Is it risky for all my family to be with the same KiwiSaver provider?
OPINION:
Q: I read two of your books and they inspired me a lot. Thanks to you, we have managed to get enough deposit for our first home.
We are a young family with a two-year-old. I found a two-bedroom brand new freehold terrace house in a well-established area in South Auckland for $799,000, which I think is a good deal. But a friend keeps telling me that I should rent for now, then look at some cross lease existing three-bedroom homes with this budget, as the terrace house has no growing potential.
Our budget is extremely limited. We wanted a hassle-free new home but are worrying about future growth.
I believe that this property is enough for what we need now, especially with a small budget, but I'm wondering if she's telling the truth and I have ignored valuable advice. Is there really a perfect place for current comfortable living and future growth?
A: There are real estate "no-nos", such as, "don't buy the best house in the street, but rather the worst house". But beyond that, how can anyone know which types of houses have the most growth potential?
If, for example, the experts thought the value of cross lease three-bedroom homes was likely to grow faster than most other properties, many people would be keen to buy those houses. And whenever there are many keen buyers for something — from shares in a promising company, to courgettes out of season — the price rises. Unless you get in at the very start, you'll pay the higher price, reducing the chances that you will sell later at a big gain.
I'm not saying the property market always operates efficiently. Most properties are unique, and many buyers and sellers are not well informed. But still, I can't see how your friend can predict price rises.
She has perhaps noticed that cross lease homes tend to be cheaper than other similar properties. But there's a reason for that.
"Cross leases are probably the most complicated form of property ownership in New Zealand, and lots of people struggle to understand them," says settled.govt.nz.
"If you buy a cross lease property you become a part owner of every building on the plot of land, not just the one you occupy, with the other leaseholders."
This can lead to difficulties, such as when you want to make alterations to your home. Knowing that, many would-be buyers avoid these properties — which would tend to keep the price lower when it's time for you to sell.
Meanwhile, who knows what will happen to the terrace house value? It will be cheaper now than a similar home in a high-income suburb, but that doesn't mean its value won't grow as much as elsewhere.
In any case, I don't think future value should be the main criterion when choosing a family home. You sound keen on the terrace house, and I would say go with it!
By the way, the settled.govt.nz website is run by the Real Estate Authority — an independent government agency that regulates the real estate industry. It has heaps of easy-to-read information about buying and selling homes.
Thanks for your first comments. It's great to know that my books were helpful!
Q: I've switched my KiwiSaver to a low-fee fund as you've suggested.
I'm keen for my husband and also my two teenagers (both work part-time and we top up their KiwiSaver to get the government subsidy) to switch.
Is it okay for the whole family to be with the same provider? Or is it better if we're with different providers in case something happens to the one provider?
A: I think it's fine for family members to be with the same provider.
A provider could, of course, go out of business. Some small ones have. But when that happens your account is transferred to another provider, and if you don't like the new one, you can always switch.
What if the failed provider had taken some of your money? That's extremely unlikely. Independent firms of supervisors make sure providers invest your money properly, and the Financial Markets Authority regulates both.
While there is no government guarantee, it's hard to imagine anyone losing their KiwiSaver money that way.
Still, it doesn't hurt for family members to try two or three low-fee providers — perhaps to see which one offers the best communications and services — and then you could all switch to the best one.
Q: As a grandmother, can I contribute to a KiwiSaver account in the names of each of my grandchildren, with the permission of their parents of course?
What is the earliest age at which a child can have a KiwiSaver account?
A: As soon after birth as the parents get the child an IRD number. They can go to tinyurl.com/IRDNumber to find out how to do that. The parents can then sign up the child through a KiwiSaver provider.
"If you're under 16, you need the consent of all your legal guardians. You cannot enrol yourself," says Inland Revenue.
A provider adds, "all providers need to go through the standard AML (anti-money laundering) process, and so the provider will do AML on the parent enrolling the child and the child. In most cases this will involve the birth certificate, though in some cases there will be a passport of the child.
"From this the provider will determine who the guardians are and who needs to sign. This is problematic for families where one parent is not in New Zealand or around. But most providers will make a practical commercial decision when one can't be tracked, as there is no penalty."
That's good to know. There used to be sad stories of children unable to join KiwiSaver because of a parent's absence or lack of co-operation. It's hard to imagine future lawsuits over: "You should not have signed my child up for KiwiSaver!"
Just to complete the picture, Inland Revenue says, "if you're 16 or 17, you need at least one legal guardian to co-sign your application. If you do not have a legal guardian, contact your chosen KiwiSaver scheme provider."
Okay, on to your question about contributions. Anyone can contribute to anyone else's KiwiSaver account, with or without permission, but you need to know the person's IRD number.
If you know the provider, you can give the money directly to them. If not, pay it to Inland Revenue and they will pass it to the provider.
You can't dictate the fund your money goes into. It will go to the fund chosen by the KiwiSaver member or, in the case of a child, their guardian.
There's one more question here, and that is whether it would be better for you to contribute to non-KiwiSaver accounts set up for each grandchild. Then the money could be spent on their education, or perhaps starting a business or helping them in some other way, as opposed to just on buying a first home or retirement. Not everyone wants to become a home owner in New Zealand.
Note, though, that when a teenager gets to 18, it's great if parents, grandparents or others can contribute to the young person's KiwiSaver account if they are earning less than about $35,000 a year.
On earnings of $34,762 or more, if the member contributes 3per cent of their pay to KiwiSaver, that will total $1043 or more — enough for them to receive the maximum government contribution of $521. But on lower, or no, earnings, they probably won't be putting in enough to receive that maximum. With your help, they can get more. See the above Q&A as an example.
Q: A comment on last week's letter about investing a six-year-old's $40,000 inheritance for her future education. Invest in high dividend Vanguard ETF (exchange traded fund) shares through Hatch! They pay quarterly.
At six years old, in 10 years that could be worth $200,000! She could use the dividends to pay for school, and still have the capital for other times during her life. And the other advantage is you withdraw the money if required very quickly.
A: An interesting suggestion, with pluses and minuses.
Last week I suggested the girl could start out in a higher-risk, low-fee managed fund outside KiwiSaver. That's not unlike your idea, although I was thinking of New Zealand-based funds listed in the Smart Investor tool on sorted.org.nz.
You've gone for a US-based Vanguard fund, which will charge remarkably low fees.
However, tax on such an investment is more complicated than on a local fund. The Hatch platform offers help with tax, but it's still an issue that some people wouldn't want to bother with.
Sorry but your estimate of the girl's $40,000 growing to $200,000 over 10 years is overly optimistic. She would have to earn an average of 16per cent a year, including dividends! At a more realistic annual average of, say, 7per cent, the money would grow to $80,000 — still not bad.
But there's another issue. Last week I suggested the girl's risk should gradually be reduced. "When the girl is within nine or 10 years of spending the money, move it to a middle-risk balanced fund — to avoid being hit hard by a long-term market downturn.
And when there are only two or three years to go, move it to a cash fund." Even that assumes whoever is running the account could cope with the fluctuations of higher-risk funds at the start of the journey.
If instead the girl stayed in a Vanguard share fund the whole time, there's a risk the money could suddenly lose heaps right before she plans to spend it.
Still, you could argue that she could leave the money where it is and use a student loan, which she would repay after a market recovery.
It all depends on how much volatility, and the hassle of taxes, the adult running the investment wants to take on.
On withdrawing quickly, that shouldn't be a problem in any of the non-KiwiSaver funds.
Readers interested in your idea might want to check out other share trading platforms such as Sharesies and InvestNow. All of these have children's accounts. To compare the platforms, see moneyhub.co.nz/investment-apps.
Q: Your recent article about the older couple unable to get a mortgage struck a nerve with me. Even though I have millions of dollars of equity, the banker advised me I was too old, at 66, to take out even a 20-year mortgage. Apparently the bank's cut-off age for loan servicing is 85. And they expect you to have full-time employment. My huge equity and 20- or 30-year relationship with the bank means nothing. Boomers are stuffed.
A: Not necessarily. "Just because one bank says no, it doesn't mean that all the banks will say no," says Bruce Patten, a mortgage adviser at LoanMarket.
He describes two scenarios that can apply:
• "Owner-occupied lending. Basically, anyone getting to retirement will struggle to get funding on an owner-occupied property. Some banks want the loan to be repaid by age 70, and some want it repaid by 75, unless you can demonstrate a clear path of clearance by the time you retire.
"This could be a large superannuation fund that is maturing and could clear the debt. It could be the sale of a property that has been inherited etc. Under these circumstances the bank might extend the loan term to make it affordable until that asset comes through to clear the loan.
• "The second is when someone owns existing property, worth say $2 to $3 million, and wants to invest in something else, like another rental.
"Under these circumstances the bank is likely to be less concerned about a longer term such as 30 years if the owner-occupied property is mortgage-free. This is because the rental could always be sold when the client retires in order to clear the debt.
"There is no real rule of thumb here, as long as they meet the servicing criteria when they apply for the loan.
"The main thing that you need to understand is that if you have lots of assets, ie you are asset rich, but cashflow poor, the bank just won't rely on your assets like they might have in the past."
Try some other lenders, or consult a mortgage adviser.
Footnote: Several other readers sent supportive letters to last week's correspondent, suggesting possible steps she could take. I forwarded those letters, and she has expressed her gratitude.
- 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 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. 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.
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