This article was published on 14 February 2009. Some information may be out of date.

Q&As

  • The possible perils of parents lending a mortgage to adult children.
  • Tips on mortgage reduction from a mortgage broker.
  • How mortgage borrowers could unite to force interest rates down.
  • 2 Q&As on what happens to KiwiSaver money in retirement.

QWe have a mortgage of approximately $200,000 with a bank, at approximately 7 per cent. My in-laws have money invested at a bank with interest at approximately 5 per cent.

Would it be practical for us to work out a legal contract together and they invest their money with us at a rate of say 6 per cent? Can you see any issues around this scenario?

AIt’s time for a family conference, at which you would need to discuss all of the following gloomy possibilities:

  • What would happen if you or your spouse — or even both of you — lost your jobs or had health problems and were unable to make payments to the in-laws for a period?
  • Is it possible that someone could sue you or your spouse and you lost your house? If that happened, what would you do about your debt to your in-laws?
  • What if your marriage ended and you wanted to stay in the house while your spouse moved elsewhere? Would your in-laws be willing to leave their money in the house? If not, would you be in a position to get a new mortgage?
  • What if your in-laws decided, after a while, that they wanted to spend the money, perhaps on a health problem or family financial crisis?
  • What would happen if you or your spouse died, or one or both of your in-laws died, while the loan was still outstanding?

All of these issues could be addressed in a contract. But before you go to a lawyer, it would be wise to make sure you all agree about how they would be handled.

Note, too, that there’s not a huge amount of money at stake. You would pay $2,000 a year less interest, and your in-laws would earn $2,000 more interest. And for them, the extra money would be taxed if they do the right thing legally and declare the income. Weigh up the gains against legal fees and the hassle of setting it all up.

Also, if your mortgage is fixed rate, there may be an early repayment penalty. And if it’s not fixed, consider what would happen if interest rates keep dropping. While your in-laws’ bank account interest could be expected to drop, too, how would you handle a rate change?

If your spouse has any siblings, it would be a good idea to discuss it all with them. The harmony in many a family has been disrupted because one child got a better deal from the parents.

It might be best if the in-laws offered to make loans of the same amount, at the same interest rate, to all their children. Some might turn down the offer, but it’s good if they all have the same opportunity. If the parents died while any of the loans were outstanding, those amounts could be subtracted from the borrower’s inheritance.

Still like the idea? Fair enough. It does have appeal. And, under the right circumstances, it could give you and your spouse flexibility about repayments, which could prove really useful.

QI read with interest about your call to the ‘mortgage wizard’ to divulge his secrets. I am not the financial adviser in question, however, I would like the opportunity to divulge our secrets, except they’re not really secrets, it’s just common sense:

  • Extra mortgage payments are the only way to save interest and reduce the term on your mortgage.
  • Knowing your actual expenditure and income based on bank transactions is the best way to determine if you can make regular ongoing payments to your mortgage — not a made-up budget based on what people think they spend.
  • Have a defined plan that includes goal setting.
  • Have support, ongoing encouragement and mentoring so you stay on track with your goals. This must continue for the life of the loan.
  • Provide online tools showing accurate reports that gauge your progress.

We are both well aware of the savings that can be achieved by making extra payments on your mortgage. The question is: Why don’t thousands of homeowners do it?

In 23 years as a banker and 11 years as a mortgage broker I have found that people have no idea where they spend their money. Electronic banking allows such easy access to funds that people can just spend until their card is declined. Working to a budget is just too hard.

When property values were rising, people were living off equity, and easy credit fuelled the “buy now and pay later” lifestyle. People do not set financial goals, most accumulate debt over time rather than repay debt.

However, in the current market more and more people are looking for ways to rid themselves of debt, and the falling interest rates and tax reductions provide a fantastic opportunity.

AYour letter went on to describe a company you have set up to “help people manage their cash flow better”. But, apart from the fact that you were way over our approximate 200-word limit, I’m afraid this column doesn’t run ads.

Still, thanks for your tips and comments. Some of your ideas might get people thinking.

QI love all this stuff about reducing your mortgage and that, and I’m definitely working on strategies similar to those outlined in your column lately.

Another great benefit of paying off extra principal is that if everybody pays back a bit of extra principal then the banks all end up sitting on unexpected extra cash, and then the only way they can tempt people to borrow more is to cut the rate (the good old law of supply and demand).

Right now so many people are so keen on getting skinflints like me to start spending that we are just getting stuff thrown at us from every direction. But if we just keep ourselves focused on the end-game we’re going to get there so much quicker.

ANow there’s an idea — united action to force interest rates down. I’m sure bank decision-making hangs on more than how many people are repaying their mortgages faster than necessary. Still, everything else being equal, what you suggest would probably lead to lower mortgage rates than otherwise.

The spending versus saving issue is interesting these days. I would like to see most people spend less at any time — given all the unnecessary stuff they seem to buy. And in these uncertain times, there’s even more reason to be frugal, with job uncertainty and high debt.

Having said that, I guess it wouldn’t work for the economy as a whole if we all boycotted the shopping malls. There’s got to be a middle path.

Tell you what — let’s you and I stay out of the malls, which I loathe anyway and it sounds as if you might be a kindred spirit. That will let happy shoppers do our share of spending.

QI became a KiwiSaver at age 63 contributing $87 per month as I am self employed. If I have no necessity to withdraw from the scheme after five years, could I carry on for another five years or so to age 73?

Would I be entitled to the tax credit of $1,043 for the additional years? Is it beneficial for me to remain in the scheme after 5 years has elapsed?

This question must be bothering other New Zealanders in my age bracket. I trust you would enlighten us on this subject.

AGood on you for getting in before you turned 65. KiwiSaver is particularly attractive for your age group.

The tax credit — along with the $1,000 kick-start, employer contributions and the first home subsidy — generally apply until you reach NZ Super age, currently 65. But if you joined KiwiSaver over 60, they apply until you have been in KiwiSaver for five years.

In your case, they will apply until you are 68. After that, you will receive no incentives for contributing further or for leaving your money in the scheme, but you can do so if you wish.

I suggest that at that stage you weigh up your KiwiSaver account against wherever else you might keep your savings, such as a bank account or in corporate bonds.

If you are planning to spend the money within about ten years, it should be in a non-volatile lower-risk KiwiSaver account anyway, which means the after-fees, after-tax returns might be quite similar to bank accounts or bonds. But there might be other reasons — such as accessibility and convenience — to favour one savings vehicle over another.

If you want to tie up some of the money to spend more than ten years later, it might be good to leave it in a higher-risk KiwiSaver account, such as a share fund or balanced fund that includes shares and bonds. That’s generally an easier and better way to get higher returns than investing directly in shares.

For more on taking your KiwiSaver money out in retirement, read on.

QYou and other commentators have said nothing about exiting KiwiSaver, only the variations to do with putting money into the scheme.

My question is this: Does each person get a lump sum of money on attaining 65 or retiring or both, or does each person draw a pension? If the second option applies, does each person get the same pension (most unfair because of various contribution rates) or is their pension proportionate to the amount that was put into their individual account?

AI have addressed this before, in books and columns, but perhaps not often enough. Anyway, the age at which you can take money out is the same as the age the incentives stop — at NZ Super age or five years after you join, whichever comes later. It’s irrelevant whether you are working.

At that stage the amount available to you is simply the amount in your KiwiSaver account. There is no pension — although a few providers might help you set one up if you want to.

You can take all the money out at once if you wish, or leave it all in, or do anything in between, just like in a bank account.

As suggested above, you might want to move the whole lot elsewhere — although not necessarily.

Wherever the money ends up, I expect many people will take out some lump sums — perhaps for a trip or home repairs or to pay off a mortgage or other debt. But they may also want to set up an automatic transfer into their bank account of a set amount each week or month, for regular spending.

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.