Mary Holm 's Opinion

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm: Calculating right time to pay off mortgage

10 comments
A mother wonders whether to take her son on a dream holiday or keep the end of payments firmly in sight

The memories of a great holiday are another thing to factor in when weighing up the financial pros and cons. Photo / Thinkstock
The memories of a great holiday are another thing to factor in when weighing up the financial pros and cons. Photo / Thinkstock

Q: After 16 years my mortgage is finally below $100,000 and my house is probably worth around $650,000 (conservatively).

I was able to chomp through quite a bit of my loan over the past two years by keeping to my $830 fortnightly repayments, while lowering interest rates meant I actually made a serious dent on the capital owing.

Much as I am looking forward to being out of my mortgage in about six years, I am just about to turn 54 and am keen to travel with my soon-to-be 15-year-old son before he is less inclined to travel with his mother and while I am still fit.

We had a tragedy in that he lost his father three years ago and it has made me very aware that life is for living and anything can happen. Without meaning to be flippant with my money, I do worry what the point is of having a house worth so much and not living, as we are definitely cash poor and asset rich.

Should I keep paying off the mortgage at $830 a fortnight, or should I just put the extra money into our dream European holiday fund?

A: My vote is probably for the holiday fund.

First, though, I wouldn't say you are particularly asset rich - assuming you don't have savings you haven't mentioned. You do have more than half a million dollars in your house. But unless you're happy to move at some point to an area with cheaper real estate, it's more realistic to just think of it as "my accommodation is taken care of".

There's the possibility of using a reverse mortgage in retirement to free up some of the equity in your house. But it became obvious in this column some months ago that that isn't a great proposition.

Having said that, though, you're in a reasonable position financially and your history suggests you're a good money manager. Keeping up the old mortgage payments when interest rates fall is an excellent way of getting rid of a mortgage. Well done!

A good goal for you now is to retire with a mortgage-free home and considerable savings - probably via KiwiSaver - to supplement NZ Super. Do you expect to earn enough into your 60s to be able to do that, even if mortgage interest rates rise?

If yes, then go for the holiday and enjoy it. Even if you end up retiring with somewhat less than you would like, I suspect the memories will make it worthwhile.


Student loan bonus

Q: I do not understand the student loan scheme. I repaid my student loan in full within a year of taking it out for living costs. That was a great bonus while I was unable to work.

A few weeks ago (and I am not complaining), I received an IRD cheque for $550, saying it was a rebate for paying my loan in full and promptly. Very puzzled! I had the use of the living costs, interest wiped and then given a rebate of $550.

I am delighted to have it, yet it comes from the Government I guess, when already I have enjoyed a huge benefit in interest wiped and being able to draw down this money. I didn't expect to get further monies back. An incentive, sure - but where does the money actually come from?

I do not feel the same way regarding tax returns, as I have paid tax and the rebate is due if I have paid more than my fair share. I am not being given someone else's money. There is a difference.

No, I do not want to give it back - just the sense of not having earned it somehow seems strange. How can the scheme make a profit or at least break even when I get someone else's money?

A: The scheme certainly doesn't make a profit or break even. It costs the Government, and therefore taxpayers, many millions of dollars a year.

The thinking is that we as a country benefit from people being well educated. And many students simply couldn't afford tertiary education without student loans.

There's also an issue around fairness between generations. My classmates and I paid very little for university, so it seems fair that we contribute - via our taxes - to the education of younger people.

Still, the Government doesn't have money to throw around. Your rebate was the result of a scheme to encourage fast repayment of loans. However, the scheme has now been stopped - perhaps because it didn't prompt many people to repay loans who wouldn't have anyway.

Clearly you didn't need such encouragement. Just look on the money as a bonus. If it bothers you, give it to charity. Oh, and I like your grateful attitude!


Precious little

Q: Can you please do an update on the gold and silver prices for the guy who predicted big things for the price of gold and silver?

Let's hope he was all mouth and no trousers and hasn't lost his shirt out of it.

A: Gold is down 34 per cent from its 2011 high, in US dollars. And silver is down 60 per cent. Enough said.


Not for Nervous Nellies

Q: How does a bank default, under the Open Bank Resolution discussed in your last column, affect offset mortgages?

For example, someone has a $200,000 mortgage, which is offset against $50,000 of savings. This means they only pay interest on their net position, which is $150,000 in debt.

Now say the bank gets into trouble and the Reserve Bank steps in and freezes a percentage of bank deposits under the OBR. Let's say it is 20 per cent and they never return it.

Would this person end up with only $40,000 of savings, but still keep their $200,000 mortgage debt, reducing their net position to $160,000 of debt? Or are offset mortgage structures treated differently from regular bank deposits?

Finally, how does a revolving credit loan compare? Presumably there is no potential to lose money with a revolving credit loan, but can the bank reduce the mortgage limit when the OBR is triggered, preventing access to funds?

A: You raise an interesting point. If Open Bank Resolution were applied, it would affect all credit balances but not mortgages, credit card loans or other loans - unless they happened to be in credit at the time.

Your offset mortgage example is correct, says the Reserve Bank.

"A portion of the savings balance would be frozen when the bank reopens (the next day), and the mortgage loan would be unaffected. Offsetting accounts simply pool balances for the purposes of calculating interest payments."

However, if the person instead had a $200,000 revolving credit mortgage, and had put their $50,000 into reducing the mortgage balance, OBR would have no effect.

"There is no impact on the outstanding balance or the limit under OBR," says the spokesperson.

This means that if you're a Nervous Nellie worried about OBR, you should choose a revolving credit loan over an offset mortgage.

Note, though, that bank failures are rare in New Zealand, and the Reserve Bank doesn't expect that to change.


Property versus shares

Q: Some comments on rental property versus shares.

Rental properties can't disappear. The main thing is for the investor to not be too heavily borrowed.

The only downside on property is it cannot be converted into cash immediately. And once the mortgage is paid off, the rental income less a few expenses is fully taxable. Long term, a capital gain may be made when selling as the tax laws stand at present.

In contrast, good company shares with full imputation means that the buyer will get the gross yield when they fill in their yearly tax return. In effect they are paying no tax on dividend income.

The downside is shares can go up and down according to market conditions and the buyer might be unlucky enough to lose all their investment if that company goes bankrupt.

The upside is they can convert their investment back into cash quickly, of course making a loss or a profit depending on the market.

So to me there are different situations investing in rental property as compared with shares.

A: They certainly are different investments. But there are more similarities than you imply.

Both property and shares are risky short-term, but they usually perform well over 10 years or more. Also, the same rules apply to both about whether capital gains are taxed. And the values of both go up and down with markets.

It's true that the sharemarket is more volatile, but because most people borrow to invest in property, it can be as risky or even riskier than investing in shares. That's particularly true if the share investor buys a wide range of shares or goes into a share fund, pretty much removing the possibility of losing all their money.

A couple more points:

• It's true that rental properties can't disappear. But if you do borrow heavily, and have to sell in a down market, your investment can disappear - and you still owe the bank.

• It's also true that fully imputed dividends are tax-free to the shareholder. But that's only because tax has already been paid by the company, which cuts into the company's growth.


Diversification is key

Q: Here we go again on shares versus property. Some people have a problem with the simple concept of diversification. My own investments are split between shares, property and cash. Cash is the lowest percentage.

The rentals are mortgage-free.

Share dividends did "drop" about 20 per cent during the worst of the global financial crisis but have mostly since recovered. As has most of their capital value.

The rental properties are okay but they require maintenance, insurance and rates and management. The shares by contrast are a gift that keeps on giving, with very little cost except when I pay a commission on a fairly infrequent buy or sell.

The cash in the bank isn't doing brilliantly at the moment, but it is an easily accessible security blanket.

People who still think the New Zealand sharemarket is full of wide boys and cowboys should stop looking in the rear view mirror. After its regulations were tightened up those shady characters mostly moved on to start finance companies, and we all know what happened there.

A: Indeed. And I like your summing up. Shares and property both have their pluses and minuses. Investing in both, plus cash, is the way to go - even if your property exposure is just your own home.


KiwiSaver providers

Q: For the purpose of the list that you're compiling of KiwiSaver providers contacting their members about member tax credit contributions, Brook Asset Management contacts only those eligible for tax credits who haven't yet met the threshold that maximises their entitlement. An approximate top up amount is also provided as a guide.

A: Thanks. And another provider to be added to the list is Grosvenor.


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.

- NZ Herald

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.

Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”

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