Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: Be wary of rate rises on big loans

11 comments
Holidaying on the cheap is one way to pay off house mortgages sooner. Photo / Thinkstock
Holidaying on the cheap is one way to pay off house mortgages sooner. Photo / Thinkstock

My wife and I, after years of missing out on fancy holidays, cellphones and cars, will have our mortgage paid off in six months' time.

We are both in our late 30s and are looking to buy a new house in a more fancy (Auckland) suburb, this hopefully being the last move before the retirement home.

Conflicting advice from friends says we should buy: The cheapest house possible so as to get it paid off quicker, or The most expensive house possible and let inflation and other forces do the hard yards for us.

We will likely have the option of keeping our existing property and renting it out, or selling. Apart from a debt aversion, we are not financially clued up. What would your advice be?

Is the person who talks of letting inflation do the work middle-aged or older, by any chance?

Many of us who remember inflation rates in the high teens in the 1970s and 80s - and house prices that rose at similar rates or more - recall fondly how things worked out with our first homes. The mortgage might have looked big at first. But house values zoomed up and our pay zoomed up, and after a while the mortgage payments were pretty easy.

These days, though, inflation is much tamer. And although opinions differ widely on where house prices are going, nobody predicts a repeat of the 1980s.

Nonetheless, there's still some validity to the argument that the more you borrow, the more you gain from inflation. If all house prices rise by 10 per cent over a period, you'll gain $50,000 on a $500,000 home but $100,000 on a million dollar home.

Another good reason to buy an expensive place is that you will be living in posher surroundings over the years.

However, you won't enjoy the luxury much if you're struggling to make the mortgage payments. Before you commit to a large mortgage, consider how you would cope if your income fell - perhaps because of a redundancy - and interest rates rose to, say, 10 or 12 per cent.

According to the mortgage repayment calculator on the nifty new-look www.sorted.org.nz, monthly payments on a 6 per cent $600,000 floating mortgage are $3597. But at 10 per cent they would be $5265, and at 12 per cent they would be $6171.

I'm not saying mortgage rates will rise. But if they stay as low as this over the next couple of decades, that will be remarkable.

True, if you found yourselves in a squeeze, you could put the house on the market and trade down. But higher mortgage interest and redundancies are likely to affect others, too. If you're forced to sell, it could well be in a down market. That's how people end up with mortgages higher than the proceeds of their house sale. Horrid.

Put plainly, big mortgages are risky. Given that you have an aversion to debt, a pricey house doesn't feel right for you.

So what about a cheap house?

There's a saying that it's good to buy the worst house in the best street. Such a house is often run down and unappealing. But because of its location, you usually get a good return on time and money spent doing it up. And you can do everything to your own taste. That's the route I would take if I were you.

KiwiSaver options

Our son, who is 48, after attending the Sheltered Workshop in Mangere (now known as Workforce) spent 22 years working as a trolley boy at local supermarkets.

He joined KiwiSaver six months after its inception and he had 8 per cent deducted from his wages each week up until June 2010.

Up until that point he had lived at home with us. He was then fortunate to be allocated a residency at Rescare in Weymouth and left his employment, as trolley work was becoming too onerous for him and he still has severe foot problems through years "on the beat" in all weathers. Through Rescare he is now attending Workforce in Mangere three days a week, where he is paid $30 a week, and all other expenses are in the hands of Rescare and government subsidies.

At the time we felt that we would just leave the KiwiSaver as is, as to deduct 4 to 8 per cent from $30 each week would be so paltry it would be uneconomical to administer. Also we didn't know if Workforce (which probably relies on grants and businesses to survive) would encourage any contributions to the scheme.

Our questions to you are: Have we taken the logical course? We considered closing the account but couldn't see where our son's situation fitted into the scheme of things, and the two sets of papers we were sent looked formidable to complete.

He has a bank account into which his payments are made, but once he takes out money for his ongoing expenses (podiatry) and a little pocket money, it isn't growing very fast, so he would struggle to afford a one-off payment each year as his annual contribution.

Should we endeavour to retrieve the funds in this account, and invest them on his behalf to give him a few dollars for a holiday from time to time when he reaches retirement age, or will the government expect this money to be paid over to its funds?

We have now been able to move into a retirement village knowing that, all things being equal, our son will always be cared for.

As his parents we have him home every three to four weekends and for three weeks at Christmas/New Year.

We have tried to be as brief as possible but would appreciate your comments, as there may be others in the same situation, and like us read your column each week.

I think it's best to leave your son's money in KiwiSaver, and for him to keep contributing. He'll get his share of the government's tax credits, plus employer contributions - making KiwiSaver better than other saving alternatives.

Workforce Auckland "has a number of employees with disabilities employed under minimum wage exemption permits who belong to KiwiSaver", said chief executive Neil Porteous when I first approached him, a couple of weeks ago.

"Some of our employees are subject to PAYE and some are not, depending on their level of income. An employee earning $30 a week (as in this case) would not be subject to any PAYE", because of a special exemption. And that's where it gets a bit complicated, because it's through the PAYE system that employees' KiwiSaver money is sent to Inland Revenue.

However, Porteous said he would look into what could be done about this, and he has since reported back, as follows:

"We have discussed with the IRD and they have confirmed that there is no mechanism for taking payments directly from non-taxable employees, as no IRD filing takes place. We have subsequently contacted a number of KiwiSaver providers and are in discussions with them regarding ways in which employees could contribute directly to a scheme - similar to self-employed members of the KiwiSaver scheme."

The difference is, though, that while self-employed people miss out on employer contributions, your son won't. "As an employer, we would also contribute to the scheme," said Porteous. I suggest you contact him to check on how to set things up for your son.

While you're right that your son's KiwiSaver account won't grow to a large amount, it's still worthwhile. Here are the numbers:

* If your son contributes the minimum 2 per cent of his pay, or 60c a week, that will come to $31.20 a year. Workforce will match that, and the tax credit will further boost the account by 50c in the dollar. That brings the total to $78 a year. And from April 2013, your son and his employer will each put in 3 per cent, or 90c a week. The annual total will then be $117.

* If your son contributes 4 per cent, or $1.20 a week, Workforce will contribute 2 per cent this year, and 3 per cent from April next year. Adding the tax credit, we come to $124.80 this year and $140.40 after that.

* And if he contributes 8 per cent, or $2.40 a week, the totals will be $218.40 this year and $234 after that.

Assuming your son can work for another 10 years or so, his KiwiSaver total could be one or two thousand dollars or more, plus his balance from his earlier trolley boy job. The Government wouldn't expect to be given that money, so he could use it for several holidays.

One more thought: If you can spare it, you could help your son get even more from the Government. Any amount you contribute - up to the amount that brings your son's and your annual contributions to $1043 a year - would be boosted by 50c in the dollar by the Government's tax credit.

Good on you for writing. Says Porteous, "Please pass on our thanks to your correspondent for bringing this to our attention." Best wishes to you and your son.

Student loan payments

I was hoping you could further clarify your thoughts on when to take advantage of the student loan voluntary repayment bonus scheme.

I understand the concept of leaving any money to go towards extra repayments in a savings account to earn interest for as long as possible, but wouldn't this involve some extra risk as the scheme could be cancelled at any time?

Or is it a reasonable assumption that if the scheme were to be cancelled the bonus would still apply to any extra repayments made in the remainder of the current tax year, and anyone with money put aside to go towards their student loan could at that point make the extra repayment and still have it count for the 10 per cent bonus?

You're right, the repayment bonus could be cancelled. But I'd be surprised if that happened in the near future, given that the bonus is pretty new, and the government is probably hoping it will encourage faster loan repayment, and therefore be worthwhile. I would also be surprised if a cancellation were made without warning. No government wants to alienate voters. But in these financially tough times, you can't be certain. If you don't want to risk it, make use of the bonus now.

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 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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