Mary Holm: Nothing beats security of buying

Even if you're just working part time as a teacher aid, there are still ways to afford a house. Photo / Thinkstock

My mother has just sold her house which she had in joint ownership with her brother, and came out with $100,000. This is her life's worth of assets, and she wants to invest safely but strategically so that the money can last.

She is renting and could not afford to buy a house, but we would love to hear your ideas on a safe but worthwhile investment that could allow her to live comfortably for the rest of her life, as she is now 55.

She works at a school as a teacher aid with not a lot of hours available. I'd say her income is around $20,000 a year. She also does odd jobs a few days a week. I have suggested she gets a full-time job, but she says that she would earn the same or less in a minimum-wage job, as she has no qualifications. She enjoys doing her odd jobs and having time for herself too.

She has set aside $70,000 of her $100,000 to invest. She gets by with her income from work, but I wouldn't say she lives comfortably, and that is what she deserves as she is a wonderful lady.

Don't let your mum give up on the idea of buying a home. Here's why:

About 40 per cent of today's retirees live on NZ Super alone, and a further 20 per cent live on NZ Super plus about $100 a week, according to the Retirement Commission. How do they manage? A new feature on the commission's website, at www.sorted.org.nz/retirement, sheds light on this.

The feature - which is aimed at helping 45-pluses make plans for retirement - includes profiles of real people living in retirement on various income levels.

One profile is of Roto, who lives on just $333 of NZ Super a week. "Roto says her house could do with some maintenance, but it's an expense she's forced to put off, as it would require her to take out a loan," says the website.

That's not a great situation, but at least she has a house, and we're told it's mortgage-free. A portion of the 40 per cent who live on just NZ Super either rent or own a house with a mortgage. If Roto can't afford maintenance, how do these others come up with rent or mortgage payments?

Of course your mother won't be in such a tight situation, as she has her $70,000. How much would that help?

If she doesn't buy a home, I would recommend that she invests conservatively in a bank term deposit, as she can't afford to take any risk. In 10 years, when she is 65, the money might have grown to about $110,000 after tax.

A life expectancy table says that, on average, she would then live to 82, but let's say 85 to be on the safe side. A simple way to work out how to spend her $110,000 over the 20 years from 65 to 85 is to divide the sum by 20. That gives her $5500 a year, or $106 a week.

What about the interest she would earn on the unspent balance over the years? That is likely to be largely cancelled out by inflation and taxes. While she could take out somewhat more than $5500 over the years, she would need the extra just to cover the rising cost of goods and services.

Any surplus beyond that should probably stay in her savings in case she lives past 85. People in later retirement tend to spend less, but it would be good for her to have a bit of a buffer.

Okay, so that's scenario one, with your mother renting and getting by on NZ Super plus $106 a week, rising with inflation.

In scenario two, she buys a modest, low-maintenance home. An internet search shows there are several units or small houses in her area going for $145,000 to $160,000, and in the current environment, she may well be able to negotiate down to, say, $140,000.

If she puts down a $70,000 deposit, she will need a $70,000 mortgage. Back we go to Sorted to use the mortgage repayment calculator, which shows that a $70,000 loan at 6.5 per cent for 10 years - until your mum is 65 - will cost her $795 a month. That comes to $183 a week, which might be similar to her current rent. If it's a struggle to pay it, perhaps she could take in a boarder for a few years.

At retirement age, your mother's accommodation will be mortgage-free. She will still have to pay rates, insurance and maintenance, but overall her financial position will probably be stronger than in our first scenario.

And the big plus is security. Nobody will be able to raise her rent in retirement, or boot her out because they want to sell the property. And she will be able to decorate and do the garden as she pleases. It will be her place.

There's another plus, too. She'll have something to leave to you. While you sound too nice to worry about that, most parents take pleasure in leaving at least a small legacy.

Come to think of it, the two of you could acknowledge this and make a deal. Your mother could buy something a bit more expensive, and you could help with the mortgage payments, on the understanding that you would inherit the house. You could think of it as part of your retirement savings.

Learning opportunity

Last week you wrote about when it was wise to repay your mortgage before saving, and when it wasn't. Another reason for saving long term instead of paying down debt is to gain knowledge and experience.

Most do not pay off the mortgage until around 50, and at that age they suddenly find they have spare money. They have never traded a share, received a dividend or purchased into a fund in their life, and they are easy prey for extravagant claims and risky investments. Hence all the grey heads finding out the hard way that putting hundreds of thousands into a single finance company was not a great idea.

I first bought unit trusts over 20 years ago when I was young and naive. The amounts were small, as were the losses and gains.

What I have learned over the years is diversification, patience. And scepticism for claimed returns.

Every mortgage holder should aim to be in long-term investments at least 10 years before the mortgage is paid off. The amounts should be small, but enough to be interesting, as reading about investments is boring until it is your money that is rising and falling. Maybe this is another benefit of KiwiSaver.

I did say in my answer last week that an extra advantage of KiwiSaver over mortgage repayment is that, "You'll also learn something about how markets work over the years - useful knowledge for when you finally pay off your mortgage."

Still, I'm publishing your letter because it doesn't hurt to give this more emphasis.

Before KiwiSaver, I used to say much the same thing as you, that it's good to save a little even if you have a mortgage, so that you gain market knowledge. KiwiSaver, with its incentives, strengthens the argument.

There are those who pooh-pooh this, saying that in Australia many people don't know much about financial markets despite their considerable retirement savings. But having "skin in the game" must make at least some difference.

Shop around

Your column has recently contained a lot of complaints from people unhappy with the interest rates banks offer on deposits.

People need to learn that banks are just like car dealers. When dealing with them, one first does one's homework - logging on to www.depositrates.co.nz is a good place to start. Then you decide what you will accept to lend your money to them, or alternatively, pay for money they lend you on mortgage.

It's really quite simple, you're the customer and it's your decision what is acceptable.

Bravo - sort of. As the Cockneys used to say - according to Punch magazine in 1846 - "You pays your money and you takes your choice."

It certainly pays to shop around. And if you have a large sum, you can often negotiate a better deal with a bank. But there's only so far a bank - or other lender or borrower - will go. Market forces largely dictate rates.

Having said that, I wonder if the complainants realise how much better off we are than in the 1970s and early 1980s.

Bank deposit rates then ranged up to more than 14 per cent - wow. But inflation was even higher for about 15 years.

In those days, if you put money in a bank account, you could buy less with it when you took it out again, in spite of earning really high interest. We're a long way from that.

By the way, the website you mentioned is run by Tarawera Publishing, a reputable source, as is www.interest.co.nz. I recommend readers use both.

Share trading

I read with some interest a recent column regarding the offer for Nuplex shares at below market prices. I happen to hold parcels of shares in all the recent target companies and returned the offer documents suitably endorsed.

I did not calculate the discount percentage in the offer, but let us say it was 25 per cent. It appeared obvious that the purchaser intended selling any shares purchased before he was obliged to pay for them. On the face of it, this appears to be very lucrative.

However, what is the tax liability on such transactions? The purchaser is blatantly trading in shares, and as far as I am aware any profit would be taxable at presumably 30 per cent. This completely eliminates any profit he is hoping to make.

What am I missing? When does selling shares become a "taxable activity"? How actively does Inland Revenue police share trading?

You are missing the fact that the purchaser pays tax only on his profit.

Let's say the market price is $1, but he pays only 75c a share. He then sells for $1, making a gain of 25c.

I agree that his activity would surely be taxable, but only the 25c profit. At 30 per cent, the tax would be 7.5c, leaving a net profit of 17.5c a share. Not bad.

As for how actively Inland Revenue polices share trading, who knows? I'm sure they would say they watch it closely. Anyway, here's hoping the department makes sure guys like this pay up - so that at least some of their gains end up helping the rest of us.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter 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. 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.