Q: I am in my early fifties and my husband is in his early sixties. We became mortgage-free five years ago. My husband is big on saving for our retirement, while I would like to live a little.
Rather than putting our extra money into property, we have been paying into a managed fund. This fund is now building nicely and we also have over $100,000 each in our KiwiSaver accounts. We aim to continue working and contributing to KiwiSaver for at least another 10 years.
Recently we have been thinking about moving from our inner city family home to a lifestyle block. We are both active relaxers and have dreamt about this for a while.
However, it looks like we may need to take out another mortgage (possibly up to $150,000) to live out this dream.
I am not sure if this is a wise move. Does it make sense to get another mortgage at our age and thus stop contributing to the managed fund? Or do you think it will even out in the end (capital gain versus managed fund), when we move back into the city in our seventies?
A: I wonder if the difference in your ages affects your attitudes to saving? Anyway, I'm all for you two following your dream.
It might mean that you end up worse off, but you also might be better off. It's not just a question of comparing growth in your savings with growth in lifestyle property values.
There's also growth in the value of rural properties versus city houses, given you want to move back to town later.
We're talking perhaps 20 years, so we would expect them all to grow considerably over that period. But nobody can predict which will grow fastest.
Whatever happens, though, it seems highly unlikely you will end up financially struggling.
And the mortgage is not a worry in itself — especially given that you have savings. If the lifestyle block is currently worth $150,000 more than your house, it will probably also be worth more than the house you move back to later on.
By then, hopefully, you will have repaid the mortgage. So the money you free up by "trading down" will make up for the lack of new contributions to your managed fund in the meantime.
In short, go for what you want. And if that turns out not to be the best choice financially when you come to sell the lifestyle block, just look out over your beautiful rolling meadows and smile.
Money should be a means to an end, not an end in itself.
P.S. I love the term "active relaxers".
Q: Like many others, I started investing in shares during lockdown. My father, however, has invested in NZ shares for many years and supplements his income from dividends.
All our shares are on the NZ sharemarket (NZX). We like to think that by focusing on the NZX we are somehow supporting New Zealand business. There is a common complaint that by investing in property, New Zealand business is missing out on much-needed investment, and we like to think that by buying NZ shares we are somehow helping our own country.
I have heard you say on the radio that you recommend also spreading investments to the Australian and US stockmarkets.
Given that I really would like to do something to help little old New Zealand keep its head above water and invest in our own businesses, am I being naive to think we are being altruistic for all the right reasons?
(My son invested in Hatch and US shares, and has doubled his money — on paper — from US$30,000 to US$60,000!)
A: I actually recommend investing not just in Aussie and American shares, but worldwide shares. The easy way is through a low-fee international share fund, run by a New Zealand provider.
The reason is clear. You reduce your risk by investing in many different industries and many different countries. They won't all plunge at once.
But what about supporting local businesses? It's a fair point, but there are a couple of counter arguments:
• By buying shares in the market, you are only indirectly supporting business. Your money doesn't go to the company, but to whoever is selling the shares.
It's different, of course, if you buy shares in an initial public offering, or IPO — which involves new shares coming onto the market — and the company uses your money to expand their business. But most share purchases aren't like that.
Having said that, the more people who are buying New Zealand shares, the more likely it is that there will be IPOs.
• I argue that it's better for the New Zealand economy, as a whole, if we all hold considerable offshore investments.
Think about what would happen if this country were hit by a major economic crisis, such as a terrible agricultural disease or disruption from a big earthquake or eruption. Or what if a Covid-like virus broke out and took hold only in New Zealand? As we have learnt in recent years, anything can happen.
Such a disaster could see profits plunge, unemployment soar and the value of many New Zealand shares plummet.
The more New Zealanders who could cash in overseas investments — which would have retained their value — the better off everyone will be.
Footnote 1: One argument in favour of local shares is dividend imputation, which means you get credit for the tax already paid on company profits, and so you are not taxed again when those profits are paid out as dividends. This doesn't happen on international shares. It's one reason why it's good to have, say, 20 to 30 per cent of your shares based in New Zealand.
Footnote 2: It sounds as if your son has done really well over a very short time. I hope he doesn't let it go to his head and put in more money than he can afford to play with.
The same goes for you, actually. The recent surge in interest in share investing is great. But I worry that people will start thinking shares nearly always rise. And, worse, that they decide they have a gift for picking which shares will do best.
Nobody can do that consistently, and especially not amateurs. By all means invest in shares — local or otherwise — but:
• Buy a wide range of shares or use a share fund.
• Use only money that you don't mind losing, or that you can lock in for 10 years or more. Long term, shares rise. Short term, it's anybody's guess.
• If you must trade often, be aware that the most successful share investors are those who buy and hold, preferably for decades.
Q: What are the best strategies for single boomers — 55-plus, no children or partner to leave money to — to use their hard-earned money now tied up in mortgage-free properties?
I have met more and more people in this situation nowadays, and traditional financial advice doesn't apply to them.
A: It seems to be a growing trend for people with mortgage-free homes to think that they should somehow make use of the "tied-up" money.
The idea is usually to take out a mortgage and invest in a rental property, or perhaps shares or a share fund. And these days, there's a pretty good chance you will earn a higher long-term return on your investment — after fees, tax and other costs — than the mortgage interest rate, so you'll come out ahead.
But do you want to? You have to select the best investment for you. And there will — not "might" but "will" — be times when share and property prices drop, and that could be nerve-racking. With rental property there can also be lots of hassles.
The fact is that the tied-up money is already bringing you a good return, in that it provides you with free accommodation — apart from costs like maintenance, rates and insurance. Compare your housing costs with someone paying down a mortgage or paying rent. You are much better off.
And leaving your money "in your house" is much easier and less worrying. It's what I've chosen to do.
However, as you get older you might want to consider a reverse mortgage to finance your spending if you're short of cash.
That would let you run up a debt, on which you make no repayments of principal or interest until you move out or die. At that point the loan is paid off in a lump sum.
While reverse mortgage interest rates are considerably higher than on ordinary mortgages, a reverse mortgage lets you enjoy some of your tied-up money.
It's important to note, though, that these loans can grow fast, with compounding interest.
I don't recommend a reverse mortgage until you are at least 75, and preferably 80, unless you have a short life expectancy.
You can read more on what to take into account by clicking on "reverse mortgages" under Topics on www.maryholm.com. For another idea on how to use tied-up money, read on.
A helping hand
Q: Just a comment on a good landlord. I have a friend who has had a couple of rentals.
She had a casual friend who had been saving for a long time and renting, not able to save enough deposit, so she decided to give her a leg up. She used the equity in her home to buy a property with the lady.
Lady had to pay all costs and the mortgage for two years. They had the property revalued and the value had risen a lot. So the lady was able to borrow more, take over the house totally in her name, and pay my friend back. It worked for lady and daughter — they have their own home.
She also knows a young builder, wife and kids who are saving hard but ... She is considering offering them the same deal. My friend is a good lady.
I would like to do something similar but I'm too old and haven't a well paid job. I am mortgage-free. If I had extra in the bank to cover for a few years I wouldn't have a problem. I will help towards my grandchildren somehow.
A: Good on your friend. What she did is a great idea, which others might want to copy — as long as:
• They can count on the people they help paying them back.
• House prices rise. If prices stabilise or fall for a while, it might be a long time before the money comes back. Given the way the Government has been talking lately, I would hate to see anyone counting on big house price rises continuing.
On your desire to do something like this, it sounds as if you are not in a strong enough position financially.
It's not uncommon for older people to want to — or feel pressure to — financially help their children, grandchildren or others. Sometimes it's contributing to a house deposit, or guaranteeing a mortgage.
The rationale goes: "The young ones need the money now, not when I die." In many cases, that's good thinking. But only if the older person can spare the money and still have a comfortable retirement. I've seen elderly parents sacrifice for their family, only to watch the younger ones later enjoying a higher standard of living than their parents.
Mortgage guarantees are particularly tricky. Before anyone guarantees a loan, please consider how you would manage if the borrower defaults and you have to come up with the money. Unforeseen stuff happens. People lose jobs, businesses fail, or marriages fall apart. I've heard of retired people losing their homes in these circumstances. It must be devastating for family relationships too.
So lend or give what you comfortably can. The kids and grandkids can get the rest in your will — or perhaps when you are 85 or 90 and have a clearer picture of how much you will need for the rest of your life.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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 email@example.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.