Money: How to eat your home

By Richard Braddell

WELLINGTON - You're 45, your beautiful and you're broke. Worse still, you're into a second marriage, have a clutch of new kids to support, educate and succour through expensive adolescence.

Maybe that's not quite you. But you may be among the middle income earners who are feeling the squeeze on their incomes, or whose profligate ways have not been helped by confused government messages about superannuation.

You know you have to save, but dull homilies, mostly from those who don't need to, and fearsome blueprints for household budgets offered by financial advisers, make the straight and narrow path to fiscal probity look very long indeed. But the message from the likes of the Retirement Commissioner and financial advisers is, DON'T GIVE UP.

Even $20,000 in savings provides a worthwhile boost to New Zealand Superannuation. And most people can do much better. Even at age 50, there are still 10 or 15 years in which to make reasonable savings, says Kasar Singh, the manager of savings and investment at AMP.

But many bad savers already belong to an investment scheme already; the one they signed up to when they bought their house. Yes, paying off the mortgage is a form of saving.

Fund managers and investment advisers may argue over the benefits of paying off the house before beginning other forms of savings. But as Auckland financial adviser Murray Weatherston says, even at today's low mortgage rates of around 6.5 percent, the effective risk-free return of 9.7 percent before tax (for those on a 33 percent marginal tax rate

) is hard to beat.

"The rationale for that is that you're borrowings are not tax deductible, so repaying your mortgage is the same as investing at the after tax rate equivalent to your interest rate," he explains.

However, Mr Weatherston says there is still a case to diversify into other savings vehicles once the mortgage level is moderate.

The managing director of fund manager Armstrong Jones, Paul Fyfe, puts it this way: "The discipline of putting money away for retirement is essential. But with low interest rates now, it could be argued that you can get a better return out of some markets."

Nevertheless, it has to be remembered that property, like shares, generally appreciates in value, even although there may be short-term corrections in the market. So investing in house, even if it's the one you live in, and paying it off, has to be a good start to saving.

But owning a house and little else creates a dilemma of its own at retirement. Trading down to release capital may be an option.

But there is another solution in the form of reverse annuity mortgages. These involve borrowing against the value of house to set up an annuity to provide retirement income.

"I think, in time, that people have got to be able to eat their house block by block," Mr Weatherston says.

He suggests that if a retired person was able to borrow 2 percent of the home's value each year, or say the 2 percent of the average Auckland house price of more than $230,000, that would provide an extra $4600 a year in retirement. That is the equivalent of $90 a week, or close 50 percent extra for a single person on New Zealand Superannuation.

In Mr Weatherston's view, two features should be incorporated into what he prefers to call a home equity loan. The first is that the loan can be transferred to another similar property if the borrower wants to move, the second, that the borrower can never be kicked out of his or her house.

But there is a hitch. Although the concept is frequently advocated and received serious consideration in the Todd report on retirement savings, only one small company is known to have provided the means to do so.

Mr Weatherston, who often comments on personal financial matters on National Radio, says he gets a flood of inquiries whenever he mentions them. "I have to say sorry, I don't know where they are freely available," he says.

But that seems surprising since they are a natural adjunct to the risk management products provided by life offices. In fact, they make a good hedge since while most life insurance is based around managing the risk of people dying early, the concept of reverse annuity mortgages is based on managing the risk that they will live too long.

One way or the other, life offices have the actuarial experience to determine that risk statistically. And with baby boomers soon to enter retirement, there should be plenty of demand to ensure the normal statistical distribution of deaths applies.

But the borrower's life expectancy is only one of three risks a prospective home equity mortgage lender has to contend with. The others are future interest rates and the value of the housing market itself.

Neither should be insuperable. A home equity lender can gain some measure of protection by lending less in the early years of retirement and more later on. Annual reviews in which prevailing interest rates and market values are built into the equation will help, as will the greater stability in interest rates that is now expected.

Whatever, it should not be beyond the wit of financial institutions to find ways of trading off those risks through financial markets.

But it's not just financial institutions who show reluctance to get caught up in home equity mortgages. For many elderly people, the house represents the inheritance they hoped to pass on to their children. For them, the idea they may exhaust the equity they spent a lifetime building up can be repugnant.

But for many debt burdened 45-plus year olds, the chance their largest asset might provide comfort in retirement might be an even greater comfort during the rest of their working lives.