KEY POINTS:
I have been an avid follower of your Saturday column in the Herald for some years. I particularly enjoy your in-depth, no-stone-unturned and comprehensive analysis of KiwiSaver. Bravo!
Allow me to add my two cents' worth of comments to the Q&As in the past two weeks about
painlessly reducing mortgages.
What your reader's financial adviser was referring to is almost certainly a way of restructuring a loan so that you can pay it off faster. In a scenario often postulated and oversold by mortgage brokers, you could in theory pay off your loan in 10 years instead of 25 years.
Such restructuring involves splitting the total loan amount into two portions: portion one, say 20 per cent of the total amount in a floating rate loan, and the remainder on a fixed rate. But it can be any combination.
The theory behind the split loan structure certainly stacks up on paper but is extremely difficult to put into practice and achieve the intended result.
In my 15 years of working in a leading bank here, I have found that having a portion of your loan on a floating rate, and having the ability to redraw this portion of the loan, is almost like committing financial suicide. The temptation to draw on this facility for emergency or other purposes is simply too difficult to resist for the vast majority. Instead of shortening the loan term, it often ends up achieving the opposite.
One sure-fire way to pay off your mortgage earlier and which is seldom discussed anywhere is stepping up your loan repayments at regular intervals. There is a provision in most banks' loan agreements to allow the borrowers to step up their loan repayment by a maximum of 10 per cent of the original repayment amount. Instead of paying $2000 a month, you are at liberty to step it up to $2200, without attracting any
penalty.
During the years when I had a mortgage, I stepped up my fortnightly loan repayment by a paltry $30 a quarter, and then a further $30 the following quarter, virtually every year. A sum of $30 may not sound much (and is something most people can afford if they have a couple of drinks fewer on Friday!), but the effect is compounding.
At the end of the first year, I was paying $120 more a fortnight. In the past several years, I am sure most people would have got pay rises much higher than $120!
If you repeat this process, you will pay off your mortgage in next to no time. I certainly did, without any sacrifices in luxuries like an overseas holiday for the entire family every three to five years.
At a time when interest rates are literally tumbling, I also suggest borrowers keep their old loan repayments, instead of using the saving for other things.
If only people knew how to calculate these things and realised how much more they could reduce the principal amount at a time of low interest rates, I am sure it would send the banks broke.
There are in fact no excuses for not knowing how to calculate your loan payments. The Sorted website is an excellent place to start. The website is inundated with tools for loan calculations. I only wish people knew.
More than a few do - but your letter may put others in the know. The Retirement Commission, which runs www.sorted.org.nz, said just the other day, "January's always busy on sorted.org.nz as people plan for the year ahead, but this January has set new records, with 163,000 visitors to the website - nearly a third more than January 2008."
And one of the most popular tools on Sorted is the Mortgage Repayment calculator, "which can help people review their mortgages in the light of changing interest rates. There were 1.3 million calculations on this tool in 2008, and 216,000 in January 2009," says the commission.
Meanwhile, thanks for several good tips - worth a bit more than two cents, in my opinion. Your warning about loans on which you can redraw is important. For some self-disciplined people it can work well, for others, as you say, it can be a disaster.
Your stepping-up idea is excellent. It's amazing what such strategies can achieve. And, as you say, just maintaining the old payment level when your mortgage interest rate is reduced can be pretty powerful.
For example, on a $100,000 25-year mortgage with a floating rate of 9 per cent, monthly payments are $839. If the rate drops to 8 per cent, your monthly payments would fall to $772.
It would be tempting just to enjoy the lower payments. But if you keep your payments at the old $839, you will cut the term of the mortgage from 25 years to less than 20 years. What's more, you will pay about $23,000 less interest over the life of the loan.
What if the rate drops to 7 per cent? Your monthly payments would fall to $707. Again, if you can resist temptation and keep up the old $839 payments, you will pay off the mortgage in just over 17 years. That's a big difference. And you'll pay more than $30,000 less in interest.
If you have a $200,000 mortgage, rather than $100,000, double the dollar figures above. If it's a $500,000 mortgage, multiply them all by five. Your interest savings from maintaining your old payments will be huge.
Finally, thanks so much for your opening comments. I usually edit them out, but I've had several letters lately complaining about my publishing too many Q&As about KiwiSaver. Given that pretty much every New Zealand under 65 would benefit by being in the scheme, I don't think I overplay it. But it's lovely to have your encouragement.
Reading recently about the reluctance of many to join KiwiSaver, I am drawn to the fact that many people who do not work are unaware that they are still able to join. I have never seen any reference in your column advocating such.
Where have you been? It feels to me as if I'm always going on about non-employees in KiwiSaver - often mentioning that they include children, the self-employed, beneficiaries, people at home looking after children and anyone else not in a PAYE job. Being self-employed myself, I'm keenly aware that we matter too!
But just in case there are others who have missed this point, yes, pretty much any New Zealand resident under 65 can join KiwiSaver. The exceptions are those not entitled to live here indefinitely, such as people on temporary, visitor or student permits.
In your reply to a letter last week, you stated, "There are several levels of commitment to KiwiSaver. If you don't have a job you can do one of the following:" The second bulleted item then states, "Contribute up to $1043 a year, which will be matched by the tax credit, doubling your money."
Maybe I'm missing something here, but you have to have taxable income to get the tax credit. So no job equals no tax credit, right?
In my own case I have a job but my wife does not (apart from the huge unpaid job of raising our five children!). Hence if we put $1043 into a KiwiSaver account for her, since she has no independent income, don't we miss out on the $1043 matching contribution from the Government?
No you don't. The mis-naming of the KiwiSaver tax credit is one of my pet peeves about the scheme. The tax credit has nothing to do with tax.
The Government simply makes a donation into your KiwiSaver account. So your wife will get as much as anyone else.
I've said this often before, too. It's difficult to strike a balance between repeating these important points so everyone sees them and boring regular readers witless.
I have been in KiwiSaver for three months now and I am at the stage where I have to decide which provider I want to go with.
My query is, though, with the recession at the present time, whether or not it would be better to quit the KiwiSaver scheme at the moment and have the money go into an ordinary high-interest savings account and look at KiwiSaver again in 12 months or so. Are you able to give any advice on this?
You can't quit KiwiSaver - unless you were automatically enrolled when you started a new job. And even then, you have to opt out between two and eight weeks after you join, so you've missed that deadline.
However, if you're not an employee, you can stop putting in money at any time. And if you are an employee, you can go on a contributions holiday after you've been in KiwiSaver for 12 months, and keep renewing that holiday indefinitely, if you wish.
But it wouldn't make sense to stop contributing. Within KiwiSaver, you can go into an ultra-conservative fund that's similar to a savings account, if you wish. Several providers offer them. And you'll do much better in the scheme than out, because you'll get tax credits and, perhaps, contributions from your employer.
If you are worried about having an emergency fund in case of a job loss or something similar, and you're an employee, you can reduce your contributions from 4 per cent of pay to 2 per cent from April 1, so that will help.
And if you "suffer or are likely to suffer financial hardship" during your first year of membership, Inland Revenue may allow you to stop contributing before a year is up. They let more than 3000 people do that in the scheme's first year.
Longer term, if you suffer "significant financial hardship" you can withdraw some or all of your contributions, employer contributions and investment returns earned on your money. In other words, you can take out everything but the $1000 kick-start and tax credits - and that's money you wouldn't have had if you hadn't been in KiwiSaver. So I can't see that being in the scheme can harm you.
Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her 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.
