Following on from your article about investing $95,000 of the single mum's money, would it be sensible to split the investment as you advised but invest it into four different NZ finance companies? The reason I ask is that they were showing far better returns than banks. What would you advise?
I would advise caution.
Put yourself in the shoes of the finance companies. Why would they pay you higher interest than the banks? It must be because if they offered lower rates they wouldn't get many takers. They are viewed as riskier — especially after the collapse of several finance companies a decade ago.
How risky are they? You can get a pretty good idea by looking at their credit ratings, which are listed in the term-deposit pages on interest.co.nz.
These ratings are issued by big international agencies such as S&P, Moody's and Fitch.
The agencies don't always get it right — as we saw in the global financial crisis — but they give you a pretty good idea of how risky an institution is.
The ratings are usually expressed as AAA (extremely strong), through AA, A, BBB, BB, B and so on, down to D (in default). Sometimes a rating has a plus or minus sign after it.
Look at the letters first. For example, AA- is better than A+.
I would invest only in institutions with an "investment grade" rating, which means BBB- or better. Note that a B rating means there's a one in five chance the institution will default over five years. That's not for me.
Okay, so what ratings have New Zealand banks got? The big four — ANZ, ASB, BNZ and Westpac — all have an AA- rating. Kiwibank has A and TSB has A-. Co-operative, Heartland and SBS all have BBB.
If we look at the finance companies on interest.co.nz, UDC does best, with the same BBB as the smaller banks. And unsurprisingly it tends to pay lower interest than the other finance companies.
The only other finance company on that website with an investment grade rating is Liberty Financial, which just squeaks in with BBB-. The others have lower ratings or none at all. The ones with no rating may be too small to bother — or maybe they're scared of what rating they might get. Either way, I would give the "low or no ratings" a miss.
If you want to go for higher returns, it's better to do it by investing in, say, a medium to higher-risk managed fund. Your returns will be up and down, but your money will almost certainly not disappear, as it could in a finance company.
But riskier managed funds don't work well for money you might need in the short term, because of their volatility. For money you expect to spend within the next two or three years, I would stick with bank term deposits. Read on for some ideas on how you might get a better deal from the banks.
My own experience over some 30 years has been that you need to front up at the branch, on the day that it matures, preferably by appointment if it is Westpac, and talk about it face-to-face with the retail banker.
Success can range from zero change up to maybe 0.25 per cent (as I managed on one heady occasion), depending on conditions at the time — especially what the competition is offering, and perhaps also the size of one's account at the bank.
I would hesitate to deal with an institution that agreed to half a per cent over the phone. I hope that helps.
You could well be right that showing up in person might make a difference. These days, though, bank branches are often not handy for many people.
On your last paragraph, I think you're being overly cautious. If it's a major bank with a good credit rating, I don't think you have anything to worry about. Thanks for writing.
I don't think I have ever achieved 0.5 per cent a year over the offered rate (close once at 0.4 per cent), but it has been unusual to achieve less than 0.15 per cent extra.
Bear in mind that the term and size of each deposit is the major cause of variation. But I usually do six-monthly terms and I have about $200,000 on deposit, so that my bank will sometimes say they regard me as a "wholesale" customer — which is how they justified the increase. Then they conveniently forget that "status" next time around.
My bank will always match any other bank's offer. So it is well worth the time and effort.
I fondly recall a time when I was getting about 7 per cent. Now only 3.55 per cent. We certainly live in interesting times.
At a recent US Federal Reserve meeting, they increased the cash rate to 1.75 per cent from 1.5 per cent and indicated plans for further increases during the year. That suggests that volatility of interest rates to the upside will become a major issue for folks with both term deposits and mortgages.
Two other factors dictate that interest rates will probably rise. The first is the increase in global inflation rates, and the second is that other central banks — notably the European Central Bank — are ending their quantitative easing programmes.
Both the cessation of this programme in Europe and the intended move by the US Federal Reserve to sell down its US Treasury Debt over the next few years will suck up any available funds and drive up interest rates.
I have suggested to my sons that they consider fixing their house mortgages for a much longer period at their next reset.
In my humble opinion, Liam Dann's warning on the prognosis for interest rate increases in a recent Herald article should be taken seriously.
Wow! Raising your term deposit interest by 0.4 per cent is impressive. As you say, having a large amount on deposit must help. And doing your homework first on what other banks offer.
On whether interest rates will rise, it certainly looks likely. But before all the term depositors get excited and the folk with mortgages panic, consider another recent article by Liam Dann, the Herald's business-editor-at-large.
"I've been wondering for how long I should fix my mortgage," he writes, adding that he doesn't have any special insight into this. Despite all his reading and interviews, "the thing I've learned from all this information is it doesn't give you powers to predict the future ... Are rates going up? Definitely, in theory. In reality, only probably."
He adds: "As likely as rate rises now seem, I can't forget the two or three false starts we've already seen since the GFC.
"One of them caught out our Reserve Bank in 2014 — it started a cycle of hikes that had to be reversed.
"Since 2009, I've twice fixed my mortgage at a higher rate long-term than I needed to — because everything I read said they would go up. So I'm wary of the conventional wisdom, even if it looks more likely than ever this time."
Dann's advice: "Imagine how your budget would look if rates rose by one percentage point, or two. What would that cost you a week and could you survive it? Float a bit and fix a bit. Or fix some long and some short."
I couldn't agree more. I've also seen too many interest rate forecasts go wrong.
A mix of fixed and floating, and of short-term and long-term fixed, is
the best strategy — regardless of forecasts.
At what point does the $1043 annual deposit, to obtain the full member tax credit, get counted? At the IRD or at the KiwiSaver fund provider?
The reason I ask is that upon checking my balance I find that there have been no deposits made to my account for May or June, though they have been deducted from my pay.
Presumably these are still with the IRD.
This means I am some $300 short and will miss out on $150 if I do not make a voluntary contribution.
To my surprise, I've never seen that question raised before either. And it's a good one. No apology needed.
As you may know, it can take three months for money to get into an employee's KiwiSaver account. For info on how employee contributions are processed, how to keep track of them, and so on, see tinyurl.com/TrackKSContribs.
However, an Inland Revenue spokesman says: "Any employee deductions made from a KiwiSaver member's pay at any time up to and including June 30 count towards their member tax credit (MTC) for the year. The time when IR receives the funds or when they're transferred to their KiwiSaver provider won't have any impact on the total amount of MTC they are eligible for."
Phew! So you should get the maximum tax credit without having to make extra contributions.
The spokesman goes on to explain the process. "Providers submit MTC claims to Inland Revenue for their members on or after July 1. In those claims, the providers tell IR the number of days during the year the member was eligible for MTC and the sum of any contributions paid directly to the provider.
"It does not include any information about employee deductions, as we already hold this."
He adds that it's likely you'll receive two payments for your tax credit.
"Let's say the member's deductions received by IR and passed to the provider as at the time the MTC claim is processed in July is $842.86. We will pay the member's MTC to their provider of $421.43 (at 50 cents per dollar up to $1042.86 of contributions).
"Then some time after June 30, we receive information from their employer of an extra $200 in deductions prior to July 1 (employers usually file this information to IR in the month after the pay cycle).
"This triggers our system to automatically recalculate the member's MTC, and in this scenario would result in an extra $100 being paid to the member's provider. This would take them to the maximum MTC of $521.43."
This is a good time to remind everyone, again, that if you haven't contributed $1043 into your KiwiSaver account since July 1 last year, it's a great idea to do it now, so you get the full tax credit.
Give the money directly to your provider before June 30, and the sooner the better.
Note that people on a contributions holiday can still contribute any time they wish.
- 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 email@example.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.