Investing while you have a mortgage

WITH MARY HOLM

Q. My partner and I have recently bought our first house.

Over time we have built up a small portfolio of shares: $1000 in a New Zealand listed company acquired through an IPO; $3000 in an Australian listed company acquired through demutualisation; $6000 in a UK listed company acquired as part of a remuneration package.

As a result, we do not have any form of account with any share trading service.

To me the maths is obvious. The returns on the shares after tax are unlikely to exceed the mortgage interest rates, hence the best thing to do is to sell the shares.

Unless you can advise me of a way where it is in our interests to hold on to the shares, what is the best way to dispose of these shares?

A. The maths may be obvious to you, but it's not to everyone.

I get quite a few letters from people thinking of doing the exact opposite to you. They want to raise or increase a mortgage so they can invest in shares.

As you say, it all hangs on whether you can make more on the shares, after tax, than you pay for the mortgage.

And the short answer to that is: no one knows.

Note, too, that people who borrow to make an investment can deduct the interest from their taxes. In your case, though, you borrowed to buy the house, which isn't regarded as an investment. So you can't deduct your interest.

That swings the scales in favour of your selling your shares.

Also, you hold just three shares. That's a lot better - in terms of risk - than holding only one, as many New Zealanders do. What's more, yours are in three countries, which gives a bit more diversification.

But still, it's far from ideal. An investor can reduce his or her risk considerably - for a given level of reward - by owning many shares or units in a share fund. So no, I'm not going to try to talk you out of selling your shares. I think it's a good move.

How should you sell? I emailed five firms that offer a discount service for people like you who don't need any advice on what to buy and sell.

"But does he want advice on when to sell?" asked one broker.

On your behalf, I said no. I don't think anyone has superior knowledge on market timing.

There's an argument for not selling the lot at once, just so you don't happen to hit the lowest day in the market. But, with the relatively small amounts of money involved in your case, I wouldn't bother with that. For one thing, you would be hurt by minimum brokerage charges.

The brokers are: Access; ASB Securities; DF Mainland; Direct; and NZIJ.

All are members of the Stock Exchange. That offers you protection if the broker should go broke, or disappear to South America.

Several offer the option of trading on or off the internet, but the UK shares can't be traded by internet.

Brokerage and fees for selling your NZ shares were all pretty similar, ranging from $23 (Access) to $30 (NZIJ). For the Australian ones, they ranged from A$24.95 (ASB via the internet) to A$55 (NZIJ).

DF Mainland doesn't handle UK shares in one-off transactions.

From the others, the quotes ranged from £40 (Access) to £55 (NZIJ).

If you don't want to bother with selling some via the internet, the next cheapest way to sell the Aussie shares was $A39.95 with ASB or $A40 with Access. Over all, then, Access or ASB seems your best bet.

Whichever firm you go with, you'll have to fill out an application form - which you can get from the website or by phoning the firm - photocopy some ID and so on.

It's a bit of a hassle, but the firms have to do it to comply with the Stock Exchange's "Know Your Client" requirements.

Some of the firms have lesser requirements if you want to do just a one-off trade, as opposed to becoming an ongoing client.

Other readers should note that the brokers have varying minimum charges, cut-off points and sliding scales. So you might find a different broker cheaper for the amounts you want to trade.

Liam McBride of NZIJ, for instance, observes: "Our charges have always been designed to be cheaper for larger amounts rather than minimum parcels."

So there you have it. If there are any other brokers out there who could better these prices, let's hear from you.

But I doubt if anyone will charge much less.

As John Southworth, head of equities with DF Mainland, says: "The charges do not cover the cost of doing the business. However, we offer this as a service to investors as a matter of goodwill."

It makes the heart glad.

* Got a question about money?

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