Diana Clement: Traps for the unwary buyer

New Zealand is awash with poorly performing financial products. If you're not on the ball or fall for the flashy charts, you could find yourself with investments that will seriously dent your wealth.

Savvy investors take advice, shop around and get the best financial products for their needs and tolerance for risk.

Websites such as Consumer Online, Fundsource, Cardwatch and Depositrates (see links below) will help you find the best buys, or your financial planner or insurance adviser should have access to comparison tools and sift the wheat from the chaff.

But, says Insurance Ombudsman Karen Stephens, don't just buy something because it's a "best buy". Make sure you know what you're buying and the return you expect to get from it.

So here are five products which, if not approached with caution, could trip you up.

Hire purchase

We Kiwis love bargains. So why do we pay over the top for expensive hire purchase deals?

Take the example of a bargain $1699.99 Philips 32" digital widescreen TV featured on Noel Leemings's website this week. Buy it over three years on HP and the cost soars to $2881.80.

At that price, this superb piece of digital technology is hardly the bargain it is if you had cash to hand over.

I'm no fan of borrowing to buy consumer goods, but if you must, why not get a personal loan? Interest on the HP deal amounts to 24 per cent per annum, but you get the first three months free.

If you were to take out a BNZ personal loan you'd pay 15.25 per cent.

Pitfalls: When you take out hire purchase, extras are added to the capital that you must pay back. They can include:

* An administration charge, called a "booking fee", to set up the deal. .

* Extended warranties.

* Insurance required by the seller to cover your loan.

* Other charges such as fees to check your credit rating.

If you're canny and use interest-free deals to your advantage, then you're likely to be better off than taking out a loan.

But, by and large, HP deals have stings in their tails that mean if you're a day late in paying off your interest-free deal you're in for a pain in the wallet.

Lifetime mortgages

Also known as home equity release or reverse mortgages, these products allow older people to take a loan on their home.

The money is paid out on a monthly basis until you die or move into a rest home, or in one lump sum.

Interest and charges on the loan compound and when you or your surviving partner die, the home is sold and the lifetime mortgage, interest and charges, are paid back to the lender.

This market is in its infancy in New Zealand and mortgage broker Sue Tierney, of Mortgages by Design, hopes that we learn from lessons overseas, where horror stories abound.

But she believes reverse mortgages are right for some older people.

Pitfalls: In Britain, people who have taken these mortgages have faced many problems that include:

* Finding their equity eroded to such a point that they can't afford to move house to be nearer family.

* The erosion of savings leaving little or nothing for next-of-kin when you die and the subsequent feuds this can cause.

* Leaving partners or friends who share your house with you nowhere to live when you die.

* Losing entitlement to state superannuation because your new-found cash takes you over the means test threshold.

* Interest rates on mortgage-based schemes can be higher than regular mortgage interest rates.

* You may have to pay valuation and legal fees adding to the total cost.

Capital guaranteed stock market investments

With capital guaranteed managed funds, your money is invested in the sharemarket, but you're guaranteed a minimum of your capital back on maturity. For anyone scared of fickle sharemarkets, these risk-free investments may sound ideal.

Pitfalls: These "all-gain-no-pain" products come at the price of losing much of the upside.

So if the sharemarkets are on a bull run - as they have been in New Zealand for the past two years - or your manager beats the index, a chunk of the upside will be eaten up in charges. In the case of some funds, you get the capital gains but don't share in the dividends.

Nor is the guarantee worth anything unless you keep your money in until the investment matures. For the risk averse, a DIY alternative is to put some of your money in sharemarket funds and the rest in safer term deposits.

Shabby bank accounts

If you've had your account for a while, make sure you carry out an annual review and check the interest rate you're being paid. When banks introduce new savings products they often fail to tell existing customers.

Pitfalls: If you've got a ASB Moneymaker account, you'll earn a paltry 1 per cent interest on all balances below $1000 and 1.5 per cent over that figure.

If you don't want to switch banks one phone call to the ASB could see your money switched to an ASB FastSaver account and you'll get 6.2 per cent.

If you've got $5000 sitting in your Moneymaker account you'll be $235 down the drain after one year compared with the FastSaver account, $3321.93 after 10 years of compounding interest and $9917.49 over 20 years - all as a result of taking your eye off the banking ball.

The likelihood is you'll find a cheque account paying better interest if you shop around.

BankDirect charges no fees for cheque account balances of $5000 to $49,999 and offers 5.25 per cent interest. Consumer's website is the best place to compare charges online.

Expensive extended warranties

It's tempting when you buy a big-ticket item such as a fridge/freezer or computer to buy extended warranties and maintenance contracts for peace of mind.

But modern appliances are far less likely to break down than they once did, making warranties good business for retailers and insurers.

Pitfalls: The Consumers' Institute has one word for anyone tempted to buy extended warranties: "don't", unless you're a family of eight that overuses its appliances.

That's because you're paying for protection you already have - you can in many cases claim from the retailer or manufacturer under the Consumer Guarantees Act.