NZ Herald 14 March 2009

AI started to write “Yes, he should…” and then I suddenly thought that I — and, dare I say it, perhaps also you — probably oughtn’t to be telling a 20-year-old what to do. Let’s try again. I suggest that your son joins KiwiSaver, which for most people is the best place to save for a first home.

And this past week it got even better, with a loosening of the rules. More on that in a minute.

There are two aspects to KiwiSaver assistance for first home buyers.

The first applies if you have been in the scheme for three years or more, regardless of your income, how much you contribute, or the price of the home. You can withdraw — and put into the house deposit — your own contributions, employer contributions, and interest and other returns earned on all the money in the account.

The rest of the money — the $1,000 kick-start and tax credits — remains there, usually until you reach NZ Super age. And you can, of course, add more to it.

The second aspect is a government subsidy — basically a gift to you — as part of your home deposit. The subsidy starts at $3,000 after three years of contributing to KiwiSaver (or $6,000 if you and your partner are both eligible), rising gradually to $5,000 after five years (or $10,000 for a couple).

To be eligible for the subsidy:

• You must have been contributing to KiwiSaver for a total of at least three years.

  Under the old rules, you had to contribute 4 per cent of your income if you are an employee, and “about 4 per cent” if you are a non-employee — including the self-employed, beneficiaries and others not in the work force.

  But last Tuesday Minister of Housing Phil Heatley said the government will drop that to 2 per cent for employees from April 1 — in line with the drop in the minimum KiwiSaver contribution for all employees, not just those wanting the first home subsidy.

  That makes it affordable for pretty much everyone. For your son, 2 per cent of pay is less than $11 a week.

  Heatley added that “the same principle will apply” for non-employees. “We’re lowering the bar for them as well.” More detail about that will be announced before April 1, he said.

  If you want to take contributions holidays while you are saving for your first home — or to simply not contribute if you are not an employee — that’s okay. But those non-contribution periods won’t count towards the three to five years.

  Whether people under 18 are eligible — and if so what their contribution requirements will be — is expected to be announced some time this year.

• The government originally said that the total income of one or two home buyers had to be less than $100,000 a year (or $140,000 for three or more buyers). It now says the income cap will be reviewed, probably in late June.
• You must buy a lower-priced home. Originally, the government said the home had to be priced in the bottom 25 per cent of prices in your region. However, the price cut-off is now also subject to review — again probably by the end of June.

You don’t have to withdraw money from your KiwiSaver account in order to get the subsidy. The two parts are quite separate.

To get the subsidy or withdrawal, the home has to be your main residence, not a bach or rental property. And you must be intending to live in it for at least the next six months.

By the way, your son shouldn’t let his admittedly large student loan stop him from joining KiwiSaver. The incentives of the scheme make it a much better proposition, financially, than repaying the student loan faster than necessary.

His priorities should be:

• Firstly, get into KiwiSaver and contribute 2 per cent of pay, to get the first home subsidy.
• Secondly, boost his contributions to $20 a week or $87 a month, if possible, so he can get the maximum $1043 a year tax credit.
• If and when he can afford to, he might want to pay extra off his student loan as well as contributing to KiwiSaver. But higher priorities should be repaying any credit card or similar loans and — once he gets his house — his mortgage. That’s because he has to pay interest on all these other loans, but not on the student loan.

AThe government’s reduction of the minimum KiwiSaver employee contribution from 4 per cent to 2 per cent, from April 1, will make the choice easier for you.

And if you are willing to wait three years to buy your home, this week’s news about the new 2 per cent contribution level for the first home subsidy also plays into your hands.

What’s more, you wrote your letter some time ago. Since then, house prices and mortgage interest rates have fallen — both of which will make mortgage payments lower than they were.

Nobody knows, of course, what will happen to prices and interest rates over the next three years. But it’s hard to imagine either rising hugely in that time.

And if you wait for three years before buying, you’ll have longer to save a bigger deposit.

A few more points:

• Your wife may also qualify to get the first home subsidy, if she contributes enough. As I said above, Heatley will announce the new contribution rules for non-employees shortly. Keep an eye on this column for details.
• Your pay is perilously close to the $100,000 cutoff point for the first home subsidy — although that may be changed. Again, watch this space. In the meantime, if your boss offers you a rise that would take you over $100,000, it might be worth asking for that money to go into your KiwiSaver account instead.
• If your wife gets a job within the next three years, that will almost certainly take your income, as a couple, above $100,000 — although maybe not above a new limit. I would never suggest she doesn’t work just for the sake of the first home subsidy, but it’s one factor to take into account.
• If your income, individually or as a couple, does go above the subsidy limit, you can still do the first home withdrawal. Because you will have been in KiwiSaver, you’ll have employer contributions and larger returns to go into your house — thousands of dollars you wouldn’t otherwise have. You’ll also have government contributions left in your KiwiSaver account, which will be good for the long term.
• You refer to a tax rebate for you from your wife’s membership of KiwiSaver. That’s not how it works. The tax credit is misnamed. It’s actually a gift into your wife’s KiwiSaver account, regardless of whether she pays tax. As far as your daughter is concerned, she won’t get a tax credit until she turns 18. However, she will have got the $1000 kick-start.

AWith a three-to-five year time horizon, it’s a good idea to be conservative — regardless of what’s happening in the markets.

I suggest investing in a fund that holds mainly bonds, perhaps also with some cash. It probably wouldn’t hurt if it had say 10 per cent of riskier assets, such as shares or property, but not much more than that. And once you get within about two years of buying a home, it would be wise to move to an even more conservative fund holding mainly cash.

Your trouble is that you are already in a somewhat riskier fund and, if you switch out of it now, you will cement in the losses.

The markets may, of course, go down further, but they also may rise over the next little while. To avoid moving all your money at what turns out to be the bottom of the market, you might want to move say a third now, a third in six months and a third in a year.

Meantime, put any new contributions into a highly conservative fund. That will help to offset the risk in your current fund. And many providers will let you be in more than one fund at a time.

All of this is, of course, a bit academic if you have only a small amount in your accounts at this point. If that’s the case, move the lot now and be done with it.