How will student loan debt affect your ability to borrow for a home?
OPINION
Q: Our daughter is in her fourth year of uni, with three more to go for her PhD. She has been lucky enough that scholarships and savings have covered all her uni fees and living costs.
She has been drawing down the maximum available student loan and investing in term deposits. By the end of her seven years of uni she will have around $100,000 in term deposits earning a reasonable return, and an equivalent $100,000 student loan at zero interest (assuming she stays in New Zealand).
Potentially she may look to use the $100,000 towards a house deposit one day. Do banks treat student loans differently from other debt in their lending calculations?
A: Your letter will anger some readers. They would argue that, if your daughter doesn’t need the student loan money, she shouldn’t be using it to build up a home deposit. Why should taxpayers without her opportunities subsidise her?
It’s a good question. Years ago, I chided a reader in this column for taking out a student loan he didn’t need, and investing the money. Since then, though, many people have been saying, “Everybody’s doing it”, and “If the Government is giving away money, why shouldn’t I take it?”. But your daughter’s example is extreme. I hope she feels some gratitude to New Zealanders and will serve the country well in future.
Okay – I’ve got that off my chest! Moving on to your question, “Banks include student loan repayments in their calculations,” says John Bolton of mortgage broker Squirrel.
After your daughter stops studying and starts earning, she will have to repay her student loan at 12% of income over $24,148 (currently) a year. And that “has a big impact on a bank’s assessment of affordability,” says Bolton.
For example, if she earns $100,000 a year, she will have to repay $759 a month. “That reduces borrowing power by $100,000,” he says. “The debt is also factored into bank DTI (debt-to-income) ratios. The limit for an owner-occupied borrower is six times income.”
So it’s not quite a free ride! You and your daughter should be aware, too, that if she goes overseas, she will probably be charged interest and will have to keep making repayments. People with PhDs often spend at least some time living in another country.
Q: Re the Q&A last week on the merits of focusing on dividends, I have a few comments.
A portfolio focused on high dividend yielding shares, even if spread over a decent number of stocks, will almost certainly lack diversification across both industry sectors and regions, and it will likely produce lower long-term returns than a broader based portfolio.
Furthermore, while “dividend” stocks may generally experience lower volatility than growth stocks, they can be tossed around by significant changes in interest rates, and by regional or sector specific fluctuations.
Looking at the latest Smartshares five-year returns, after tax and fees, the NZ Dividend fund, which tracks 25 high-yield NZ stocks (Chorus has one of the highest weightings), returned negative 0.05% a year versus the NZ Top 50 fund’s 2.4%.
The Australian Dividend fund, which tracks 50 high-yield Australian stocks, returned 5.5% versus the Australian Top 20 and Mid Cap funds’ 7.9% and 9.1% respectively. Meanwhile the Total World fund returned 10.4%.
My bigger question though is what is the writer’s motivation for focusing on high dividend yield stocks? If it is to use dividends as income, it’s unnecessary. With managed funds, it is easy to sell units when you need to. All that is important is ensuring the appropriate mix of funds to cover your required time horizons.
By the way, I realise that five years is too short to draw any firm conclusions, but it’s all I could get the data for. I expect it would be broadly indicative though, albeit that the last five years have been particularly unkind to income-focused assets until recently.
A: I agree with all your comments.
On the lower long-term returns and lower volatility of high-dividend shares, that is probably because those companies tend to be older established businesses. New companies often keep their profits to reinvest in growth, and pay low or no dividends. They are more likely to fail, but they’re also more likely to soar. And usually, over the long term, higher risk brings higher average returns.
And yes, it’s easy to receive regular cash payments from a managed fund, including KiwiSaver funds for those over 65. It’s best to use a low-risk, non-volatile fund for this, while keeping your longer-term money in higher-risk funds with higher average returns.
On the problem of having access to only fairly short-term data, read on.
Q: We are told to consider KiwiSaver as a long-term investment. Therefore, why can I only find returns for up to five years (including on the Sorted website)?
As KiwiSaver has been running since 2007 (17 years) shouldn’t we be able to see results over 10, 15 and eventually 20 years? This would make long-term comparisons available and would encourage members to consider the long-term picture.
A: : You make a really good point. I’m always saying, “Only long-term returns tell us much.” And Tom Hartmann, personal finance lead at Te Ara Ahunga Ora, the Retirement Commission, which runs the Sorted website, doesn’t argue.
“We agree: longer is better, and the farther back in time you can reach to see returns, the more you can appreciate how well a given fund has performed,” he says.
“On Smart Investor we display returns in the funds details page from as far back as 10 years, and we’ll look to include even longer time horizons as we move forward.”
Click on your fund on Smart Investor and scroll down, and you’ll get a graph of 10 years of returns, if the fund has been around that long.
However, Hartmann adds, “When you are comparing funds side-by-side, there are a number of funds that have not been around that long, which makes including them in the comparison tables challenging. Waiting 10 years to compare a newly arrived fund is a bridge a bit too far. So we had to take a Goldilocks approach of a timeframe that was just right – short enough to include as many funds as we could, while looking far enough back to make sure it wasn’t a fluke.”
That means that at the top of the Smart Investor listing for each fund, you’ll see a comparison of the fund’s five-year returns with the five-year average for all funds in that risk category.
If you’re comparing similar individual funds – as opposed to comparing index performance, as in the above Q&A - I suggest you don’t take a lot of notice of average five-year returns, or even 10-year returns.
By all means note how volatile a fund can be. And reject those with a particularly bad track record. But don’t switch to a past winner. Past returns so often are really different from future ones. Put more weight on how your funds’ fees compare with those of other similar funds.
Other sources of return info:
Q: Why are the KiwiSaver contributions from the Government not adjusted in line with inflation? This must be costing a fortune in forgone wealth for KiwiSavers? Is this another dirty little secret getting in the way of everyday citizens gaining financial independence?
A: There’s nothing secret about it, but it’s true that Government boosts to KiwiSaver have seriously dwindled.
The scheme started in 2007. Two years later, the Government fee subsidy of $40 a year ended. In 2012, the Government contribution – then misleadingly called a tax credit – halved to a maximum of $521 a year. Then, in 2015, the $1000 kickstart ended. And in May this year, the KiwiSaver first home grant ceased.
Meanwhile, as you say, inflation has reduced the value of the Government contribution. If the $521 in 2012 had been adjusted for inflation, it would be just under $700 by now.
I suppose a Government would argue the incentives have been good enough to get nearly two-thirds of New Zealanders of all ages into the scheme, and they need to spend the money elsewhere.
Q: I’m hoping people have read your recent columns and are getting their wills in order. I know many people who haven’t, although they plan to get around to it.
I suggest they buy a will kit from the stationers if their estate is straightforward, and if going to see a lawyer is too daunting. It will be better than nothing. But most relationships now are tricky with new partners/children etc so need a lawyer.
Can you find out from your experts how much lawyers charge to process probate for an uncomplicated estate on average and how long it should take? Also, same question for someone who dies without a will. I’ve heard from friends that the Public Trust will charge a minimum of $20,000 and take two years. Is this true?
Your readers need to be aware of the ramifications of dying without a will and the stress for loved ones left behind. People also need to tell someone who or where their will is located!
A: This is important stuff. A trustee corporation or lawyer can draw up a will for you, or you can do it yourself for as little as $20, says the Citizens Advice Bureau. For more on this, see www.cab.org.nz/search/wills
Consumer NZ also has some helpful advice. “You’re legally entitled to make a will yourself. A DIY job may be fine if your assets are modest and your family relationships orderly. But if not, you may need to seek legal advice,” it says on consumer.org.nz
The article adds, “There are potential downsides to DIY. Experts say home-made wills may create problems if the will-maker’s intentions aren’t clear. Simple errors – for example, the will is not signed or witnessed properly – can also create grounds for challenge.”
If you use a lawyer, she or he might charge a couple of hundred dollars for a simple will – or may do it free for a regular client. You can always call and ask a few lawyers what their fee is. At Public Trust, online wills start at $85. Or you can do it in-person with an expert for $450.
On the cost of processing an estate after someone dies, it varies widely, from a few thousand dollars on up, depending on how complicated it is. Similarly, the time taken varies, but it’s usually around four to 12 months. As Public Trust puts it, “Our work can involve legal, property, financial and tax matters, as well as family dynamics. Everyone’s situation is unique.”
What happens if you die without a will? The process is more complicated and costly. “Your spouse or partner gets your personal possessions (such as cars, furniture, jewellery, appliances etc), the first $155,000 of the estate and one-third of the rest. The other two-thirds goes to your child/children in equal shares,” says Consumer NZ. If you have no partner or no children, there are other rules.
In short, dying without a will is not a good idea. Your family won’t thank you.
Public Trust denies it charges a minimum of $20,000 and takes two years to process probate. “This is not true,” says a spokeswoman. “Every situation is different and there is no minimum amount or set time to administer an estate. We believe we offer value for money for estate administration, in line with the market for the specialist services we provide.
“Public Trust can only charge up to 5% of the total value of the estate assets (plus special fees) for administering an estate, so we are incentivised to work quickly.
“We provide families with a detailed plan of administration before work begins – this covers an estimate of our expected fees and charges, so people are informed about the costs involved, as well as timing estimates.”
You can always also talk to lawyers and get estimates from them.
One last point: Don’t forget to change your will if your life changes significantly – you start or end a relationship, you have children or grandchildren and so on.
Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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 click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
The council has also been served with judicial review proceedings.