Reducing mortgage debt can put you in a better position than saving long term, just as fixing the roof is wiser than adding a new kitchen. Photo / 123RF
COMMENT:
Q: I have recently become a first-home owner. I have fixed the majority of my mortgage for a year, and borrowed $60,000 by way of flexible/revolving home loan — the same account I have my salary paid into.
I am disciplined at saving and fortunate to be in a well-paying profession, so I am planning to save a decent amount each fortnight in addition to making my mortgage payments (fixed and flexi).
To get the most out of my flexi loan I know I should be keeping that balance as low as possible (I also make all possible purchases on a credit card and pay off the balance when due). But I view my additional savings as separate, and don't want all my savings to be going towards my mortgage.
Should I take the money out of my flexi account and put it in my savings account once a month? With low deposit rates, I suspect there is an argument for keeping everything in my flexi loan account.
A: This is a classic case of psychology getting in the way of best money management.
For the benefit of others, with a flexible or revolving credit mortgage you have a bank account with a huge negative balance — the mortgage.
Then you put all your income into that account as quickly as possible, and pay all your bills on the payment due date. That keeps the negative balance somewhat smaller, so you pay interest on a lower amount.
You've set it up well, with your salary and credit card arrangements. And I can understand why you want to watch your savings balance grow — as opposed to keeping that money in the flexi account.
But which option increases your wealth more?:
• Saving in an account that grows at 2 per cent after tax.
• Reducing a mortgage with a 5 per cent interest rate — which is the equivalent of having a risk-free investment with a 5 per cent return after fees and tax.
Let's assume you save $1000 a month. Over five years, that would grow to more than $63,000 in the savings account. Or it would reduce your mortgage interest payments by more than $68,000.
Over 10 years, the totals are $133,000 in savings or $156,000 off mortgage payments. The longer the period, the bigger the difference.
It's a bit like spending on a new kitchen versus spending on repairing a leaky roof. The kitchen is showier, but in the long run you will be better off fixing the roof.
Rather than watching your savings grow, try to get your good vibes from watching your flexi mortgage balance fall.
Q: Mary, you are sounding like an Aucklander! You should know by now that the average price of a home in Whanganui is $260,000. There is no need to budget $600,000, as you did in the first Q&A last week. And Aucklanders are coming here in droves.
A: The Wonderful Whanganui Warrior strikes again! You wrote along similar lines back in 2011, and the relative house prices in Auckland and the River City haven't changed much since then.
Last week's couple, living in a caravan in their late 50s, were unsure where in New Zealand they will eventually settle. So it was hard to suggest an amount they should set aside for a house. I chose $600,000 because it's about the national average — way below the Auckland average. But, it seems, it would easily buy two homes in your neck of the woods.
Perhaps the couple should check out your town. But they'd better get a move on, before all those Aucklanders push up the prices.
Q: I was absolutely appalled that you used the totally misleading and erroneous example of Mt Albert as an exemplar in your last column — 30 per cent house price drop etc.
If you really do have any expertise in the matter you would have smelled a very big rat and perhaps phoned a local agent for possible reasons. Had you done that, you may well have found that there have been many apartment sales in recent months, thus dragging the median sale price down. If you expect to come to our fine suburb and buy a quality house for 30 per cent less — well dream on!!
If I sound a little more aggrieved than in my other communications with you — that is because I am!!!
Please check the situation (the facts are correct but as I said above there are explanations) and print a clarification to restore your credibility.
A: Oh dear. Lots of exclamation marks. That's always a worry.
Sorry to all Mt Alberters who were offended that I said their house prices fell 30 per cent, while prices rose by about the same percentage in Takapuna. I was just trying to show how much property markets can differ.
I'm sure you're right about the apartment sales. That kind of thing can wreak havoc with average prices.
But perhaps Takapunonians — or Takapuna-ites? — are the ones who should complain, especially those trying to sell their houses.
Once everyone knows about their big price rises, no buyers will be keen to look there.
Meanwhile, Mt Albert's "quality" houses have held their value according to you, but buyers will be willing to pay asking prices, assuming they are snapping up bargains.
As for your being more aggrieved than usual, I'm not so sure. Some highlights from your previous emails over the years:
• "Amazing that you can talk about unbiased experts without recognising that you yourself are one of the most biased."
• "What about a bit of intellectual honesty?"
• "Your column on Saturday left me breathless for its utter hypocrisy, even by your standards."
But please keep writing. I love challenging letters.
Q: My wife who is 64 has just joined KiwiSaver and will make at least one contribution before June 30. We intend to also pay the provider $1000 so we can get the full $521 government contribution.
But ASB tells us that the Government will only pay the full $521 if you were a KiwiSaver member for the full year, and will calculate the credit based on the number of days as a member.
Is this correct? If so there is no point in the lump sum top up, is there?
A: That's great that your wife has signed up before June 30, so she can get five years of government contributions, and also employer contributions if she's an employee. After June 30, as I've said before, the five-year deal for people aged 60 to 64 no longer applies.
But your provider is right. In anyone's first year in KiwiSaver, their maximum government contribution is proportionate to how much of the KiwiSaver year — from July 1 to June 30 — they are a member.
If, for example, your wife joined on June 1, her maximum would be about one-twelfth of $521, which is about $44.
As long as she contributes at least $88 before the end of the month, she will get that maximum.
In each of the next four years, her maximum will be $521 if she contributes $1042 or more. Then, the year after that, her maximum will be about eleven-twelfths — $478 if she contributes $956 or more. That's because the five-year anniversary of her joining will be on June 1 of that year.
When your wife is calculating how much to put in, she should err on the generous side. After all, it's her own savings she's adding to.
For that matter, it wouldn't be terrible if she put in the full $1042 this year. It's likely to turn into quite a good investment, which she can access in five years.
Q: I lead the investments business (including KiwiSaver) at BNZ. I read your Q&A entitled "Money's not free" in last week's Weekend Herald with interest.
Given the changes coming for over-65s on 1 July I do think that cash funds inside of KiwiSaver may become quite attractive for retirees.
Our cash fund is essentially an actively managed short duration fund priced at 30bps. The fund returned 2.38 per cent net of fees but before tax in the year to 31 March. Given we have recently removed our monthly member fees, I think this could be quite compelling to people wanting enhanced returns on cash with daily liquidity.
A: Fair enough. I'm sure other KiwiSaver providers have similar offerings, but you're the one who bothered to write.
For other readers, 30bps means 30 basis points. In other words, the fee on BNZ's cash fund is 0.30 per cent — one of the lowest fees on any KiwiSaver fund.
P.S. "Daily liquidity" might be a bit of an exaggeration. See next Q&A.
P.P.S. Did you realise you said that you had read "with interest" about money not being free? The punsters will love you.
Q: You said in your last column that most people over 65, "can withdraw your KiwiSaver funds at any time".
My bank, ANZ, advises that that doesn't mean "instantly". You have to fill out a form and then take it to be notarised. The process, including bank processing, can take up to two weeks.
Just a caution for folks who may have urgent needs and find they will have a delay.
A: Thanks. And I'll just note here that there's a message below for younger KiwiSaver members planning to live overseas for a period. But first, you're right that your first withdrawal from KiwiSaver after turning 65 takes a while.
You need to "complete a Retirement Withdrawal Application Form and Statutory Declaration and return it to ANZ, with certified identification and proof of residential address.
The statutory declaration and certified identification is required by law (in the KiwiSaver Act)," says Craig Mulholland, ANZ's managing director of wealth and private bank.
Those forms have to be signed in front of a solicitor, justice of the peace or court registrar — although they don't usually charge for this service.
Once that's done, it can take up to 10 working days for ANZ to communicate with Inland Revenue "to claim and finalise the government contributions the member is entitled to", says Mulholland.
After that, later withdrawals are processed within five days. Or you can set up regular withdrawals of at least $200 a fortnight, $400 a month or $1000 a quarter.
The same rules about the first withdrawal apply to all providers. But other providers will have different processes and rules about further withdrawals. If you don't like what your provider offers, you can move to another one.
Now the note for people planning their OE: Tell your provider before you go, so that your government contributions — which are not available to non-residents — are stopped.
Otherwise, this will catch up with you when you fill out the statutory declaration to make withdrawals in retirement.
On that form you have to list periods when you lived overseas, so Inland Revenue can check whether you wrongly received government contributions then.
It's serious stuff. The form says, "I make this solemn declaration conscientiously believing the same to be true and by virtue of the Oaths and Declarations Act 1957."
And, as noted above, you have to sign it in front of a solicitor, justice of the peace or court registrar.
Mary Holm 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 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. 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.
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