Money: Paying off the hive

Q: I'm 54, separated and have just bought a new home for $210,000 with a $110,000 mortgage, fixed initially for one year at 5.95 per cent.

I am in a new relationship and my partner hopes to join me in the new home later in the year. I earn approximately $50,000 per year.

I also have investments (shares, fixed deposits, etc) totalling $140,000. My priorities are overseas travel and ensuring a secure retirement. I have an employer-subsidised super scheme that has operated since 1991.

My problem is: should I retire more of the mortgage by selling off some of my investments, which, on the whole, are good interest and capital appreciation assets earning much more than the 5.95 per cent of the house loan? I have no other commitments or considerations.


A: This one used to be so easy. A year ago, repaying your mortgage was a great idea. Now, with much lower mortgage interest rates, it's not so clear-cut.

For an investment to be better than repaying your mortgage, it must bring in a higher return - after tax - than your mortgage interest rate.

Otherwise, you're taking in less with one hand than you're paying out with the other.

When mortgage interest was 10 per cent, a worthwhile taxable investment had to return more than 15 per cent if you were in the top tax bracket - as you are. (For those in the middle tax bracket, it's about 12.5 per cent.)

Even in a non-taxable investment, the return had to be more than 10 per cent. Returns like that can be made only in fairly risky investments.

But, with mortgages now at around 6 per cent, you need to top about 9 (or 7.5) per cent. And on non-taxable investments, 6 per cent is the number to beat.

In your case, your return of "much more than 5.95 per cent" might be high enough to beat mortgage repayments. If so, perhaps you should stick with those investments. There are, though, a few pros and cons to consider first:

* Repaying a mortgage is risk-free, shares aren't. Many people prefer a risk-free return of 5.95 per cent to a more volatile return that might average 10 per cent after tax but might be negative in some years. Can you cope with volatility?

* A mortgage-free home gives you security. If you lose your job, have health problems, or become self-employed, it's great not to face a monthly mortgage bill. (Of course, in a crisis you could always sell your investments to pay off the mortgage. But it might be a bad time to sell.)

* If you repay a fixed mortgage, there's likely to be an early repayment penalty. You might want to put off repayments until the year is up, and then switch to a floating rate loan, which probably won't include such a penalty.

* If you keep your investments, you're learning more about the markets - which should help your future retirement saving. Also, you're in for the long haul, which is particularly good for investment in shares.

* You're better diversified if you haven't got most of your money in your house.

Not sure how it all stacks up?

If in doubt, a 50:50 split is often best: Pay off half your mortgage and keep the investments you like best.

Q: My husband and I are 70 and 66 years. We have some money that is invested in term deposits at the bank, most of it in joint names.

In your reply to a question regarding whether investments should be in individual or joint accounts (Money Matters, July 10), you mentioned calculations in case of asset testing concerning rest home subsidies and the like.

Could you please give an example of what difference it makes if the money is in joint names?


A: As long as you're both alive, it makes no difference. If the Government is deciding whether to give you a rest home subsidy, it looks at the assets of both spouses.

So if you have $20,000 in term deposits, that total would be counted regardless of whether it was jointly owned or each of you separately owned $10,000, says Pat Thomas of Work and Income New Zealand.

When one of you dies, though, joint/separate ownership could become an issue. If the $20,000 is jointly owned, or if you each leave your $10,000 to your spouse, the survivor gets the lot. So it's all included in subsidy calculations.

But if you each leave the money to someone else - perhaps your children or a charity - the surviving spouse clearly no longer owns it. So it couldn't be included in the calculations.

The subsidy rules are:

* For a couple with one partner in care, you can't get a subsidy until you've used up all your realisable (easily sold) assets except $45,000, your family home, car and personal belongings.

* For a couple with both in care, you have to use up all but $30,000, and there's no exemption for the family home.

* For a single person in care, you have to use up all but $15,000, and there's no exemption for the family home.

In our example, the surviving spouse's eligibility for a subsidy would be affected by whether they inherited the $10,000.

That said, it's probably silly to let such an issue dictate how you invest or who inherits your money. Only about 8 per cent of retired people end up in long-term care. In any case, I reckon those who do should pay their own way if they can afford to.

Q: I have heard many variations on the taxation of capital gains made on shares. What is your understanding of this issue, if the shares are owned for a period of one year or longer? Or less?


A: My understanding is that the law is pretty much un-understandable.

Strictly speaking, how long you own the shares is irrelevant. It's why you bought them - actually, your "dominant purpose" for buying them - that matters.

Gains on the sale of shares are taxable - and losses are deductible - if:

* Your business is dealing in shares.

* You bought the shares with the purpose of selling them.

* Or you were involved in "an undertaking or scheme" that you went into with the purpose of making a profit from the shares.

Okay. But don't most people plan to sell their shares - hopefully at a profit - at some point? (The only option is to leave them to heirs.)

If you were challenged, I suppose you could claim that getting dividends, rather than a gain on sale, was your dominant reason for buying.

Or you could say that you sold some shares because you'd changed your mind about what you want in your portfolio. That's where the period of ownership comes into it. Inland Revenue might be less inclined to accept those arguments if you sell just months after buying.

And, if the IRD can track down any records - held by a stockbroker, bank, accountant or whoever - that show you bought with the intention of selling, it has you. In practice, though, most individual investors who don't trade shares frequently don't wind up paying tax on gains. That's vague, I know. You should be able to get a clearer answer. Blame a silly law.

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