Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: In a spin over revolving mortgage

22 comments
People can get themselves in a pretty pickle with revolving mortgage accounts. Photo / Thinkstock
People can get themselves in a pretty pickle with revolving mortgage accounts. Photo / Thinkstock

I've been a freelancer for six years. Because my income fluctuates substantially and I am single, I have always been conservative in managing my provisional tax and GST commitments. I simply put 45 per cent of all invoice payments aside into a separate GST/prov tax account (in addition to my daily and savings accounts), to avoid any nasty surprises.

However, recently I bought my first house on my own and have split the mortgage 50:50 fixed and floating, with floating on a revolving credit loan. I chose this so that I could "utilise" the prov tax and GST monies that accrue during the year, to lessen my revolving part of the mortgage.

The trouble is, now when I look at my single combined account with a large negative balance, I have no idea what portion is tax/GST, what is savings or what is my emergency buffer.

Because of my unpredictable income, I don't really know my end-of-year terminal tax/wash-up figures until the end of the financial year.

For the first time in my life, I'm in a bit of a pickle. Should I sacrifice the mortgage savings I am making by having the revolving credit "slush" account, and instead put everything on to a fixed mortgage and reinstate my three separate accounts - thereby gaining control of my accounts again? My situation seems rare and difficult to understand from my accountant, bank manager, friends' and family's perspectives - none of whom can help.

I doubt if your situation is rare, and it's disappointing that your accountant and bank manager can't at least see where you are coming from.

For the benefit of other readers, if you get a revolving credit mortgage of, say, $100,000, your everyday bank account suddenly has a balance of minus $100,000. It's a shock at first. You make your mortgage payments into the account, and the negative balance gradually reduces as you pay off the loan.

If you have several bank accounts, they are usually rolled into that one account. That means the money you previously had sitting around in other accounts reduces the mortgage balance day by day. So you pay less interest on the loan.

Of course you miss out on the interest the bank used to pay on your bank accounts. But that interest will always be lower than the interest charged on your mortgage - even more so after tax. So you come out ahead. It's as if you are earning the mortgage interest rate on your savings.

A feature of revolving credit loans is their flexibility. If you want to borrow for something, you just withdraw from the account, up to the maximum - $100,000 in our example. This can be useful for unexpected expenses and in some other situations - although it can be a disaster for people who can't resist borrowing for flippant spending.

Another possible negative of revolving credit mortgages is what you're experiencing, that it's harder to keep track of different savings funds.

A solution would be to simply keep a record of your deposits, withdrawals and balances for different purposes. You would know that you had put in, say, a total of $20,000 for provisional tax and GST over a period. When you withdrew it to pay the tax, your mortgage would suddenly grow by $20,000, but that would be fine. You could feel pleased that for a period you had skipped paying interest on the $20,000.

You could handle savings for, say, a trip similarly. But you don't really need to keep track of long-term savings. For anyone with a mortgage, repaying it is usually the best form of saving. So a gradual reduction in the negative account balance would count as your saving. As for an emergency fund, the account is that. Once your balance is below the maximum, you can easily borrow back up to the maximum if you need to.

Would that work for you? Everyone manages - or in some cases mismanages - their money differently, so it may take a while for you to get your head around doing it that way.

However, if you still feel in a pickle some months down the track, I suggest you switch to an ordinary mortgage. Life's too short to worry about this sort of thing. You sound as if generally you have your financial act together, so you should do just fine without a revolving credit loan.

Note, though, that if you move away from revolving credit, you don't have to put the whole lot into a fixed mortgage. I suggest you get a traditional floating mortgage. It's better to have some fixed and some floating, as each has its advantages.

KiwiSaver funds

Mr Banks and Co sold their KiwiSaver scheme for $20.9 million. Why not spread the $20.9 million around to the fund-holders?

I have assumed that Mr Banks and Co have kept it.

You're referring to the sale of the Huljich KiwiSaver Scheme to Fisher Funds. John Banks, now Act's parliamentary leader, was executive chairman of Huljich Wealth Management, which ran the scheme.

Why not spread the proceeds to fund-holders? Because they have no right to that money - any more than they would have to the proceeds if their bank were sold. And that's a good thing.

When you invest in a KiwiSaver scheme, your money is not invested in the company that runs the scheme. It's invested in a wide range of shares, bonds, property, cash and sometimes other assets - the investments made by the scheme's funds.

If your scheme is sold, those investments are transferred to the new provider, and your situation shouldn't change much.

I'm not saying you shouldn't take an interest in your provider. You want to feel confident you can trust them to:

•Invest as they say they will.

•Choose their investments - and their method of investing - wisely.

•Communicate clearly with you.

•Charge reasonable fees.

•Run the scheme efficiently.

But the size of your provider's profits - whether ongoing or when a scheme is sold - isn't really relevant to you.

I suppose if you knew your provider was unprofitable, you might expect your scheme to be sold. And if you knew your provider was making huge profits, you might want to pressure it to reduce fees. But I suggest you pay much more attention to the list above.

In many cases, you won't have access to profit information anyway - which is why I say it's a good thing KiwiSavers don't share in their provider's profits. Some people would do really well, some would do really badly, and for the most part it would be a matter of sheer luck.

Cash cut from Super

I'm interested to know how Work and Income is going to treat KiwiSaver funds for people in our situation, when we are able to withdraw them. I am the younger spouse of a superannuitant and currently receiving means-tested NZ Super at the married rate. I have recently heard of someone in the same situation as ourselves receiving a life insurance payout which has been treated as income by Work and Income. Are you able to find out if Work and Income intend treating KiwiSaver as income?

Before I answer your question, I'll explain to other readers that if one spouse or de-facto partner is over 65 and the other is under 65, the older partner can "include" the younger one in their NZ Super payments if they wish. This means that each partner receives a payment.

The amount depends on how much other income either partner earns. This is the only situation in which NZ Super is income-tested.

NZ Super is paid fortnightly and taxed before it is paid out. Standard payments to a spouse over 65 are currently $523 after tax (based on the M tax code). But if an under-65 partner is included, each person can receive up to $497 after tax. That maximum applies if the couple's other income is less than $100 a week. Clearly, such a couple gains lots by including the younger partner.

However, for every dollar over $100 a week of other income earned by the couple, their total NZ Super payments are reduced by 70c. At the current payment levels, that means that if the couple's other income is more than $24,700 a year, they are better off not to include the under-65 partner. Work and Income will help couples work out which is their better option.

Now for your question. Work and Income says that generally money in a KiwiSaver account, and returns earned on that money, are not considered to be cash for all means-tested benefits, including your NZ Super.

However, the rule changes when a person is able to withdraw their KiwiSaver money in retirement - at 65 or after five years in KiwiSaver, whichever comes later. At that point, any KiwiSaver money and the interest, dividends or other returns earned on it should be included in income and asset tests - including the income test applied to you.

Whether your NZ Super payments will decrease will depend on whether the returns on your spouse's KiwiSaver account plus any other non-NZ-Super income totals more than $100 a week. If so, your payments will decline by the 70c-per-dollar rate.

While you probably won't be thrilled about this, keep in mind that your total income - from NZ Super plus KiwiSaver - will still be higher than now.

What if your spouse put the KiwiSaver money into shares that don't pay dividends, so there is no income generated?

"Once the KiwiSaver fund becomes available to the clients, if they want an income-tested benefit or extra help, for example, NZ Super for their non-qualified spouse, the department expects them to earn a reasonable income from that investment," says a Work and Income spokesperson.

"If no income is earned from the asset, the department may consider that the clients have deprived themselves of income, and so charge a notional income rate. Generally the benchmark used is the Reserve Bank average retail six-month term deposit rate. This is currently 4.05 per cent."

Keeping student afloat

What is considered a reasonable weekly allowance for a first-year university student who lives at home? What items are considered discretionary spending rather than typical parental expenses by other readers?

We plan to pay our daughter's fees for the courses she passes, but in the first instance she will take a student loan to cover these.

I'm not up with the play on this, but some readers will be. Happy to hear from students as well as parents, but no fibbing about how much you need!

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 best-selling 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, 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.

- NZ Herald

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