This article was published on 11 October 2014. Some information may be out of date.

Q&As

  • A free panel discussion on investment risk
  • How couple might sort their conflicting ideas about saving
  • Can reader get KiwiSaver first home help after his trust has already bought a house?
  • Worries about having your mortgage and KiwiSaver with your bank probably unfounded
LEARN ABOUT INVESTMENT RISK

This coming week, from Monday through Sunday October 19, is Money Week, organized by the Commission for Financial Literacy and Retirement Income. For info on activities near you, see www.moneyweek.org.nz.

As part of Money Week, the Financial Markets Authority is hosting a panel discussion on Thursday evening called the Heavy Weight Debate. It aims to help investors and consumers understand more about risk. It’s free, and members of the public are welcome to come and to ask questions.

The panel members will be FMA chief executive Rob Everett, ANZ Wealth managing director John Body, authorized financial adviser and commentator Martin Hawes, and me. Wallace Chapman from TV’s “Backbenches” and Radio New Zealand will be chair.

It will run from 5.50 to 7pm at St Matthew’s Church in the City, 187 Federal Street, Auckland. For more info, see www.fma.govt.nz/help-me-invest/money-week/.

QWe earn $120,000 a year. We have a mortgage with $228,000 owing. We pay off $1300 a fortnight.

We have $20,000 that we have paid off the mortgage as “extra” above the minimum payment. This has taken two and a half years to build up. We can access that money by making a phone call and giving a password to be able to transfer the funds to our everyday account.

My husband sees the equity as savings that is okay to use, but I believe this will lead us down a very long repayment of our home loan.

He wants to use $10,000 from the equity to buy a motorbike. I believe it to be better to put away $100 a week in a savings account. My husband’s argument is the difference in interest. The mortgage is 6 per cent and savings only 3 or 4 per cent.

I just want some “holiday” or “furniture”, or fun money separate from everything else. We could have $300 or $400 left in a fortnight according to my calculations, but this is just spent somehow.

We have a toddler and another on the way so our income will decrease. My work is casual so the access to our equity was supposed to be a safety net only.

We purchase things interest-free and pay this off, which seems to be the only way we can buy anything over $500. I truly believe if we had put aside a little bit each week we could buy things like a motorbike etc after a few years.

It seems we have a different view about future spending. I do worry about missing out on some things to do with my family and having a great life because we can’t reach an agreement.

The value of our property at the current market is probably over $1 million. I don’t know if this is significant to the question.

AYou two seem to be weighing up three lots of saving:

  • Your husband wants money for a motorbike.
  • You want money for holidays, furniture and so on.
  • You would also like to pay off your mortgage fast, which is a form of saving.

How about making your first move one that should make you both happy: Let your husband withdraw $10,000 for his bike, and set aside the other $10,000 for your spending.

Part of the deal, though, is that you two also make a future saving plan. Work out how much you can save per month, including the extra mortgage payments. Then allocate some to the Hubby Fund, some to the Wife Fund, and some to the Untouchable Mortgage Fund — money that’s not to be withdrawn except in a real emergency, with the idea of repaying your mortgage fast.

If you and your husband disagree on how much you can save per week, start out with a fairly low amount and commit to increasing it by, say, $10 a month. Perhaps put an agreement in writing, and stick to it.

Where should all this money be saved?

There’s a good argument for putting it all in the mortgage account. Your husband is right that paying extra off the mortgage is a great way to save — even for short-term goals.

As he says, avoiding paying 6 per cent on the money you put into the mortgage account is better than earning a lower interest rate on it in a savings account — especially after you consider that the savings account interest is taxed. Every dollar in the mortgage account works harder than it could elsewhere.

The trouble is that makes it tricky to keep track of the amounts in your three funds.

If you bank with BNZ, Kiwibank or Westpac, you might want to use an offset mortgage.

You could put the Hubby Fund and Wife Fund in separate savings accounts, and those balances would be offset against your mortgage balance. That has the same effect as putting everything in the mortgage account, but the separate account balances would be obvious.

If your bank doesn’t offer offset mortgages, you might want to ask if they could set up something like that specially for you, or consider switching banks.

Note, though, that the banks charge a fair bit in fees for offset mortgages. Before you set one up, ask the bank to help you work out whether it will be worthwhile for you.

Another option is to simply make a point of keeping track of the allocations to the three funds in your mortgage account. It shouldn’t be that hard.

QI have been looking at the KiwiSaver rules for first home withdrawal, and I have not been able to find any information about my situation.

My trust bought a house last year with money I had donated to it. I was wondering whether I would be able to withdraw my KiwiSaver savings and get any first home subsidies to purchase a home in my name, as I have technically never owned a house. Your advice would be greatly appreciated.

ALike many issues about trusts, this is complicated.

Housing NZ, which runs the first home subsidy, says you need to contact your provider to ask about whether you would be able to withdraw money to buy a first home.

“In regards to the deposit subsidy, this will depend on the type of trust and if the property is being used as the member’s place of principal residence or not, as well as the type of beneficiary of the trust,” says a spokesperson for Housing NZ. “We would advise the applicant to submit an application that would be assessed on a case by case basis.”

I can see where they’re coming from. Trusts operate in many different ways. If — in reality as opposed to legally — you would not really be a first home buyer, I don’t think it would be fair for taxpayers to subsidise you.

QI have some misgivings about what appears to be unified activity by banks to get clients’ KiwiSaver funds, particularly when the saver has a mortgage with that bank.

In my experience, mortgages usually have an “all recourse” clause allowing banks to use other funds held by the client to shore up debt arrears.

KiwiSaver funds are available to use in the event of financial hardship, and I guess the banks are seeking an extra insurance against their lending.

However, there are some things of concern.

First, if a mortgage applicant has a KiwiSaver account with the bank, the bank may stretch the boundaries of prudent loan percentage limits. They lend the applicant too much knowing that there is a stepping-stone available before launching mortgagee-sale proceedings (for a bank, always very bad PR).

Second, having the buffer of emergency funds available to the borrower — and over which the bank has control — the bank might well delay its usually quite quick reaction to mortgage arrears until there are no funds and no house.

Third, the borrower knowing their funds are with their mortgage holder and available in hardship, may be less inclined to prudently manage their mortgage obligations.

Fourth, there is no “arms length” between the fund owner and their mortgage holder, and that smacks of a substantial potential for a conflict of interest.

In your opinion, are these concerns justified?

AProbably not.

Your questions follow on, logically, from a question raised in this column in July.

The reader, who was in ANZ’s KiwiSaver scheme, asked: “If I owed money to ANZ, would they be permitted to deduct (from my KiwiSaver account) what is owing on other accounts when I reached 65 years old, or are they not permitted by law to touch my pay-out balance?”

Inland Revenue replied: “The KiwiSaver Act states that a member’s interest or future benefit cannot be assigned to another person. This means the bank, as a creditor, would not be able to use a person’s KiwiSaver funds to settle a debt without the member giving consent.”

However, the spokesperson added, if the reader went bankrupt, “a bank or other creditor might be able to get a court action to access those funds in order to settle debts.”

Note, though, that that could also happen if the person’s KiwiSaver account was with another provider.

Moving on to the issues in your letter, I expect that anyone applying for a mortgage would tell the lender they have a KiwiSaver account, whether with the lender or another provider. So the bank would know that money was there for the person to possibly draw on in times of financial hardship.

That might make the bank more inclined to lend more — in the same way that it might lend more to someone with other assets that aren’t easily accessible.

But I doubt it would make either the bank or the borrower more casual about mortgage payments. KiwiSaver financial hardship withdrawals aren’t quick and easy, and it’s the independent trustee of a scheme, not the provider, who decides when a withdrawal is permitted. It would be foolish for anyone to count on that money being available.

What’s more — as in the July Q&A — all of this applies regardless of whether the person’s KiwiSaver account is with the bank or another provider.

On your final point about an arm’s length relationship, the presence of the independent trustee — who supervises the KiwiSaver scheme and is charged with acting in the best interests of members — should take care of any problems along those lines.

I do have other concerns, though, about banks’ “encouraging” mortgage customers to switch to their KiwiSaver schemes.

One major concern is that the bank scheme could easily not be the best one for that person. I suggest everyone uses the KiwiSaver Fund Finder on www.sorted.org.nz to work out their best provider and fund, and don’t be talked into switching.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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 [email protected] 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.