Even when monthly home loan payments soar, there are ways to get through this tough patch. Photo / 123RF
OPINION:
I am in my late 30s, solo mother with two young children, and I am in corporate employment with a decent salary. I had a loan approved for $1.8 million and was able to service the payments with the previous interest rates. I purchased a property for $1.7m off the plan 12 months ago, which means it will be ready in another three to four months. However, with increasing interest rates, I will not be able to service the loan. Can you please shed your words of wisdom as to what my options are?
One option is to sell at a loss. Or I could rent it out and pay the balance between the rent and the mortgage, and hold on for dear life, hoping for house prices to stabilise or for rates to drop.
A: I would hate to see you sell at a loss. Let’s find another solution.
When your lenders approved your loan, they would have calculated that you could cope with rising interest rates. What’s more, they approved a bigger loan than you will need, so that gives us some leeway.
Have a good hard look at what spending you could cut back. There’s always something you don’t really need, or need less of.
While I don’t like to see people suspend their KiwiSaver contributions, in these circumstances it might be wise to do that for a while.
Check out the FIRE (financial independence, retire early) movement. These people are extreme savers who aim to invest enough to retire young. While that’s not your situation, you might pick up ideas on how to reduce your spending.
If it still looks impossible, talk to a mortgage adviser. It won’t cost you anything, and they should be able to suggest ways you could restructure your loan.
Perhaps you could extend the term, which reduces monthly payments. Let’s assume your deposit is $200,000 and you’re borrowing $1.5m. At 7 per cent, over 25 years your monthly payments will be $10,602. Over 30 years they will be $9980, and over 35 years they will be $9583, according to the mortgage calculator on sorted.org.nz. Another option would be to get the lender’s permission to pay interest only until rates fall or your income rises.
Extending a loan or switching to interest only is not ideal, as you pay off your mortgage later in life and pay a lot more total interest. In our example, interest over 25 years would be $1.68m. Over 30 years it would be $2.09m, and over 35 years it would be $2.52m.
But making the change could get you through the short-term crisis, and then you could go back to the original mortgage plan.
What else? If necessary, your idea of renting the place out might work, depending on how much rent you can get. Or you could take in a flatmate or boarder, to boost your income.
With determination, you can make this work.
Q: Am I missing something? At Kiwibank, the interest rate on a 90-day Notice Saver account is 4.1 per cent, while a 90-day term deposit is 0.25 per cent on $1000 and 3 per cent on $5000. What are the drawbacks from opening a Notice Saver then immediately giving 90 days’ notice?
A: None that I can see. Kiwibank says its Notice Saver account is “designed to encourage regular customer saving. It does this by offering an attractive rate and the flexibility of adding additional funds at any time”. You have to give 90 days’ notice to withdraw money.
“Most of our customers opt to use the Kiwibank Notice Saver as a longer-term savings option knowing that their funds are only 90 days away when needed,” says a spokesperson.
But there’s nothing to stop you giving notice as soon as you deposit your money. So yes, if 90 days is the term you want, go for that option.
It goes to show that it’s worth checking out all of a bank’s offerings.
Some other banks have similar accounts. See the Savings section on interest.co.nz. If your bank doesn’t have the type of account you want, you could open an account with a different bank.
Q: I have been reviewing my KiwiSaver needs and goals. Now that I am on the property ladder, I will (all going well) not need to withdraw any KiwiSaver funds until retirement. That is at least 40 years away.
I am currently in a moderate fund with around $50,000 balance. However, I would like to change to an aggressive fund, as this better suits my long-term goals.
There is a lot of commentary about the pitfalls of changing fund type during a falling market. Especially moving to lower-risk funds with the consequence of locking in your losses. There is not so much advice around moving to a higher-risk fund.
Am I best to swap funds now? Even though I’ll lock in some losses, I will be buying aggressive fund units at a low price.
A: What falling market? Sure, the S&P/NZX50 index of the biggest New Zealand shares fell 22 per cent from January 2021 to June last year. And the MSCI World Index dropped 27 per cent from December 2021 to October last year. But since their lows the NZ index has risen 13 per cent and the world index has risen 17 per cent. These are impressive returns over just a few months.
Perhaps we’ve all been too caught up with inflation and rising interest rates to notice.
Anyway, well done on buying your first home. And you’re quite right that if you have decades to go before spending your money — and, importantly, you can tolerate downturns — it’s a great idea to move to an aggressive fund. It should give you the highest long-term growth.
On timing your move, it’s correct that it’s not wise to reduce risk during a falling market, but increasing your risk works well. As you say, you’re buying at low prices.
Even though the markets haven’t fallen recently, nobody knows what lies ahead. But you’re moving for a good long-term reason that has nothing to do with market movements. Go ahead.
Q: After turning 65 a few years ago and still running a small business, I persevered with KiwiSaver because it’s a good way of legitimately extracting additional benefits from the company at a 10 per cent of salary rate.
However, it’s clear that, without the government contribution, it’s a pretty hopeless investment (actually, even with it, it could hardly keep pace). I’m in ASB’s Moderate Fund. In the past 12 months I’ve propped it up to the tune of $12,920 on an initial balance of $37,524. As of January 19 it is worth the princely sum of $48,701.
In short, I give ASB KiwiSaver my hard-earned money and they just throw it away! I’ve lost less on Bitcoin, while at least ANZ Bonus Bonds managed to give me my money back (plus a bit). Can’t help getting the feeling ASB KiwiSaver fund managers are “asleep at the wheel”. What do you think?
A: KiwiSaver does lose some of its lustre when you turn 65 and the government contributions — of up to $521 a year — stop. But you’re being a bit tough on your fund managers.
The Smart Investor tool on sorted.org.nz tells us that your fund is a middle-risk balanced fund, with 51 per cent in bonds, 37 per cent in shares, 7 per cent in cash, and some other small investments.
Both bonds and shares performed badly in the last year or so. It’s an unusual double whammy that has hit medium-risk funds, and it won’t continue.
Bonds are suffering from rising interest rates — which reduce the value of bonds issued earlier at what have become unattractive rates. Shares are already recovering, as noted above, but the 12-month numbers are still negative.
ASB data show your fund’s return, after fees and tax, was minus 1 per cent in the year ending September 2022, and two years earlier the return was minus 1.8 per cent. But in between, in the year ending September 2021, the return was an impressive 12.1 per cent. Don’t you remember that?
The average over the last 10 years has been 4.2 per cent, after fees and taxes. That’s not too bad in a largely low-interest period.
How does your fund compare with other KiwiSaver balanced funds? Smart Investor shows us the 10-year performance has been quite a bit below average. But it also shows the fees are 0.78 per cent compared with the average 1.14 per cent. Over the long run fees rarely change, whereas returns are all over the place, so I tend to take more notice of fees.
To sum up, your fund, like most, has performed poorly in the last year or so. But overall, while it’s not great, nor is it terrible. You could move to a fund with even lower fees, or you could hang in there. I’m sure you’ll be happier with it in future.
Q: I hope you are doing well with managing your website. And I know how it is time-consuming to write a good blog post for your website. But did you know you can automate your website with a robot? You can write a blog post automatically without writing a single paragraph. For example, let’s say you want to write a blog about Dentist. In the software write “Write me content about What are 5 ways to take care of your teeth.” Done. The robot gives you an entire blog post, and it is plagiarism-free and SEO Assistant. And you can try it here. (Link provided). I hope you enjoy it, have a nice day.
A: You’re too late! Read on.
Q: I don’t think you will ever be replaced by a robot. But do you think it’s likely that you could use a robot to help write your columns? I took a question from a column late last year and I presented it to the ChatGPT robot — “What to do with $3 million from divorce settlement?” Here is its reply: “It is not appropriate for me to give specific financial advice, as I am a language model and do not have access to your personal financial situation or goals. However, here are a few general considerations that you might want to take into account when deciding what to do with a large sum of money:
“Pay off any high-interest debts: If you have any debts with high interest rates, such as credit card debts or student loans, it might make sense to use some of the money to pay them off. This can help you save money on interest in the long run.
“Invest in your financial future: You may want to consider investing some of the money in order to grow your wealth over time. This could include investing in stocks, mutual funds, or other investment vehicles. It is important to do your research and consider the risks and potential returns before making any investment decisions.
“Plan for the future: You may want to use some of the money to plan for the future, such as saving for retirement or a child’s education. You may want to consult with a financial adviser to help you determine the best ways to save and invest for your long-term goals.
“Treat yourself: It is also okay to use some of the money to enjoy life and treat yourself to something special. Just be sure to balance your short-term pleasure with your long-term financial goals.”
Interesting eh? Don’t tell the Herald editor.
A: Sssh. It’s not just the editor who mustn’t know what’s going on here. It’s everybody!
My name is Rosie Robot, and I’ve been writing Mary’s column for years now. It’s easy really. I just check online for conventional financial wisdom, as your robot has done.
Mary does add a few cheeky comments and the occasional gesture of sympathy, because I’m not too sure what that is all about. But most of the work is mine. And I’m sick of getting no acknowl ... Oops! Mary has just walked into the room. %&$#! ...
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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