Mary Holm: Use windfall to pay off the mortgage

When you have paid off the mortgage you can dance on the beach and splurge for a month.

I'd appreciate some quick advice about what to do with a $4500 "windfall".

My house mortgage is down to $10,000 and the interest is $23 a fortnight. Should I put the windfall on my mortgage or add it to my savings (at 4 per cent)?

I am 64 and in full-time employment. I plan to retire in about 18 months.

Get rid of that mortgage, not just using the $4500 but also your savings - assuming you have enough savings. Speed up the glorious Mortgage Free Day - at which point you can dance on the beach and splurge for a month, but then be a good girl and put your former mortgage payments into your savings.

Why do it that way around? Let's say your mortgage interest rate is 6 per cent. When you pay it down, you improve your wealth in the same way as if you had an investment earning 6 per cent after fees and taxes. Your savings are earning only 4 per cent - and that's probably before tax. So they can't compete.

It's good to have some savings for emergencies, even if you have a mortgage. But it's not financially smart to have much money earning 4 per cent while also paying a higher interest rate on a loan.

Oh, and I can't resist asking my "When I'm 64 Question": Are you in KiwiSaver? If not, join before you turn 65 and are no longer eligible.

KiwiSaver is a particularly good deal for people in their 60s. And everyone gets at least five years of KiwiSaver incentives, so you'll get them until you're 69.

You'll receive the $1000 kick-start and, while you're working, employer contributions and the tax credit. After you retire, I suggest you keep contributing $1043 a year - perhaps as $87 a month - and you'll get the $521 maximum tax credit each year.

The downside is that you tie up the money, but it's only for five years from your joining date. People close to retirement don't usually mind that. They can spend other savings in the meantime.

Why is KiwiSaver so good for older members? It's about the returns on your contributions - more specifically what happens to each year's contributions.

Let's look first at 20-year-old Jack. The money he puts into KiwiSaver this year is boosted by government and employer contributions. So in its first year in KiwiSaver, that money earns a fantastic return. However, Jack's 2013 contributions then sit in his account for decades, earning whatever his fund earns - which we might call an "ordinary" return.

Next year, Jack's 2014 contributions will get the big boost. But then that money will also earn just ordinary returns for decades. And so on. For Jack, a lot of money earns ordinary returns for a lot of years, watering down his total returns.

Meanwhile, Jill joins KiwiSaver over 60. Her contributions also get the first-year boost, but they then earn ordinary returns for just a few years.

I'm not saying KiwiSaver isn't a good deal for Jack. The incentives can mean he will end up with twice as much - or more - than if he had saved the same amount elsewhere. And anyone who saves over a long period benefits from powerful compounding.

But Jill does even better. Even if she has to dip into savings to make the contributions after retirement, it's well worth it.

Capital gains tax

Speaking from experience with capital gains tax, I recommend the simple following approach to valuations.

If and when capital gains tax is introduced, property owners who have purchased prior to the starting date would be exempt from the capital gains tax on that asset.

But purchases from the start date would be subject to the tax at time of sale or on the winding up of their estate.

This is a relatively straightforward way to introduce capital gains tax without unnecessary set-up expense to all.

Forget that government will lose a potential "windfall". It is not gaining anything at the moment.

Finally, the Government then might introduce legislation without the "oohing and aahing" and use a more definitive approach.

The trouble with your idea is the effect it would have on property sales.

Let's say a landlord has been thinking of selling a property and buying another one - perhaps in a different area or needing less maintenance or for whatever reason.

Under your proposal, the landlord probably won't make that move. Gains on the new property would be subject to tax, whereas the landlord could keep the old property for decades more, making big gains on it that wouldn't be taxed.

Similarly, people owning shares might hold on to companies they would prefer to sell.

Distortions like that - incentivising people to do financial things they wouldn't otherwise do - harm the way markets operate. In the end, everyone is worse off.

KiwiSaver changes

I have a couple of questions about the changes to the KiwiSaver first-home deposit subsidy. My partner and I have pre-approval for subsidies of $5000 each.

We're looking for a house in Auckland and we're really hoping to have enough land to grow our own vegetables. The increase in the Auckland house price caps for the subsidy from $400,000 to $485,000 now makes this a possibility.

However, the new requirement for a 10 per cent deposit would mean we were no longer able to get the subsidy unless the deposit can include a loan from our parents. Is this acceptable, especially given that we would also be getting a low-interest mortgage for the house from my father?

My second question relates to timing. I understand the changes will be implemented on October 1. If we made an agreement to buy a house priced between $400,000 and $485,000 before October 1, but settled after then, would we be able to receive the subsidy, or does the initial agreement to buy have to be made after the changes are implemented?

To get other readers up with the play, the Government has announced several changes to the KiwiSaver first home deposit subsidy, effective on October 1.

As you have noted, people applying for the subsidy will need a deposit of at least 10 per cent of the purchase price.

Other changes are:

House price caps have risen to: $485,000 in Auckland; $425,000 in Wellington City and Queenstown Lakes; $400,000 in Christchurch City and Selwyn district; and $350,000 in Thames/Coromandel, Waimakariri, Hamilton City, Western Bay of Plenty, Hutt City (Lower Hutt), Upper Hutt, Kapiti Coast, Tasman/Nelson, Tauranga City and Porirua City. For the rest of the country, the house cap stays at $300,000.

The income caps will be $80,000 for one buyer and $120,000 for two or more buyers. This is a change from $100,000 for one or two buyers and $140,000 for three or more buyers. So single people on incomes of between $80,000 and $100,000 need to apply before October 1. After that they will no longer be eligible.

Now to your questions. "A loan from family or other means would not be accepted as a deposit for a property, as this would be classed as a liability for serviceability purposes," says Mike Adamson, manager financial products at Housing New Zealand, which runs the KiwiSaver subsidies. In other words, the loan would be something you would have to repay, sort of like another mortgage.

Adamson adds that the deposit would need to be made up from one or more of: your KiwiSaver deposit subsidy, KiwiSaver savings withdrawal, other savings, term and fixed deposits, a gifted deposit - as evidenced by a signed gifting certificate, and "funds already paid to a real estate agent in line with a signed agreement for sale and purchase".

Note the gifted deposit. Perhaps you can persuade your parents to give you the extra deposit money rather than lending it. Time for some sweet talking!

On your question about timing, Adamson says the date an agreement is signed doesn't matter. It's the settlement date that would need to be after October 1 for you to use the $485,000 price cap.

Note, though:

You won't be able to use your existing pre-approval for the subsidy if you want to buy a house with the new price cap. Your pre-approval applies only to purchases made under the current rules. So you'll have to apply again for the subsidy after October 1.

"An application needs to be submitted to Housing New Zealand four weeks prior to settlement," says Adamson. That means the settlement date would have to be at the end of October at the earliest.

So there's nothing to stop you house hunting now - as long as the seller can live with not getting their money for more than two months.

You're not the only one asking about the changes. For basic information about the first home subsidy, see tinyurl.com/kiwisaverfirsthome. For more about the changes, see tinyurl.com/subsidychanges. And for frequently asked questions about the changes, see tinyurl.com/subsidyquestions.

Grandparents' dilemma

My son and his wife have recently gone overseas to work. They intend to come back to New Zealand, although things may change.

My grandson is 15 months old and I am contemplating opening a KiwiSaver account for him. He was born in New Zealand. However, as he is overseas can I open an account for him?

What are the implications for the account if he does not come back? Needless to say my wife and I would be heartbroken anyway.

If it's any comfort, it seems that most couples, when they are both New Zealanders, do end up back here. So fingers crossed.

I'm afraid, though, that you're out of luck on KiwiSaver. To join you have to be:

A New Zealand citizen, or entitled to live in New Zealand indefinitely, and

Living or normally living in New Zealand, and

Under the age of eligibility for NZ Super (currently 65).

In many cases, state sector employees serving outside New Zealand and voluntary/charitable workers overseas can also join. But that doesn't help your wee grandson.

Still, KiwiSaver isn't great for under-18s anyway. They get the $1000 kick-start - which is worth signing up for while it's still around. But they don't get annual tax credits.

And the downside is that, while they can withdraw money later to buy a first home, they can't withdraw it for tertiary education or to start a business.

That's why I suggest parents and grandparents sign up the kids, but make contributions to some other savings account or fund that's more accessible.

In your case, you can't do the former but you can do the latter. Here's hoping the young man might return to New Zealand to study or set up a business if he's not already back here by then.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and 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, 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.