Credit ratings are not like marks for a high school essay, where a B was pretty good. A credit rating of B means there's a one-in-five chance the institution will default over five years. Photo / 123RF
I am constantly looking to find the best term-deposit rates when my savings, which are split between banks, mature.
When I search www.depositrates.co.nz, I notice there are names unfamiliar to me included with all the banks on the list, such as Liberty, Flexi Cards, UDC and First Credit Union.
How do these differ from the banks we are familiar with? Some of them offer slightly higher rates than the banks.
The lesser known institutions are riskier. That doesn't mean they will go out of business tomorrow, but let's just say they are not as safe as the big banks. That's why they usually offer higher interest. Otherwise, everyone would stick with the banks.
The best way of assessing an institution's riskiness is to look at its credit rating. These ratings are issued by three big international agencies, S&P, Moody's and Fitch.
S&P and Fitch's ratings range from AAA (extremely strong), through AA, A, BBB, BB, B and so on, down to D (in default). Moody's is similar, but it uses Aaa, Aa, A, Baa, Ba, B and so on, down to C (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+.
As the Reserve Bank points out, credit ratings are not like marks for an essay in high school, where a B was pretty good.
A B credit rating means there's a one in five chance the institution will default over five years. I wouldn't take that on. It's best to stick with "investment-grade" bonds or term deposits, which have a rating of BBB- or better.
The big four New Zealand banks — ANZ, ASB, BNZ and Westpac — all have an AA- rating.
Kiwibank has A and TSB has A-. Cooperative, Heartland and SBS all have BBB. Some smaller institutions have no rating. Unless you know a lot about them, I suggest you give them a miss.
The agencies give these ratings based on research, but they're not perfect. In the global financial crisis, some highly rated companies went under. Still, the ratings generally give us good guidance.
The website you're using, www.depositrates.co.nz, doesn't include ratings in its interest rate tables. You might want to switch to www.interest.co.nz, which does.
For more on ratings and how to interpret them, see a clear explanation by the Reserve Bank at tinyurl.com/CreditNZ.
Oh, and good on you for shopping around.
Buying a home on $30,000 (like last week's correspondent): right, we live on a couple's pension, with a mortgage. I have reduced it from $751 a fortnight to $701 by fixing interest for three years. The term is now 17 years.
I make food from scratch, including bread. I buy milk powder, and what fruit and veges we don't grow, we get from local vege shops — far cheaper than supermarkets. I buy meat when on special, in bulk (3kg is bulk) from local butchers, which is far cheaper than supermarkets.
We don't go out. Our car is 22 years old, bought with cash for $2500 several years ago.
Yes, you can buy a mechanically sound car for that if you do your homework.
I have the cheapest power company. I am about to switch ISP, too. I get free haircuts. We do not shop, and replace clothes when worn out.
I certainly didn't pay $99 for a phone, either. I still have the old Nokia flip phone, on a $20 a month plan. (I'm not interested in data).
We can't save 35 per cent (as last week's correspondent did). We can't save 5 per cent, either.
We do not qualify for a rates rebate. We do not have a heat pump or woodburner — can't afford one.
So we make do with keeping the electric heater off as much as possible. Let's see someone save a deposit on $30,000 now.
And without cheating by basing it on a house in Mataura, either. We barely survive now. Move? We'd net maybe $275,000 if we sold and paid back the mortgage, with the costs of selling, etc. Move where? No, Mataura is out.
We did try a small town once, the costs bar housing were astronomical. Which is why we now have a mortgage in Auckland again. And too old to do it again, anyway.
Poor Mataura — and poor you, as it seems you feel affronted by last week's column. Sorry.
It sounds as if you are doing really well at living frugally. A few possible sources of help:
• Although you're not eligible for a rates rebate, anyone can get a rates postponement. You put off paying part or all of your rates until you sell the property or die. Basically, the council lends you the money in the meantime.
• You pay costs as well as interest, which is at a reasonable rate, but will still compound over the years. Nevertheless, this is a way to get some use out of the value in your house. For more on Auckland Council's rates postponement, see tinyurl.com/AuckRatesPostponement. Some other councils offer similar schemes.
• You'll soon get a bit more NZ Super in winter to help with heating costs. For singles it will be $20.46 a week, and for couples $31.82. This year it will run from July through September, but from next year it will be May through September. I hope you use it to keep warm.
• For people struggling to make ends meet in retirement, there may be extra money from the Government. See tinyurl.com/NZSuperHelp which lists "Extra financial help you may need".
Click here for more on buying a house on $30,000 next week.
In response to your last column, I am a commercial real-estate agent — industrial. Actually, industrial owners and agents are probably the most open and decent of all! Office owners tend to be lawyers, doctors, etc, and egotistical.
In an auction, the words "on the market" are not always said at the vendor's reserve number.
If you have momentum in the auction room those three words can add "the cream" to a price. Sometimes they need to be said before the reserve being met. That requires trust. Sensible vendors find an agent they trust.
However, in this market, where financial funding is difficult and fewer people are able to buy, the smoke and mirrors of private treaty (an ordinary sale) are achieving the top dollar.
If I am going to have four or more buyers, then I'd say — go to auction. If you have only one buyer and have advertised an auction, bring the auction forward. You have them locked in at their top price.
I am part of a team of 30 agents. Most of those guys and gals would put the vendor's needs before their own. All agents have is their name, and we treasure our names. Our clients will tell you each of us is in the real-estate game for the love of the industry — not the money.
The money is a by-product of giving good advice, providing information and solutions and long-term relationships. We lease and sell on behalf of the same investors many times over.
Good on you for sticking up for your colleagues.
That's interesting that an auctioneer might say a property is "on the market" before the reserve price is reached. For the benefit of readers who haven't attended property auctions, the reserve price is the lowest the seller says beforehand that they will accept.
And "on the market" means the bidding is now high enough for the property to be sold that day.
So I suppose in your scenario, the agent is confident the bidding will continue up to at least the reserve price. Otherwise they would face an angry seller.
Your referral to smoke and mirrors is also interesting. I'm not sure it's the right image if you want to encourage trust!
I would love to also hear from an agent on why it's better for a seller to list with only one agent.
Next week, we'll have more on selling houses, too. The letters keep flooding in. Wonderful!
Letter from Wendy Jenkins, group manager planning and investor relations at Genesis:
At Genesis, we have recently launched a dividend reinvestment plan (DRP). Based on some of the feedback and questions we believe that DRPs are not well understood by many shareholders.
DRPs are offered by Genesis, Auckland International Airport, Sky City Entertainment, Chorus, Abano Healthcare, Tourism Holdings and many others, and are an efficient way for businesses to raise capital.
A DRP allows shareholders to reinvest some, or all, of their share dividends without having to pay any broker fees, providing a benefit to shareholders in addition to any price discount.
They don't suit everyone, but we are great believers that knowledge helps people make good, informed financial decisions. To that end, it would be helpful if you could share your thoughts on DRPs with your readers.
It's most unusual for me to include a letter like this in the column. But Genesis has 47,000 shareholders. And dividend reinvestment works well for many people.
It's been a long time since I wrote about dividend reinvestment — apart from the fact that it happens automatically when you invest in a managed fund, including KiwiSaver funds.
Under a DRP, instead of receiving a cash dividend, the company gives you a few more shares.
As Wendy Jenkins says, you avoid brokerage and often there's a price discount. So it's a good deal.
More importantly, reinvesting dividends boosts your investment. When cash dividends trickle into your bank account, it's easy to spend the money on groceries. But if it's reinvested, it can make a big difference over the years.
DRPs can be good for the company, too. It keeps the cash — which it might use to reduce debt or grow the business.
Get moving if you want to get into the Genesis plan. Forms need to be returned by April 6.
If you hold shares in another company, you might want to ask if they have a similar scheme.
In response to your "Let's be professional" item, let's not forget veterinarians, dentists, optometrists, audiologist, psychologists (and probably many more medical paraprofessionals I haven't heard of).
Can't argue with that.
I know it wasn't your point, but as a pharmacist I am a health professional, as are dentists, physiotherapists, and I guess midwives, although they technically probably come under nurses, which you said already.
I would argue semantically that academics are not professionals, as while they have a qualification, it is not in "academics", but in their specialist subject. Maybe I'm wrong, and it's entirely irrelevant to your points, but I enjoy the mental exercise!
I hope you're not too inundated with pedants like me and that you have a great week.
Just the two inundators — both in the medical area. I thought I'd better publish your letters for fear of otherwise getting the cold shoulder next time I'm unwell!
To forestall further letters:
• Midwives and nurses are quite different.
• Going back to the Oxford definition that a profession is "a paid occupation, especially one that involves prolonged training and a formal qualification", I think we should keep academics on the list.
- 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.
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