Mary Holm: First steps on the housing ladder

My wife and I are in our mid-40s and we have two children, 12 and 10. We live on my income as a teacher (around $60,000) plus receive a Working For Families top-up of about $200 a fortnight. We spend $360 a week on rent.

We live a fairly modest existence, although by the end of the month we don't have a lot left over, especially if we get a one-off car repair bill, for example.

I joined the Public Service superannuation scheme (medium risk) about five years ago and contribute 3 per cent of my income. We have no debts.

Before our children arrived my wife and I both worked and managed to save a healthy deposit for a house. We soon discovered, however, that our limited income would not allow us to buy.

We have since been waiting for house prices to become more affordable, but are now of the opinion that we need to rethink this plan.

So my question is, what do we do with the deposit that is sitting in the bank? Interest rates have dropped recently and I worry that inflation will eventually rob us of these hard-earned savings. Are there alternatives for a financial conservative like me?

What's happened to this country that a family with no debt and on a pretty good income - especially when you include the Working for Families money - can't quite readily get into home ownership?

Don't give up. Apart from the security that having your own home would give you two and the children now, there's the issue of your retirement. If you haven't got your own home, preferably mortgage-free, at that stage in your life - or have equivalent savings that will comfortably provide you with accommodation in retirement - you're in for a tough old age.

I suggest you plan to buy a house - with substantial savings to keep the mortgage manageable - in about five years. Nobody knows where house prices will be then, but I would be surprised if they are much higher than now. They might even be lower. Here are some steps you two could take towards your goal:

* Leave your savings in a bank, but shop around for higher interest. Check out the different rates on www.interest.co.nz. There's a pretty wide range of rates on term deposits.

Tie up, say, a third of the money in a five-year term deposit, a third for three years and a third for one year. Then renew the shorter-term ones as you go. It's always hard to tell what interest rates will do, but by spreading your money you'll end up getting a good deal on at least some of it.

This might boost your savings by, say, $1000 more than you would otherwise have.

* Sign your wife up for KiwiSaver. As a non-employee, as long as she saves 2 per cent of the minimum annual wage - which amounts to $10 a week - she will be eligible for the first-home subsidy, which is $5000 after five years. She will also be able to put her KiwiSaver savings, plus all returns earned on the account, into the house.

I appreciate that you haven't got much spare cash. But if you set up an automatic transfer to KiwiSaver of $10 a week you probably won't miss it. And if you can gradually increase that to $20 a week, your wife will receive the maximum KiwiSaver tax credit of $1043 a year. She won't be able to put the tax credit money into the house, but it will be there for her retirement.

Total extra for the house: say $8500.

* Look carefully into your retirement savings options. In your situation, you might be better off also joining KiwiSaver and contributing 2 per cent, while continuing to put 1 per cent into the other scheme, if that is permitted.

Even if you get somewhat smaller total employer contributions, this might still work well for you, as you will also be eligible for the KiwiSaver first-home subsidy, adding another $5000 to your deposit.

And you'll be able to put all of your and your employer's KiwiSaver contributions, plus returns, into the house deposit as well. It's a way of getting at the money earlier than you would in your super scheme. And given that you would be using it to buy a home - which will contribute to your retirement comfort - there's nothing wrong with doing that.

Total: Perhaps $18,000.

* If your wife can earn some money - even in just a small part-time job - that would obviously help. But keep the total household income under $100,000 - the current maximum to get the KiwiSaver first home subsidy.

Once in the workforce, your wife would need to put 2 per cent of her pay into KiwiSaver. She could get out of this by taking a contributions holiday, but she would then lose eligibility for the first-home subsidy. And in any case she can put her KiwiSaver savings, plus her employer's 2 per cent contributions, into the first home, too. It will all help.

Note that if your wife works, your Working for Families money will be lower, but you should still come out ahead.

Total, net of extra costs: Say $30,000.

* Consider trying to negotiate lower rent in exchange for a commitment to your landlord that you will stay in your current accommodation for five years. You sound like good tenants and your landlord may be willing, especially if rents have been falling in the area.

If you could save $20 a week that way, it might amount to $5500 including returns over five years.

All in all, we come to $63,000 to add to your current savings for a home. That could make all the difference.

When I read last week that someone has to ask your advice about investing in a racing tips scheme, then I start to believe that there are people out there who truly deserve to have their money parted from them.

That's a bit uncharitable. According to the Ministry of Consumer Affairs' Scamwatch, "Overseas research suggests that one in 10 people have lost money to scammers, with an average loss of over $2000 each!"

And some scammers aren't easy to detect. An example is when they commit what is sometimes called affinity fraud. They first approach a church or other community leader and offer them a really good deal - say an investment returning 20 per cent - which the scammers then deliver. The leader then quite innocently recommends the scheme to many others. At that point, the "delivery" stops.

If the minister of your local church or someone else you know and trust recommends an investment to you, and you're not savvy enough to realise it's too good to be true, I don't think you "deserve" to lose. True, a service that provides horse racing tips is more transparent, so arguably everyone should recognise that it might be trouble. Then again, it's also more feasible. For all I know, it might be possible to pick race winners often enough to make money over the long term.

Still, I come back to what I said last week. If someone really knows how to beat the odds, why don't they just get rich by doing it rather than by selling their secrets to others?

For more info about scams, go to www.consumeraffairs.govt.nz and click on Scamwatch. It's lively and readable - and could well save you a lot of grief.

I was reading your article from last week, and the subject of means testing NZ Super against KiwiSaver savings came up. You commented that the Government probably wouldn't penalise KiwiSaver contributions any more than other savings forms such as investment properties, shares, etc.

I can understand this logic. However, a lot of people use family trusts to protect assets when things go wrong. KiwiSaver funds can't be put into trusts, so there is no way to protect this asset or to avoid means testing if/when the time comes.

Government officials are very much aware that people use family trusts in ways that give them an unfair advantage over people without trusts.

While it's probably legally tricky, I would like to think any government that introduced means testing for NZ Super would somehow include savings in trusts.

Actually, I suspect the very presence of family trusts - and the difficulty of treating them fairly - is one reason current and future governments might stay away from means testing our super payments. And that's a good thing.

While there are powerful arguments against giving government handouts to millionaires just because they are over 65, there are more powerful arguments for sticking with the status quo.

Because of the universality of NZ Super, we are not wasting clever minds thinking up ways around the rules - ways that would surely be used by the millionaires, leaving the middle class to bear the burden.

I was interested to read your comments about the parents who had started KiwiSaver for their children. In particular "at the worst they will end up with $700 or $800".

The worst has already happened to our children's KiwiSaver accounts in that case. We did exactly as your correspondents have done for our three children, and they now have just over $700 in the accounts started with the government's $1000 top-ups (and held by ASB).

That's not surprising, in light of the recent market slumps.

You obviously put your children's money in higher-risk funds, which is a good idea unless the kids are within, say, 10 years of buying their first homes. Over longer periods, higher-risk investments almost always do better than lower-risk ones.

But the downside is short-term volatility. And the volatility has been extreme in the first couple of years of KiwiSaver.

You could always move the money to lower-risk funds, but that would be a pity. There's a better chance that the children's accounts will recover and grow strongly over the next decade or so if you leave them where they are.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her 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. Please provide a (pref day) phone number. Sorry, but Mary cannot give financial advice.