Try to flip any investment around and see it from the perspective of those receiving your money. Photo / 123RF
OPINION:
Q: I have $300,000 to invest but I have decided not to continue with term deposits with my bank as interest is less than 1 per cent.
I am considering talking to a mortgage lender in Auckland with an interest rate of 7 per cent. Your thoughts please?
A: Be careful. Very careful. You don't get a much bigger return without taking much more risk.
It's always wise to flip an investment round, looking at it from the perspective of the people receiving your money.
With a bank term deposit, the bank gets the use of your money for a period, perhaps to lend out to someone else. They pay low interest to you, because they can attract enough money even at those low rates — partly because investors see bank term deposits as pretty safe.
With an investment through a mortgage lender, the recipient of your money uses it to buy a property. If you are receiving 7 per cent, and the mortgage lender is clipping the ticket on the way through, the property buyer must be paying considerably above 7 per cent.
Why would he or she do that, when banks are offering mortgages at 2 to 4 per cent?
Clearly the borrower, or the property they are buying, doesn't meet the banks' standards, so they have gone to someone who lends to higher-risk borrowers.
The mortgage lender will make it all look good, and point out that you have the security of the property if the borrower defaults. But there's been many an investor who discovers a property is not worth what they thought when things go wrong.
On the other hand, it might all work out fine, and you'll be rewarded for taking higher risk.
What you should do with the money depends on two factors:
• How long before you expect to spend the money.
• How much risk — both volatility and possible loss — you can cope with.
If you plan to spend within a few years, it's best to keep the risk level down, perhaps with a low-risk managed fund. These funds hold bank investments, lower-risk bonds and the like. Their returns are usually a bit volatile, but slightly higher than bank term deposits.
Check out the defensive funds listed in the Smart Investor tool on sorted.org.nz. Click on "Compare" at the top, then "KiwiSaver and managed funds" and then "managed funds". I suggest you sort by "Fees, lowest first".
You might also look at the conservative funds, which are somewhat more volatile, with somewhat higher returns. They typically hold a few shares as well as lower-risk investments. Smart Investor tells you what each fund invests in.
If you have more time before you spend and can cope with more volatility, consider the balanced, growth and aggressive funds. At each level, risk grows and so does average return.
Or you could go with the mortgage lender. But with eyes wide open please!
Q: I would love your advice to pass on to my stepson, who is nearing 30.
He has been very fortunate to inherit about $300,000 to put towards a deposit on his first house. He also contributes regularly to his KiwiSaver. He wants to buy his first house in Auckland, where he currently lives and works.
My concern is that his deposit is sitting on term deposit at his bank, earning next to nothing. We already know that what he could afford to buy a year ago is now not possible due to the fast-moving property market.
What are your suggestions to help grow his deposit, so he can keep up with the market a bit more.
Fingers crossed he will buy in the next year.
A: It must be really discouraging for would-be first home buyers to see prices rising faster than their savings.
But if your stepson wants to buy a home within a year or two, he really should stick with bank term deposits or a defensive fund, as described above. There's too big a chance in a riskier investment that its value will drop right when he wants to buy.
He could, though, change tack and wait a few years. I'm not saying house prices will fall, but they might.
And given the Government's new policies, it would be really surprising if prices keep rising fast.
In the meantime, your stepson could use one of the middle-risk balanced funds in Smart Investor.
Returns will sometimes fall, but over a few years they should beat term deposits. When he is again within a year or two of buying, he should move to a defensive fund.
Q: Last Saturday you shared the sad tale of the "penalised" landlord who owns a Hamilton rental while also renting for herself an Auckland property. You painted her as being "hurt" in two ways by the recent tax changes through:
• no longer being able to claim an interest tax deduction, and
• having her Auckland rent rise.
If landlords are raising rents to offset the loss of the tax deduction, why can't she also? On the other hand, if rent increases are generally not sustainable, why would her own landlord raise the rent?
Don't you think it's disingenuous to combine two opposite scenarios like this to paint property investors as the victims?
If we are to discuss the fairness of the new laws, then how about the poor renters who are paying off other people's mortgages?
A: I was not so much disingenuous as plain wrong last week. You're quite right — if rents may rise in one city, they are just as likely to rise in the other. I didn't think it through properly. Sorry.
But I wasn't trying to raise sympathy for property investors. Many landlords would confirm that I'm often quite tough on them!
As for renters, I've supported them many times, and will continue to do so.
Q: Last weekend you offered some advice to a woman who had bought a house in Hamilton because she couldn't afford Auckland, and she was renting in Auckland.
If I was her, I would immediately sell the house in Hamilton and either:
• Buy a home unit in Auckland within my budget, with a mortgage if necessary.
• Rent in Auckland and invest my hard-earned cash in something like Milford Asset Management, or Craigs Investment Partners etc.
You didn't seem to offer the poor woman any real other options.
A: I did say the government changes might cause Auckland house prices to drop, at which point the reader could sell in Hamilton and buy near her Auckland work. But yes, some other suggestions might have been helpful.
The only trouble is that I doubt that your first option would work unless Auckland prices fall — or the reader would have done it in the first place. And your second option leaves her out of the property market, which is clearly an outcome she wants to avoid.
But still, thanks on her behalf!
Q: There has been a lot of landlord criticism of changes to tax on investment properties.
But one probable outcome is that properties that were in the investor market will adjust downwards in price over time to reflect the costs/benefit changes. Landlords won't just increase rents because tenants have limits to their spending. So a number of landlords will sell into a market that factors in the new cost/benefits.
While landlords to date have gained at the expense of owner occupiers, and will lose from readjustment of their net incomes on their existing investments, new landlords and current ones buying more properties will buy at adjusted prices and calculate consequential adjusted cost/benefits.
A: I agree. We should reach a new equilibrium.
And you raise a point that I've been pondering — about whether landlords really will raise rents much, despite threats. Firstly, there's a limit to how much rent tenants can pay, as you say. But also, if some landlords bail out, pushing down house prices, hopefully some tenants will then be able to buy. With fewer tenants in the market, landlords won't find it easy to push up rents.
But who knows how it will all play out? With so many changes going on at once, it seems to be hard for economists, let alone the rest of us, to make predictions.
Q: I struggle to understand why the Government is penalising some people who only own one residential property by imposing the bright-line test in some cases.
Surely, if the intent is to support home ownership, NZ citizens or permanent residents who only own one property but don't live in it for part or all of the 10-year bright-line period, for whatever reason, should be exempt the bright-line test.
Such an exemption would address many circumstances, such as the renter who buys a rental in a cheaper location, or others who are absent from their house for more than 12 months for reasons such as renovation, overseas work posting, etc.
Am I missing anything obvious here? Hopefully other readers that agree with my view will take the issue up with their MP.
A: I hope you have, too, because your idea makes sense to me.
I suppose some people would work their way around the rule — maybe by having one spouse own one property and the other spouse own another.
But there should be ways such cheating can be avoided.
Q: Just to remind you, as you no doubt get a million letters a year, in 2014 I wrote to you with a dilemma about whether to travel with my 15-year-old son or pay off more of the mortgage.
His dad had died and it was a "be prudent now or life live while we can still ski together" question.
You suggested I'd done pretty well so far and to have a holiday. We did, and skied for three magical weeks in gorgeous places in the Swiss Alps. We continued to have amazing one-month holidays most Januarys over most of the next few years. We had a ball.
He's 22 now, and with Covid and everything we are so happy we travelled together and have such great memories.
I wasn't wealthy but chugged away prudently while still living life, and now have just $13,000 left to go in my mortgage, so it all worked out. I am forever grateful for your advice.
A: What a wonderful letter to receive amidst the mostly gloomy emails about property. Thanks so much.
A note to others: I don't always say, "Go out and have fun." It depends on how strong the person's finances are. But this reader was clearly keeping on top of things financially.
It seems to me that for every person who is foolhardy with their money, there's another one who is being too cautious.
- 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. 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.
'Debt becomes more like a rent payment that people get so used to paying.'