Forget about the mortgage and use your savings to make the most of the precious time you have left. Photo / 123RF
OPINION
Q: I’m a 55-year-old employed nurse for 30-plus years. Just diagnosed with terminal cancer. Approximately two to five years prognosis depending on the treatment outcomes.
I have $75,000 in my balanced growth KiwiSaver, plus about $30,000 in investments, and have $125,000 outstanding on my mortgage.
Am unsure what to do with my finances. Should I pay down my mortgage and have a very small mortgage remaining, or sell my home and either rent (I have a large dog) or buy a motorhome to free up my equity?
My understanding is that I need to be 60 years and be mortgage-free to be considered for a reverse mortgage. Or if you know of any other options that may be available in my situation it would be greatly appreciated.
A: Gosh, a difficult situation to come to grips with. But it’s great you are looking at how best to handle your money.
Let’s look first at the financial help you might get from the Government. The main benefit would be the Supported Living Payment. I’m assuming you are single with no dependants, so you could currently get up to $385 per week. See tinyurl.com/NZSupported.
But you need to have a maximum annual income of less than $39,600. And, assuming your house is worth more than, say, $700,000, I think we can get you an income of more than that without the benefit.
If I were you, I would forget about paying off the mortgage fast. There’s no need to, and you want to have as much cash as possible to do what matters to you during the precious years to come.
There’s also no need to sell your home, unless you want to. There are other ways to put some money together for you to spend:
· If you are an employee contributing to KiwiSaver, apply for a savings suspension. This will give you a little more cash, and should be straightforward. Go to tinyurl.com/NZSuspension on the IRD website.
· Apply to withdraw your KiwiSaver money early. You can do this if you have “an illness, injury or disability that permanently affects your ability to work or poses a risk of death”, says Inland Revenue. Go to tinyurl.com/NZHealthWithdrawal.
· Once you’ve used up most of your investments and KiwiSaver money, talk to your mortgage lender about taking a mortgage holiday – when you would make no payments - or at least switching to interest-only mortgage payments.
· Apply for a reverse mortgage. You’re right that New Zealand’s two main providers, Heartland and SBS banks, usually offer reverse mortgages only to people 60 and over. But don’t let that stop you.
“We do at times make exceptions,” says Keira Billot of Heartland. “Any exception to our standard criteria is referred to our specialist team and senior management to evaluate the circumstances on a case-by-case basis.
“A more detailed analysis would need to be considered. Given the age demographic for this product, we do have customers with a range of health scenarios that we are able to support with a reverse mortgage. We would be happy to discuss the situation with the enquirer directly.”
And from an SBS spokeswoman: “In response to this particular situation, we would have an in-depth conversation with the customer to consider their needs and work through all the options, eg. a mortgage holiday, making interest-only payments, withdrawing KiwiSaver funds as a hardship withdrawal and a reverse equity if it was deemed appropriate.”
Usually, I don’t recommend reverse mortgages for people under 70, let alone 55. That’s because you make no regular payments on these mortgages, so the debt rolls up, with compounding interest, over the years. And the interest rate is always higher than on ordinary mortgages.
Twenty years after borrowing $200,000, for example, you might owe close to $1.5 million. Of course your house value will have also grown lots over that time, but almost certainly not as fast as the debt.
But that worry probably doesn’t apply to you – although people do sometimes way outlive their doctor’s forecast! In any case, it’s best to delay a reverse mortgage until after you’ve spent your savings. And, when you do take out the loan, don’t borrow a lump sum but small amounts over time, as and when you need the money. That slows down the compounding interest on the debt.
Both bank’s websites have lots of info on these products.
One more thing: If a motorhome appeals to you, shout yourself a lovely one, and head off with your doggie for some fun times!
Q: I particularly liked the first letter two weeks ago about those NZ folks who proudly brag about their abilities to dodge paying income tax. I, too, am disappointed in those Kiwis. As you reminded us, most people either have their tax removed from their pay by PAYE or by NZ Super.
I have lived in Oz for many years, and they don’t tax the first A$18,200 of your wages or income. This applies to all workers.
I am thinking, this could work in NZ too. It allows the small income earners, eg. students, part-time workers, etc, to unclog the tax system, allowing Inland Revenue to concentrate on the folks who earn higher amounts, and ensuring they are paying their fair share. Just a thought?
A: This idea comes up every now and then in New Zealand – where currently the first $14,000 of income is taxed at 10.5 per cent.
Largely I like the idea, although not all part-timers need that kind of help. Think, for example, of the partners of big earners who have a nice little part-time job to prevent boredom.
Q: They say that between $6 billion and $7b is evaded by tax dodgers every year. The one easy way to stop this theft is do away with cash. Do you think any government will do this easy fix?
A: In a word, no. Quite a few people – many older or poorer – prefer to use cash for reasons that have nothing to do with tax dodging.
Also, working for cash so you don’t have to declare it to the IRD is just one of the ways people dodge tax. Other people claim false or inflated deductions. And probably the biggest tax dodgers of all use fancy tax minimising set-ups.
Q: I was interested to read the question about tax recently. A friend’s father told me about the idea of not having any income tax and just collecting through GST.
As a lower-income earner I like the idea, but wonder if there is a catch. Would services, etc, be cut? I think the Government would collect a lot of tax that it’s missing out on. Your thoughts please.
A: The idea has some appeal. As you say, it would be hard for everyone to avoid paying tax. And the whole system could be much simpler.
But the big problem with raising GST – or even bringing it in in the first place – is that it hits people on lower incomes harder than others. They tend to spend all or nearly all of their income, saving only a little, and therefore are taxed on almost all of it.
On the other hand, wealthier people are likely to save or invest a fair bit of their income. Sure, they will pay tax on that money when they spend it eventually. But in the meantime they earn compounding returns on the money – which wouldn’t be taxed under your plan, and would push them further above poorer people.
And they may never spend a fair bit of their money, instead passing it on to their heirs – and therefore never pay tax on it themselves.
One idea nobody has mentioned is for Inland Revenue to increase the amount of auditing they do, to catch tax cheats and extract money from them.
In the year ending last June, IR carried out 3608 audits. For every dollar the department spent on compliance, it recovered $8.92, so it’s a pretty profitable activity.
I once asked a senior tax official why they don’t increase their auditing activity. His reply went something along the lines of, “Who wants to live in a society in which everyone feels as if they are being monitored all the time.” Food for thought.
Q: Thanks for your interesting reply last week to the couple wondering whether to sell their rental.
One major consideration that your reply did not mention is the Brightline period. If they bought in 2021 and sell before July 1 this year, they’ll be caught by this, meaning possibly they would have tax to pay on sale net profits. At the very least they should hold it until the announced impending changes to Brightline come into force in July, ie. all Brightline reduced to two years.
A: A really good point – although, as I said last week, they might be lucky to make a profit, given the drop in house prices since late 2021.
Q: At 67 and working only three days a week I am thinking of retiring while I still have good health. But can I afford to?
I receive NZ Super. I have $40,000 in the bank which I would like to use on a caravan and travel, $50,000 in a term deposit earning 6 per cent, $160,000 in a conservative KiwiSaver account, and $2000 in shares.
And a rental property valued at $1.1 million, that earns $720 per week less tax and maintenance.
At the moment my wife works and has $100,000 in KiwiSaver. Also a rental earning $470 a week less tax and maintenance.
We have no debt. But is this enough?
A: I’m afraid yours is another of those letters that make some readers crabby, because you are so well off!
As I was reading through your asset list, I was thinking, “They haven’t got huge assets”. And then, suddenly, there’s a million-buck property. And then we learn your wife has another one!
A 2022 Retirement Commission report says, “Nowadays, 40 per cent of people aged 65 and over have virtually no other income besides NZ Super. And another 20 per cent have only a little more.”
What’s more, many people say they manage fine on just Super, as long as they have a mortgage-free home. See the next Q&A.
With your and your wife’s savings totalling about $352,000, apart from the rentals, you could spend $352 a week and the money should last as long as you do – using the rule of thumb outlined in this column recently. Then there’s the rental income. If that’s not enough, you can always sell one or both of the rentals, which will give you much more. So yes, it’s time for you, too, to clamber into that hammock by the sea.
Q: I am a superannuitant single so I get $960 a fortnight after tax. I have a mortgage-free unit in a retirement village where any profit made on selling is mine.
The amount that the financial gurus tell us to have when we retire is outrageous. I do not have any investments or other income. It is possible for me to save from my $960 for minor trips to relatives and have coffee every morning. If one has a mortgage-free unit, knows about nutrition, and grows some veges, the super is quite adequate.
Where are the rice packets in the supermarket trolleys? Op shops and Hospice are wonderful.
A: Good on you. Some people in your situation complain, but I like your attitude.
* 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.