Mary Holm: Beware bubbles when buying home

Signs of bubbles include rapid price rises, many people bidding at auctions and houses selling really quickly. Photo / Dean Purcell

The best time to invest in a house is when you have the money, but think carefully before spending

I will soon be eligible to pull my KiwiSaver contributions and receive the Housing NZ subsidy to buy a house. This, along with savings, will give us about a 10 per cent deposit on a $200,000 house.

We are currently paying in rent more a week ($260) than we would pay on a mortgage ($250). The house we live in has quite bad mould in the winter. We have thought about moving to another rental place. However, to get a house in relatively good condition we would need to pay an extra $60 a week.

My question is whether to buy now or move and pay higher rent. This will lead to us not buying a house for a while, as we will not be able to save as we have done.

In the meantime interest rates are low and house prices seem to still be going upwards. We are in the Hawkes Bay. Do we buy now or rent?

Asked when it's a good time to buy shares, one expert replied, "When you have the money". The same probably applies to houses.

Trying to "time a market" - to pick when it's best to buy or sell - is really difficult. But one guideline is: don't buy when everyone else is. That's when you get caught by price bubbles, which later burst. Signs of bubbles - apart from the obvious rapid price rises - are that many people bid at auctions, and that houses sell really quickly.

Parts of Auckland are starting to look bubbly. But I haven't heard of that happening in Hawkes Bay lately. Still, you might want to ask around - not real estate agents! And go to some auctions just to watch.

Assuming there's no local bubble, it sounds as if you would like to buy now, so why not - as long as you're pretty confident your incomes will continue. Finances aside, most people like to own their own homes for psychological reasons.

A couple of notes of caution:

* As you say, mortgage rates are unusually low. You might want to get a five-year fixed loan, to protect you from rises. Even so, have a plan for how to cope if rates rise a lot after five years.

* When doing your sums, don't forget expenses beyond the mortgage. Get a rough estimate of rates, insurance and maintenance on the sort of house you're looking at - perhaps by asking someone who lives in a similar house.

Good advice

A bouquet for your encouragement to join the KiwiSaver scheme at its inception. What a wonderful reward I received recently when the KiwiSaver payout was deposited into my mortgage account.

It made a dent in the mortgage, which for a recently superannuated self-employed professional is great. Although this is well short of liquidating the mortgage, "every bit helps" and is reflected in the reduced interest due each month.

I keep the fortnightly mortgage payment constant, so this reward of almost $10,000 will shorten the duration of that loan. So THANK YOU!!!

As background information: during the term of KiwiSaver, $1043 was deposited every June for both my partner and me. She is several years younger than I, and we intend continuing this investment until her 65th birthday then withdrawing it, probably to further reduce the mortgage.

In my opinion there is no better investment in the world that provides a tax-free total of $9700 for an input of $5215 over five years. This will be even better for my partner.

We have a mix of mortgages and overdraft facilities in excess of $130,000 on our modest home. We take several trips throughout the country and overseas every year.

Now to your recent comment where you speculate as to the merits of KiwiSaver versus mortgage repayments for the self-employed. It is a no-brainer that the KiwiSaver balance at 65, applied to the mortgage, makes significant inroads to the loan capital. So go for it!

The receipt of super does not diminish my intention to continue as a professional. Work is enjoyable and rewarding, and I intend continuing for another 10 years at least.

It's good that you plan to work for a while yet. Until I read that bit, I was concerned that you were entering retirement with considerable debt and yet travelling a lot. But if you have plenty of income and plan to tackle those loans, fair enough.

That's great that KiwiSaver has worked so well for you. But I can't take much credit. The government - bless its cotton socks - is the generous one.

It's not quite so generous now, though, with the tax credit halved to a maximum of $521 a year, while members still have to contribute $1043 to receive that. So your partner probably won't get a better deal than you in terms of her contributions compared with the total outcome.

The halving of the tax credit was behind my recent comment that it's debatable whether self-employed people with mortgages are better off contributing to KiwiSaver or making extra mortgage payments.

It's different for employees with mortgages. It's clear that they should join and contribute to KiwiSaver, to get employer contributions.

And there's no question that the self-employed and other non-employees should join KiwiSaver, to get the $1000 kick-start. But should they contribute after joining?

Let's look at the situation for your partner, assuming she is self-employed or not employed.

We'll say your mortgage interest rate is 6 per cent. If your partner puts her annual $1043 into repaying that loan, it's the equivalent of getting a 6 per cent return, after fees and tax, on that money.

If, instead, she puts it into KiwiSaver, she gets the $521 tax credit, which is great. But then the total $1564 sits in her account earning whatever the return is. And, especially in a lower-risk fund, it's likely to average less than 6 per cent after fees and tax.

Next year and every year after that, her new $1043 contribution will also be boosted by $521. But each year's money from then on makes just the KiwiSaver return, year after year, until it is withdrawn.

Whether your partner ends up better off in KiwiSaver than repaying the mortgage depends on:

* The gap between the mortgage interest rate and the average KiwiSaver return - something we can't predict.

* The number of years before she can withdraw her KiwiSaver money. The younger she is, the less attractive KiwiSaver becomes - assuming her KiwiSaver return stays below mortgage rates.

In your partner's case, though, she hasn't many years to go, so KiwiSaver is probably her better option.

I should add that KiwiSaver returns won't always be lower than mortgage interest rates. That's particularly true in higher-risk growth KiwiSaver funds, where we expect higher average returns over the years.

Also - and this is important - contributing to KiwiSaver gives you diversification away from just investing in property.

Largely because of diversification, I still recommend that self-employed and non-employees with mortgages contribute $1043 a year into KiwiSaver. I'm just no longer quite as enthusiastic as you are.

Oh, and for people without mortgages, KiwiSaver is still clearly a good deal.

Repayment barriers

I was interested in the discussion last week around ANZ Bank loans and making higher than minimum repayments.

We had a similar discussion with the ANZ - we have made lump sum payments off our floating rate loan and hence will repay early. We have our loan loaded on to our internet banking, and whenever we get some spare cash it is simple to transfer money to the loan account.

The bank has told us we will no longer be able to have the loan account on internet banking because of the new and better platform. We can still make lump sum payments but will have to go into the bank.

They also want to reduce the term of the loan, which is okay, but what a hassle. If we want to reduce our payments we will have to readjust the term again. Lots of little barriers that do not encourage you to pay off your loan early.

ANZ's broad response is much the same as last week: "We are moving ANZ customer accounts on to the same technology system and experience that successfully serves the needs of National Bank customers, and has underpinned consistently strong customer satisfaction over the years."

But, like last week's correspondent, you don't sound too satisfied.

It seems, though, that this is partly because of a misunderstanding. "To clarify, the customer will be able to continue to view their home loan on internet banking. They will also be able to make lump sum payments to floating loans through internet banking, phone banking or by visiting the branch," says a spokesperson.

On the hassle involved in changing the loan term, he says, "The process is quick and simple for customers and is designed to maximise flexibility while ensuring customers are not put under financial hardship."

ANZ catch

There appears to be a small "catch" to what you wrote about ANZ last week. Previously, if the customer wanted to increase their payments and then later reduce them again, the reduction was their contractual entitlement. All payments above the original minimum were discretionary.

Now, if they increase the term of their loan they must go through "a simple and quick process to assess requests to reduce repayments and extend the term of a loan".

It seems that the customer loses the right to reduce the payment. In most cases the bank would probably agree, but the circumstances that could lead to them saying no might be exactly when you want to reduce your payments. The point is, under the new system if you want to revert to your original lower payments, the bank could now say no.

I take your point.

In response to your suggestion that the bank might refuse to extend a loan when a customer is going through tough times, the spokesman says: "As a responsible lender we are obliged to ensure repayment arrangements do not put customers under financial stress, and in these particular circumstances we are often actively working with customers directly to structure their lending to suit their situation."

Still, the new system does seem to give the customer less flexibility.

However, I suggest that readers proceed assuming they will be treated fairly. If you're not, file a complaint with the bank. And if that doesn't work, contact the Banking Ombudsman Scheme. And write to me again.

I'm a believer in crossing bridges when you come to them. As Mark Twain said: "I am an old man and have known a great many troubles, but most of them never happened."

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.