Careful financial planning can make it easier to buy a home and start a family. Photo / Getty Images
I'm looking for advice regarding buying our first home. My partner earns a good income of $70,000 a year, which we can afford to live on comfortably for the two of us.
Our idea is to save my income of $63,000 (around $40,000 cash in hand after KiwiSaver, student loans and tax) for the next two years. We have already saved $64,000 from living just off his income for the last two years when I was in a lower-paying job.
We have been contributing to KiwiSaver for at least five years each, and if we can get the subsidy we will have $83,000 for our first home. The properties we are looking at are between $210,000 and $220,000. So if we can save my income for two years we should be able to pay for our house in cash.
I am 33 and my partner is 34, and we would like to start a family in around two years when we have purchased the house.
My partner is feeling a little uncomfortable about putting all our money into the house with little savings behind us when starting a family.
Would it be better to buy the house with cash and scrape by for a year or two on just his income or get a small mortgage and leave $40,000-$50,000 in the bank as an emergency fund?
You two are impressive. Many people on much higher incomes would say they couldn't save at the rate you're saving.
Your plans are, of course, eased by the fact that you can buy a cheaper house. Aucklanders will envy you. But still, aiming to buy a house mortgage-free is commendable.
One hitch in your plan is that your incomes are too high for you to get the KiwiSaver first-home subsidy — now called the HomeStart grant. The maximum before-tax incomes are $80,000 for one person or $120,000 for two or more people in the previous 12 months.
Given that you're planning to take time off work to have children, you could perhaps delay your house purchase until then, to get your incomes down so you're eligible for the grant. But that might not suit you. And I wouldn't suggest you let a grant of $10,000 — or $20,000 if you buy a newly built home — dictate some important life decisions.
On to your question. Experts say it's good to have an emergency fund of two or three months' expenses — which sounds like less than $20,000 for you two. But you don't want that amount earning low interest in a bank account while you're paying higher interest on a mortgage.
One solution is to get a revolving credit mortgage, which is like a bank account with a big negative balance. Often these loans have a maximum higher than the amount needed to buy a property, so you can easily borrow more later just by withdrawing it.
With a revolving credit mortgage, the borrowers put all their savings and income into the account, even if some of that money stays there only a few days before it's spent. They then pay interest only on the daily balance — which will be lower than it would otherwise be because of the income.
Let's say you need a $40,000 mortgage. You could ask for a revolving credit loan with a maximum of, say, $60,000. You'll have lots of equity (house value minus mortgage) in your home, so I'm confident a bank would be willing to offer that. Then you can borrow up to the $60,000 limit in an emergency.
If you don't need a mortgage at all, you could set up a revolving credit loan with a maximum of, say, $20,000, to use as needed.
That way, you're borrowing only when you have to. It beats having money sitting around earning low interest. Your money is working harder for you.
I submitted new KiwiSaver account applications for my children to my bank (KiwiSaver provider) on May 19, two days before the Government announced that the kick-start is withdrawn. Will the children still get the $1000 kick-start?
Hopefully. The key is when the children were enrolled into the scheme. "If a person enrolled directly with a scheme provider, enrolment means the date the KiwiSaver account is opened," says an Inland Revenue spokesman. So the question becomes: Did your bank open the accounts before 2pm on May 21?
Ask them. And if they didn't open the accounts in time, you might suggest they contribute some sort of kick-start themselves. Two days should have been time enough.
Assuming all's well, your children should receive their kick-starts three months from the date the KiwiSaver account was opened with the provider.
Are you able to clarify when the entitlement to the $1000 KiwiSaver kick-start became unavailable?
There are rumours that IRD has been dragging its heels on completing applications well before May 21 — Budget day.
In our case, I stopped pestering my partner to join KiwiSaver once we knew he would be starting a new job and would be automatically enrolled. His first day was May 4 and first pay day May 15. Does he retain any entitlement to the $1000 even if his employer was tardy with the paperwork?
It seems so. Says the Inland Revenue spokesman, "If you were automatically enrolled into KiwiSaver, you will be eligible for the kick-start if you started your new job before 2pm, May 21, 2015."
He adds, "For existing employees who join KiwiSaver through their employer, enrolment means the date the person gave their completed application form to their employer."
To be sure, your partner should check whether KiwiSaver contributions are listed on his May 15 pay slip — and ask questions if they're not.
Again assuming all's well, the kick-start will be paid to his provider three months after Inland Revenue receives the first contribution.
As for the department dragging its heels, the spokesman says, "There has been no change to the way applications are processed. They are processed the day they are received by Inland Revenue." The rumour sounds a bit like a conspiracy theory to me.
The Reserve Bank spokesperson's answers in your column two weeks ago regarding the failure of a bank and the application of the Open Bank Resolution (OBR) rules miss out an important issue.
Nowhere does he mention that if a New Zealand bank fails, not only are shareholders' and creditors' funds at risk, but depositors' hard-earned cash. This is a major omission, and I find it peculiar it has not been mentioned in the answer.
New Zealanders should not be deluded. OBR means your bank deposits are at risk of being used to pay off the debts of a failed bank. Neither will the bank be bailed out by the Government, unlike in the UK.
Neither should New Zealanders be under any naive belief that Australian parent banks will help their NZ subsidiaries if one of them goes "belly-up". This has been made clear in the past.
This is in contrast to most other developed countries, including Australia, where governments guarantee depositors' funds to quite a high level — for example, $250,000.
Depositors are on their own in New Zealand, because of dubious claims by the powers-that-be of the risk of "moral hazard".
Don't put all your money in one bank is the best advice I can give. Or perhaps even better, put your money in an overseas bank in a jurisdiction that offers some guarantee against irresponsible bankers and financial advisers, such as we saw in the financial crisis.
The creditors of a bank include depositors. Perhaps I should have spelt that out more clearly.
But as I said in that column, we've already gone into OBR in some depth recently — in the February 28 and March 7 columns. You can read them by doing a search for "OBR" on www.maryholm.com.
Briefly, under OBR, if a bank fails, it can be reopened the next day, and depositors will get access to most of their money.
However, if the bank's losses aren't covered by shareholders and the bank's capital, a portion of depositors' money will be frozen — although they may get some of that money back eventually. For more on this see www.tinyurl.com/obrmadesimple
The question of why New Zealand doesn't offer deposit insurance or guarantees is also covered in the March 7 column.
And so are the pitfalls of depositing money overseas. In short, I don't recommend it.
On whether a New Zealand bank's Aussie parents would help it out, the Reserve Bank says, "Where banks have overseas owners, it is possible that those owners may choose to not get involved in the unlikely event of their New Zealand operations facing problems.
"However, the Reserve Bank insists that all banks registered in New Zealand, regardless of who owns them, have adequate capital in this country, have certain essential information and systems available in this country, and have managers and directors who actually live in New Zealand. This means that resolving any issues with a bank does not depend upon support from the owners."
That's good enough for me. But maybe not for you.
In the end, there are no absolute guarantees about bank safety. Your suggestion about not putting all your money in one bank makes sense for people with substantial bank deposits.
In your recent comments about bank failures you stated that the OBR regime pushes the costs of a bank failure on to the bank shareholders and "creditors".
I'm happy to have the bank's shareholders take the first bath on losses, but when it comes to creditors should this not mean "debtors"?
The bank's creditors include those with deposits — that is, people to whom the bank owes the value of their funds held by the bank. The debtors are the mortgage holders and other borrowers who owe the bank money. Surely the debtors should be called upon first to stump up money to support the bank? Anyway, aren't they the likely cause of a bank getting into trouble? Why would the creditors (depositors) carry the cost? Surely you go after those who owe you money not those you owe money to? Have depositors been duped?
I don't think so. If a bank failed, debtors would, in fact, be called upon to repay their debts, says the Reserve Bank. "But the process of recovering money from debtors could take many months — as it always does with a receivership or liquidation.
"Open Bank Resolution is designed to ensure that the immediate support the bank needs — so it can open the next day in order for people to continue using their accounts — needs to come from people who can provide that support immediately.
"In the unlikely event of a bank becoming unstable and OBR being used, then it is the shareholders and depositors who have that money immediately available — that is, overnight."
• 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 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.
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