withdrawal at that point."

I strongly recommend that your daughter - and anyone else thinking of applying for a grant or KiwiSaver first home withdrawal - discusses their situation with Housing NZ before making any moves. Go to www.kiwisaver-homestart.co.nz , email kiwisaver.enquiries@hnzc.co.nz or phonel 0508 935 266.

"It is clear, in some cases, people have made incorrect assumptions which can usually be cleared up quickly with a phone call to the team," says the spokesman.

"The criteria and rules around eligibility and other information is clearly outlined on the website and again, we would urge all individuals and/or couples to take the time to read this information fully and contact us to discuss further."

Question: With reference to the item in last weekend's paper about the couple who bought a section but couldn't afford to build a house, I would like to suggest that they buy a tiny house.

If you Google "tiny house NZ", it will bring up several options. I hope this helps.

Answer: The issue for the couple last week wasn't that they couldn't afford to build, but that they didn't qualify for a KiwiSaver HomeStart grant. That was because they had already bought property when they purchased their section a couple of years ago.

Still, I decided to publish your letter, and the next one, because they make useful suggestions for anyone struggling to afford to build a home.

Question: Re the article last week, why do they not look at a transportable home?

There are firms in the Auckland area that make these homes on a 3-metre module. The beauty of them is you do not require any consent as they have no fixed foundations. All you need is a sewerage hookup,and power. And it would be a start. Later they could build and on-sell it, or keep it as an additional let.

Answer: The whole idea of really small houses seems to be catching on. Perhaps it's a backlash against the steady increase in house size since the 1940s.

According to CoreLogic, the average house built in the 1940s was 113 square metres. These days it's approaching twice that, at 205 square metres - with growth being particularly fast since the 1980s. That's interesting, given that the number of people per house has declined over that period.

Now some people are realizing they don't need to be surrounded by acres of carpet.

* 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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