Mary Holm: Cut your loan into pieces - is that the answer to the mortgage puzzle?

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COMMENT

Q: I've been thinking about dollar cost averaging in relation to mortgage rates.
I wonder if one split their mortgage into, say, four chunks, each coming up for renegotiation every six months, would they then be guaranteed to beat the averages? Something to mull over.

A: Indeed. Yours is one of those questions that required a long walk to think about!

Here's the conclusion. What you're suggesting is not dollar cost averaging. For that, you have to deposit the same amount regularly in an investment whose value fluctuates. That means you buy more shares or units when they are cheaper. So your average price is lower than the market average price.

Dollar cost averaging happens automatically when, for example, you invest regularly in any middle-risk or higher-risk KiwiSaver or other managed fund.

Your mortgage idea doesn't work quite like that. However, it does reduce risk a little in a couple of ways, and that's always good.

To set it up, you would put a quarter of your mortgage on a six-month fixed rate, and then fix a quarter for a year, a quarter for 18 months, and a quarter for two years.

Then, as each term expires, you renew for two years. That means part of the loan will mature every six months.

This is similar to what I suggest for people with considerable sums in term deposits. It's sometimes called laddering. It has these advantages:

• You average out interest rates. Nobody knows when mortgage rates will fall or deposit rates will rise. If you have some money maturing quite frequently, you'll sometimes get lucky with your timing.

Of course the opposite is also true. You'll sometimes have to renew your quarter-mortgage or deposit when rates are deeply unattractive.

But most people prefer this. They accept that they won't always have good luck in exchange for knowing they won't always have bad luck.

• You get frequent access. With a laddered mortgage, you get a chance every six months to pay off a lump sum without penalty — in case you receive an inheritance, win Lotto or receive some other lump sum. It does happen! With laddered term deposits, you can withdraw some money six monthly if you need it.

• If interest rates get worse — rising if you have a mortgage or falling if you're in term deposits — the rates will change in steps for you, giving you more time to adjust.

One possible negative is that your lender will know it will be complicated for you to move elsewhere, so perhaps they won't treat you as well.

But still, it's an idea worth thinking about. Readers with fixed rate mortgages might want to ask their lender about it when their current term expires.

Too old to borrow?

Q: My bank, Westpac, tells me that they can't give me a mortgage to buy a rental property as I am now over 65.

This is in spite of me previously having an investment property and having a good record.

The lady at Westpac said we would not fit the current criteria for "responsible banking". I do not know what that is, but she said all trading banks had to abide by it.

My main problem is that it seems to be a general rule against older folk, whereas all older folk are different.

If we were looking to take out a loan for an owner-occupied home, that may not be responsible. But if we were looking to buy an investment property that would be break-even for costs versus income, that would be I think responsible.

To say that no-one can borrow money because they are older seems to me discriminatory.

A: Indeed. Age, in and of itself, should not be a reason to turn someone down. And a Westpac spokesperson says, "Customers of all ages are eligible for mortgages if they meet our lending criteria".

He adds, "However, it's not in a customer's interests for them to have difficulty meeting repayments. Therefore, as a responsible lender, our main interest in processing any mortgage application is assessing whether the customer is able to service the loan across its full term.

"With this in mind, it is important that we talk to borrowers who have retired or are due to retire during the term of their loan about their future income and how they will pay their mortgage.

"Approving a mortgage is not as simple as working out break-even costs. Our lending assessment covers a range of aspects including the customer's current income, foreseeable changes to that income, and the impact of any adversity that may affect either income or costs."

He goes on to say that the bank can't comment on your specific situation without knowing more. "We apologise to this customer for any misunderstanding that might have occurred from our end, and have asked Mary to pass on an invitation for them to get in touch so we can explore their options." I've given you the contact details, so I hope you take him up on his offer.

Paying for NZ Super

Q: I just need to vent and ask: why is there so much anxiety, resentment and doubt about the viability of the present and future funding of NZ Super?

I feel it is totally unjustified negativity as we boomers have been around since 1946 to 1964. That's plenty of time for the government to invest on our behalf and they have known how many of us there are — give or take a few immigrants and refugees who had no equivalent funding to bring with them.

KiwiSaver is an excellent introduction and addition, but there are still a lot of the population who know next to nothing about how to manage it effectively, which worries me more.

A: Happy to be vented at if it helps! But I'm afraid that what I'm about to say might make you angrier.

NZ Super does not currently come from money the government has set aside and invested. It comes from taxes and other revenue coming into the government coffers the same year the Super payments go out.

I say "currently" because the NZ Superannuation Fund has been set up to help cover the costs of NZ Super in the decades to come, when baby boomers push up demand. But even so, that fund will cover only a minor proportion of the costs. Most of the money will continue to come from taxpayers.

And until then, today's taxpayers pay for today's superannuitants. That's not unfair, because a few decades back the current superannuitants were taxpayers, in turn paying for their parents and grandparents. And presumably today's taxpayers will get their time as recipients later in their lives.

The system is different from what you and many others think it is. But let's just relax. It works. And as I said last week, no future government would be heartless or foolish enough to push the elderly into poverty.

On people's knowledge about KiwiSaver, I — and plenty of others — are doing our best!

Family v the in-law

Q: My widowed mother has the family house in a family trust, which was set up by my late father. It's got the house, Mum's car and a few investments. Mum is keen to sell the house and has paid a deposit on a Ryman apartment, which we think is a very good move for her.

There are three children, myself (married with children), my brother (separated from his wife in England with children), and my younger sister (single, no dependents).

My brother's wife took him to the cleaners when they sold their house in Yorkshire. She got way more than the 50 per cent she was entitled to, left him with lots of business debts and was the one who left him for a friend.

She's busy claiming every benefit she can in the UK, while running an underground cash photography business which doesn't declare the income that they get. My brother has no money left from the house and is pretty hopeless at saving. He's 50.

I am worried that if Mum dies, the wife will come after my brother's inheritance. This is not what Mum wants, and we are thinking of setting up a New Zealand based trust for my brother, for the purpose of benefiting him and his children. I have tried to raise the issue of divorcing the wife with him but he says he can't afford it and they still have a child at school who needs financial support.

Are we able to do this? Do we have to let him know that we've set up a trust for him? Until he divorces her, we are convinced that he and any inheritance are at risk from her trying to access it, and she wouldn't hesitate to bring in lawyers to do that — while he can't afford any to fight her off.

I guess Mum would need to change her will to note that her wishes are for things to be divided between myself, my sister and my brother's trust? And then what? How can we look after his trust so that he doesn't blow it all? Or is that outside of our remit as fellow beneficiaries?

I would welcome your thoughts!

A: There are always two sides to a story, but I must say your sister-in-law does sound like a worry.

What to do about the situation? Your idea is creative, but you could end up going to a lot of trouble for no gain.

It would be possible to set up a trust for your brother and his children. "But if the brother is already a beneficiary of the existing trust, I see no benefit in setting up another one," says trust and estates lawyer Rhonda Powell.

"The mother could simply divert his inheritance to the existing trust (or leave all of her estate to the existing trust)." Could you control how your brother spends his money from the trust? I asked.

"The money would not be 'his' if it were in a trust," she says. "Beneficiaries of trusts generally do not have any particular entitlements. If the trust gave the brother 'rights' to the assets, then it would not be effective in protecting him.

"So yes, the trustees would and should remain in full control of the trust fund and could choose if and when to make distributions to the brother or any other beneficiary. There should be other beneficiaries in addition to the brother because if not, he could legally bring the trust to an end by demanding this of the trustees." Powell adds that your brother's wife probably wouldn't be able to get the assets anyway.

"Under New Zealand law, inherited assets are not 'relationship property' and are not at risk in a divorce situation," says Powell.

"The most important thing is to keep the inherited assets separate from relationship property — for instance, not using an inheritance to repay the mortgage on the family home.

"However, in this scenario the brother lives in England and it will be English law that applies. It sounds as if the brother and his ex-partner have already resolved relationship property, and if that has been properly documented, there should be little risk, and the additional complications of a trust should not be warranted."

By the way, you would soon have to tell your brother if you set up a trust for him.
"Once the Trust Act 2019 comes into force (January 2021), trustees will be required to tell beneficiaries a certain amount of information, including the fact that they are a beneficiary, the details of the trustee, and the fact that they have the right to additional information," says Powell.

- 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 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.