Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: Graduating from paying student loan

Putting freed-up cash into extra mortgage payments can broaden future options

Life is too short to miss out on a budgeted treat for yourself for achieving financial goals such as paying off a student loan. Photo / Thinkstock
Life is too short to miss out on a budgeted treat for yourself for achieving financial goals such as paying off a student loan. Photo / Thinkstock

Q: I am a 34-year-old woman and in September will (after 12 long years!) have paid off my student loan.

As I am now classed as a high-income earner, paying off my student loan will free about $15,000 a year. I am not very good at saving, so am keen to get an investment strategy in place so that money is automatically channelled somewhere and I don't get used to having extra cash to spend (oh, the clothes I could buy!).

My primary question is, should I:

• Put that money into paying off the mortgage (it's $540,000 - the bank owns about 75 per cent of my house), which is what Sorted.org suggests?

• Increase my KiwiSaver contributions (I contribute the minimum 3 per cent)?

• Consider something like a managed PIE fund?

The reason I mentioned I'm female is obviously due to the child-bearing age factor. I have one child and I may have a second. So I need to consider not earning when on maternity leave.

I'm tempted to just put a third into each of the above options. But this seems quite a simplistic approach?

I'm sure there are other 30-somethings about to pay off their loan who will have the same question. What are your thoughts?

A: Firstly, how about treating yourself to, say, $500 or $1,000 a year to spend on clothes and the like. Life is short.

Beyond that, though, your thinking is spot on. When you finish paying off a student loan - or a mortgage or any other loan - it's a great opportunity to painlessly boost your saving.

Where? All your suggestions are good, and putting a third of your money into each one isn't a bad idea. It would increase your diversification.

However, in your situation I think we can do better.

Your top priority should be setting aside enough money to cover maternity leave - as well as any emergencies that may arise. You could use bank term deposits. But a better way would be to make extra mortgage payments, on the understanding that you can get the money back out if you need it.

Let's say you have a 6 per cent mortgage. Paying extra off the loan - and thus reducing your interest payments - is the equivalent of earning 6 per cent, after fees and tax, on an investment.

That's way better than term deposits pay.

If you have a revolving credit mortgage or similar, you can do this easily. If not, consider switching some of your mortgage into revolving credit. Or just ask your bank for a letter stating that you will be able to later withdraw your extra mortgage payments.

If your bank can't accommodate this one way or another, it may be time to switch lenders.

Once you've got enough money to cover maternity leave and emergencies, what next?

If you weren't in KiwiSaver, or you weren't contributing $1,043 a year to get the maximum tax credit, I would suggest going down that route. The KiwiSaver incentives make it hard to beat. But on your income you'll have the tax credit well covered. Should you put more into KiwiSaver?

Any extra contributions will simply earn whatever the return is on your KiwiSaver fund. And that brings us to your other option, a non-KiwiSaver PIE fund. If the two funds have similar risk, their returns will probably be similar.

The main difference is that the KiwiSaver money is tied up, generally until you reach NZ Super age. If you were choosing between them, then, the choice should depend on whether you're likely to raid your savings for a spending spree. If you're made of tougher stuff, it's better to keep your savings more accessible, as you never know what the future holds.

But wait! Because you have a mortgage, I don't think you need to make that choice. Your key question is whether the return on either of the funds is likely to beat the 6 per cent after fees and tax you "earn" by paying extra off your mortgage. And the answer is probably not - especially after taking into account that repaying your mortgage is risk-free.

It's a really good idea to reduce your home loan. It increases your security and broadens your options later. And it has another great merit - it's easy. Just set up an automatic transfer each month. The Sorted website is right. Stick the lot in that horrible half-million mortgage.


KiwiSaver tax credits

Q: ASB deserves credit for writing to its KiwiSaver customers earlier this month to draw their attention to the opportunity to receive a $521 tax credit by making a lump sum payment to their KiwiSaver accounts before the end of this month - if they don't contribute throughout the year.

That's useful - as was your column last week drawing readers' attention to the potential to get this tax credit regardless of their membership of other superannuation schemes. So all credit to you too, Mary.

A: Thanks - but that's not why I've published your letter. I think this is the sort of message every KiwiSaver provider should be sending to its members, and I'm wondering which other providers also do it.

So, dear readers, please let me know if your KiwiSaver provider raises this with you. I'm not talking about just a mention in a newsletter, but direct contact with either all members or members who might be affected. I'll publish a list next week.


Shares versus property

Q: There seems to be quite a bit of debate on which is the best way to go, property or shares.

It seems to me that both investments have the ability to grow or decrease over time. However, the fundamental difference is how fast this happens.

Share values seem to gain or drain quite quickly, in some cases just days. Mighty River Power, for example, has flopped several per cent in a couple of weeks. That is not to say this trend will continue, but my point is, it happened fast.

The crash of 87, as I recall, happened in just hours. Dangerous country, and if Mum and Dad investors don't have a finger on the trigger ready to pounce, all could be lost (or gained) pretty quickly.

They say you only make or break money on the share market when you actually sell the shares, but most times in life you can't actually plan when you will want the money - so good luck on that one.

Property trends, on the other hand, tend to move much more slowly, a few per cent over a few months. It gives one time to weigh up the good or the bad in a more controlled manner and make more reasoned decisions.

I remember the last dip in the property market took several months to slow and eventually dip, and the full impact of only less than 10 per cent took a couple of years. You would have to be in a coma to miss that one.

So what are your thoughts? Quick draw Macaw or Mr Tortoise?

A: Each week lately, when I finish writing the column, I think: "Okay, that's enough on shares versus property. It's really important - given that they are the two main vehicles for long-term saving - but we've explored every angle now." Then readers come up with new ways to look at it. Your letter is a good example.

Property prices probably fluctuate way more than we realise. If you held a weekly auction on your house, with no reserve price, you would probably see wild swings in how much you got.

Still, it's true that property prices don't plunge over mere hours, whereas share prices can. But does that matter?

As I've said many times, there are two rules about investing in shares and property.

The first is that you shouldn't expect to spend the money within the next 10 years or so. You're right that we can't plan financial emergencies. But everyone should have easily accessible emergency money that's not in shares or property.

The second is that you need the courage and patience to stick with the investment when prices plummet. It's not a matter of how quickly you can pull the trigger, it's a matter of leaving your gun in its holster - and perhaps even taking advantage of the plunge to buy more.

Remember our teacher couple in the June 8 column? They said, "We have experienced several stock market catastrophes, including the last one. Each time we did not sell our shares but with every spare bit of cash we bought more shares while the market was so low." That's a great attitude.

A couple more things:

• If you do need to raid your long-term savings in a major emergency, you'll get the market price - which is usually okay - on shares, but probably a fire sale price on a property if you have to sell fast. What's more, you can easily sell part of your share portfolio. It's much harder to sell part of a property.

• Selling is certainly not the only way to make money on shares, despite what "they" say. Many shareholders happily draw a good income from dividends.

My main point, though, is that in property and share investments it shouldn't matter whether prices move quickly or slowly. You should be in for the long haul regardless of price fluctuations.


Real returns on property

Q: My partner and I are investigating our options for long-term investments and trying to decide between shares or property.

One thing that doesn't make sense to me is that return on property only seems to include the initial purchase price, and not the additional costs put into the property over time (largely interest payments but also rates and maintenance).

Once these are taken into account, I would imagine there are a large number of properties that don't provide any return on investment at all. Is there something I am missing?

A: Rental income. Sometimes this more than covers interest and other costs, although sometimes there's a shortfall - especially for landlords with substantial mortgages who have to contribute other money.

I think the point you're making is that when these people look back on a rental property investment, they often say, "I bought for $300,000 and sold for $500,000, so I've made $200,000".

They seem to forget all the money, over and above rent, that went in over the years.

What's more, they need to make a big enough gain to compensate for lost interest on those extra payments. If they end up having to sell at a disappointing price, you're right, they can end up worse off than if they had just put the money in the bank over the years.

Still, it's probably an exaggeration to say that happens to "a large number of properties".


Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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, 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.

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