Mary Holm: A tale of two Auckland houses

Plenty of people have bemoaned selling a home in formerly cheap suburbs such as Ponsonby.

Q: Here is our dilemma: we are in our mid-40s with two kids aged 9 and 11. I work full-time and make $175,000 a year and my partner is a stay at home dad (I have to travel a lot for work).

We emigrated to New Zealand 15 years ago and bought a modest three-bedroom house in 2006. We still owe about $270,000 on that mortgage, but the house is valued at over $850,000 at the moment. We have about $20,000 in cash savings and we both contribute to KiwiSaver.

The house is getting too small for us. We could borrow an extra $200,000 to extend it, but it is likely we will have to move in a year when our son starts college (to avoid our zoned college - academic results are the worst in Auckland).

We feel we have two options next year:

• Sell our house and buy (Glendowie is our preferred choice). But to get a slightly bigger house with a much smaller section we are probably looking at borrowing at least an extra $500,000-$700,000.

• Rent out our place (possibly for $500 a week) and rent in Glendowie (probably for a minimum of $800 a week) for probably eight years until our youngest finishes high school. My partner thinks the first option is too risky, but I prefer it. We would have a bigger mortgage but potentially maximise our investment more and not have to be tenants again and waste money on rent.

We can't seem to agree and would like to get some sound unbiased advice. Thank you.

A: I'm not surprised you and your partner disagree. I can think of strong arguments on each side. And where you live - especially with children involved - matters a lot.

Let's look first at the numbers. Your extra mortgage payments in option one will be much higher than the difference between the rent you get and the rent you pay in option two. Repayments on a $600,000 30-year loan at 6 per cent are $3600 a month, compared with about $1300 a month for the rent difference.

On the other hand, property values might rise more in Glendowie - although that's certainly not a given. Lower-priced suburbs can come into favour. How many people have I heard lamenting that they sold a rundown Ponsonby house for a pittance a few decades ago that would be worth millions now?

Then there's your point about rent being a waste. But so is all the interest you pay on a mortgage.

The truth is that it's impossible to know which option is likely to find you financially better off 10 years from now - with the direction of house prices, mortgage rates and rents all up for grabs.

What about risk?

With option one, you might worry about house prices falling given that you'll have a bigger mortgage. But you have about $600,000 equity - house value minus mortgage - in your current home, which you can transfer to the new one. So it's highly unlikely you would ever get into negative equity, with a mortgage higher than your house value.

The main worry with option one is whether you would be able to make the mortgage payments - especially if interest rates rise. They should be manageable on your high pay, but what if your pay dropped for some reason? I presume, though, that your partner could then get work. Compared with many couples taking on huge Auckland mortgages, you two seem fairly well set up for it.

And option two has risks too. Your landlord could kick you out, not because you're bad tenants but because she or he wants to sell. In a worst case scenario, that could happen several times over eight years.

Even if you're able to stay in the one place throughout, as a tenant you have less flexibility over what you do with your home, and this matters particularly when you have children.

At the same time, you would be a landlord, and that would add complications to your lives. The tenants might not pay or might damage the place. Even if you get great tenants, there'll be some wear and tear.

Picture this: after eight years you move back into your old house, at least slightly the worse for wear, in your lower-priced suburb. While you might be happy there now, at that stage it would probably feel like going backwards.

If I were you, the thought of that - and the chance that you will get a bad landlord, bad tenants or both - would tip me towards the first option. Sorry, partner!

Perhaps you could compromise by getting a new house with "just" $400,000 in extra mortgage.

A word of warning: in the current iffy housing market, I strongly recommend that you sell before buying, so you know exactly how much you have to spend.

Double your money

Q: Are the KiwiSaver contribution rates set in stone? My employer is offering an increase of 1 per cent of both my and its contributions. The proposal is that if we increase by 1 per cent it will match that. I am on 4 per cent. Can I go to 5? Does the scheme have that flexibility?

A: The usual employee contribution rates, handled via Inland Revenue, are 3, 4 or 8 per cent of pay.

However, there's nothing to stop anyone from putting extra money - called voluntary contributions - into someone's KiwiSaver account by paying it directly to the provider or via Inland Revenue.

Do take up the offer. Your money is being doubled. And twice as much in means twice as much out again at the other end.

Capital gains tax

Q: I read your column most weeks and find your replies to letters to be generally informative and sensible. However, and there are always "howevers" in life, your comments on capital gains tax (CGT) relating to KiwiSaver left me bewildered. KiwiSaver is not the only vehicle that older folk use to build up pension income.

I have a portfolio of investments built up over a long period, including direct shareholdings spread over a number of New Zealand listed companies, and PIE structured investments mainly in listed property companies.

Why would you suggest that KiwiSaver investments should be treated differently from any other pension saving scheme?

I would suggest that any government implementing a CGT will take whatever they can from this tax. Perhaps you should be warning KiwiSavers that their investment funds are just as likely to be attacked by this tax as any other capital gain except the family home.

After all, why should those building up their pensions in KiwiSaver be given an out from CGT when all other forms of pension saving will almost certainly be subject to this tax where use is made of share and PIE investments?

A: Let's start with what I said last week:

"I would really be surprised, though, if a tax change would leave members of KiwiSaver much worse off. The scheme has more than 2.7 million members. And many other people - such as retirees - have family members in KiwiSaver. It would surely be political suicide to anger all of them."

And I later added:

"As I said above, I wouldn't expect KiwiSaver accounts to be hit hard by any tax changes - although other managed funds could perhaps be affected."

I didn't say what should happen, just what I think might happen. Nevertheless, KiwiSaver probably should get special tax treatment.

The scheme was created by a Labour Government - and then carried on by a National Government - to encourage a wide range of New Zealanders to save for their retirement.

Most developed countries have somewhat similar schemes, which include tax breaks. KiwiSavers' "tax break", its member tax credit, is actually a cash gift unconnected to tax. But broadly speaking, it amounts to the same thing as a tax break.

It sounds as if you haven't joined KiwiSaver, perhaps because you're over 65 and therefore receive NZ Super. If not, I suggest you sign up.

But a huge number of other New Zealanders have enrolled, and are doing what both governments hoped:

Tying up thousands in savings to help fund their retirement.

Investing largely in shares and bonds, as opposed to rental property. That's more conducive to economic growth and reduces overall risk.Why shouldn't a government encourage that behaviour by taxing KiwiSaver relatively gently - or perhaps increasing the KiwiSaver tax credit to compensate for introducing a CGT that applies to all managed funds including KiwiSaver?

You could argue that other share and managed fund investments like yours also help economic growth. But your money is not inaccessible until retirement.

If you're under 65 and want to climb on the KiwiSaver bandwagon while continuing your direct share investment, you can do that through Craigs KiwiSaver. And if you want to stick with commercial property investing, several KiwiSaver schemes offer property funds.

Even if you don't or can't, I wouldn't worry too much about tax changes. It seems unlikely that any share or managed fund investments would be hit hard.

Why? Labour has said it has two goals from tax reform: to make the tax system fair; and "to do something about the housing crisis".

I haven't heard anyone say the current tax system unfairly favours shares or managed funds. It's people investing in rental properties - especially those making losses on their investment, or with more than one property, or making a habit of frequently trading properties - who should probably be nervous.

Taxing KiwiSaver

Q: The one thing that bothered me in your last column - and I think this could happen - is your comment that KiwiSaver might avoid CGT whereas other managed funds might not.

This has happened in other countries and caused huge distortions, not least of which is the fact that the subsidy is appropriated by fund managers by way of higher fees than in competing instruments. I very much hope we have an even playing field and that it is opened up to international players with genuinely low fee structures.

A: As I said above, KiwiSaver is already effectively tax-favoured over other managed funds, because of the tax credit. But providers don't tend to charge higher fees for KiwiSaver than for their other similar managed funds. If anything, KiwiSaver fees are usually a bit lower.

Still, the tax credit is limited to $521 a year on contributions up to $1043. By contrast, a CGT advantage might apply to all money in KiwiSaver accounts.

That could certainly lead to distortions, with people putting huge amounts into KiwiSaver. But I doubt if fund managers would get away with charging higher fees. These days, more and more people have their eye on KiwiSaver fees. Hurray for that! Local competition seems to be having some downward effect. But I agree that international competition would be great.

Now, let's all take a deep breath and relax.

I'm sure a tax working group would be aware of distortions, would check how different ideas have worked in other countries, would be open to input from the public and would probably come up with better-thought-out tax reform than politicians are equipped to do.

• 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.