Mary Holm: Choosing the right time to buy

My husband and I have saved a $120,000 deposit for a property. My husband is going to be returning to study for the next three years and so we will be a one-income family, on around $110,000.

Are we better off to buy a house we don't really like that much now, only to have to sell and upgrade in three years time when my husband is back in the workforce, or should we continue to rent and buy the house we want in three years time when we are both working again?

We are worried that the costs of buying and selling may make buying for such a short time an unwise choice.

Would having around $7000 more to put into your house - over and above your own savings - sway you towards waiting for three years?

I'm assuming you don't belong to KiwiSaver, or you would have known about the KiwiSaver help for first home buyers and mentioned it in your letter. Joining the scheme now and buying your home in three years could be worth an extra $7000 to you. And if you are in a position to take a pay cut, it could be worth a further $6000.

But more on that in a minute. While $7000-plus is not to be sneezed at, it shouldn't be the only factor to take into account. So let's firstly consider your position without KiwiSaver.

In the current market you'll almost certainly find that if you were to buy the house you rent, it would cost you more in mortgage interest, insurance, rates and maintenance than the rent. We don't count mortgage principal payments, as they are a form of long-term saving, but they amount to very little in the first three years of a mortgage.

True, if you keep renting, you'll miss out on any capital gain on the property. That is a big unknown. But you would struggle to find an unbiased expert who thinks property values will grow fast over the next three years. It's still quite feasible that they will decline.

The other issue, as you say, is the costs of selling your house and buying the new one. You can sell without an agent, but it's not easy. If you use an agent, their commission on a $300,000 house might be around $12,000. Add to that lawyer's fees for selling and buying.

All in all, even without KiwiSaver it seems likely you will be better off continuing to rent for three more years - especially if you save the difference between your rent and what your mortgage interest, insurance, rates and maintenance would have been. To get a rough idea of that, ask friends and workmates.

How would KiwiSaver help? Let's start with the basics - including some details released just this week.

There are two parts to the KiwiSaver assistance for buyers of first homes. The first is withdrawal from your KiwiSaver account. After three years or more in KiwiSaver, you can make a one-off withdrawal of your own contributions and employer contributions, plus interest and other returns earned on all the money in your account. The money must be used for a deposit on your first "principal place of residence", not a rental property.

You don't have to contribute to KiwiSaver at any particular level to be eligible to make this withdrawal. Nor are there income or house price limits. The rest of the money in your KiwiSaver account - the $1000 kick-start and tax credits - remains there.

The second part to the assistance is a deposit subsidy - a gift from the Government. This starts at $3000 after three years of contributing to KiwiSaver (or $6000 if you and your partner are both eligible), rising gradually to $5000 after five years (or $10,000 for a couple).

To be eligible for the subsidy:

* You must have been contributing to KiwiSaver for at least three years. For employees, the minimum contribution is 2 per cent of pay, and for beneficiaries, it's 2 per cent of their gross (before-tax) benefit. The self-employed need to save 2 per cent of their gross taxable income in the year prior to the financial year in which the contributions are made (look at last year's tax return).

Other non-earners will need to save 2 per cent of the minimum annual wage, which amounts to $520 a year or $10 a week. The minimum wage is reviewed each March or April, so keep an eye on that or simply contribute somewhat more than $10 a week to make sure you are covered.

Anyone can top up their contributions before the end of each KiwiSaver year, on June 30, to get to the required savings level for that year.

It's okay to take contributions holidays along the way, but those non-contribution periods won't count towards the three to five years.

* The Government has now confirmed that, to get a subsidy in 2010, your household income has to be less than $100,000 a year for one or two borrowers, or $140,000 for three or more borrowers.

* You must buy a lower-priced home. Housing NZ has just announced 2010 house price caps of $400,000 in Auckland City, North Shore City, Rodney, Wellington and Queenstown Lakes District and $300,000 in all other areas. These caps will be reviewed annually from June 2010.

How does all this fit in with our correspondent over the next three years?

If you join KiwiSaver and contribute 2 per cent of your pay, which is $2200 a year assuming no pay rises, you and your employer will each put in $6600 over the three years. You can put that total $13,200 into your house when you buy it, and the employer's contribution is money you otherwise wouldn't have had.

Your KiwiSaver account will also be boosted by the $1000 kick-start and at least two years of tax credits. Depending on timing, that might total around $3000. While you won't be able to put that money into your house, you can put in the returns earned on it, plus the returns on your own and your employer's contributions.

Given that you plan to take some of the money out in just three years, I suggest you invest in a low-risk KiwiSaver fund, earning a conservative 3 per cent after fees and taxes. That means the returns on the money you got by being in KiwiSaver - excluding your $6600 contributions which I assume you would have saved anyway - might amount to about $450.

Meanwhile, it would be good if your husband also joined KiwiSaver, contributing $20 a week. At that level, he'll get not only the $1000 kick-start but the full $1043 annual tax credit. Again, he won't be able to put that government money into the house, but he will be able to put in the $3120 he has saved, plus returns on the lot. In his case, the returns on the money excluding his own savings might come to about $150.

So there you have it - $6600 plus $450 plus $150 you won't get unless you join KiwiSaver. With pay rises and good luck on returns, it might total more like $8000.

Unfortunately, with income of $110,000, you won't be eligible for the first home subsidy. If for some reason it would suit you to work a bit less, or you could negotiate some way to get your pay below the $100,000 cut-off, you could as a couple receive a $6000 subsidy - more if you delayed buying for longer.

Don't forget, too, that if you join KiwiSaver now and start receiving the annual tax credits, that money plus your kick-starts will be accumulating for your retirement.

Once you have bought the house, you can take contributions holidays from KiwiSaver if you wish, all the way to retirement. But if you keep contributing that will almost certainly make you better off in retirement than if you put the money into extra mortgage repayments, because of the KiwiSaver tax credits.

My wife and I are considering buying our first house and, having been contributing to KiwiSaver for two years this October, are wondering under what conditions we can withdraw our KiwiSaver contributions towards our deposit.

The information regarding how and when we can access these funds is rather sparse at this time. I assume this is due to eligibility not beginning until next year.

Our income level means we are not eligible for the first home buyers' subsidy at this time.

We are wondering whether it is better to buy now and miss out on the use of the KiwiSaver contribution, wait till October next year when we'll be eligible for the contribution, or whether the rules may even allow us to buy now and access the funds in October 2010 anyway?

To answer your last question first, no you can't buy now and access later.

A spokesperson for Housing NZ says the legislation on the first home withdrawal and subsidy "says that it is for the purchase of a first home and is paid to the solicitor on settlement day. It is for first home buyers (or previous home owners in a similar financial position to first home buyers), so someone who buys a house now and applies later would not be considered a first home buyer."

That leaves your other two options: buying now with no KiwiSaver money or waiting a year and using the KiwiSaver money.

Given we're talking about only a year, and given the pros and cons of buying versus renting listed above, I don't think market timing should affect your decision. So let's concentrate on the KiwiSaver issues.

If you were eligible for the first home subsidy, clearly it would be better to wait and get that. But as you are not eligible, the question is whether it's better to buy a home and leave your and your employers' contributions, plus all your returns, in your KiwiSaver account, or to withdraw that money a year from now to put into your house deposit.

It's not obvious which would be better mathematically. But the bigger your house deposit the easier it is to get a mortgage, and the more secure your whole financial situation will be. I vote for waiting and putting the KiwiSaver money into the house.

When the time comes to get your money out, you should approach your KiwiSaver provider for details on how to do it.

You must be intending to live in the house for at least the next six months, and you will have to sign a statutory declaration saying that.

While we're on choices about properties, a couple of readers sent interesting letters about last week's Q&A in which the correspondent wondered whether to sell her house at Mangere Bridge or her house at Whangamata. We'll look at those next week.

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 answer all questions, correspond directly with readers, or give financial advice.