One of the pleasures of home-ownership is growing a garden, letting you literally and figuratively put down roots. Photo / Getty Images
Q: We are in our mid-30s, have two children, and are grappling with the question of whether to continue renting or buy in central Auckland.
Combined, we earn about $150,000. We have saved $110,000 - plus spent plenty on regular trips overseas to visit family, as we value experiences, too. With KiwiSaver and family help we could raise a $150,000 deposit.
With new LVR (loan-to-value ratio) rules, our house price limit is $700,000 to $750,000 - that is, if we are "lucky" enough to find something for that in the central suburbs. With school and daycare and work in the city, commuting is not an option.
Our current rental agreement is likely to come to an end. So do we:
1) Rent a property for $750-plus a week in central Auckland and wait until our deposit is a minimum $200,000 before we buy?
2) Or do whatever we can to get on to the property ladder?
We are worried that if we buy we won't have funds in case of a family emergency overseas. If prices adjust we would have bought at the height of the bubble. But we are also concerned paying a high rent is not a good use of money. Are we being too cautious?
A: This is another of those situations in which there's no clear right answer.
Arguments in favour of continuing to rent include:
• Data in the OECD report I quoted a couple of weeks ago. It looked at the ratio of New Zealand house prices to rents and said this country is 66 per cent above its long-term average - compared with 5 per cent for the OECD overall. In other words, renting is a better deal than buying at the moment.
• The need to keep some emergency funds.
• The concern that you might turn out to have bought at a market peak.
However, one sentence in your letter caught my eye: "Our current rental agreement is likely to come to an end."
Perhaps the worst thing about renting - especially if you have a family - is that the landlord can decide when you're going to move. That can be pretty disruptive for a family, especially if it happens repeatedly.
There's more to it, too. If you own your own place, you can decorate as you wish, or renovate, or develop a garden that you'll be around to enjoy. A family can literally and figuratively put down roots in their own place.
You're right, too, that paying rent is "dead" money - you don't get any future gain from it.
A counter-argument is that mortgage interest is also "dead". Sure, principal repayments build up your equity, but in the first years of a mortgage most of your payments go on interest. But that's not really valid for a couple of reasons. First, after 10 years or so, you'll really make inroads into the mortgage principal. Also, you do get something for the interest you pay - the chance to participate in any house price appreciation.
As you say, that appreciation might not happen, at least for a while. But here's a funny thing. Older people can often remember what they paid for their first home, but you don't hear them talk about whether they bought at a good or bad time. Over the years it all becomes rather irrelevant.
The emergency fund issue is important. It's not clever to find yourself running up a credit card debt you can't pay off fast. So perhaps set aside several thousand dollars that doesn't go into the house deposit. Or make at least part of your mortgage a revolving credit loan, so you can access lower-interest money if needed.
How does all this sit with you? If you're thinking, "Yes we could buy, but ..." then you're probably not in the emotional space for buying a home. A lot of this is about non-financial issues such as the desire for security and a family base. If that's not how you feel, then it might be best to rent for a while longer.
But if home ownership appeals, why not start looking? Even if you can afford only a modest place, you'll probably enjoy the fact you own it.
It's great to be in a position in which you don't have to buy. And given what we're hearing about the market shifting a little - with fewer people at auctions and open homes - you might find you can bargain quite hard.
PS: You mention the new LVR rules, which mean that for the vast bulk of bank mortgage lending the borrower needs at least a 20 per cent deposit. As I said in a recent column, it's still possible to get a mortgage with a smaller deposit. But it's much lower risk to have a decent deposit, so you're probably best to have 20 per cent anyway.
KiwiSaver time lag
Q: I am contributing to KiwiSaver for the first time and notice from Inland Revenue's Form QS3 (your introduction to KiwiSaver: employee information) that it takes "about three months for any KiwiSaver contribution deducted from your pay to reach your account".
Surely in these high-tech days this is extraordinary for what is an electronic transfer of money?
A: Here's how the process is explained on www.kiwisaver.govt.nz:
"During Month 1: Every payday your employer deducts KiwiSaver contributions from your salary or wages. In most cases, your employer needs to send this money to Inland Revenue by the 20th of the following month.
"During Month 2: Your employer sends your KiwiSaver contributions to Inland Revenue, along with a report that summarises their payroll for the month. We start checking that the information your employer has sent through is correct. It can take us up to a month because of all the checks we need to make. Note: If information is missing, or the data doesn't match our records, we follow up with your employer. This adds more time to the process.
"During Month 3: We transfer your contributions to your scheme provider, including any interest earned, once we've made sure that your employer's payroll schedule is correct."
As mentioned, you do get a little interest - at an annual rate of 1.57 per cent - while your money is going through the process. But it's a far sight from the 5.36 per cent paid in the early days of KiwiSaver. While interest rates in general were higher then, that's still a big drop.
I agree with you. The whole process sounds cumbersome - surprisingly so given that KiwiSaver will be seven years old in July.
But perhaps we shouldn't complain too loudly.
The Government is still pretty generous to people in KiwiSaver, with the kick-starts and tax credits. And as your KiwiSaver account balance grows, the proportion of your total savings waiting for clearance at Inland Revenue will become minuscule. By the way, none of this concerns non-employees, who make their contributions directly to their provider. The provider should be able to process that money promptly.
Enrolling yourself...
Q: After many years of being self-employed, I am now in a reasonably well-paying job. Some tax issues mean IRD is deducting 20 per cent of my gross income each month, on top of normal PAYE and ACC - probably for two to three years.
I'm not a fan of KiwiSaver, but my accountant regularly bugs me about joining. The situation with IRD means I currently can't afford to join KiwiSaver, and as I generally don't like the concept, I wouldn't even if I could afford it, at least not 3 per cent of my pay.
That said, I see investing the minimum each year as probably sensible; free money is always good.
My question is, even though I am employed, can I join KiwiSaver without going via my employer - that is, make the minimum contribution a year directly? Obviously, if I can, I'd be a fool not to and probably should have started years ago.
A: First the bad news. If you're an employee, the only way to join KiwiSaver is via your employer.
Next the good news. That's not the commitment you might think it is. You have to contribute 3 per cent of your pay for only a year - and even less if you face financial difficulties.
After 12 months you can take a contributions holiday. It's an easy process, and you can renew every five years all the way through to retirement if you wish. While you're on holiday, you can contribute nothing or any amount you like, directly to the provider.
By the "minimum" contribution, I assume you mean the $1043 you have to contribute each year to receive the maximum tax credit of $521. If you put in less, the tax credit is 50c for each dollar contributed. But I agree, you might as well get the maximum free money from the Government.
Keep in mind, though, that there's also free money to be had from your employer. If you don't take a contributions holiday, but keep putting in 3 per cent of your pay, you'll get the employer contribution as well. That matches your 3 per cent, except the employer's contribution is taxed.
I can fully appreciate that it might be hard for you to join now, given your other heavy pay deductions. But maybe a further 3 per cent wouldn't make much difference. Or, if that's just not possible, I suggest you sign up as soon as your other obligations are over.
Wavering? Don't overlook the third lot of free money, the $1000 kick-start three months after you join.
...and enrolling your kids
Q: The one thing I can't seem to find a clear answer on is that if I enrol my children in KiwiSaver, are they able to opt out after they turn 18?
I understand that it's a great way to start saving for retirement, but I'd like my kids to be able to make up their own minds when they're old enough.
A: Young people can't opt out of KiwiSaver, even if their parents signed them up for it. Or at least that seems to be the case so far. Somebody might challenge it in court - and it would be an interesting case.
I suspect, though, that most people wouldn't be bothered, given that they can easily take contribution holidays if they don't want to take part in KiwiSaver - see answer above.
If your child challenges you later about committing them to KiwiSaver, tell them:
• You wanted them to have the $1000 kick-start, while it's still there.
• Being in KiwiSaver can help them build a savings habit and learn about investing.
• KiwiSaver is the best place to save for a first home. They can use employer contributions as well as their own savings to buy the home, and they may also be eligible for the first-home subsidy.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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, Business Herald, PO Box 32, Auckland. 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.
OPINION: You need to consider interest, taxes and fees.