A financial adviser convinced a couple they should get a loan to invest in shares.
Q: We’re considering exiting an investment, but if we do we’d be realising a loss. But there’s a risk the loss could be bigger if we stay in it.
Needless to say, we regret the investment and wish we’d read your column earlier, because if we had laddered the investment we would not have put so much money in!
About three years ago, a registered financial adviser recommended we buy shares using a bank loan at a very low interest rate (instead of property which we couldn’t afford). We were told we could use the dividends to pay off the loan.
That never happened because unfortunately the $200,000 investment tanked by half (offshore markets plunged). The investment is in overseas shares, and the financial adviser manages these funds.
We’re still negatively geared (the investment is worth less than the loan) and can’t see that changing in the next few years what with offshore volatility. Meanwhile, we’re paying interest, so it’s costing us.
The investment has been slowly recovering. When it reached $160,000 recently, we decided to pull out half and paid off some of the bank loan. We can’t afford to lose the other half, and we’re considering a swift exit. We’ve paid about $20,000 in interest and fees so far and would lose $30,000 if we pull out - a hard pill to swallow but better than losing more.
We have teenagers and we’re planning to extend our house. We live simply, we both work and have pretty low tolerances for risk. We paid off our mortgage last year, so our only loans are for the above investment and also a successful investment in the company I work for (dividends are still paying off that loan).
However, we’ll be taking on a big mortgage for the house extension, and are concerned about the overseas shares dropping further. Your advice would be much appreciated.
A: Firstly, fire your adviser, and file a complaint against him or her. More on that in a minute.
Borrowing to invest – sometimes called gearing – is risky, whether you’re buying rental property, shares or a dinosaur farm. When things go well, you get the gain not only on your money but also on the borrowed money. But if the value falls and you sell, you can lose all the money you put in and still owe the bank. That ghastly situation can’t happen if there’s no borrowing.
Because of that, any adviser worth their salt should check, before proposing a geared investment, that the client:
That’s not you! So what should you do? I suggest you get out now. The markets might improve, or fall further – nobody knows. But even if share prices rise for a while, you’ll still wonder whether they’ll go even higher or drop again. You don’t need the anxiety.
Get out, repay the debt, and get on with the house extension.
Two more issues:
If you’re not completely happy with the response – which on the face of it should perhaps include some compensation – ask who is their disputes resolution scheme. That scheme will help you further with your complaint, at no charge to you.
Q: Over the years, many have extolled the benefits of so-called dollar cost averaging when purchasing shares. Can dollar cost averaging work for sales as well as purchases?
A: No, it doesn’t work well when you’re selling.
Dollar-cost averaging happens when you invest the same amount regularly – for example, $100 a month in a volatile investment. Employees do this in KiwiSaver, and others set up regular contributions to KiwiSaver or other savings.
That’s good not only because your savings are steadily growing, but also because of the way the numbers work:
However, if you are selling instead of buying, you sell more when they are cheap, and fewer when the price is high. Not so good! Once you’ve decided to sell something, it’s better just to get rid of it in one go.
Q: I read with interest about veterans’ spouses' pensions last week. As a former welfare officer of a local RSA, I took a particular interest in this, and was very successful in not only having the pension awarded but also a lump sum payment in some cases.
In my day we had district welfare officers, and we would meet regularly to pass on advice on successful applications.
Many World War II veterans were reluctant to apply for a pension. But that changed after we explained the benefits – one of which was, if they should pass and their spouse was still alive, she would be entitled to the surviving spouse pension. The delight on the faces of those awarded it made it all worthwhile.
Check with your local RSA. They still may have a welfare officer who can help. Otherwise, the RNZRSA should be able to advise.
A: Good on you for all the work you’ve done. And thanks for the RSA tip.
Another reader wrote: “I read last week’s lead Q&A with dismay and a fair dollop of anger, as my own situation is a slightly younger, but similar, version of that of your correspondent’s mother.”
She wrote of her late husband’s service in the RNZAF. And, as in last week’s story, she was never made aware of her eligibility for a pension.
“Well today, after searching the website you named, it appears that I am eligible and I will duly apply. Better late than never, you might agree.
“I am understandably a tad bitter at nearly 39 years of lost income. During difficult times it would have helped a great deal.
“I am grateful to your correspondent for bringing this information into public attention, and to you – for publishing the letter.” More on this topic next week.
Q: Your interesting comments on house costs appear to omit apartments, which are a lot more realistic in purchase price and, according to my calculation, have rarely exceeded annual general inflation over the past 20 to 30 years.
My two-bedroom unit with sea and city views cost me $282,000 in 1998, and today a similar unit is valued at about $730,000, which has barely kept up with inflation. So there are plenty of opportunities for those not wishing to purchase a standalone house.
A: Your place might not be typical. Maybe your neighbourhood has deteriorated, or many new apartments have kept prices down.
But in any case, you’ve actually done considerably better than inflation. The Reserve Bank’s helpful inflation calculator tells us that goods and services that cost $1 in 1998 cost $1.88 now. Prices have less than doubled. Meanwhile, your apartment’s price is about 2.6 times what it was then.
Still, you’re right that apartment prices generally have not risen as fast as house prices. Real Estate Institute (REINZ) data shows that:
The patterns of growth are similar, with price drops during the 2008-2011 Global Financial Crisis, unusually fast growth from then until 2021 or 2022, and falls since then. But the house price graph is steeper than the apartment graph.
Interestingly, the Auckland apartment increase has been only 3.3-fold while in the rest of the country it was 5.3-fold. And average Auckland apartments in 2024 were cheaper, at $585,000, than elsewhere, at $613,000.
Enough numbers! Thanks for giving would-be homeowners hope.
Q: A cash-poor asset-rich retiree in Ponsonby has a mortgage-free flat valued at $0.5 million. They have just enough income to cover all of their living expenses, other than their $2000 annual rates.
Someone told them that they could pull up to $5000 per year for at least seven years from a reverse mortgage. At the end, they’d probably be wealthier than they are now, but they’d be running out of “headroom” on their reverse mortgage.
A more conservative plan would be to use the reverse mortgage only to pay their rates, in which case their wealth would probably continue to grow over the next decades – assuming that rates don’t rise more rapidly than 10% a year and that the value of their property doubles every 10 years. Do you agree?
A: I’ve got a better idea. But first, let’s look at the reverse mortgage situation.
We’ll start with your assumption, that the property value doubles every 10 years, which means it grows by 7.2% a year. We also assume Heartland Bank’s current reverse mortgage interest rate of 8.89%.
Even at the lower price growth rate, the $115,000 increase in the property value is still well ahead of the $55,667 loan. So I don’t know where your “running out of headroom” comes from. That would happen only with a much bigger or longer-running loan.
If the person borrowed only $2000 instead of $5000 a year, the loan would be proportionately smaller.
However, the person would probably be eligible for a better deal under the Auckland Council’s rates postponement scheme. Some other councils also offer this, sometimes with age (older is better) or income limits. Check your council’s website. But Auckland doesn’t have such restrictions.
Rates postponement is like a mini reverse mortgage, but usually at a lower interest rate. You don’t pay some or all of your rates, and that debt grows until it’s repaid when you die or sell your home – although you can repay it earlier if you wish.
In Auckland, you have to have owned the property for at least two years, and live in it yourself. The postponed rates can’t exceed 80% of your equity (property value minus any mortgage). There is a $130 fee and you pay interest at the council’s annual borrowing rate, currently 6.4%.
I’m not sure why more people don’t take this up. It can work well if you’re struggling financially, or would like a few thousand dollars a year to have fun with.
Q: Forgive my math denseness. From what you’ve said, if I have saved $1 million, say, and I run down my savings by $1000 a week, the money will all be gone in 20 years – based on the “$100 spend for every $100,000 of savings” rule.
But that does not include NZ Super, as you advised. So in reality I could run savings down by $600 a week (plus $400 NZ Super to spend), and my savings will last more than 20 years?
A: Your first paragraph is mainly correct, except for your money lasting for 20 years. How long it will last depends on your future investment returns, which nobody knows in advance.
However, two actuaries, Alison O’Connell and Ian Perera, have calculated that if you start spending your savings at:
You’re right that NZ Super doesn’t come into this. So yes, if you take less than $1000 a week from your savings, the money will last longer – maybe even until you are 200!
* 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.
The High Court heard Waipareira's judicial review in May; a ruling is pending.