Mary Holm: Putting home or savings first a matter of priorities

Because you can't really predict what the share market or the housing market will do over time it may be best to base your housing goals around non-financial motivations. Photo / Getty Images

OPINION:

Q: I am halfway through your new book and am really enjoying it. I just wanted to get your opinion on my situation, and I imagine a lot of people my age will be in a similar predicament.

I am 24 years old and currently saving for a deposit on a house while also investing for retirement. I am investing 3 per cent into a conservative KiwiSaver fund so that I get the extra 3 per cent from my employer and the government contributions. I will use the balance of this for a house deposit.

I am putting about $200 a week into a savings account and $100 a week into a share index fund through Sharesies, which I won't touch until retirement.

Am I better off continuing this or would I better off to put everything towards the house deposit, and once I have that sorted then focus on investing for retirement?

A: So many older readers will wish they had had their act together as well as you have at 24. You're getting the best out of KiwiSaver as well as setting aside another $300 a week. Brilliant! Making a habit of saving a regular amount when you're young is the way to financial comfort later.

But should you put the retirement savings on hold and put all your savings into a first home? Firstly, let's look at it purely from a numbers perspective.

If you concentrate on the house purchase, you will be in your own home when you are, say, 30. But if you continue with your current plan, it might be 35. Will house prices grow hugely, grow slowly or fall in that five years? Nobody knows.

Meanwhile, if you go whole hog on the house I assume you would move your retirement savings into your low-risk KiwiSaver fund or another low-risk investment, because you don't want to risk a share market fall close to the house purchase time.

That means, of course, that if the share market does really well in the next several years you will miss out.

But it might also tank and you'll be glad you're out. Again, nobody knows.

In these situations, you might as well decide for non-financial reasons. Are you keen to get into your own home? Maybe you can't wait to escape landlords. Then again, maybe you enjoy not having to worry about the complications of home ownership while you're young. Go with whatever appeals.

Under either scenario, once you buy a home, keep up your KiwiSaver contributions to build your retirement savings. And your other $300 a week could go into reducing your mortgage faster, or adding to the retirement fund.

Either way, you're sure to end up financially strong. And I hope you are right — that many people in their twenties are in a similar situation. Glad you like the book.

Q: I am now 69, having joined KiwiSaver with my bank in 2013 when 61 to get the subsidy.

In 2018, I wanted to put $200,000 into a managed fund, and was talking to the bank. They very fairly pointed out that because I was over 65, KiwiSaver was effectively "on call", and their KiwiSaver fees were lower than their managed fund fees. However, the funds were managed the same way, by the same people, and invested identically.

If that is still the case, maybe you could give some publicity to this advantage to those over 65 with money to invest, and those near enough to 65 to know they will not need the money before then?

A: I already have — quite a few times! But it doesn't hurt to make the point again.

KiwiSaver fees are in almost all cases lower than fees on the same provider's similar non-KiwiSaver funds. And if you choose a low-fee provider — see the KiwiSaver Fund Finder on sorted.org.nz — it can be a great place to park retirement savings.

You can put short-term money in a low-risk fund, and longer-term money in a middle- or higher-risk fund with the same provider, in the hopes of getting higher returns.

A couple of other points:

• Until a couple of years ago, you couldn't join KiwiSaver after turning 65. That is no longer true. Anyone of any age can sign up.

• The Financial Markets Authority's newly released KiwiSaver annual report says the number of people over 65 who are in KiwiSaver rose 15 per cent in the year ending March 2021. And fewer over 65s have "fully exited", which means people are using KiwiSaver to hold their retirement savings. Good! Still, fewer than one in five people over 65 is in KiwiSaver.

• On your comment about KiwiSaver being effectively on call after you turn 65, I have had a few complaints from over-65 readers saying it takes a while to withdraw from their KiwiSaver account.

If that's a problem for you, switch to another KiwiSaver provider with easier withdrawals. All you have to do is contact the new provider and they will move the money for you.

Q: I just read the letter in last week's column from the single woman in her 50s. Something about this just seems off to me.

She says: "I have no debt except for a $120,000 mortgage on my home." Isn't that the definition of debt? Seems like a reasonable chunk to me.

She says, "I am considering selling my house, resigning from my job, renting for a while, recovering from surgery and then finding a new job and buying another house." I'm no financial expert but this just seems wrong on all levels to me.

Selling a house and buying later on in this market sounds like a great way to get locked out of the market.

Your option of not selling until ready to buy just seems so much safer to me. It's much more likely house prices would rise, and in the unlikely event that they fall, she'd have the option of not selling. If she was worried about not being able to service her mortgage during her time off, wouldn't taking a mortgage break be an option?

She says, "I know I can always find work and make enough money to live on." I've heard stories from people in the 50s who have highly-sought-after skills who just can't get a job because of their age. Even if she's right, there's always the chance her health may take a dive and prevent her from working.

If I were her, I'd just stay in the job for another couple of years, pay off the mortgage and accumulate a bit of spending money. Then she can quit her job, rent out her house while she takes some time off and not worry about anything. In the worst-case scenario of not being able to find work later, at least she'd still have her house.

A: Journalists writing about personal finance tend to err on the cautious side. We don't want someone coming back later and saying, "I followed your suggestion, and look where it led me!"

So maybe I should have argued against last week's correspondent's plans. You spell out lots of good reasons to do that. And it's not as if she's particularly well off.

Another reader wrote along similar lines, and added, "I suggest having the operation, this will be a sabbatical of sorts, and chances are that while recovering, her options moving forward will become clearer to her. All while securely in her own house, and not at the mercy of others."

But reading between the lines of the woman's letter, it felt to me as if selling her house might be psychologically important. Taking the risk that house prices soar while she's out of the market might all be part of saying, "I don't care. I want to do something radically different."

After all, she would still be able to buy a home of some sort later on, as long as she is not out of the market for too long.

There's such a thing as being too cautious, sitting on the sidelines while life passes you by.

By the way, you're much surer of house prices continuing to rise than the Reserve Bank is. I quoted them last week as saying, among other things, "In our projection, house prices are assumed to begin to fall modestly from late 2022." We'll see!

Q: My advice to the recent solo mum who is considering using her house deposit to pay for her son's private education is please don't!

I have twin boys who went to a private school from the age of 9. They almost grew up with the same group of friends who have since become adults in a diverse range of professions.

I have been asked over the years by other parents if their children would do better academically if they went to a private school. My answer has always been, "Not necessarily. If you have lots of money and don't feel the pinch every time the fees go up or you get a bill for a sports uniform, school trip, equipment, etc, then go for it. Otherwise, you are better off spending the money on private tuition for your child to catch up on subjects they are falling behind at school."

Other parents at the same school have expressed dissatisfaction that their son or daughter has not made any improvement on their grades after many years of paying exorbitant school fees.

I am a health professional and I have many colleagues who have come from decile 1 (low socioeconomic) schools around the country.

I have also worked with a health professional who gained a scholarship to a private school because of her skills at playing the violin. She told me her school years were just miserable because her parents could not afford any of the expensive things, school trips and holidays which her classmates could afford.

She was motivated, bright and hardworking. She would have succeeded anyway and would have been far happier in a public school with peers who did not make her feel inadequate every day.

A: An interesting perspective, despite your boys' apparent success at the private school. Sad story of the young violinist.

Q: For what it's worth I think your advice to the single mum two weeks ago was spot on: "I would rather see you keep saving for a modest home."

My only suggestion would be to apply for a place at Dilworth College which was set up, I believe, to accept students from a disadvantaged background.

I know personally of one such student, his mother died of cancer and his father applied for him as he felt he would have struggled to pay for private education for both him and his sister.

It is a long shot but it costs nothing to apply. In the meantime perhaps the mother might "work" on her son to try his best, take up music or some other extra-curricular subject that he might enjoy but that perhaps would impress the board that chooses the students.

I wish her all the luck in the world. She is in a disadvantaged position, bringing up a child on her own and determined to do all that she can to secure a good life for herself and her son.

A: Dilworth is an interesting suggestion.

Your point about the son taking up music echoes the letter above. But at Dilworth all the parents are "from good families of limited means", so the young man wouldn't struggle as the girl did.

- 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 or click here. 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.