This article was published on 16 April 2005. Some information may be out of date.

Q&As

  • Woman can get her dream property — if she makes some sacrifices.
  • What does finance company gearing mean?
  • Who hears a will being read?

QI have fallen in love with a country property, which is my dream-place for my retirement.

I am single, and intend to work for only another five years, owing to age. I earn a little over $100,000 a year.

My present house is mortgage-free and worth in the low to middle $500,000s, before the agent fee is deducted.

I have $130,000 in savings, including shares, and also a couple of significant art works, worth a total of about $350,000. My family doesn’t want me to sell any of the major works.

I have recently taken out an employer-contributed superannuation, at present worth about $50,000. I do not intend this to be considered in the potential purchase of this property.

The asking price of the property is about $1 million.

Am I foolish in even considering such a property, and also taking out a mortgage, at this time of life — being aware that during the time that I’m working there are disadvantages, such as the time involved and increased petrol costs driving into the centre of Auckland?

Should I follow my dream? Or am I being totally unrealistic?

AI reckon you can do it — if you really want to. But it’s going to take a bit of sacrifice.

The property market is a bit softer than it has been, which may affect both your buying and selling prices.

Let’s say the owners of the country property accept $950,000, and you buy on condition that you can sell your house for $500,000, after commission. That leaves a $450,000 gap.

I propose you fill that with your $130,000 of savings, $200,000 of art — your happiness should come before your family’s inheritance — and a five-year mortgage of $120,000.

A fixed-rate loan for that period, at 8 per cent, would cost you about $29,200 a year.

The downside:

  • The mortgage payments are a hefty $2433 a month. But your income is high.
  • Your $130,000 of savings will be tied up in the property.

    But you also have your super scheme. With an employer subsidy, it should grow quite well in the next five years, giving you a reasonable addition to NZ Super on which to live in retirement.

  • You’ll have to put up with the longer, more expensive commute to work.
  • There’s always the possibility that you’ll lose your job, or have to stop work for health reasons, before the five years are up.

    That could leave you unable to meet the mortgage payments and — in a worst case scenario — facing the prospect of selling the property for less than you paid for it if the market slumps.

    Perhaps, though, you could take in a boarder, or subdivide, let neighbours graze their stock on your land, or work part-time.

While it’s much better to have the mortgage paid off before you retire, the mortgage lender — which would have heaps of security in the property — would quite likely extend the term of the mortgage, to reduce payments, if necessary.

If all else fails, you could sell the rest of the art. If you family loves it that much, could they buy it from you?

While you might miss whatever art you do sell, you’ll have the view over the countryside to look at. Your call!

QIn the Business section of the Herald on March 21, an article by Ellen Read appeared, with the headline “Fears raised over finance firm ‘meltdown'”.

It included a list of the ten most geared finance companies. It reads:

  1. Lombard
  2. MFS
  3. Speirs
  4. Capital + Merchant
  5. North South
  6. Elders
  7. St Laurence
  8. South Canterbury
  9. Bridgecorp
  10. Nationwide

Could you explain the term “geared”, because we don’t know what it means? We have an interest in several of the names listed.

ABroadly speaking, the more highly geared a company is, the more potential risk it carries — although that’s an over-simplification.

Gearing is borrowing to invest.

Finance companies are in the business of borrowing money from people like you, who invest in their debentures or similar. They then lend that money to others. All finance companies, therefore, are geared.

All of them also have some equity, which is money invested in them by shareholders. Some also have what is called preferred debt.

If some loans made by a finance company are not repaid, the first ones to suffer are the shareholders, then the preferred debt investors.

If, however, bad loans total more than the shareholders’ equity and preferred debt, the people who have lent money to the company, such as you, start to lose out.

The more highly geared a company, the less of an equity buffer there is. Lombard, for instance, has very little equity, says David van Schaardenburg, boss of FundSource, which did the research quoted in the Herald article.

“If equity is 5 per cent of assets, that’s relatively low. If it’s 15 to 20 per cent, that’s relatively high. That company would need 15 to 20 per cent of their loans to go bad before the debenture investors would start to face losses on their investments.”

The amount of gearing is not the full story, though. In some finance companies, bad loans are more likely to occur than in others — depending on who they lend to, and under what circumstances.

“You hope that if a company has more gearing, their lending policy will be more conservative,” says van Schaardenburg.

And companies that lend small amounts to many people may be less likely to get into big trouble than those that lend large amounts to a few. “The larger companies tend to have more diversity,” he says.

So what does it all mean for you? All the companies listed, and especially the first ones on the list, may perhaps be riskier than other finance companies — everything else being equal.

Of course, everything else is not equal. Still, you would be wise to be cautious about investing with them.

You don’t get higher interest than you would at a bank for nothing. It’s compensation for taking higher risk.

At the very least, don’t put too much of your savings with any one finance company. If you already have, make sure you diversify as your debentures mature.

QI have tried to find out for myself and only got fudged answers from folks trying to drum up business.

I have always understood that if you were amongst the main beneficiaries of a last will and testament, after that person died you had the will read to you at the time of death. If this was not possible you could have the will read or you could read it at a later date.

My brother tells me this is not the case. The Privacy Act says only the executors are allowed to read the will of a dead person.

Does this mean that I have to write in my own will that the main beneficiaries of my will be allowed to read my will on my death?

AHow does your brother explain all those dramatic will-reading scenes in movies? The fact is, he’s wrong.

Once a will has been probated, it becomes a public document that can be read by anyone, says Public Trust managing solicitor Richard Calvert.

But let’s start at the beginning. While you’re still alive, nobody is entitled to read your will, says Calvert.

After you die, the executors hold the will. Even before it has been probated, it’s standard practice to let the main beneficiaries read it. And, if all of them agree, minor beneficiaries are also given a copy.

Probating — putting the will before the high court registry in your area — usually takes a few weeks.

If the estate is worth less than $10,000, the will doesn’t have to be probated, but with estates bigger than that, it must be, says Calvert.

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.