Mary Holm: It all amounts to faster payment

Dive in to your mortgage and pay it off earlier. Photo / Sarah Ivey

Perhaps you can clarify the following. Having a principal and interest 20-year mortgage, we can now afford to double or triple monthly repayments.

Would it be better to pay these additional monthly amounts directly off the principal or to have the term of the loan reduce, as the bank suggests?

We're getting conflicting info from our bank and our accountant, and I can't calculate it myself.

It amounts to the same thing - and your banker and accountant should have realised this, and explained it to you. Seeing they didn't, I'll have a go at it.

If you pay extra off the principal each month, that must mean you will repay the mortgage earlier.

So the term of the loan will automatically shorten.

If you shorten the term of the loan, you will have to make bigger monthly payments or you won't repay the total.

That extra money won't go into interest. Why should it? You start out with the same total mortgage at the same interest rate, so you don't owe any more interest. Therefore, the extra money must go towards reducing your principal.

Given that the bank is the one lending you the money, go along with their terminology and reduce your mortgage term - knowing that means you are cutting back the principal.

Oh, and well done for speeding up the repayments. It will make a huge difference to how long your mortgage runs and the total interest paid.

If you have a 20-year 6.5 per cent mortgage, and you double the payments, you'll repay it in just seven years. If you triple the payments, it will be repaid in just four years and four months - according to the mortgage calculators on www.sorted.org.nz

The interest paid will, of course, depend on the amount of the mortgage.

For example, if it's a $300,000 loan, total interest will plunge from $236,600 to $73,800 if you double the payments, and to $44,400 if you triple them.

For other amounts, adjust accordingly. On a $100,000 mortgage, take one third of the interest totals. On a $600,000 mortgage, double them.

Gold speculating

I am in the camp that does not consider gold to be an investment. It is a store of wealth when the world is uncertain, and obviously like anything you can make money by speculating.

Anyway I decided to have a look at gold from a return point of view. I could only source quickly this morning the past 20 years. The graph shows the gold price in New Zealand and US dollars.

What does the NZ dollar line tell you? Who knows? I am not sure that it says anything. You can make some observations:

* It did nothing from 1991 to 2005. It rose a little through the uncertainty of the tech bubble, but as that was a narrow focused event it was minimal in the long-term context, although material in the short-term context.

From 2005 to 2009 it boomed. This was the period of concern and uncertainty, but it had a "false" peak in May 2006.

* It peaked (so far) in February 2009, about when the US said, "no more major bank failures".

* For the past 18 months it has gone sideways. You get a slightly different line on the graph in US dollars:

After slumping in the 90s, the line has continued to go up more recently. I suspect that this is telling us that there is uncertainty as to whether the US dollar will continue to be the "reserve" currency.

Over the full period you have made 6 per cent to 7 per cent a year, depending on the currency you measure it in. But in the past five years it is 23 per cent a year.

There is no evidence that it protects you against inflation.

There is evidence that when the world with hindsight doesn't like the mainstream financial system, then gold protects you. But you still have to decide when the world doesn't like the mainstream system.

I think I will stick to my view that gold is about speculating.

As you say, you can make money by speculating - but you can also lose it.

One thing your graph doesn't show is what happened to the gold price in the 1980s. It fell from about US$850 at the start of the decade to well below US$400 10 years later, and about US$250 by the end of the 1990s. Not everyone could cope with a drop like that, especially over a sustained period.

Even when we look at just the past 20 years - without the terrible 80s performance - the return of 6 or 7 per cent is not all that marvellous, given the risk.

Overseas funds

Your correspondent last week is in a dilemma regarding their UK funds and the likely exchange rate fluctuations in the future.

Presumably the money is in a savings account at present. If this is the case, with the current level of interest available in the UK, the value of the deposit is likely to remain fairly static.

However, if the funds were to be all brought to New Zealand, they should be able to buy a term deposit at a decent rate with one of the big banks. Even after tax, over five years the returns should go a long way towards cushioning against any adverse movement of the British pound against the NZ dollar.

You're quite right - as long as the NZ dollar doesn't fall far.

When I answered the question last week, I decided not to go into the difference between UK and New Zealand interest rates. That's because, in answering a similar question some years ago, I quoted experts who said that when there's a difference in international interest rates of this kind, that usually means the markets tend to expect the currency of the higher-rate country to fall.

Why? Well, if the strength of a currency is iffy, the only way institutions in that country can attract overseas funds is by paying high interest rates.

People want compensation for taking risk.

In short, generally it's not worth moving your savings to higher-interest countries. What you gain on the interest rate swing you lose on the currency roundabout.

Since I wrote about that, though, the trade weighted index - which measures the NZ dollar against the currencies of our major trading partners - rose, fell and rose again. In total, it went nowhere much.

This could be interpreted as:

* The experts don't know what they are talking about.

* The kiwi is building up a head of steam for a big fall.

* There's something - not obvious - that's different about the New Zealand situation, and the kiwi may not fall much for a long time yet.

Not knowing which of those is correct, I decided not to go into all that again.

But now that you have brought it up, let's just say that the higher interest rates here will certainly help to compensate anyone who brings money into this country and is then annoyed to see the kiwi fall.

In light of all the uncertainty, though, I still favour bringing money in a bit at a time, over a fairly long period.

IRD deductions

I changed my job at the start of July 2007 and joined KiwiSaver from day one and have been a member since then.

Ever since I could access my accounts with the default provider online, I have been checking it every now and then.

In October 2009, I observed that about $550 had been deducted from my member contributions. On being approached, the provider informed me that the money had been withdrawn and returned to the IRD on its request.

I approached IRD, which advised me that the deduction was made since it had wrongly deposited that amount to my account with the provider in 2007 - after two years?

My query is: For KiwiSaver contributions, IRD has the job of transferring money received from the employer to the provider. But does it have access to the money already deposited, for it to be returned, without the reasons advised and permission obtained from the member?

I would also like to know if any of your readers have experienced similar deductions.

Probably, but not in large numbers, according to Inland Revenue.

And the department assures me you haven't been victimised. "It is important to note that in the types of cases mentioned, the member has not actually lost any money. The original amount that was sent to the provider was in excess of the true amount of KiwiSaver contribution made by the member," says a spokeswoman.

So how did it happen?

"Every month, employers file a summary of their payroll, which lists KiwiSaver deductions and employer contributions," says the spokeswoman.

"When Inland Revenue receives the employer monthly schedule (EMS), we check to make sure money is credited to the right people and query any discrepancies or incomplete information. When we believe the report is in order, we transfer KiwiSaver payments to the scheme provider.

"However, employers sometimes make further amendments at a later date. Where they adjust downwards the amount of KiwiSaver deductions or contributions, Inland Revenue needs to request back the overpaid funds from the provider."

How come it took so long? "When KiwiSaver started in 2007, the functionality to request funds back from providers took a little while to fully implement," says the spokeswoman.

"Once this was done, there were some cases from previous months that had to be addressed."

Still, I agree with you that two years seems ridiculously long. Whose fault that is we have no way of knowing. Inland Revenue had to take on a lot, in a hurry, when KiwiSaver started, so it might not be entirely fair to point the finger at it.

The main point is that we've been assured that such delays no longer happen.

"These sorts of requests are now issued as soon as an EMS is reassessed," says the spokeswoman.

She adds, in response to your question, that Inland Revenue has the right to take money out of a KiwiSaver account under section 81 of the KiwiSaver Act.

However, it seems to me that someone should have told you what was going on.

Your employer, your KiwiSaver provider and Inland Revenue probably all owed you an explanation. Come on, you guys - communication is crucial to building trust.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter 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 (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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