Mary Holm: Better pay off the mortgage first

Q. My husband and I, in our 30s, both work for the government with combined income of $180,000 annually. But I am looking at going part-time later this year to start a family. That will reduce our pay to $120,000.

We have a $150,000 mortgage with the fixed rate expiring in the middle of the year. We have savings in the bank of $100,000. Should we pay that amount off the mortgage, or take advantage of the low interest rates to buy another property?

We didn't join KiwiSaver as you suggested. Instead we are with work superannuation, because the employer is contributing dollar for dollar and we can withdraw the money at the age of 55. I thought this was better compared to KiwiSaver now, since KiwiSaver will not match our full contribution till a few years later.

A. Put the $100,000 into paying off the mortgage as soon as the fixed term ends. This is generally the best advice for anyone, and it's a particularly good idea when you are starting a family, and security becomes a bigger issue for a couple of decades.

Before the downturn, it was common to hear people worrying that paying off their home mortgage meant they had too much equity - the difference between the value of a property and the mortgage - sitting there "doing nothing". That prompted some to borrow against that equity to invest, usually in rental property.

However, I've always thought that having lots of equity in your home - or, better still, owning it mortgage-free - is a great strategy. If you do that, you are in a strong position to:

* Cope if one or both of you should reduce your income or lose your job, or if your expenses should suddenly increase. If your mortgage is low, the lender is more likely to let you make lower or no payments for a while, or to increase your loan. And if you no longer have any mortgage, it's surprising how little you can live on for a few months - going out less and postponing spending on clothes and so on.

* Help out family members or friends if they should need financial support or if they are starting a new business or similar. With a low or no mortgage, it should be easy to get a new loan for this. And if you have no mortgage, you might be able to afford to transfer money regularly to a family member.

* Take more risk with future investments. Once you are mortgage-free, you can get into a share fund or rental property knowing that, if things go badly, you're much less likely to be forced to sell at the wrong time - which is how many people suffer big losses.

Mortgage repayment also tends to beat investment if you look at risks and returns on your money.

If you pay off a 6 per cent mortgage, that will improve your wealth as much as an investment with a return of 6 per cent after fees and taxes. It's easier to find such an investment than it was when mortgages were at 10 per cent, but you still have to take considerable risk, whereas mortgage repayment is pretty much risk-free.

The alternative you are considering, buying a rental property, is quite risky these days. Your return might be well over 6 per cent a year, but you could also do abysmally, especially over the next few years.

You're right that current interest rates are relatively low, but there's no guarantee they will stay that way. Nor can you be certain rents won't fall.

House prices are a worry, too. For all the speculation that prices may have reached the bottom of this slump, I can't look past what the OECD reported a couple of months ago.

New Zealand wasn't the only country to see its house prices soar since the turn of the century. But more relevant is the ratio of house prices to disposable income - in other words, how affordable are houses. That ratio rose by an astonishing two-thirds between 2000 and 2008 - more than for any of the other 18 countries the OECD looked at.

Sure, immigration is boosting New Zealand house prices somewhat - or at least slowing the decline. But in the end, the main influence on prices must be how much New Zealanders can afford to pay. With incomes unlikely to soar, I'm not putting my money on house prices rising over the next few years.

What about your future savings? In pre-KiwiSaver days I would have suggested you also put that money into your mortgage until it's paid off. But KiwiSaver has changed that.

Firstly, I need to correct you about KiwiSaver not matching your contributions. Now that the maximum employee contribution is 2 per cent of pay, employers must match that, and you also receive the government's $1000 kick-start and annual tax credit matching your contribution up to $1043 a year.

KiwiSaver is, therefore, quite a lot more generous than your super scheme. Certainly, withdrawal at 55 is attractive. But you will surely want to spend some of your retirement savings after NZ Super age, so it can't hurt to have some of the money tied up until then.

In your strong financial position, I suggest you do both KiwiSaver and work super. You probably won't be able to receive employer contributions on both. But KiwiSaver with just the government contributions is still a great way to save - better than repaying your mortgage.

Put the minimum into KiwiSaver to get all the incentives. For employees, that means contributing 2 per cent of pay, if necessary topping that up to $1043 to get the full tax credit. Beyond that, it's best to put any extra saving into mortgage repayment.

Q. I am a retired 60-year-old. I joined KiwiSaver primarily because of its Government-matched tax credits. However, I haven't received any annual statement from my KiwiSaver provider for the past financial year. To put it simply - I do not even know for sure how much I have contributed to the scheme (since there is never an itemised statement from my provider).

Should there be more transparency in the whole operation by providers? I also wonder how and when IRD is going to award me, if at all, the tax credits due to me since almost two years ago.

My provider is ASB. My wife is in the same boat. Her provider is Tower.

The last we heard from our providers was well over a year ago. The fact that she still works part-time (irregular hours) means her contributions vary from month to month. Without an itemised statement it is very difficult to keep track of one's contributions.

A. It seems to be fashionable to have a go at big financial institutions such as ASB and Tower. But I'm not sure that it's fair in this case.

You're quite right that you should have received more. But spokespersons for both ASB and Tower say they have sent several communications to KiwiSaver members in the past year, and both wonder if they have incorrect addresses for you.

"It is not clear from the content of the letter whether the correspondent and his wife joined KiwiSaver electively or by default," says the Tower spokesman. "There can be problems contacting default members where their postal address details as supplied to KiwiSaver providers by the IRD are incorrect or incomplete. This is no fault of the IRD, which is reliant on employers' information concerning new default members' correct address details."

Of course you two might not be default members. You can't be unless you joined KiwiSaver while employed, as only employees can use the default system. But the main point is that - for some odd reason - it seems that neither provider has your correct address.

As well as sending newsletters or news emails and other info, both companies send KiwiSaver members annual account statements. ASB sent its statements in early June, and Tower is sending them about now. I must say I wonder why you didn't take the initiative and contact the providers before now. Anyway, it's never too late. Give them a ring - on 0800 272 738 for ASB and 0800 808 808 for Tower - and explain your situation. While you're at it, ask how you can use their online facilities to check account transactions and balances whenever you want to.

There's another way to check on at least some of your KiwiSaver transactions, too - via "Manage my KiwiSaver", as mentioned in the next letter. On the tax credits, after June 30 each year all the providers claim tax credits for their members from Inland Revenue. When they get the money back - probably around August to October - they add it to members' balances.

Nobody has received more than one tax credit so far, but those who have been in KiwiSaver for more than a year should get their second credit in the next few months. Your annual statement, once you get it, should include your first tax credit. If not, this time yell!

Q. I note that recent correspondents to your column refer to the difficulty in matching their KiwiSaver contributions to those received by the providers.

In a recent column you mentioned registering with the IRD "Manage my KiwiSaver" on www.kiwisaver.govt.nz. This is a must, but I have gone a step further and designed a simple spreadsheet to track contributions. There are columns for gross employer contributions; after-tax employer contributions; employee contributions; IRD contributions - the kick-start, tax credits and fee subsidy when it was available; interest earned at IRD; total; and cumulative total.

Each month I enter my employer's contribution from my payslip, but I do not enter the net contribution after tax until this shows up in "Manage my KiwiSaver". The IRD are slipping behind a little. Never mind, I'm sure they will catch up, and I can track the accumulated interest.

Feel free to use this spreadsheet to assist others to gain a better understanding of how to track their contributions to the scheme.

A. Why am I not surprised that you are an accountant! Thank you for this. I'm sure it will help others.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot correspond directly with readers or give financial advice.