Mary Holm: High risks for house hunter

Q. I am 27 and have been on the big OE for the last 3 1/2 years working first in England and now in the UAE.

During this time, I have saved and sent money back from time to time and have managed to buy four houses (total value $530,000) and a small section of land (value $22,000).

The houses are being rented out and seem to be going well. They have mortgages on them and are on 56 per cent loan to value, based on the purchase prices, with 15 years left till they are paid off.

I have also saved about $25,000, a portion of which I want to keep in case of unforeseen costs that may come up - no tenants or repairs.

I am coming back home in the middle of this year. On my return, I would like to make the most of the luck I seem to have had so far.

My question is: Do you think I should buy more houses before I return and take my loan-to-value ratio up to about 70-80 per cent and switch to interest-only mortgages, or should I just chill out for a while and wait for a few years till I have paid a bit more off the mortgages before I buy again?

I am not afraid of risks as long as there is a good return and they are not just gambles, if that makes sense.

As I am not in the country, it is sometimes hard to decide which way to go, so your advice would be much appreciated.

A. You've done really well in many ways. I particularly like the fact that you have four rental houses rather than just one. That gives you much more diversification than most landlords.

It does, though, mean that each house is cheap. And that suggests that there might be big maintenance expenses not too far away.

There's also a bit of a glut of rental properties in some areas, which is keeping rents down and boosting the chance that you could be tenantless for a while.

I think, therefore, that $25,000 is the minimum you should keep aside for unforeseen expenses - especially given that you are overseas. It's harder to solve problems from afar, so sometimes you just have to throw money at them.

In any case, this doesn't feel like a great time to buy property, with prices possibly falling soon.

You acknowledge that you've been lucky, but I wonder if you realise just how lucky. You've been buying into New Zealand's biggest housing boom since the early 1980s.

It's common for newcomers who happen to start investing as house or share prices are soaring to become over-confident about their abilities.

They borrow more and more to invest, and when the market slumps they sometimes lose all they have gained.

Obviously, you earn good money and you're disciplined enough to invest much of it.

If you don't buy another property now, you have plenty of time to do so later and I can't imagine your ending up anything but wealthy.

If, on the other hand, you do buy now, you might end up even wealthier but you might ruin it all, if house prices slump and you are over-extended.

Risk can be great, especially when you're young. But why overdo it? You need only so much wealth. Chill out, at least until you get back here.

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Q. I'd like your advice on revolving credit loans.

I'm 26, and nearing the end of the first year of a $215,000, 30-year mortgage. I'm on a fixed rate of 7.55 per cent, for which I pay $700 fortnightly. I've an annual income of $52,000, with a fair possibility of a small rise in the near future.

Recently, I approached my mortgage broker about my options for paying off the loan faster. He recommended that I take advantage of my lender's revolving credit loan facility, where income goes directly into the home loan account.

What he's told me about the package does seem sensible. And it appears to be backed by personal finance advice websites.

But I worry about paying more each fortnight on the floating interest rate (although having said that, there's 0.5 per cent between the fixed and floating rates).

I know I have the financial discipline not to go giddy with all that credit, but I'd appreciate your advice all the same.

It is quite depressing when whole continents move faster than the pace of my mortgage's retreat.

A. Whoever said people of the same age tend to have the same financial needs and wants is shown up by today's letters.

You and the previous correspondent are starting young in the property market and good on you. It can be a great financial base. But your attitudes to debt are opposites.

Neither is right or wrong. Borrowing lots to invest is riskier and, when things go well, it brings in higher returns. You, it seems, like to take less risk. And there's much to be said for getting a mortgage-free home as young as possible.

So what is your best strategy?

There's probably a penalty if you make extra payments off your fixed-rate loan or renegotiate it before the fixed period ends.

But check that out. In periods of rising interest rates, some lenders are pleased to have a fixed mortgage paid off fast so they can re-lend the money at a higher rate, so they might waive the penalty.

If they don't, and it's a substantial penalty, you are probably best to set aside savings in term deposits until the fixed rate period ends and then repay a lump sum.

At that point - or now if they will waive the penalty - you have three options:

* If you want to commit to always making bigger repayments, shorten the term of the loan.

Changing your mortgage to 25 years would boost your fortnightly payments to $736. But you would repay the loan five years earlier and slash total interest payments from about $329,000 to $263,000.

That's a whole $66,000 more for other things. What's more, it will speed up your mortgage's "retreat" - which can be discouragingly slow in the early years of repayment.

You could even go a step further. On a 20-year loan, fortnightly payments would be $802. You would be debt-free even faster, and cut interest payments to $202,000.

* If you would rather be more flexible about when you make extra repayments, make part of the mortgage fixed and part floating. Then pay any spare money off the floating loan, without penalty.

If floating rates are still above fixed, limit the floating portion to the extra amount you realistically expect to repay.

* Do the same as above, but make the floating portion a revolving credit loan, as recommended by your broker.

With those loans, your mortgage is your cheque account, with a huge negative balance. The idea is to keep that loan balance as small as possible, so that you pay less interest on it.

To achieve this, try to get all income direct credited into the account, or deposit it as soon as possible.

And pay bills out of the account as late as possible.

The best way is to have them direct debited on the last payment date.

In the meantime, the cash reduces your mortgage. And if your income is higher than your spending, the excess sits in the account, permanently reducing your mortgage.

The return on your deposits is, effectively, the mortgage interest rate. Not having to pay $100 in interest boosts your wealth in the same way as earning $100 in interest.

That's a great return - way above bank account rates, especially after tax. Receiving that rate on your money while it sits in your account probably more than makes up for paying higher interest on the mortgage.

Obviously, it works better if you tend to have large sums sitting around for a while.

It's important to plan to decrease the loan balance over time, which amounts to repaying the loan.

Some people, though, can't resist the temptation to borrow back some of what they've paid off. And it's easy to do. You just write a cheque.

For them, a revolving credit loan is probably not a good idea. But it sounds as if that won't be a problem for you.

Before you make a choice, or you might choose a combination, ask about all fees and charges.