NZ Herald 10 April 2021

ABe careful. Very careful. You don’t get a much bigger return without taking much more risk.

It’s always wise to flip an investment round, looking at it from the perspective of the people receiving your money.

With a bank term deposit, the bank gets the use of your money for a period, perhaps to lend out to someone else. They pay low interest to you, because they can attract enough money even at those low rates — partly because investors see bank term deposits as pretty safe.

With an investment through a mortgage lender, the recipient of your money uses it to buy a property. If you are receiving 7 per cent, and the mortgage lender is clipping the ticket on the way through, the property buyer must be paying considerably above 7 per cent.

Why would he or she do that, when banks are offering mortgages at 2 to 4 per cent? Clearly the borrower, or the property they are buying, doesn’t meet the banks’ standards, so they have gone to someone who lends to higher-risk borrowers.

The mortgage lender will make it all look good, and point out that you have the security of the property if the borrower defaults. But there’s been many an investor who discovers a property is not worth what they thought when things go wrong.

On the other hand, it might all work out fine, and you’ll be rewarded for taking higher risk.

What you should do with the money depends on two factors:

• How long before you expect to spend the money.
• How much risk — both volatility and possible loss — you can cope with.

If you plan to spend within a few years, it’s best to keep the risk level down, perhaps with a low-risk managed fund. These funds hold bank investments, lower-risk bonds and the like. Their returns are usually a bit volatile, but slightly higher than bank term deposits.

Check out the defensive funds listed in the Smart Investor tool on sorted.org.nz. Click on “Compare” at the top, then “KiwiSaver and managed funds” and then “managed funds”. I suggest you sort by “Fees, lowest first”.

You might also look at the conservative funds, which are somewhat more volatile, with somewhat higher returns. They typically hold a few shares as well as lower-risk investments. Smart Investor tells you what each fund invests in.

If you have more time before you spend and can cope with more volatility, consider the balanced, growth and aggressive funds. At each level, risk grows and so does average return.

Or you could go with the mortgage lender. But with eyes wide open please!

AIt must be really discouraging for would-be first home buyers to see prices rising faster than their savings.

But if your stepson wants to buy a home within a year or two, he really should stick with bank term deposits or a defensive fund, as described above. There’s too big a chance in a riskier investment that its value will drop right when he wants to buy.

He could, though, change tack and wait a few years. I’m not saying house prices will fall, but they might. And given the government’s new policies, it would be really surprising if prices keep rising fast.

In the meantime, your stepson could use one of the middle-risk balanced funds in Smart Investor. Returns will sometimes fall, but over a few years they should beat term deposits. When he is again within a year or two of buying, he should move to a defensive fund.

AI was not so much disingenuous as plain wrong last week. You’re quite right — if rents may rise in one city, they are just as likely to rise in the other. I didn’t think it through properly. Sorry.

But I wasn’t trying to raise sympathy for property investors. Many landlords would confirm that I’m often quite tough on them!

As for renters, I’ve supported them many times, and will continue to do so.

AI did say the government changes might cause Auckland house prices to drop, at which point the reader could sell in Hamilton and buy near her Auckland work. But yes, some other suggestions might have been helpful.

The only trouble is that I doubt that your first option would work unless Auckland prices fall — or the reader would have done it in the first place.

And your second option leaves her out of the property market, which is clearly an outcome she wants to avoid. But still, thanks on her behalf!

AI agree. We should reach a new equilibrium.

And you raise a point that I’ve been pondering — about whether landlords really will raise rents much, despite threats.

Firstly, there’s a limit to how much rent tenants can pay, as you say. But also, if some landlords bail out, pushing down house prices, hopefully some tenants will then be able to buy. With fewer tenants in the market, landlords won’t find it easy to push up rents.

But who knows how it will all play out? With so many changes going on at once, it seems to be hard for economists, let alone the rest of us, to make predictions.

AI hope you have, too, because your idea makes sense to me.

I suppose some people would work their way around the rule — maybe by having one spouse own one property and the other spouse own another. But there should be ways such cheating can be avoided.

AWhat a wonderful letter to receive amidst the mostly gloomy emails about property. Thanks so much.

A note to others: I don’t always say, “Go out and have fun.” It depends on how strong the person’s finances are. But this reader was clearly keeping on top of things financially.

It seems to me that for every person who is foolhardy with their money, there’s another one who is being too cautious.