Mary Holm

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

Mary Holm: Preparing for doom a waste of time

4 comments

Reader happy to use banks and every other means available to enjoy life in the interim

As for a catastrophe, it depends how you define it, but it is by no means a certainty. Photo / Supplied
As for a catastrophe, it depends how you define it, but it is by no means a certainty. Photo / Supplied

Let's have some fun. Why not ask the doom merchant who wrote to you last week exactly where his or her wealth is held or invested, and how he or she earns a crust and pays for the groceries and other necessities of life each week without using banks or other financial institutions?

I would love to know. I can't see the supermarket accepting gold bars.

I think the point the doom merchant (and other like-minded survivalists) may well miss is that preparations for total doom are a waste of time. Whatever provision we make, when total catastrophe strikes, we will all be stuffed anyway.

Always accepting that there will be some future catastrophe - I agree that it is a certainty, whether or not in my lifetime - I have every intention of utilising banks and every other means available to me to enjoy life in the interim.

I don't want all the details about our friend's finances, but it would be interesting to know if he manages without using a bank.

As for a future catastrophe, it depends how you define it, but I certainly don't see a catastrophe as a certainty - in whatever time frame you choose. Collectively, we're not that stupid.

Cuddly banks

I enjoyed your dismissal of writer "Doom Merchant" as without any merits, but wished you had more scope to attack his lack of evidence and rather village-idiot - but educated to the level of sounding knowledgeable - argument.

I probably shouldn't be so harsh, but I do find it very frustrating the way people hate the financial institutions. They haven't exactly behaved in a respectable way overseas, but I have yet to hear evidence of wrongdoing with the banks in New Zealand.

Now, now, a little more respect for our worried mate, please!

To be honest, I didn't want more space to counter his arguments. It's the kind of conversation that can go on forever, with nobody getting very far.

As for the banks, you're right, the New Zealand banks don't seem to have done bad things. But their handsome profits - $2.44 billion before tax and $1.77 billion after tax for the Big Five banks in the first six months of this year - don't endear them to us.

Many would like to see the profits a bit smaller and our savings accounts earning a bit more, or the interest rate on our loans a little lower.

Sure, anyone can move to another bank that offers a better deal. But it's not easy to switch, especially if you have lots of automatic payments lined up, and so on. Also, Bank A might be more generous today, but Bank B might beat it tomorrow.

As our previous correspondent points out, it's almost impossible to operate without a bank. But the power imbalance between banks and us seems to be larger than between, say, supermarkets and us. Hence the resentment - which I'm sure our next correspondent shares.

Getting a mortgage

We are close to retirement and want to buy a home. We will have $40,000 as a deposit when we reach retirement age. Why don't banks want to lend to us?

Our income is from social welfare and my husband's small part-time job, which he intends to continue into retirement. When we retire, we expect to receive at least as much from the Government as we are getting now.

We are renting privately paying $400 a week. If we can afford this why can't we get a mortgage? We could possibly afford a $250,000 home over 20 years. I would be interested in your comment.

A $250,000 home, with a $40,000 deposit, might be pushing it. But with a bit of help from an expert maybe you could get a loan.

Mortgage broker Stephen Wilton of Mortgage Minders, who is former vice-chairman of the NZ Mortgage Brokers Association, points out that you'll have to come up with not just mortgage payments but also rates and house insurance of, say, $50 a week. And you also need "a small buffer for the unforeseen" of at least $25 a week "to give the lender some additional comfort".

That leaves $325 a week - or $650 a fortnight - for the mortgage. Mortgage calculators show that would cover payments on a $210,000 20-year loan if the interest rate is 5.2 per cent. You may be able to get such a rate now, but what if interest rates rise?

Then again, rents rise too, and presumably you would cope with that.

People with mortgages who really want to keep their houses tend to make things work. And if you - or the mortgage lenders - want more leeway, you could buy a cheaper home - perhaps a unit or a house outside the big cities.

Okay, so the numbers could work. But what about mortgage lenders' attitudes?

Your income from the Government is probably more secure than most people's.

What else is taken into account? Wilton says it's possible for people in your situation to get a mortgage "if packaged and presented correctly, and if they had an acceptable explanation as to why at that age they only have $40,000.

"The mainstream lenders could do it, as they cannot discriminate on age, but they would be very tough on the other assessment areas."

You would need to have no other debt, "and a history of account conduct that demonstrates the ability to handle easily the new commitment level".

That history is important. "A lot of more difficult applications struggle as clients believe they can just instantly change habits and just afford a new commitment level," says Wilton. "The lender wants to see a history that clearly demonstrates that."

I suggest you visit a mortgage broker and get their advice. They generally don't charge you anything, as they earn a commission from the lender that gives you a mortgage.

Let me know how you go.

Mortgage v KiwiSaver

If one has a mortgage, is there much point in having a retirement savings scheme? Is it not better to pay off one's major debts as quickly as possible, prior to contributing to retirement savings?

Generally, it's better to repay a mortgage than to save. If your mortgage interest rate is 6 per cent, by repaying the loan fast you are improving your wealth as much as if your savings earned a return of 6 per cent, after fees and tax. And you can't get returns like that without taking risk.

But there are two "howevers":

* If you are an employee, KiwiSaver will probably beat mortgage repayment, because of the extra money coming from your employer and the Government. But contribute just 2 per cent of your pay into KiwiSaver. Unless you earn less than about $35,000, that will get you all the KiwiSaver incentives.

* If you're not an employee, it's debatable whether KiwiSaver beats mortgage repayment. But in any case, having a small savings scheme gives you some diversification. So I suggest joining KiwiSaver and contributing $1043 a year, to get the maximum tax credit.

In both cases, put any further saving into mortgage repayment.

NZ Super lifts income

I represent many people for whom NZ Super will be an increase in income.

I currently care for frail elderly parents and receive a Carer's Benefit - for which I am extremely grateful, as it allows my parents their wish to retain familiar surroundings and routines, and allows me to spend this precious time with them. I live separately on the same freehold property and pay for all my household expenses including contributing to KiwiSaver and running a small car.

When I transfer shortly from Carer's Benefit to NZ Super my income will rise substantially. I am already planning all sorts of treats I cannot currently afford, and to continue to save.

How far money goes depends on many things, including how well you can plan a budget and stick to it whatever your circumstances, but also on how much joy you can derive from the free/inexpensive things in life - spending time with friends and family, walking, visiting art galleries and free outdoor events, gardening, reading, to name just a few on my very long list. I feel my current life is of a really good quality, and wish everyone else similar happiness.

There are many things that can happen in life to affect one's ability to save huge amounts by retirement - illness and disability, being a refugee, marriage break-up, always being on a minimum wage, being made redundant and unable to find work for significant periods of time, etc, let alone some of the sad things that happen from an inability to cope with life - drugs/alcohol-related events, going off the rails in one's youth.

I think it's important to let people know that for many, NZ Super is the light at the end of a very financially constrained tunnel.

You have a wonderful attitude. And it's good to point out that many can't be blamed for reaching retirement without savings. I'm assuming you will inherit your parents' home, and it sounds as though you certainly deserve to. For those who retire without their own home or much income, there may be some good news in the next Q&A.

Accommodation help

Good coverage recently on the topic of accommodation help for people on NZ Super. Oldies on low income should also be entitled to Housing NZ help.

Quite right. Age is not a factor in deciding who gets that help.

"Housing New Zealand uses a social allocation system to allocate state housing to those with the greatest housing need," says a Housing NZ spokesperson.

Factors taken into account include your assets and income, "whether you can afford lower quartile private sector accommodation, how adequate and suitable your current accommodation is, and whether you have particular needs that might make it difficult to find accommodation in the private sector.

"The income threshold is 1.5 times the net rate of NZ Superannuation for someone living on their own, and 1.5 times the NZ Superannuation rate paid to a couple for all other households." So if your only income is NZ Super, and you meet the other criteria, you're likely to be eligible for a state house.

Furthermore, state house tenants, "with income at or lower than the rate of NZ Super, may be eligible for income-related rent", says the spokesperson. In some cases, the rent will be approximately 25 per cent of their take-home income. Those on higher incomes will pay a bit more, but nobody is charged more than the market rent for the property.

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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