KEY POINTS:
Q. I have paid off my owner-occupied property. I also have an investment property worth $283,000 in a LAQC. I have paid more than $100,000 towards it. Should I revert to 100 per cent gearing on my investment property and use the $100,000 for a term deposit?
Our
household income is around $160,000 ($80,000 each). Would this help in increasing our after-tax income?
A. Only if you are willing to take on a fair bit more risk. If you add to your investment property mortgage, you will pay, say, 8.5 per cent on a one-year fixed rate.
You are in the 39 per cent tax bracket, so after deducting the mortgage interest on your tax return, you'll be paying 5.18 per cent. (That's the 61 per cent of 8.5 that you will be left with after tax.) Meanwhile, on a bank term deposit you might earn 7.5 per cent. After tax, that will be 4.57 per cent.
So you would be going backwards - making less than you spend.
But you could earn, say, 9 per cent on a finance company term deposit, or similar. After tax, you would get 5.49 per cent - which is 0.31 per cent more than you would be paying on the mortgage. On $100,000, that amounts to $310 more after-tax income a year.
The cost of that $310? Taking on the risks of the following:
* A heavily geared property. If circumstances forced you to sell at a time when prices were low, the sale proceeds might not cover the mortgage. You would owe the excess to the bank, with nothing to show for it.
* A fairly risky term deposit. You could lessen the risk by spreading the $100,000 over, say, half a dozen finance companies. But, while that more or less guarantees you wouldn't lose the lot, it increases the chance that you would lose some - and quite possibly more than the $310 a year.
There are other ways you could earn more than the 5.18 per cent after tax you would be paying. You could, for example, invest in other rental properties, or shares or a share fund.
But all these investments come with risk. And given that you would gain only to the extent the after-tax return exceeds 5.18 per cent, you might feel it's not worth the hassle and worry.
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Q. I support the writer in last week's article who wants to buy shares to build up their own portfolio over 20 years or more, rather than invest in an index fund.
I have built up my own portfolio over 30-plus years and now have a holding of 50 shares worth nearly $2 million, for an initial outlay of probably around $300,000. This has been built up by, where possible, opting for reinvesting dividends into new shares, as I have not been dependent on the income from the shares for everyday living.
I am no expert, but read a number of financial magazines and newspapers, and initially chose blue chip shares through a reputable stockbroker, which should - and did - increase in value.
Of course one has a few failures, but most shares, if chosen sensibly, will increase in value over time, and shares become an interest and a hobby not possible through passive investment in index funds.
A. You're quite right that share investing can become a hobby, which many people enjoy. And that's great.
But I'm concerned that such hobbyists are often poorly diversified, especially at the start, and that they sometimes trade frequently, which is not usually a winning strategy. By now, though, you have great diversification and an impressive portfolio. Well done.
Note to other readers: Hands up those who thought this letter was written by a man. I certainly did. Men seem to be much more likely to build up a portfolio this way. But not this time!
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Q. I was particularly interested last Saturday with your comment regarding donations to charities and the maximum rebate being capped at $630.
But I would like to point out that Tear Fund was the first organisation to offer the Christmas catalogue idea. Therefore it is another organisation to add to Oxfam and World Vision.
Its contact details are: Tear Fund NZ, 0800 800 777; www.tearfund.org.nz. I hope you can make these details known to your readers.
A. Fair enough. I don't know anything about the Tear Fund, but its website looks legit.
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Q. A considerable part of donations made to charitable institutions is used to meet overheads, staff salaries, maintenance of premises etc.
A study of one charity showed that 60 per cent of their donations was used to cover the overheads.
I would like to have every cent of my donation used to provide aid to the poor.
Could you please let me have the names of charitable institutions that are run by volunteers and which use little or no part of their income on overheads?
A. I don't know of such a list. And in any case, your criteria sound rather harsh.
It would surely be impossible for the bigger charities to be run entirely by volunteers, and even the ones that are run by volunteers must have overhead costs. It's hardly fair to expect volunteers to cover those themselves.
From next autumn there will be more information available about many charities - the services they provide, who benefits and how they are run - when the Government's recently formed Charities Commission gets into full swing. The info will include some basic financial data.
In the meantime, you can browse www.charities.govt.nz to get a feel for what will be available.
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Q. I agree that it is much better for society if "the wealthy reduce their tax bill by boosting their donations rather than setting up trusts" and for the less wealthy to help with what they can afford, or to even enter the ADRA Charity race for disaster relief and needy children at Mission Bay tomorrow, as I am doing.
We can all help the poor in our own way, such as the Sydney church minister who received a call from the Australian tax department, as many of their donations are tax-deductible.
"Reverend," inquired the caller. "I am ringing to check that George Clark donated $10,000 to your church rebuilding fund". The minister thought for all of one second and replied; "Sir, if he didn't, he will."
A. This column is not a noticeboard about charity events. But I liked your Sydney story enough to let you get away with it, just this once.
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Q. Your piece two weeks ago about the price of pies in the 1950s brought back memories of a decade further back.
I recall that during the war pies cost 3d. I remember that when meat rationing was introduced (early in 1944?) questions were raised as to whether pies would require a coupon. Meat ration coupons came in 3d denominations (I think the adult ration for the week was about 1/9d) and it was decided that pies would not be subject to rationing and coupons.
That would suggest that 3d during the war was about equivalent to $1 today. That's about where I calculate wartime prices and values. My equation has been 2d = $1, or approximately 1 pound then = $100 today.
The Herald then cost 2d, I think, and $1.50 today, while a 3d icecream then is about $1.50 now. Of course this doesn't apply to Auckland house prices or overseas telephone calls!
A. No indeed. It's interesting to note which prices have grown faster than inflation, and which slower. Long-distance calls are certainly relatively cheap these days, as is long-distance travel.
House prices are the opposite, growing faster than inflation - although the growth wouldn't be nearly so strong if we allowed for the improvements in quality and size over the decades.
Speaking of which, in a recent newsletter mortgage bankers Cairns Lockie pointed out that the median New Zealand house price increased an average of 6.7 per cent a year in the 10 years ending September. I suspect this is lower than many people would expect.
What's more, Auckland's pace has been slower, rising 5.4 per cent a year.
"This is well up on the annual inflation rate of 2 to 3 per cent," says the newsletter. But my reaction is the opposite. Given that we've been through an extraordinary boom - with house prices now at their highest levels ever relative to rents and incomes - the 10-year growth is surprisingly low.
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Q. Like you, I cannot recall the price of a pie in the 1950s. But I have seen some interesting carvings in the stone outside the entrance to the Freiburg Cathedral in Germany that depict the size of a loaf of bread that could bought for one pfennig at various times in the cathedral's history, which goes back to 1513 when it was consecrated.
These clearly show that inflation was alive and well in the Middle Ages, and that the idea of using the cost of food items to quantify it is not a new one.
Sounds like a fascinating exhibit.
In New Zealand, the Reserve Bank's inflation numbers go back to 1880. They show that inflation was always below 10 per cent from then until the 1970s. Prices actually fell in the late 19th century and during the Great Depression.
The cost of a bought lunch in 1940 and 1941 is burned on my brain - it was so delicious! I was given 4d to buy lunch at the dairy next to school. I was supposed to buy two filled rolls at 2d each.
Actual purchase: Mince pie - 3d; Large cream-filled doughnut, genuinely fried in who knows what and smothered in icing sugar - 1d.
Sounds appalling now - and all jammed together in one small brown paper bag.
A. We've had more than enough on pie prices. But I had to run your letter. It reads like a confession, so it may be good for your soul. Thanks to the many others who sent in info on historic prices.