Q: I'm 40 years old and work in a very good paying job in a low-cost-of-living area of New Zealand. I paid off my mortgage last year and am now focusing on saving 50 per cent of my salary for retirement.
My plan was to save for five more years to get me to a total of $250,000 in shares, cash and KiwiSaver and then reassess my life. I don't want to stop work then. I just want to look at different job options, most of which will not pay me anywhere close to what I'm earning now ($95,000-plus).
Trouble is ... I really, really don't like my job, and the thought of spending five more years in it brings me down. There are no jobs in my area that I have the skills for that would pay me anywhere near what I get paid now.
Do I hold on for five years in my current job just for the money, or find a lower-paying job now, even though it'll significantly affect my retirement savings? Thank you!
A: I vote for quitting the job, especially given your age. You have many more years to save for retirement — or, for that matter, to do a course or get other training so you can earn good money doing something you love. There are lots of online courses you could look into.
You've already done well, getting rid of your mortgage before turning 40. You know how to set goals and you're clearly a good saver, so I'm sure you can set yourself up well for retirement without the horrid job.
It's time to treat yourself kindly. Go and get work that makes you smile.
Q: I am in my fifties and recently separated. My ex-partner and I sold the family home and I bought a smaller home last year. I am now back to having a $180,000 mortgage.
I am currently saving towards having three months' living expenses in a separate bank account as an emergency fund, which of course is earning no interest.
A friend suggested a better idea would be to have a small portion of my mortgage — the equivalent of my emergency fund — in a flexible facility on a floating rate. I would only pay interest on it if it is used in an emergency. Then I would top it back up again.
The money in my emergency fund could go towards paying down the mortgage. Is this possible and are there any downfalls to this plan?
A: Firstly, good on you for setting aside some rainy day money. Events of the past year have shown us how important that can be.
It's possible to get the result you want in several ways. And while it might not be worth doing currently — more on that in a minute — it could work well in future.
I assume your mortgage is on a fixed rate for a certain period. You would wait until the term ended and then negotiate a new set-up. Otherwise charges would probably make this prohibitive.
There are three types of mortgages you could use. Not all of them are offered by all banks, but you could switch borrowers.
The three are:
• Offset. You receive no interest on your bank accounts — not that there is much these days anyway. But the balance of these accounts is offset against your mortgage. So if you save, say, $20,000 for your emergency fund, and also have money in an everyday account, both those balances will be subtracted from your mortgage and you will pay interest on that lower balance.
Note that you will have to make the same mortgage payment as if you had nothing in your other accounts. But because you are charged less interest, more of your payments will be reducing the mortgage principal.
Some banks let you include other family members' accounts, so their balances are also subtracted from your mortgage.
Avoiding paying interest on $20,000-plus improves your wealth in the same way as earning the mortgage interest rate on that amount. Not bad.
• Redrawable. You pay extra off your mortgage — in your case the emergency fund money — and can withdraw that extra money any time you need it. In the meantime, it's reducing your mortgage so you pay less interest.
• Revolving credit. Your everyday banking and your mortgage are together in one account, which has a negative balance.
You put all your income into that account, which reduces the debt until you spend that money. In the meantime, you pay interest on the lower balance. You can also park your savings and emergency money there, reducing the debt for long periods.
Note that this works well only if you are disciplined, as you can borrow back to your limit whenever you want to — although with some lenders the limit reduces over time.
Currently, the big drawback of all these facilities is that they are floating rate mortgages, with interest rates well above fixed rates. Because of this, you should have only part of your mortgage as offset, redrawable or revolving credit, with the rest staying at a fixed rate.
Even then, the fixed-floating gap might make the whole thing not worthwhile, especially given that fees are often higher on these loans. "Most lenders charge a monthly fee on these products of around $10 to $15 per month," says mortgage adviser Bruce Patten at LoanMarket.
Whether it might still work for you depends on two factors:
• How much money you will set aside. "Three months' expenses may only be $10,000 for some people, so it probably doesn't warrant the change in my mind," says Patten. But maybe you're talking $30,000. It can also work well for people who sometimes receive large chunks of income and spend that money only gradually.
• Your personality. "My question would be if it's in the mortgage will you spend it? Or can you manage your money to make sure you don't?" says Patten.
To set up the change, your lender may want to reassess your application — especially if you want a revolving credit facility, says Patten. But it will probably be simpler for an offset or redrawable facility.
I suggest you talk over your situation with a mortgage adviser. There should be no charge for that. And note that even if it's not worth making a move now, floating rates are sometimes lower than fixed rates, as our graph shows. When the fixed-floating gap reduces, it's much more likely to work well.
Q: When warning about the potential risk when a 7 per cent return is on offer — as you did last week — you might draw attention to a quite recent episode where chasing returns had disastrous consequences for many lenders.
From Wikipedia: "Between May 2006 and the end of 2012 there were sixty-seven finance company collapses in New Zealand; including companies entering into liquidation, receivership or moratoria. An inquiry by the New Zealand Parliament estimated losses at over $3 billion that affected between 150,000 and 200,000 depositors." Often it was stated that these companies were secure because of the underlying value of the property over which a mortgage was held.
And if anyone suggests, "This time it's different", rest assured, it never is.
A: Indeed. Wise people say those four words are the most dangerous in the investment world.
Most readers will recall the collapses of South Canterbury Finance, Hanover Finance and Bridgecorp Holdings, but I hadn't realised it was 67 companies. Horrifying.
New Zealand regulates finance companies more closely than it did back then. But risky investments are still out there — as they should be. They can work well for investors who are in a strong financial position and understand what they are taking on. Others should give them a miss.
Housing is different
Q: There has been a great deal of comment and angst stemming from the Government's decision to remove the mortgage interest deductions. The argument is generally along the line of "why is rental housing being treated differently to other business investments?"
While buying a rental property does constitute investment as defined in Economics 101, it seems to be fundamentally different from other investments. When buying a piece of capital equipment to produce widgets, the investor is aiming to make a profit selling widgets — and pay tax on that profit — anticipating that the value of the equipment will depreciate.
When buying a house, especially now given the very high price of houses, how many investors are expecting to make a profit from the rent earned? Very few, with the great majority anticipating the asset to appreciate — a profit on which no tax is usually paid.
Am I being unfair and are there other "investments" which are also very like rental housing?
A: Shares are — sort of. Dividends are like rent, and investors in both property and shares hope to make a capital gain.
The big difference is that most people borrow to invest in property, while few borrow to invest in shares. And it's the mortgage payments that slash profits on landlords' rental income, leaving their main profit — from gains — largely untaxed, as you say.
P.S. Some might say dividends are often not taxed because of imputation. But that's just because that money has already been taxed at the company level.
An unhappy landlord ...
Q: Mary, Mary quite contrary ... You are supposed to be giving unbiased comment and advice to your readers and yet you are so against property investors. You say, "If the Government won't introduce a comprehensive capital gains tax — and I wish they would ..."
What have you got against property investors? Are you one of those pathetic renters who spend and spend, hoping that God will send? Then go crying to the Government every day and asking for help.
Many investors sacrificed a hell of a lot to buy their one or more houses. Why are they being penalised for saving and being prudent? Why are other investments not being treated the same way?
The Government and others, who have a vested interest in other investments like the stock market, keep telling us we should diversify and invest into other markets.
Pray, tell me what to invest in that I am in complete control of, without outside interference? In property investment, I make the decision when to sell and to buy, not some other BIGBOY or stock broker who can and does control the market to suit their needs.
A: This is a column, not an article, so I can be as biased as I like. But I do try to be fair. At the risk of sounding rude, can I say the same of you?
A comprehensive capital gains tax would be just that — comprehensive. It would cover all investments. We've discussed this before in this column, at great length, and I don't want to start that going again.
In short, there would be lots of problems with such a tax, just as there are in other developed countries. Nevertheless, almost all of those countries tax capital gains. We should too.
In reply to your other questions: I have nothing against property investors. No I'm not a renter, pathetic or otherwise, or a spender, or a crier to the Government.
For why other investments are not being treated like investment property, see the previous Q&A.
Other investments you have control over? Well you can control your own share portfolio, despite what you say. But sure, the property market is less regulated. And now it's starting to be more so. I thought you wanted fairness!
... and a grateful one
Q: As landlords with a mortgage on a residential investment property, we are directly financially impacted by the loss of interest deductions, and still support it.
We are thankful we do have four years of the change being phased in to budget for it or consider other options (although a significant rent increase is not an option we would consider). Not all landlords are horrible people; many of us work hard to make it work for both parties.
A: Thanks for writing, and for being big hearted.
- Mary Holm, ONZM, is a freelance journalist, seminar presenter and 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 firstname.lastname@example.org. 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.