Mary Holm 's Opinion

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

Mary Holm: Mums often know best about money

13 comments
Varying the timing of mortgage payments can magically change the total you'll have to pay.
Varying the timing of mortgage payments can magically change the total you'll have to pay.

My mother is somehow convinced that paying off my mortgage in fortnightly repayments is better than monthly ones. The bank says it's exactly the same. I am terrible with numbers. Is there something I'm missing here?

There's nothing magic about fortnightly payments. The result you get depends on how you set it up. There are two ways:

Work out your total annual mortgage payments. Then divide that by the 26 fortnights there are in a year. If you paid that amount each fortnight, it would make only a tiny bit of difference - you'd pay a little less interest because the bank gets some of your money slightly sooner. But it wouldn't really be worth bothering with.

Cut your monthly payments in half and pay that amount fortnightly. You pay somewhat more per year, because there are 26 and a bit fortnights in a year, not 24. And that can make a surprising difference.

Let's say you have a $200,000 30-year mortgage at 6 per cent. Monthly payments are $1200 - or $1199 if we're being pedantic. If you switch to paying $600 a fortnight, you'll pay off the loan in 25 years instead of 30 years, and save almost $50,000 in interest. Not to be sneezed at.

Should you switch? Well, it's a good idea for budgeting to match your mortgage payments with your income flow. If you get paid fortnightly, pay the mortgage fortnightly. But if you're paid monthly, it's probably easiest to pay your mortgage monthly.

If the latter is the case, you can still increase your monthly payments to get rid of the loan faster. To work out how effective an extra payment is, use the mortgage repayment calculator on www.sorted.org.nz

The moral of the story: Mums are worth listening to!

First home buyers

I'm considering using my KiwiSaver contributions to buy my first home. I believe that I do qualify, but we'll just have to wait and see. I do, however, need some advice and am too scared to ask in case it goes against my application for pre-approval.

My partner and I are going to buy a house together and we'll be using our KiwiSaver. We have the intention of one day buying another house in about three years, after our first home. Our dilemma is, are you allowed to rent your first home out when you buy another one? If so what are the requirements to ensure we do not break any laws we don't know about.

I'm not sure if you are planning to just withdraw your and employer KiwiSaver contributions to buy your first home, or whether you also plan to apply for a subsidy of up to $5000 a person.

If it's just the withdrawal, there are fewer rules. Unlike the subsidy, there's no income cap or house price cap. And while you have to be in KiwiSaver for at least three years, there are no rules about minimum contributions. The property you buy has to be your "principal place of residence", but there's no time frame on that.

However, if you want the subsidy, there is a time limit. "They must live in the house for six months, or pay the subsidy back," says a spokesperson for Housing New Zealand, which runs the subsidy.

Sounds reasonable to me, and it's way short of three years. So your plan shouldn't present any problems. The fact that you rent out the first home is irrelevant.

While we're on the subject of KiwiSaver help for first home buyers, the changes to the house price caps, income caps and minimum deposit for the KiwiSaver subsidy and Welcome Home Loans took effect on October 1. The main changes are:

You need a deposit of at least 10 per cent of the purchase price.

House price caps have risen to: $485,000 in Auckland; $425,000 in Wellington City and Queenstown Lakes; $400,000 in Christchurch City and Selwyn district; and $350,000 in Thames/Coromandel, Tauranga City, Western Bay of Plenty, Hamilton City, Kapiti Coast, Porirua City, Hutt City, Upper Hutt, Tasman/Nelson and Waimakariri. For the rest of the country, the house cap stays at $300,000.

The income caps are now $80,000 for one buyer and $120,000 for two or more buyers. This is a change from $100,000 for one or two buyers and $140,000 for three or more buyers.

Housing New Zealand has produced a new booklet "which shows how the deposit subsidy, savings withdrawal and Welcome Home Loan can be combined to make getting your first home easier for first home buyers with low to modest incomes or those with difficulty saving for a deposit", says the spokesperson.

You can download the booklet from www.my-first-home.co.nz.

Aussie super funds

As the New Zealand dollar is riding high, this may not be quite the time to challenge the wisdom of bringing home Australian superannuation funds to KiwiSaver accounts.

A good argument could be made now in favour of taking such steps, and it will become even more "logical" when New Zealand interest rates rise next year, further closing the gap between the New Zealand and Australian dollars.

But for most New Zealanders who come home from Australia, it surely makes sense to leave their funds intact across the Tasman. After they have been transferred to KiwiSaver accounts, they can't be touched until people are over 65 (unlike the Australian rules, which allow earlier access on retirement).

But the best reason for leaving money in Australian super accounts is New Zealand's vulnerability to potential shocks like major natural disasters and agricultural calamity. A foot and mouth outbreak, for example, would hammer the New Zealand economy indefinitely and savage the dollar.

Australia and the Australian dollar face their own challenges, but the generally robust economy there will always come back. Because we are so small, so reliant on agriculture and so susceptible to disasters like earthquakes, New Zealanders can't have the same confidence. We need to spread our risk, as you regularly remind us.

I find it staggering that the coverage on the rule change allowing New Zealanders to place their Australian super in KiwiSaver accounts has so far avoided the dangers of eggs in one basket.

Why is it, do you think, that no leading financial adviser or fund manager (to my knowledge) has spoken publicly of these risks? Could it be that they are so excited about getting their hands on more fees that the interests of their clients are being ignored?

I'm afraid there are a couple of flaws in your thinking.

The first is that bringing money into New Zealand is a good idea because the kiwi dollar's value is high relative to the past. The opposite is the case.

Think of it this way: NZ dollars are currently expensive by historical standards. So when you transfer money in from another country, you can buy fewer kiwi dollars.

There's another issue here, though. You might have noticed that I've said "relative to the past" and "by historical standards". Who knows how we'll view 2013 foreign exchange rates in the future? Nobody can predict those rates - regardless of expectations about interest rates.

In light of that, I don't think people should consider the exchange rate when deciding whether to move their super to New Zealand.

Another point: while you're probably right that the New Zealand economy is more vulnerable than the Australian economy, that needn't have a major effect on someone's decision about moving their super.

It's true that most savings funds - whether an Aussie super fund, KiwiSaver or another savings fund - invest a portion of the money in the home country. To that extent, moving your super from Australia to New Zealand will increase your exposure to the local economy.

However, to benefit from diversification, it's best to put a large portion of your long-term savings in overseas assets. And you can do that through practically every KiwiSaver scheme. If you move super from Australia and your KiwiSaver scheme doesn't offer overseas investment options, switch to one that does.

Okay, you'll still probably have some of the money in New Zealand assets. But that's no bad thing. Assuming you're planning to retire in New Zealand, somewhat reducing your exposure to future foreign exchange risk is a plus.

Having said all that, you make an interesting point about whether New Zealand financial experts are pointing out the disadvantages as well as the advantages of moving Australian super to KiwiSaver.

A quick survey of several KiwiSaver provider websites shows some list disadvantages while others don't - and some don't even bother with any of that, just telling you how to make the transfer. If your provider doesn't give you the pros and cons, keep that in mind when assessing the quality of their service to you.

Here's an objective view. Firstly, arguments in favour of bringing your super from Australia to New Zealand:

It will probably be easier to manage your savings if they are all with one local provider.

There's an advantage for people planning to withdraw KiwiSaver money to buy a first home. You can't withdraw money you've transferred from Australia. However, "you can withdraw the investment earnings earned on it while it is in KiwiSaver", says SuperLife on its website. "A person looking to buy their first home may gain an advantage if they transfer their Australian superannuation balance sooner as the investment earnings earned while it is in New Zealand can be withdrawn for this purpose."

Now for some arguments against bringing your super back:

As our correspondent says, in many cases people can access their money at a younger age in Australia. This might or might not matter to you.

When you transfer, you may have to pay exit fees to the Australian provider and/or to a pension transfer company.

How about the all-important fund fees and taxes? On fees, compare what you're paying in the two countries. Sometimes the Australian fund will win, sometimes the New Zealand one will.

On tax, several websites point out that Australian super funds are taxed at 15 per cent, while many New Zealanders pay more than that.

However, SuperLife points out that the Australian tax applies to both income and capital gains.

"In general, New Zealand adults pay tax at 17.5 per cent or 28 per cent on income (some pay 10.5 per cent) and 0 per cent on capital gains. While the New Zealand rate is often higher (for example, 28 per cent versus 15 per cent), it is applied to less of the total return and so for many investors, it will result in less tax."

Another important point about tax: it changes. It's not a good idea to make any decision based largely on tax.

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 (pref daytime) phone number. Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

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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