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OPINION:
Q: I'm a solo mum with two boys, 9 and 12, living in ever-expensive Auckland. I'm determined to get on the property ladder, so that's a work in progress.
I want my kids to be financially literate and involve them in most discussions around property, savings etc. They have savings accounts and both are in KiwiSaver with the kick-start of $1000, and building nicely.
When they have money to save, are they best to put it in a bank account or KiwiSaver?
They both want to get into property when they are young adults. What if the KiwiSaver rules change and they can't withdraw for a first home?
Is it risky in KiwiSaver? Will they potentially lose funds?
I'm looking at switching to a provider with no fees for under 18.
A: You're doing well, getting the boys into KiwiSaver, teaching them about money and — perhaps most importantly — setting a great example by working towards owning your own home.
KiwiSaver is a great place for first home savings. And while nobody can guarantee what a future government would do, it's inconceivable that they would totally stop first home withdrawals.
I suppose a government could say that future contributions to KiwiSaver couldn't be used for a first home purchase. And from that point your boys could save elsewhere. But past savings? Talk about a vote loser!
Of course your boys might also want to save for university, or to buy a car or something. Obviously, that money needs to go elsewhere.
On losing money in KiwiSaver, if they are in higher-risk funds their balances will probably grow faster over the long term, but will fall a lot sometimes. But that money is not lost if they don't panic and move to a lower-risk fund. When they get within, say, 10 years of buying a home, they should gradually reduce their risk.
Losing money because of fraud? That's not impossible, but extremely unlikely.
And yes, using a low-fee or no-fee provider is a great idea.
Q: My husband (42) has stage four cancer and has recently finished work as he is too unwell to continue. We are about to rely on a benefit as our sole source of income (I run my own business but don't pay myself yet).
We are looking to reduce our expenses as much as possible, and part of this includes selling our rental property in Avondale, Auckland, as we are still topping this up significantly.
Unfortunately, we have a year remaining on our fixed-term mortgage for that property, and Westpac has quoted a significant prepayment fee. After I explained the situation, the bank has finally agreed to waive the first $10,000 of the fee on compassionate grounds.
While I feel they could/should have waived it all, they have made a concession beyond what they normally do, so I have decided to make peace with the situation and pay the remaining break fee.
I would love to know your best guess on what banks may do with their home loan rates over the next couple of months? I understand the Reserve Bank has committed not to drop the OCR until next year, however banks may reduce rates independently. My challenge is determining whether I:
• Hold off until closer to the settlement date (about the end of November), which will reduce the prepayment fee if rates don't drop.
• Or break the loan now (and move it to floating), anticipating banks might reduce rates again and therefore the repayment fee would increase.
Even $1000 is helpful in our present situation. My instinct is to hold off but I realise that is risky.
We have two young children and this is a very stressful time for us, so I would really appreciate your thoughts.
A: Tough times for you and your family. And I'm afraid I can't give you a clear-cut answer to your question.
To make your quandary clear to others: with your first option, the longer you wait, the closer you are to the end of your fixed term, and so the lower your break fee will be. But if mortgage rates fall in the meantime, that will increase your break fee — which is calculated on the difference between your fixed rate and the currently lower rate the bank will get when it relends the money to someone else.
I asked Westpac how likely it is that your mortgage interest rate would fall before the end of November. Their reply: "Interest rates are influenced by a variety of factors. We are unable to forecast when rates may increase or decrease."
I could have asked other economists, but the truth is that nobody knows. In light of that, I suggest you split the difference. Break half the loan now, and half in late November. That way, you won't end up making a decision that is 100 per cent wrong.
How does that sit with you? If you just want to get this off your mind, move the whole lot to floating now, and then try to forget about it. You've got plenty else to think about. And given that it's not long until the end of November, there probably won't be a huge difference between acting now and later anyway.
I did try to get some concessions from Westpac for you. Could the bank waive the whole fee, or at least commit to the break fee being no higher than it is today for the rest of 2020? "That doesn't seem like a lot to ask in the circumstances," I said.
A spokesperson replied, "We sympathise greatly with our customer given her family's predicament and have been working through ways we can assist. We've agreed to make an ex-gratia payment towards the mortgage break fee costs on the second property on compassionate grounds."
That's the $10,000 you wrote about. And maybe we can't expect more. A bank must hear a lot of sad stories. Good on you for accepting what you were given and moving on.
The spokesperson added, "We have also suggested structuring repayment across both properties to lower break costs, and this remains an option we would be happy to talk more about.
"One option could be to apply the proceeds of the sale of the rental property to the mortgage on the family home, which is closer to reaching the end of its fixed term than the rental property, and therefore the break costs on that mortgage could be less. The mortgage on the rental property could then be transferred to the family home." This sounds like something to discuss with a mortgage adviser.
Finally, the spokesperson said, "It is important to note the break costs are not a bank fee. They represent the cost to Westpac of securing funds at the time a fixed term loan is agreed.
"Funding may come from a variety of sources, including customer deposits and wholesale funding.
"When a bank agrees to lend money at a fixed interest rate it does so on the understanding that fixed-rate payments will be made for the whole of the fixed-rate period. If a loan is repaid ahead of the due date the lender may make a loss from re-arranging its funding positions, and this cost is passed on to the customer."
He says break fees are "a reasonable estimate of the loss that arises from a full prepayment of a fixed term loan agreement. The law provides some guidance on how to calculate this cost, and we do not profit from break costs." I hope things go as well as possible for you and your family in the months ahead.
Q: I wonder if the son, referenced in the second letter last week, who is keeping the cheque from his grandmother, is making more of a statement about her generosity (lack of) rather than making a prudent investment decision.
A: For those who didn't see last week's column, the son says he is keeping the cheque in the hope it will become a valuable collectible.
And you may well be right. If the cheque was for a large amount, he would probably be too tempted to "take the money and run". But let's not be harsh on grandmas!
Q: You have been writing about the demise of cheques, which has been inevitable for a while to the point that BNZ abandoned "cheque" accounts a long time ago in favour of calling them "YouMoney".
However, I found out recently that BNZ customers can rename their individual accounts, which led me to promptly rename my "YouMoney" account as — guess what — Cheque account — ta da!
A: Excellent! BNZ confirms that you can name your transactional account anything you like. Says a spokesperson, "If you wanted to name your account 'Cheque', you can, but it doesn't affect how the account works." You can have up to 25 of these accounts — which have won awards for BNZ. That's quite enough free advertising!
More on dying cheques next week.
Q: Under the heading "Play it safe" last week you state "... they are PIEs, so tax on your returns is a bit lower." This is not always the case.
The PIE standard tax rate of 28 per cent is only lower for individuals whose taxable income exceeds $48,000. Marginal tax rates over $48,000 are 30 per cent and, if over $70,000, 33 per cent.
Investors whose taxable income is under $48,000 do not get a lower tax rate on their PIE investments. In fact, as their personal tax rate may be either 10.5 per cent or 17.5 per cent, they may be over-taxed if they have not advised their correct rate to the PIE and are automatically taxed at 28 per cent.
Incidentally, many investors whose marginal tax rate is 33 per cent mistakenly assume that a PIE investment at 28 per cent must be superior to any other investment taxed at 33 per cent.
The test is really the after-tax return. For example an investment returning 10 per cent taxed at 33 per cent gives an after tax return of 6.7 per cent. A PIE investment returning 8 per cent taxed at 28 per cent gives an after-tax return of 5.76 per cent.
A: I beg to differ. Some people on lower incomes also get tax breaks in PIES or portfolio investment entities — which include pretty much all KiwiSaver and non-KiwiSaver managed funds.
The tax on PIES is as follows:
• If your taxable income from other sources, such as wages or bank account interest, is $14,000 or less, and that taxable income plus your PIE income is $48,000 or less, the tax on your PIE income is 10.5 per cent.
• If your taxable income from other sources is $48,000 or less, and that taxable income plus your PIE income is $70,000 or less, the tax on your PIE income is 17.5 per cent.
• For everyone else, the tax on PIEs is 28 per cent.
Okay, now let's look at Sam, whose taxable income from other sources is $13,000. This year he earned $10,000 in KiwiSaver. The whole lot will be taxed at 10.5 per cent.
If instead he had earned that $10,000 in a bank account, all but $1000 of it would have been taxed at 17.5 per cent.
How about Jess, whose taxable income from other sources is $45,000? She earns $20,000 in KiwiSaver, which is taxed at 17.5 per cent. In a bank account, most of that would have been taxed at 30 per cent.
Those are big differences. You might say the situations are contrived. But as people's balances in KiwiSaver and other managed funds grow — and therefore their returns are higher — more and more people will benefit in this way. Still, I should have said "tax on your returns is often a bit lower." Apologies.
And of course your last point is right. It's a mistake to let tax breaks drive investment decisions.
- 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.
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