High life can be hazardous

Q: I have just been speaking to my solicitor about investing in apartments, which we signed up for on the weekend.

He strongly suggested I speak to you as someone who knows all about this subject.

He says the market is slow, there are a lot of apartments out there waiting for tenants and a lot for sale. He is speaking from experience as he has a few himself.

We have a few days left in which our solicitor can peruse our agreement and he said we should talk to as many people as we can to gauge the feeling towards the market.

He has really put me off and rightly so. I have appreciated his advice very much, but wondered what you thought.

I am now scared we have done the wrong thing and would appreciate your advice.

A: Many property experts - all of whom expect house prices to at least slow, if not fall, in the near future - are particularly worried about apartment values. I certainly wouldn't invest in an apartment right now.

And given that your lawyer is in the market, he'll know what he's talking about.

Also, unlike the apartment salespeople, he hasn't got anything to gain from what he's saying. In fact, he may lose some business. So I would heed his warnings.

Even if prospects for apartments were great, I would hate to see you rushing into a big investment.

No doubt the salespeople said the apartments were special in some way, or the price was particularly low, or there were only a few left, and that's why you signed up promptly.

But why are they rushing you? Could it be that, if you take time to look around, you just might realise their deal is not as good as they are painting it?

Rule Number One in investing is to take enough time to fully understand what you are getting into.

I've never heard of anyone who was later sorry they backed out of an investment being sold under strong time pressure. And I've heard of plenty who were glad.

Dump this investment idea. And keep your lawyer.

Note to other readers who may worry that this reply may be too late: while I don't usually answer readers directly, I sent this correspondent a copy of my answer right away.

Q: I am a little confused by this whole student loan thing.

According to my daughter, who is in her third year as a student, the loan money is paid directly to the institution rather than to the person.

Or does the author of the letter in your column last week, who wants to invest his student loan money, know something we don't? How can you make a deposit on a mortgage using your student loan if the student loan funds are paid directly to the tertiary institution? Just doesn't seem possible.

Just looking at her loan statement: one column has the date; the next has a description ("Compulsory fees paid to university; loan administration fee; living costs payment").

From what I can make out, students who can afford to pay their own living costs could not get the living costs lent to them (unless they are cheating the system and how are you going to overcome that?), whereas the actual fee loan component goes to the university.

Now I am even more confused.

Sorry.

A: I'm sorry too, if I've confused you.

You're quite right that the fee portion of a student loan is paid directly to the institution.

But anyone who doesn't need a student loan presumably has other money available to pay their fees and living costs, perhaps from savings or helpful parents.

If they want to take advantage of the interest breaks on student loans, they take out a loan to cover their fees and living costs and then invest the other money.

Sure, they are not investing the actual loan money. But they end up with a loan and an investment. The effect is exactly the same.

On the living costs portion of a student loan, there is no means test or need assessment. This is because the money is a loan that has to be paid back, says StudyLink, which manages the loans while students are studying.

So students can borrow that money without needing it.

On the other hand, student allowances, which are non-repayable grants, are given only to those on lower incomes and, if the student is under 25, those in families on lower to middle incomes.

Students who get allowances cannot also borrow the full $150-a-week loan for living costs. Their allowance amount is subtracted from the maximum loan amount.

In addition to fees and living costs, students can also borrow for course-related costs. More on that in the next Q&A.

By the way, as I said last week, I doubt if most mortgage lenders would be happy with someone using borrowed money as a mortgage deposit. But, if you had a deposit from elsewhere, you could use student loan money instead of some of the mortgage, or to boost mortgage repayments, and save on interest.

Q: At the end of last week's column you say that the $1000 available for course-related costs cannot be invested, but rather is a reimbursement for a purchase.

A quote for course-related costs is sufficient. As a student, and student loan holder, I find that it is quite common among my peers to go to a computer store, get a quote for a laptop or home PC and send that in to StudyLink to get the money credited to their account.

Unfortunately, they often use it for discretionary spending rather than investment.

A: Telltale! But given that we taxpayers are subsidising the student loan scheme, I guess it's good that you tell us about all the little tricks. And they are not easy to counter.

StudyLink requires all students to provide evidence of the course-related costs they claim. But it adds: "Most students do not have the means to purchase the items first and then seek reimbursement, so most claims are approved on the basis of quotes.

"It is, therefore, possible for students to use their course-related costs money for reasons other than that stated."

However, StudyLink says it can "randomly verify" individual course-related cost claims. "And we do investigate specific allegations or identified concerns regarding individual claims that students make."

A spokesman says StudyLink believes "the vast majority of students access the student loan scheme for the purpose for which is was designed" and it encourages students to borrow only what they need.

In 2005-06, it is starting a pilot programme "targeted at first-time students, ensuring that they have the information and support they need to enable them to make informed decisions about financing their tertiary study".

Still, I don't really see how StudyLink can stop students borrowing to invest.

Q: Further to your column last week regarding ratings information on Capital + Merchant, we would like to point out that our debenture stock has been independently rated by Property Investment Research (an Australian-based, ASIC-approved research company), which uses qualitative and quantitative research to reach its results.

PIR specialises in assessing mortgage-based debentures, which form the basis of our loan portfolio.

PIR's overall security rating for Capital + Merchant debenture stock is 4 out of 5 stars (an investment grade rating is 2.5 stars). This is based on factors associated with the risk relative to the return, liquidity, security spread, diversification and experience of the manager.

Under the SQP rating system, you referred to last week - a remote assessment process based only on published data - highly profitable finance companies tend to be rated more favourably. These companies tend to reward their shareholders with solid dividends and not necessarily reward their debenture holders with higher interest.

We offer our debenture holders a higher interest rate than many. On the other side of the ledger, the fees we charge our borrowers are less than other finance companies. It means a lower margin, and less profit, but it increases the quality of our loan portfolio and reduces the risk to investors.
A copy of PIR's report can be viewed at our website, www.capitalmerchant.co.nz (see link below).

Capital + Merchant Finance

A: Fair enough.

* Mary Holm is a seminar presenter, author and publisher. Her advice is of a general nature and she is not responsible for any loss that any reader may suffer from following her advice.

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