Money: Gearing up to buy a unit

By Mary Holm

Money matters

Q. I am a 47-year-old single female who has just started saving for a house.

Up until two years ago I was not in a position to save much as I was on very low-paid employment while I freelanced as an illustrator, and most of my money has gone on further study and travel.

I have $10,000 in a Mortgage Income Trust Fund, and I now make regular monthly payments of $400 into this fund.

I wonder whether it would be sensible at my age to buy something small like a unit as soon as I can (maybe in a couple of years' time), or to buy a house along with two other female friends (is this a good idea?), or to continue saving until I retire and maybe move to a cheaper area, ie out of Auckland.

The question is, these days would I gain by buying something as soon as possible?


A. Start planning what colours you'll paint the kitchen. There's a good chance you would gain from buying a home soon. As is virtually always the case in finance, if you want to do better you have to take on more risk. But, in this case, not a lot.

Let's say you build your savings to $20,000 and use that as a downpayment on a unit. You then pay off the mortgage with the $400 a month, plus whatever you're paying in rent at the moment.

As for whether you would have more equity in the unit when you retire than you would have had in the mortgage income trust fund, the answer is: Probably. And with luck it will be lots more.

That's largely because you'll borrow to buy the unit, so your investment will be geared. That means that if the value of the unit rises more than a little, the return on your downpayment will be extra good.

It will almost certainly outdo your return in the fund, which invests in first mortgages and pays roughly the same as a short-term bank term deposit. (Currently, mortgage income trust funds are paying a bit more than 5 per cent.)

If, though, the value of the unit happens to fall, you will be considerably worse off than in the fund.

While mortgage providers will often lend up to 95 per cent of the value of a house or unit, they usually won't lend that much if you're buying an apartment or terraced house, says mortgage broker Rob Tucker of Loan Plan.

"There's uncertainty about their future value. It's a new market that hasn't established itself yet," says Tucker.

Even if you don't need a 95 per cent loan, you might want to avoid properties on which the bank wouldn't make such a loan just because that's a sign that they could be riskier investments.

Still, I'm probably being over-cautious here. Chances are that you won't retire for 15 or 20 years. And it's highly unlikely - even if the developers in the current apartment boom prove to be way too optimistic - that values on any type of housing will drop over such a long period.

It's worth taking into account the non-financial factors, too. Most people like the security and control they gain from owning their own place. If you're one of them, I would say "Go for it". On your two other ideas:

* The obvious advantage of buying with your two friends is that you could get something grander. But it can get tricky if you disagree about spending on maintenance or upgrading the property, or if one of you wants out and the others can't afford to buy her share.

Better to keep the friendships, and live separately.

* I wouldn't move out of Auckland solely because houses are cheaper elsewhere.

Think hard before you give up your friends and your base for a few more square metres of bricks and mortar.


Q. I have greatly appreciated your articles on annuities.

I have an "Allocated Pension Plan", courtesy of the Queensland Government Health Service. This would seem a kind of annuity, as it pays until I die, then goes to my widow. Or if requested, they will disburse the balance to my estate.

I somehow doubt this arrangement could be purchased in New Zealand. From what I have gleaned from your models of an annuity, any remaining capital disappears into the coffers of the insurance company (or whatever) on death, unless this happens within 10 years of commencement.


A. We can't let the Aussies outdo us. Christine Ormrod of Aon Consulting says some New Zealand employer super schemes offer features similar to yours.

People who buy their own annuities may not be able to get quite the same set-up, but similar, says Darrell Colmore-Williams of Aon Benefit Services.

All the providers will sell you an annuity with payments that continue to your spouse after you die. There's usually a choice on whether the spouse gets full payments or a lower amount.

But the providers may not give your spouse the option of getting a lump sum on your death. AMP, for instance, would do so only if your spouse provided satisfactory evidence that she or he was healthy, says Colmore-Williams.

Incidentally, my "models", as you call them, are only examples. Annuities come with lots of options, including:

* A guaranteed period of payment, even if you die before it's up. Ten years is commonly used.

* Payment increases of a fixed percentage each year, to allow for inflation. Two and 3 per cent are common.

* Deferred payments, which start several years after the purchase date.

All of these affect the price. Or, if you have a given amount of money to buy your annuity, they affect the size of your monthly payments.

* 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 phone number. We cannot answer all questions or correspond directly with readers.