When the chips are down, many desperate people will turn to payday lenders, but also those driven by reckless borrowing. Photo / 123RF
COMMENT:
It was interesting to read the discussions about payday lenders and their interest rates in your recent columns.
I have followed a lot of the debate and discussion by Government ministers and consumer groups over recent years.
Noticeably most of this has focused on "borrowers as victims", which is common among politicians and consumer advocates, usually painting themselves as crusaders to get on the news.
Many of them use the obvious attention-getting headline of ridiculously high interest rates. This is skewing the numbers for a story.
Say a borrower wants a loan of $1000 for a short term, like a month. If the annual interest rate is 20 per cent, that's $200 a year, which is less than $20 for the month.
Who would lend $1000 to a desperate person with a low credit rating for a $20 return?
The assumption is the money gets paid back. In many cases that doesn't happen.
Working in retail for 35 years and helping many customers to arrange low-interest finance, I frequently came across people who have used payday lenders, and have always failed to secure them financing.
The main reason is these are individuals with a cavalier attitude to borrowing and a history of not repaying debts.
Bear in mind that a payday finance company lending $1000 is at risk of losing the entire $1000, so it's basically gambling for it, and it all comes down to the odds.
If just one borrower out of five disappears without repaying, then the lender needs to charge the other four interest plus costs of $250 each just to break even.
The large established finance houses work on loss rates of about 1 per cent, so they are actually the ones making the big money.
Payday lenders exist, as you pointed out, to give the borrowers an alternative to borrowing from the underground.
Regulating them would force them out of business, and the "knee-cappers" would be the only option.
PS: We had many middle-level lenders in New Zealand 15 years ago. They all went bust after the global financial crisis.
You make some good points. There's a fine line between making sure borrowers are treated openly and fairly, and pushing out payday lenders — only to be replaced by illegal operators offering money to people desperate to borrow.
However, often it's not desperation but desire that drives reckless borrowing.
What we most need to change is people's attitudes to borrowing — the idea that they can have goods and services when they haven't got enough money to pay for them.
Keep in mind, though, who is encouraging that attitude? It's often the retailers and the lenders. Just look at all the ads screaming "buy now, pay later", or words to that effect.
Stop it, you guys! (Fat chance.)
Horror of horrors, Mary. The best thing for the 50-year-olds in your last column, who were considering a reverse mortgage, is to go against everything we have been taught and believe in — sell up and become a renter.
The $1 million is theirs to play with, travel or invest, and they are not creating debt.
They may even be able to negotiate a sale to an investor who is prepared to lease their home back to them for five years.
Part of what they will be paying for the lease can be built into their price, although the price will have to be keen.
More importantly (and realistically, perhaps), they need to have the stability of a lease rather than just paying short-term rent.
They will be far better off than many who move into a retirement village and lose any capital gains.
This is not silly, given that house values are now so far out of whack relative to our incomes.
Many people would reject the idea, because they love their home and the fact that they can do whatever they want with it, or they value the security of home ownership.
But, as you say, if you got a long-term lease, you could be pretty secure.
Many landlords might value having long-term retired tenants, and might therefore be quite flexible on issues like how the place is decorated.
And some people would appreciate not having to worry about home maintenance and so on, especially as they get older.
What about the financial side of it? I've written before about the NZ Society of Actuaries' rules of thumb on how much you can spend in retirement, given that you have a certain amount of savings.
One "rule" that's flexible about your retirement age — which works well given that the couple last week are thinking of retiring in their early 50s — is that you divide your money by the number of years that you want it to last.
Let's say you retire at 53, and want your savings to last until you are 83 — or 30 years.
After that, you plan to live on NZ Super, which many older retirees say is enough.
You would spend one thirtieth of your money in the first year, a twenty-ninth in the second year, and so on, until you spend the whole lot in your last year.
In the meantime, your money is invested, so in most years your spending money would grow by more than inflation.
If the proceeds from selling your house were $500,000, you would spend $16,667 in the first year. That's too little. But if the proceeds were $1 million, you would spend $33,333, and if the proceeds were $1.5m you would spend $50,000 in the first year.
Still, that's not a big income, keeping in mind that you would have to pay rent.
However, things change when we take into account that NZ Super starts at 65, plus any KiwiSaver savings and other pensions, which the couple in last week's column had.
With that in mind, they might decide to spend half their proceeds in the 12 years until they turn 65 — spending a twelfth in the first year, an eleventh in the second year and so on. That would give them $41,667 in the first year if the house proceeds were $1m, or $62,500 on proceeds of $1.5m. Then they would stretch the remaining half of their proceeds over the following years, supplemented by the pensions.
If their KiwiSaver and pensions are considerable, they may be able to spend a bigger portion of their house proceeds in their pre-65 years.
Also, if they put their money into riskier investments — putting the amount they don't plan to spend for at least 10 years in a share fund — their money should grow faster on average, and they should be able to spend somewhat more each year.
A good fee-charging financial adviser could help them work that out.
Note, that anyone who does this is likely to end up with not much to leave to others when they die. But in many cases that will be fine.
I have an alternative suggestion to getting a reverse mortgage in your 50s — sell up and buy somewhere cheaper.
We have been in a similar situation, needing to bridge income until retirement. We had to close down our (physically hard work) business due to illness. We lived on a lifestyle block on the Auckland fringes, could not sell the business, nor was there any work.
We had bought our home in the late 1970s, it was mortgage-free, but we had no other savings except KiwiSaver.
At first it seemed rather hopeless, especially as we had never depended on welfare and certainly did not want to apply now. After considering our options we decided to sell and take advantage of the great Auckland property boom.
We needed to know exactly how much money we would have before we even looked at where we would go.
We sold by auction for a very good price, had a good clear-out garage sale, then had a removal firm pack up and put everything in a (big) container for storage.
Then we travelled around to our once-favourite holiday destinations (Whangarei, Hawke's Bay, New Plymouth, Nelson, Kapiti Coast) with our list of "must haves" — such as mortgage-free, not a do-upper, good public transport, hospital not too far away, climate, and all those amenities older folk like us will need in the near future.
Kapiti Coast came out best. As we could not find a short-term rental, we stayed at a motel for two months while looking for our new home. By the way, the interest from our house sale was enough to cover all those expenses!
We bought a brand new home with double glazing and central heating, so much better than what we ever had before. A wonderful friendly and supportive neighbourhood and, best of all we had $300,000 spare.
It feels almost like we won Lotto. We can easily live within our budget until we get Super and our KiwiSaver.
There is enough for a few extras like holidays to actually enjoy our early retirement. It's only an hour flying to Auckland, so it's easy to stay in touch with friends, who are very happy to fly here for a visit too.
We do voluntary work to keep us happily busy. A great way to meet new friends in a new place.
We were devastated when we suddenly had to stop working, but now, looking back, it gave us opportunities we would never have realised.
Unlike with a reverse mortgage, our home will still gain in value. We might not be able to ever buy into the Auckland property market again, but we are happy here and can downsize or move into a retirement village if we choose.
There is maybe a place for a reverse mortgage, but I fully agree with you, it's best leaving that to much, much later in life.
Thanks for sharing a great story. I especially like that you sold your home before buying, and that you did your homework about possible places to live. Also that you gave yourselves a couple of months to find a new home.
That's also a good point that you can fly back to your old city, and friends from there can visit you. Many people mistakenly dismiss moving towns because they worry about losing friendships.
I recently inherited some money when my mother died. I am soon to turn 54 and am mortgage-free.
Is putting a bulk sum into KiwiSaver a good idea? My contributions have been intermittent as I am a contractor.
Let's assume you have no credit card or other high-interest debt, as paying that off would be your first priority.
There are two issues here:
Are you happy to tie up the money until you reach 65? If there's any chance you might want it — perhaps for travel or home maintenance or to help someone out — you could instead use a similar but accessible non-KiwiSaver fund. Ask your provider if they have such a fund.
However, non-KiwiSaver funds often charge somewhat higher fees. So if you're happy tying up the money, stick with KiwiSaver.
Is there any chance that, before you turn 65, you won't be in a position to contribute at least $1043 a year to KiwiSaver to receive the maximum tax credit?
If that's a possibility, put some of your inheritance in a bank account or short-term deposit to use for KiwiSaver contributions if needed.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. 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 mary@maryholm.com or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
Will this be Simon Dallow's swansong year as the 6pm newsreader?