Mary Holm: Risk the equity in family home or kick back and watch my mortgage go down?

You could take on the risk of investing your equity in the family home — or you could simply kick back and watch the mortgage go down. Photo / 123RF

OPINION:

Q: My wife and I are both teachers and thinking about how we can get mortgage-free before we retire. We have two young children, 8 and 11.

We own a house on Auckland’s North Shore valued at about $1.3 million with a mortgage of $217,000, which we are making maximum repayments on. We have followed your investment strategy of investing in KiwiSaver and managed funds, which total about $350,000. I have 10 years until retirement age, my wife 18.

We are thinking about using the equity in our family home to invest in rental property and have been in discussions with a company that specialises in this, offering a holistic service including property management (which we would use).

They offer only new builds in high density developments in Auckland, and their model is based on clients paying interest only and making capital gain — over a 10-year or longer investment horizon — which is what we would intend.

Notwithstanding the current trend in interest rates and house prices, do you think this is a wise move or are there other ways of using the equity in our family home that we have not thought about? As always your advice is greatly appreciated.

A: Before you do anything, Google the company name along with the words “review” and “scam”, to see what comes up. Also search for the name on the FMA website. This is an easy and important first step for anyone looking into any investment or financial service.

If you don’t find anything worrying, you will probably do okay, and possibly really well, in a plan like this — as long as you stick with the 10-year-plus horizon, and feel sure you won’t ever be forced to sell at what could be a bad time. Over a shorter period your risk rises considerably.

Keep in mind that the company will be taking its share. You’re sure to end up with considerably less than if you did it all yourself.

And there are risks. For one thing, some experts question the quality of all the new high-density homes being built. They look flash when new. But could some of them become the slums of the future, with a shortage of good tenants and slumping values? If you’re keen to take part, I would get an independent building inspector — hired by you, not the company — to check out the quality of the property.

And what if the Auckland population decline continues? That will also affect property values.

What it boils down to is this: Do you really need to “use the equity in your home”?

It’s a phrase much used by property sales people. And in the recent years of big property price gains, many people have done well out of borrowing against their home equity to invest elsewhere.

But there’s certainly no guarantee that will continue.

There’s nothing wrong with feeling content about reducing your home mortgage and finally paying it off. Your “use of the equity” is knowing that you face no more mortgage payments, and the security you gain — including the knowledge that you could borrow against your home if an emergency should arise. That seems like a good use to me.

Meanwhile, instead of paying interest to the company, you could be boosting your KiwiSaver contributions, and quite possibly ending up better off. It would certainly be simpler.

Q: I am in the fortunate position of having subdivided my current property into three and am putting a small house on one section. I have been considering whether to sell or rent my existing house with a value of around $650,000. The third property, my empty section, is worth around $250,000.

I am 56 and semi-retired — trying not to work as much as possible while still having some money to live. Once my small house is finished I will have a mortgage of about $100,000, with a flexi mortgage up to $250,000.

My initial thought was to sell the house, pay off the mortgage and keep the empty section until I need cash in my retirement. But I have now been considering renting out the house. Market rental has been assessed at $550 per week. I also have KiwiSaver of around $140,000. What do you think would be better?

A: It’s becoming more common for people to boost their wealth by subdividing their land now that it’s legally easier to do that. As you say, you’re lucky to own a big enough section.

Should you sell your current home once the new one is built? Like the couple in the above Q&A, there’s no way to tell whether you’ll end up better off financially. Nobody knows what will happen to house prices, or to the low-fee managed funds — in or out of KiwiSaver — that I suggest you invest in if you sell.

So — what would you prefer? Do you like the idea of being a landlord? Some people enjoy providing housing for others, and perhaps doing their own maintenance work. But could you cope with difficult or non-paying tenants living right next door?

Selling the house would make it easy for you to work less. Your spending money for the next few years could be in lower-risk funds, and long-term money in higher-risk funds. This could be supplemented by KiwiSaver after you turn 65, and the sale of your section, perhaps whenever property prices are growing fast.

Not sure which way to go? Perhaps rent the house out on a one-year lease — telling the tenants from the start that you might sell in a year. Then, if you’re not enjoying the landlord role, you could put the house on the market.

Whatever you decide, you should be comfortably off.

Q: I am reluctant to resist a bit of tongue-in-cheek comment on your oft repeated observation (including last Saturday) that it’s fine to move house at any time, as you’re selling and buying in the same market. But that surely comes with a few provisos.

First of all, you are assuming that capital gain has been at the same rate in both locations, and that the move is into a similar class of property and in a similar area. Your new mortgage may also well be at a different rate from the old one, as may be your insurance premiums and the council land taxes, and then there are the costs of the actual move and the real estate agent’s fees.

The differences may not all be in the same direction of course, and some may cancel out some of the others.

A: Hang on a minute. Last week I said, “When house prices fall everywhere, it’s fine to move house, as you’re selling and buying in the same market.” But I added that it’s not good to sell and move to an area where prices haven’t dropped. I think that covers your first concern.

On whether the two properties have to be of a similar class and in a similar area, I think you’re splitting hairs. Sure, rates of decline vary with house type and neighbourhood — as do rates of increase in an upturn. But broadly speaking, as long as prices have fallen in both your old and new regions, moving won’t be disastrous.

The rest of your concerns apply whether house prices are on the rise or the fall.

Okay — what with tongues in cheeks and hairs splitting, perhaps it’s time we both smiled!

Q: We have recently sold our property privately — without an agent — partly thanks to your advice.

Here is a post I prepared for a Private Sale Facebook group that I am a member of, which may be of interest.

Private Sale — luck of the draw?

We recently decided to sell our rental property and chose to try to sell privately. For a $630,000 property, agent fees can be over $25,000.

We spent a lot of effort on:

● Painting (inside and out), putting down new carpet, and tidying up the section.

● We took our own photos with our phones, and were always seeking better shots.

● We made up colour information sheets, some printed on light card.

● We made a smart open home sign which we could easily put out when we were around.

● We contacted a company to “dress” the kitchen, sitting room and dining room. ($1800)

● We put in new shower walls.

● We created a Trade Me listing. (Bronze $699)

● We posted in the Private Property Sales Group.

● We purchased a smart yellow For Sale sign with contact details on it. ($35).

Some things that did not work so well:

● The house dressers refused to work with me because we were selling privately.

● Some kids ripped the sign off and I had to buy a new one.

● We specified in all advertising, promotional posts and materials that we did not want inquiries from agents. We were approached by at least six agents, who just “wanted to help”.

Some things that worked well were:

● We were able to put the open home sign out for long periods of time — such as when we were working on the garden.

● We had a sign on the door saying to call for viewing and that we could be there in one minute. (Living next door helped).

● We constantly tweaked the Trade Me listing, with better photos, descriptions and updated valuation info.

● We also continuously improved the garden by weeding, mowing and making neat edges. Also minor little repairs to the house.

● We tried not to oversell to prospective buyers. We gave good relevant information, let them discover things for themselves, but were nearby to answer any questions.

● We also wrote to financial commentator Mary Holm, who gave us some really good advice, mainly to look at www.settled.govt.nz

Most lawyers are also an invaluable source of real estate advice, and usually handle the more complex parts of the transactions anyway.

Initially we showed a lot of people through the cottage. Saturday mornings and Sundays were the best times. Being on a busy street helped us. We had quite a few “tyre kickers” and dreamers, plus some who seemed really interested, but from whom we heard nothing more.

In the early days we carefully watched the views and watchers on Trade Me, but came to realise that it didn’t mean a great deal. Although we had around 2500 views and 37 watchers, in the end it took just one person to fall in love with the place. The buyer saw our Trade Me listing, visited that afternoon, and after one more viewing bought the property.

As far as negotiation goes, as long as you have a clear bottom figure in mind it’s not that hard. We came quickly to a fair and amicable agreement. Your lawyer can help with negotiations if required. Your lawyer initially needs to know the agreed price, settlement date, and deposit sum required.

Overall, you’ve got little to lose by trying a private sale.

I’ve concluded that apart from effectively communicating that the place is for sale and presenting the property well, the rest is the luck of the draw!

A: Your letter is way longer than the ideal 200-word maximum. But I expect more than a few readers will be clipping out this Q&A to refer to when needed.

I’m glad my tip about settled.govt.nz was useful. It has great, unbiased advice about buying or selling a property, with or without an agent. The section on private sales is at tinyurl.com/PrivateSalesNZ

- 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.