Money: Borrowing to invest in shares multiplies risk

By Mary Holm

Money Matters


Q. The concept of borrowing against the equity in the family home to purchase a rental property is well known and used in New Zealand (for better or worse).

This concept is also applied by investors purchasing shares direct.

Assuming an investment horizon of 10 years-plus, can this concept be applied to professionally managed funds, such as unit trusts that invest into international shares - for example, AMP and Tower?


A. It certainly can. But you're taking a fairly risky investment and making it even riskier. It's not for the faint-hearted.

The obvious advantage is gearing. Say you put in $10,000 and borrow $40,000, and then that $50,000 grows to $70,000. You pay back the $40,000 and keep $30,000. Your original $10,000 has tripled.

But what if you have to get out of the investment at a time when the $50,000 has dropped to $40,000?

This would not be an impossible happening at all in the share market.

You pay back the loan and are left with nothing. Your $10,000 has gone.

Let's take a step back, though.

Your first hurdle might be borrowing the money - which you'll need to get at a fairly low interest rate for the whole exercise to be worthwhile.

The cheapest money for most people is a mortgage on their home. But the mortgage lender is likely to ask what you plan to do with the funds.

And it might be reluctant to lend for an investment in shares or a share fund unless you're in reasonably good financial shape.

Remember, too, that companies in most countries pay much lower dividends than in New Zealand and Australia.

You'll probably find that your dividend income in an international share fund, after fees and taxes, won't nearly cover your mortgage payments.

That doesn't need to be a problem, though. Because the dividends are low, the capital gains on international shares tend to be higher.

You can always sell some units every now and then if you don't have other money to pay off the mortgage.

A measure of your success, when you borrow to invest in anything, is whether the investment brings in a higher return, before tax, than the interest rate on the loan.

(That is assuming you can deduct your interest expense on your tax return, which would normally be the case. Otherwise, you'd have to bring in a higher return after tax.)

That might not seem too hard. In recent years, returns on international share funds (dividends and capital gains) have been much higher than mortgage rates.

But there's no guarantee that will continue. In some years, the value of units in a share fund falls.

Also, interest rates are expected to rise over the next year or so, making the goal tougher.

Keep in mind, too, that your profit from this venture is not the whole return on the investment, but just the difference between your return and the interest you pay.

Could that difference be small - or could the interest actually be higher than the returns coming in - over a period as long as 10 years?

In a broadly diversified international fund, it's highly unlikely, but still possible.

A lot of experts reckon the risk is just too high, given the expected gain, for most people.

Then again, if you've got a taste for risk, and could cope with a bad outcome, you could give it a go. You might win handsomely.

Q. I read your comments in last week's column with interest and bafflement.

After ringing Work and Income NZ (Winz) three times to find out the date I qualified for New Zealand Superannuation, and having been given three different answers (none of which match your three months after the 64th birthday), I visited a Winz office.

There I was told that I would qualify at the end of June, my birth month, but that because I was in full-time employment my level of earnings would mean the superannuation would be rebated to the extent that I would actually receive nothing.

This doesn't seem to accord with what you have written. I am now even more confused. Can you help me?


A. I hope so. And I've probably got some good news for you.

Firstly, though, Pat Thomas at Work and Income NZ acknowledges that "this qualifying date business can be really confusing."

The trouble is that the date is gradually rising from 60 to 65. Sounds simple, but it's not so easy to administer.

"I hope that we have not given out incorrect information to your correspondent," says Pat Thomas.

"It depends a little on what question she actually asked.

"If she was born in June 1935, she would have reached the qualifying age for NZS in June 1999."

For people born between April 1 and June 30, 1935, the qualifying age was 64 years.

The people who are qualifying about now - between October 1 and December 31 - are 64 years and three months. For example, a person born on September 25, 1935 will qualify on Christmas Day.

If you are turning 64 this month, say on Christmas Day, you won't qualify for NZ Super until next June 24.

That's because the qualifying age for people born between October 1 and December 31, 1935 is 64 years and six months.

As far as your phone calls go, Pat Thomas says that if you had asked a question along the lines of "what is the current qualifying age?" the answers may have varied depending on what assumptions the Winz person made.

"What should happen with all these sorts of inquiries is that the actual date of birth is established and work from there. That would ensure that the correct date of qualification is established."

What's more puzzling is that you were told you would receive no money because of your earnings.

As I said last week, everyone of eligible age gets NZ Super, regardless of their other income or wealth.

NZ Super is, however, taxed. For many people the tax withheld from payments is around 16 to 17 percent, but for some with other income it is higher.

Occasionally, for those on particularly high incomes, super is taxed at 100 per cent, says Pat Thomas. But "that sort of assessment would have been carried out by IRD rather than Winz."

Another possible explanation is that you applied to have a younger non-qualified spouse or partner included in your NZ Super.

You would get the extra money for your partner only if your income is below a certain level.

If not, "that extra portion of the married rate could indeed have been abated away by her earnings."

Regardless, though, you should still qualify for the basic half of the married rate that is due to you.

Pat Thomas advises talking to the manager of the Winz Super section.

Hopefully, that will lead to your getting your fair share.

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.