Q: I have $150,000 in a number of term deposits held at a single prominent bank, maturing at six- to eight-week intervals through to late 2021. I try and reinvest as much as possible as each one matures.
My questions are:
• If a deposit insurance scheme is introduced, how would my term deposits be treated? Would they be subjected to "the treatment" en masse or one by one?
• In these circumstances would I be better off distributing the term deposits with the other banks?
• I am also concerned that quantitative easing and its relatives will push so much money into the system that either hyperinflation or, perhaps worse, hyper-deflation occurs. In the latter case may it mean that house prices could fall substantially?
By the time I leave my beloved home on the water, I would like to think that between sea level rise (maybe a metre in the next 30 years) and deflation, that it might be worth something to my heirs.
A: First we'll set the scene. Last December the Government said the deposit insurance scheme was not expected to be in effect until 2023 at the earliest.
But in last weekend's Herald, Reserve Bank governor Adrian Orr told Liam Dann that work is being accelerated on deposit protection, so it might happen sooner.
In the meantime, we're operating under Open Bank Resolution, or OBR. This means that if a bank fails, a portion of all accounts would be frozen and you may not get all that money back later. But the bank would stay open, and a "de minimus" amount in each transaction account would not be frozen, so everyone could continue their day-to-day banking.
Okay, let's look at your questions. Finance Minister Grant Robertson said in December that "deposits will be insured up to a limit of $50,000 per depositor, per institution". So all your deposits would be treated "en masse" as you put it.
Robertson added, "This limit would fully cover the vast majority of depositors, thought to be 90 per cent or more." But not you, with your total deposits easily exceeding $50,000.
However, he said, "depositors could obtain coverage for more than $50,000 by splitting their savings across accounts held at different deposit-taking institutions." So yes, it would be wise to spread your money around.
The same advice applies under the current OBR scheme. If a bank fails, "the same proportion of funds is frozen for someone with five $10,000 TDs and someone with one $50,000 TD," says a Reserve Bank spokesperson. But it would be different if you were in lots of different banks, which won't all fail at once.
On your third question, the spokesperson says, "The Reserve Bank has implemented a number of measures to support the New Zealand economy and ensure the financial system is functioning well during these testing and uncertain times.
"The Large Scale Asset Purchases (LSAP) programme will buy up to $30 billion of New Zealand Government bonds in the secondary market over a 12-month period. Also known as quantitative easing or QE, the programme will lower borrowing costs for households and businesses and inject money into the economy and build confidence."
On your inflation and deflation worries, he says that QE "is designed to help meet our monetary policy objectives of low and stable inflation and supporting full employment.
The Reserve Bank will closely monitor the programme, and modify it as needed.
"There appears little risk of hyperinflation given the sharp fall in economic activity due to coronavirus, while the initiatives announced by the Reserve Bank and Government will mitigate deflation impacts and help support the economy, prices and jobs." I hope that's comforting.
Q: I read that the Government intends to introduce deposit insurance cover for my money in banks, but only to a maximum of $50,000 per bank.
I am not sure if the Government has thought this through as my reaction will be to move my money so I have no more than $50,000 in each bank. This will involve moving the money from the big banks to the minor banks with lower credit ratings.
I have been considering moving money offshore to Australia where the insurance covers $250,000 per bank.
A: You're right that if you move your savings beyond the big four banks you'll be, for the most part, in institutions with lower credit ratings.
For information on this, go to the Bank Financial Strength Dashboard on the Reserve Bank website, www.rbnz.govt.nz.
Among other things, it lists the New Zealand banks' credit ratings from three agencies. Their findings vary:
• S&P gives our big four banks — ANZ, ASB, BNZ and Westpac — the highest New Zealand ratings, followed by Kiwibank and Rabobank. Other banks, including the Co-operative Bank, Heartland, SBS and TSB, are not rated.
• Fitch gives Kiwibank a higher rating than the big four. Below them comes TSB, and below that Co-operative, Heartland and SBS on the same rating.
• Moody's gives equal ratings to Kiwibank and the big four. It doesn't rate the others.
Overall, Kiwibank seems to be up there with the big players. Beyond that, it's up to you whether you want to take a bit more risk with some of the smaller banks.
Keep in mind, though, that Orr said in last weekend's paper, "People just have to know that we are sitting here with the best banking system in the world." Orr's credibility is at stake here. He wouldn't say that if he was worried about New Zealand banks' viability.
If you disagree, though, you can indeed move money to an Australian bank. That will bring with it complications with tax, foreign exchange rates and perhaps inheritance issues. I wouldn't bother, but I'm not saying you shouldn't.
Q: We have our freehold family home and an investment property with a $200,000 mortgage, and $350,000 in short-term deposits in the bank.
With the current global financial situation, we are concerned about the banks getting under pressure due to possible future corporate defaults and mortgage holders losing their jobs. Last thing we want is the banks to default and all we get back is $50,000 from the Government guarantee scheme.
Would it be prudent to pay off the mortgage on the investment property, as we feel it may be safer in the medium term in case of total global financial collapse?
A: You and several others who have written assume the $50,000 bank deposit insurance is in place. It's not yet. See above.
Anyway, on to your question. In ordinary times, holding money in bank term deposits while also having a mortgage doesn't make a lot of sense — apart from having emergency money.
If you pay off a mortgage, that's the equivalent of earning the mortgage interest rate, after fees and taxes, on that money. In your case the mortgage interest would be tax deductible, because it's an investment property. But still, you would probably do better paying it down than investing in bank term deposits, which are of course taxed.
What's more, you're nervous about the current environment. That strengthens the argument. So yes, pay off that mortgage.
- Mary Holm 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 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.