By MARY HOLM
Q. My husband and I are in our late 40s-early 50s. Our business failed catastrophically a couple of years ago, forcing a sale of our assets.
We rent a small but very comfortable townhouse for $350 a week in one of Auckland's poorer eastern suburbs and have at last both found employment. Our combined wages are only about $83,000 gross and we have two teenage children to support.
Our dilemma is this: we have $78,000 sitting in our solicitor's trust account. It is not quite enough to be really useful but too much to sit in a savings account. What should we do with it?
We would like our own home, but prices have galloped away and this is looking increasingly difficult.
We couldn't afford to service a large mortgage and at any rate would certainly be paying more than our present rent, probably for a poorer quality home.
We quite like renting from a cost point of view, but there is no security of tenure, and we have already had to move once when the house we were renting was sold.
Is investing in our own home the best option, or should we try to grow the sum by putting the money elsewhere?
A. First, good on you for having the courage to start your own business.
Those who succeed in business are, of course, praised. But I think we should also give credit to those who tried and failed. Without people who give it a go, our economy would go nowhere.
Renting versus owning your own home? For many people there's no clear-cut answer.
But the two options are roughly equal only if the renter also invests the difference between their rent and what they would pay for a similar-quality home - including deposit, mortgage, rates, insurance and maintenance.
With that investment, when the renter retires they can either buy a home or use that money to continue to pay rent.
You, however, are not putting that money aside for investment.
If you continue as you are now, you will end up retired with no home and just whatever your $78,000 has grown to in an investment.
Unless you're unusually lucky - or unless you die young, and let's not count on that! - the money probably won't cover rent on a reasonable place throughout your retirement.
If, on the other hand, you buy a home now, you will be obliged to pay the mortgage, rates and so on.
And, if you can manage a 15-year loan, you should be able to retire mortgage-free. That will give you much more security. If you're not enjoying being forced to move now, imagine what it would be like at 75 or 85.
You say you can't afford a large mortgage. But you don't need one, if you're flexible about where you live. Your $78,000 plus a $200,000 loan would get you a median-priced house in Manukau.
In Papakura, you would need a $160,000 loan, and in Waitakere, a $150,000 loan.
At 7.5 per cent, monthly payments on a $200,000, 15-year mortgage would be $1854 - not much more than your rent of $1517.
And on a similar $150,000 mortgage, the payments would be $1390 - less than your rent. Even after adding rates, insurance and maintenance, you wouldn't be paying a great deal more than you are now.
Want a somewhat better house? You should be able to afford it.
After all you've been through, I feel a bit mean pointing this out, but many readers will react to your saying your income is only $83,000.
Thousands of families are buying houses on much less income than that.
While it's good to keep your mortgage low, you could probably cope with, say, a $250,000 loan.
I would start looking at houses as soon as possible, for three reasons.
* Although the pace of house price growth may slacken, prices are quite likely to continue to grow faster than bank interest, at least for a while.
* As you get older, it may become harder for you to get a mortgage, especially as you've had past financial problems.
* The sooner you get started, the sooner you will own a mortgage-free house, freeing you up for retirement.
In the meantime, if the money is earning no interest, get it into a bank term deposit.
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Q. Hmmn, moving into relationship counselling now? Nice to see your old-style approach to relationships in last week's column, but we do live in a modern world.
At my most cynical, three years is not a long time to put up with (or enjoy) a relationship to reap a significant financial benefit.
In this modern, grasping world, perhaps the test of a relationship is to see if the partner (actual or potential) has a problem with money being put out of their reach (but it does cut both ways.) Nothing to stop the partner with the money sharing the benefits, provided they don't use access to the funds as a weapon in the relationship.
Similar issues to your correspondent with money in Britain often arise in respect of relationship property when a person receives a significant gift or a bequest.
All I suggest is that people seek professional advice and make an informed decision at the time as to what should form relationship property, rather than simply allowing things to happen and ending up with an unexpected result some time in the future.
A. Let's look at the legal situation first.
Barrister Margaret Lewis agrees with you that a gift or bequest would be separate property, as was the money last week's correspondent had saved in Britain before she got together with her partner.
"It would remain separate property, unless it's used or intermingled in a way that causes it to become relationship property", she says.
"Using it to pay off a mortgage on the family home would usually do that."
As she said last week, the intermingling could be avoided if the couple drew up a simple agreement recording that the funds are separate property, and are being loaned to reduce the mortgage.
Lewis, like you, is all for people taking such steps.
The cynic might say that any lawyer would be, because it's more business for them.
But, Lewis says, she sees many people who find themselves unexpectedly disadvantaged because they didn't look after their interests sufficiently during a relationship they thought would last forever. And it's hard to argue with that.
She also notes that keeping funds separate from relationship property, via an agreement, gives a woman more options during the relationship, regardless of whether it ends.
"If she is likely to become financially dependent at some time - because of child bearing and rearing - retaining some element of financial independence can be important, and may benefit the relationship," says Lewis.
Still, your idea of somebody testing a relationship by seeing how their beloved reacts to money being put out of their reach is rather horrid. Many people would be deeply hurt.
And, as you acknowledge, the one with the money could use that as a weapon. "Do all the housework and I will let you share my booty."
It seems to me that whatever way you approach this issue - ranging from ignoring it to putting everything into a legal document - there's potential for harm, emotionally and financially.
It's tricky stuff, way too hard for me. So no, I'm not about to turn into an agony aunt.
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Q. Re your article last week about tax deductions on mortgage interest.
What your correspondent should do is form a loss attributing qualifying company and then sell the house to the new company.
He would have to guarantee the mortgage but can claim any loss against his other income.
This ensures that all deductions can be claimed and it takes the uncertainty out of the claims for mortgage deductions.
As you know, the IRD is not bound by its own decisions, so why take the risk?
A. A loss attributing qualifying company, or LAQC, is certainly an option. But it has its drawbacks.
For those who didn't read last week's column, the correspondent was renting out a house he used to live in, and was still paying off the mortgage he acquired when he lived there.
I and many others thought he couldn't deduct the mortgage interest, as the mortgage was not originally for an investment but for an owner-occupied house.
PricewaterhouseCoopers tax partner Scott Kerse pointed out that, under the Tax Act, the deduction should be allowed.
But he thought the IRD might take issue with that.
When I put it to Inland Revenue, to my surprise they said the deduction would be allowable, as reported in last week's column. In the meantime, though, Kerse and I discussed LAQCs.
When you set one up, the company raises a mortgage to buy the house from you. Or you might borrow the money, and lend it to the company.
Either way, the existing loan is replaced with one raised for investment purposes, says Kerse.
The LAQC ends up owning the property but, as you say, you can offset any tax loss the company makes against your other income.
But it's not all roses.
For one thing, there are set-up costs.
"You wouldn't be able to buy a shelf company, have it registered as an LAQC and get change out of $500," says Kerse. "And it could be much more".
Then there are ongoing costs, with extra reporting to the IRD and Companies Office required each year.
"And there are a heap of particular requirements to meet. It can be a bit tricky."
Kerse says that's partly because some people use LAQCs for purposes the IRD doesn't think they should be used for.
"Whenever the department sees those four letters together, it tends to get their backs up a bit."
Still, he adds, last week's correspondent's use of an LAQC "would be a fairly legitimate use, the sort the regime was designed to accommodate".
Nevertheless, he would have to pay an expert to make sure he toed the line.
Is all this necessary, given that the IRD says the deduction is okay?
I suggest anyone in this situation should discuss it with a chartered accountant.
In case their accountant is not up with the play, the IRD's policy on interest deductions is spelled out in Tax Information Bulletin Vol 3, No 9, June 1992, p14.
And a relevant court case is Case T16 (1997) 18 NZTC 8,095.
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Kemp died at home, aged 50, after battling aggressive kidney disease.