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 9 December 2017
&As: Is it terrible to rent all your life rather than buy a home?
- Young man wanting to buy a home should make the most of KiwiSaver
- A real world example of a house price plunging
- Clarification on last week's letter about sole parent support from WINZ
- Sorry, but we're not getting into matchmaking in the column!
Question: Please answer this question for us young ones in our 20s.
I am in my mid 20s, have $40,000 in savings, $10,000 in KiwiSaver and a salary of $80,000. My student loan is currently sitting at around $38,000.
The problem is sometimes I don't know if I will ever save enough to own a home.
Is renting all your life truly a terrible financial decision? All the interest paid towards a mortgage seems an equal waste to me, especially when there's so much talk about the property bubble bursting and house prices potentially falling after you've locked yourself into an expensive mortgage.
I know you can never know for sure what the markets are going to do. But please advise on what you think are the best financial goals or targets to hit in your 20s.
Answer: Renting all your life can be far from terrible. Many people don't like the idea because it's harder to put down roots - including literally in a garden - if you can be booted out of your home by your landlord. This is a particularly big deal if you have children.
Also, homeowners have more control over how they decorate their homes. You can go ahead and paint the bathroom purple if you want to. And many people take pride in home ownership.
On the other hand, as a tenant you don't have to worry about home maintenance and all the other concerns of home ownership. And you can move elsewhere much more easily.
What's more, your savings can be widely diversified, compared with putting a huge amount into a single property.
The key point if you rent long-term is that you need to save much more for retirement - to cover your accommodation costs until you die, or to enable you to buy a home at that stage if you wish. But, of course, in the meantime your rent will be lower than mortgage payments, maintenance, rates and so on, so it's easier to save.
On the comparison between rent and interest, it's true that paying interest, in and of itself, gets you nowhere. But if you're paying interest to buy a house - or anything else likely to grow in value - that gives you the opportunity to take advantage of gearing.
Say you pay a deposit of $100,000 on a $500,000 house. You have to pay back $400,000, plus maybe as much again or more in interest over the years. But if the value of the house grows, you get the growth on not just your $100,000, but the other $400,000. Great!
On the downside, if the value of the house falls, and you sell when the price is down, you might end up with no house and still owing the bank money. Not so great. Gearing makes a good investment better, but a bad investment worse.
However, house values usually grow over the long term, so homeowners usually benefit from gearing.
Does that mean non-homeowners miss out on gearing? Not necessarily. You can - under some circumstances - borrow to invest in shares.
The trouble is that shares are somewhat riskier than property, so geared share investing is only for the brave. Are you the kind of person who won't bail out when the share market has crashed and you're still paying interest on the $100,000 you borrowed to buy shares that are now worth less than half that?
If not - and most of us aren't - don't worry. You can still do very nicely thank you without gearing, by investing your savings in shares or a share fund.
Unless you have at least $100,000 to invest directly in individual shares, it's hard to get broad diversification. And you need that to reduce the risk that one or two disappointing shares will cripple you. I therefore suggest that you put your $40,000, and future savings, into a low-fee share fund, perhaps an exchange traded fund or ETF.
Many people say saving in a share fund takes more discipline than paying down a mortgage. The consequences are dire if you stop making mortgage payments, but it's easy to stop saving.
However, you can get around this by setting up regular automatic deposits, of maybe a few hundred dollars every payday, into an ETF. After a while, you won't miss the money. And you'll benefit from buying in the down markets - when shares are cheap but many people are reluctant to buy - as well as the up markets.
In any share fund your balance will sometimes fall, but over the years it should grow healthily.
As a goal, how about increasing your regular deposit by a set amount, perhaps every six months? Note it in your diary, and do it! And you could promise yourself to further increase your deposit by half of any pay rises you get. Taking steps like that can really boost total savings.
The big unknown question is whether you will make it all the way to retirement as a tenant. History suggests house prices won't remain so out of whack with wages, and will become more affordable. If you've been saving in a share fund in the meantime, you'll be in a strong position to move into the housing market then.
Question: I have a grandson keen to get on the property ladder. He has recently qualified in an occupation that potentially puts him in the $100,000-plus earning capacity, but he has a student loan of $70,000.
He has a KiwiSaver account and approximately $3000 in savings. What advice can we give him to ensure he makes good decisions?
Answer: Your grandson is somewhat more optimistic than the previous correspondent!
Firstly, he shouldn't worry about his student loan. Once he's earning more than $19,136 a year (or $368 a week) before tax, 12 per cent of his pay above that threshold will be automatically taken from his pay.
He can always repay the loan faster if he wishes. But unless he goes overseas, he won't be charged interest on the loan. So it's financially smarter to put any spare cash into saving for a property deposit, where it can earn interest or other returns.
It's great that your grandson is in KiwiSaver - presumably contributing at least 3 per cent of his pay - as that's an excellent place to save for a first home. When he wants to buy, he'll be able to withdraw all but $1000 for the purchase. That withdrawal will include employer contributions and tax credits - money he wouldn't have had if he hadn't been in KiwiSaver.
He might also be eligible for a KiwiSaver HomeStart grant of up to $5000 - or $10,000 if he buys a newly built house. There are maximum house price and other rules. And his income must be less than $85,000 a year, so I suggest he reads up on the grant rules now, at www.tinyurl.com/NZFirstHomeHelp, as he might want to apply before his income gets too high.
It would also be great if he - like the correspondent above - makes a habit of saving, say, half of every pay rise he gets. It might be best not to put that money into KiwiSaver, so he can access it without any complications - or just in case he changes his mind and wants to travel or start a business before buying property. He could perhaps save in a non-KiwiSaver fund run by his KiwiSaver provider.
One more thing: If he expects to buy property within ten years, I suggest he invests in medium-risk KiwiSaver and non-KiwiSaver funds. And once he's within about three years, move to lower-risk funds, so he won't be hit by a market downturn at the time of buying.
Question: I just read your last column and feel your correspondents could do with a real example of a house price falling.
In 2008 (pre-GFC) I had my house in Tauranga valued at $800,000. I only got $620,000 for it in 2011 when I had to sell it due to health issues.
Answer: Ouch! Thanks for writing. Numbers like yours do help people to understand - better than average percentage changes - that house prices can fall significantly.
Question: Readers of your column last week regarding the separated expectant mother and her benefit entitlements may have been misled by the advice provided by the Ministry of Social Development.
To qualify for sole parent support your correspondent is required by law to file an application for child support with Inland Revenue. The father of the child will then be charged child support according to the standard formula. And, as the Inland Revenue website states, "any child support paid goes to the Crown to cover the cost of your sole parent benefit from MSD. If there's a remaining balance this will be paid out to you."
This is known as "100 per cent clawback". The additional comment from MSD that was added to the online version of your column after publication partly explains this, but still doesn't make clear that it is receipt of the sole parent benefit that requires her to lodge a child support application; or that those payments will be retained.
To illustrate the impact, if your correspondent's ex-partner earns $80,000 a year, he will be required to pay approximately $185 per week child support to Inland Revenue, and that money will be retained by the Crown.
He could pay the remaining $115 out of the $300 your correspondent says they agreed upon to her privately. It is this amount that would be treated as income for the purposes of abating her benefit. Depending on the amount of abatement she may still be better off on the benefit (the full rate of which is $329.57 per week) as she will also have the $115.
The 100 per cent clawback policy is outdated and unfair, and very few overseas countries still use it. However, these are the current New Zealand rules. (From Michael Fletcher, senior lecturer at AUT)
Answer: As an expert in this area, you know what you're talking about.
"Mr Fletcher is correct that if you're applying for Sole Parent Support then you would need to apply for Child Support as part of that application," says Kate Heddle-Baker, national manager, operational policy and practice at MSD.
"We appreciate the opportunity to clarify our comments. Your column will help people's understanding.
"We would encourage anyone who has any queries about what they are entitled to to contact us and we can talk through their situation."
Question: I read about the pregnant lady in your article. My advice is she puts an ad in say Facebook (like the farmer girl did). There are thousands of guys that would love a relationship.
Maybe put an email in your article directed to a third party who can censor genuine offers. I'd be in if the chemistry was right. I am a teacher with a PhD.
Answer: This column sometimes veers off in non-financial directions. We've done grammar, religion, booze at annual meetings, safety braces on stepladders, and earlier this year the angle of a young woman's foot in a picture illustrating the column. So why not set up a sideline as a dating agency?
Actually, I can think of many reasons. Let's leave the matchmaking to the many websites already doing it. Give one a go, and good luck!
* 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.