Q: Last week you had a Q&A about a woman who helped others buy their homes. I was very lucky to have a brother who was in a position to help me out.
Instead of guaranteeing my mortgage or becoming a joint owner, his bank manager suggested he put the equivalent of the deposit in a loan in my brother's name. This ringfenced his risk rather than leaving it open ended, which can happen with a guarantee.
I was able to make the repayments on both loans directly. I was paying off the loan in my brother's name over a much shorter period than the balance in my name, and after a couple of years I was able to refinance and repay the loan in my brother's name.
The bank manager laughed at my meeting with him. He said there were two types of people in the world: those who could save and those who could repay loans. "You're the latter and we love people like you. It's you who we make our money from."
A: That bank manager makes a good point. It's much better if you can save for something rather than borrowing to buy it. Though interest rates are at historical lows, earning interest still beats paying it. You want to be the winner, not the bank!
Anyway, that was a clever way for your brother to help you — and something some parents might consider doing for their children. Apparently, many would-be first home buyers could manage to make payments on a mortgage — which are sometimes less than they are paying in rent — but they can't get together a big enough deposit.
I like it that your brother wasn't exposed to the risk of having to pay for the whole house.
In any situation like this, though, everyone should agree in advance about what's going to happen if the house buyer can't repay the loan as soon as expected — or possibly ever.
I mentioned this briefly last week, but it needs to be underlined. All participants in any family loan should sit around a table and make a list of all the bad things that could happen — disability, death, a partnership break-up, job loss, bankruptcy. Be really gloomy with your scenarios. Then agree on how the loan would be resolved in each situation.
It wouldn't be silly to include siblings who are not getting a loan — so they don't later complain of unfairness.
Put the agreement in writing, with everyone signing it, so there can be no claims of misunderstandings later. This could avoid a lot of anger and heartache.
P.S. A lawyer tells me such an agreement would have no legal standing unless the lender and borrower each had separate legal advice. Some families might want to get that advice. But others might feel that having an understanding of expectations in different situations is enough.
Finding a fund
Q: In your last column you wrote: "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". Can you tell us what some of those are please?
A: The best way to find info about any New Zealand managed fund is through the Smart Investor tool on sorted.org.nz. It covers KiwiSaver and non-KiwiSaver funds, and includes index (or passive) funds — which I prefer — and actively managed funds.
Unfortunately, Smart Investor doesn't separate New Zealand and international share funds. But there's a way around that. Here's how to use the tool:
• Click "compare" at the top, and then "KiwiSaver and Managed Funds".
• Click "managed funds" and "aggressive". The tool defines aggressive funds as those with 90 per cent or more growth assets — shares and commercial property. Obviously, you'll skip the property funds, but consider share funds that hold a small percentage of non-share investments. That doesn't really matter.
• Scroll down a little and you'll see a "sort by" box. I suggest you click "Fees (lowest first)". As I've said many times, high-fee funds don't tend to do better than low-fee funds over time, so go for low fees and keep more of the return for yourself.
• Up will come a list of funds with some basic info about each. If you want international share funds, choose them by their names. Look for words like "global shares", "total world", "overseas shares" or "global equities", and tick the "Compare" box to the right of those fund names.
• Stop when you have about half a dozen funds in your "Compare list" — scroll down to see it. Then click on each fund's name to get all sorts of information, including the provider's brief description, and the top 10 investments.
You'll notice that some funds are fully "hedged", some are only partly hedged and some are unhedged.
Hedged funds use financial instruments to remove the effects of foreign exchange movements on the value of your investment. This is a plus sometimes and a minus at other times, depending on how the Kiwi dollar is faring.
We can't know what future exchange rate movements will be, so you might want to choose a fund that is partly hedged. But I wouldn't let that drive your choice. Share values fluctuate anyway, and a lack of foreign exchange hedging just adds to the fluctuations.
By the way, Smart Investor lists managed funds at all risk levels. You can also use it to find, for example, low-risk defensive or conservative funds that might be a substitute for bank term deposits.
Q: On investing in overseas shares, people should check if the Foreign Investment Fund rules for returning income on their overseas investments apply to them. Also, someone who buys and sells often could be considered a share trader for income tax purposes.
A: You're correct if we're talking about investing directly in overseas shares. But if you do it the way I suggest, through a New Zealand-based international share fund, that's all taken care of for you.
Sure, you will pay fees — often higher than on share funds based elsewhere. But I think it's worth it because you don't have to worry about the complications you mention. It also makes things much simpler after you die.
Southern Cross queries
Q: A while back you published some letters re Southern Cross Health Insurance. Many may not appreciate that their last annual report noted a surplus after tax of $32.4 million, investments of $535m (a massive amount for a "rainy day"), and net investment income of $19m (only 3.6 per cent on the $535m). I would appreciate your asking Southern Cross the following questions ...
A: You've raised some interesting issues. Here are your questions, with Southern Cross' replies:
• What is their total investment target? ($1 billion?).
Southern Cross doesn't have an investment target as such. "The size of our investment portfolio is primarily determined by our need to exceed the minimum solvency requirements of the RBNZ's solvency standard." As the business grows, so do those requirements.
• Why is it so high now?
"The reader is focusing on the 2020 results, which did show a reasonable surplus, but on balance over the past five years surpluses have not been that large." For example, in 2018 the investment portfolio totalled $482m, compared with the current $535m. "Over the course of those five years, the society's investment portfolio didn't grow as quickly as the business."
• Why can't the annual surplus be reduced to an average of say $5m a year?
"That amount isn't enough to keep pace with the ever-increasing minimum solvency capital requirements set by the RBNZ as the society's business grows.
"The society currently runs a solvency ratio of just over three times the minimum solvency capital set by the RBNZ." On average, that requirement increases by about $7m-$8m a year. That means "the society needs to make a $21m to $25m surplus per year.
"To put it another way, our financial statements stipulate we aim to hold between five to seven months' worth of expected claims for the 'rainy day' the reader talks about.
"Back in 2016, claims were $748m. In 2020, they were $972m. In order to stay at the midpoint of our target i.e., six months' worth of claims, our investment portfolio should have grown by $112m. It has only grown by $13m.
"Over the past five years the society has been doing what the reader is asking in the next question, which is keeping premiums and surpluses lower and allowing its solvency ratio to decline a bit."
• Why couldn't the residual be used to reduce the annual premium of long-standing members?
Long-standing members already get a better deal than newer members of the same age.
"This is because they tend to claim significantly more, because the longer they have been a member, the more likely it is they have built up health issues covered by their policy.
"When looking at offering a premium discount of any sort to some members, it's important to consider other members would need to fund it by paying higher premiums, because as a member-based health insurer, we don't have any profit margin that we can use to fund discounts of this kind.
"However, we do apply a low claims discount of up to 10 per cent to a member's premium at their policy renewal" when eligible.
• Why doesn't Southern Cross invest in a variety of sharemarket funds to improve its 3.6 per cent return to further reduce premiums?
"We already do. About 20 per cent of our investment portfolio is invested in growth assets such as international equities, listed property and infrastructure."
However, investing in these assets increases investment risk, and there are also "heightened minimum solvency capital requirements laid out in the RBNZ solvency standards.
"That solvency constraint is specific to insurers and not one most other investment portfolios have to deal with. The upshot is that the society does not have a lot of room to invest more than the current 20 per cent in growth assets."
My comment: It seems the Reserve Bank rules — which are there to make sure insurance companies can pay claims — govern a lot of this. Southern Cross needs to operate with a buffer in case claims suddenly increase.
If the society broke the rules, the Reserve Bank could intervene, and things would get pretty messy.
Lifestyle or workstyle?
Q: Just a note for last week's correspondent thinking about moving to a "lifestyle block". Please note that we call our small one (approximately one hectare) a "workstyle block". You'll need to be more than an active relaxer to find the time to relax. Having said that, when it's time to pick the avocados, life is good!
A: Sounds as if it's all worth it.
Win a book
My new book, A Richer You: How to make the most of your money, is coming into bookshops about now. It's based on some of the best Q&As in this column over recent years, and shows how the rules of finance apply to real people, with their fears, foibles and family issues. There's even a bit of fun!
The publisher, HarperCollins, is giving away six copies to readers of this column. To be in to win, email saying why you should be a winner, in 12 words or less, to firstname.lastname@example.org by midnight on Tuesday, March 16. Be clever, funny or pathetically needy! Please put "Win a book" in the subject line, and include your mailing address.
Winners will be listed in this column next week.
- 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.