NZ Herald 17 August 2024

AGreat story! I suspect it not only taught the young ones some lessons, but gave Grandpa hours of entertainment.

I hope, though, that the grandkids don’t expect to always get quite such big returns — although, of course, you really have to take the labour into account.

AAs I said in a recent column, the news is not all grim for term deposit holders. Interest rates have dropped because inflation is softening, so we should all see slower rises in costs. But still, the good news for people with mortgages is bad news for those with savings in the bank.

What should you do with your term deposits? Normally, long-term deposits pay higher interest than short-term ones. The banks reward you for tying up your money for longer. But at the moment we have “an inverted yield curve”, with longer-term rates being lower. This tells us that the experts predict interest rates will keep falling.

Your choice might be between, say, a one-year deposit at 5.6 per cent, a three-year one at 5 per cent, and a five-year one at 4.7 per cent. If you go with one year, you could well find next August that rates have dropped considerably, and you’ll wish you had picked a longer term. Then again, interest rates might not fall much, and you’ll be happy with your choice.

Most of the time, though, you’ll probably do better with longer terms.

Then there’s the issue of the Depositor Compensation Scheme, coming into effect mid 2025. As you say, that will make it tempting to deposit with a non-bank that is covered by the scheme and pays higher interest. If it goes belly up, you will be reimbursed.

Still, I imagine there’ll be some disruption during that process. So I expect some depositors will stick with their banks. But if you’re more adventurous, you may want to time your deposits to mature about a year from now, so you can then look into moving your money to a non-bank.

AYes, you can switch KiwiSaver providers as often as you like, just by contacting the new provider. You don’t need to tell the old one, or Inland Revenue.

However, I don’t recommend switching often, and I wouldn’t let a $200 gift guide me. Ask yourself why a provider feels the need to do this. Is it the only way they can get new members?

A really good reason to switch providers is because the new one charges lower fees. That makes a big difference over the long haul. Also, check out how good each provider’s services are — their communications and help with investing. The KiwiSaver Fund Finder on sorted.org.nz gives you service ratings, based on regular surveys.

But don’t move providers because one has performed well lately. Often, the good performers in one period perform badly in the next period.

On the transfer process, it usually takes about two weeks, but can be as long as a month. And during that time you are “out of the market”. Occasionally you’ll be happy, when the markets fall. But given that they rise more often, you will usually miss out on some gains.

One other point: a few providers charge a transfer fee if you leave them. At Booster, for example, it’s $30. But I wouldn’t let that stop you from moving.

In short, then, switch providers occasionally because of lower fees and perhaps superior services. But I wouldn’t bother for any other reason.

ADid you see last week’s Q&A about whether to sell a rental property now or wait, in the hope of house prices rising? That might happen, but nobody knows for sure. And most experts are ruling out really rapid increases for at least the next few years.

Meanwhile, you’ll own a house a long way from home at a time when most landlords are not making much money year by year. You of course won’t have mortgage payments, which will make a big difference. But you’ll have to pay the property manager. And I’ve heard worrying stories about both distant tenants and property managers.

What about the state of the house? While it’s easy to diversify shares by investing in a share fund — so that if one share goes bad it doesn’t matter much — you’ll have just the one rental property. You never know when it might suddenly need expensive work on the roof or wiring or whatever.

I suggest you choose a low-fee non-KiwiSaver fund — so you can access the money at any time — by using the Smart Investor tool on sorted.org.nz.

You might say in ten years, “I could have done so much better if I had kept the house.” But equally you might say, “I did so much better in a share fund.” And — provided you sit tight through share market downturns — there shouldn’t be any complications.

By the way, the brightline test, under which gains on a rental property are taxed if it’s owned for less than two years, don’t apply to inherited property.

ASorry, but I’m not a financial adviser, I’m a journalist, so legally I’m not allowed to give one-on-one advice. But here’s a step-by-step guide so you can easily make your own plan.

Opportunities like the two we have now — making the most of the tax cuts and mortgage interest cuts — don’t come up often, and I would love to see as many people as possible make the most of them.

Firstly, the tax cuts, which took effect on July 31.

Step 1: Find out roughly how much you’ve benefitted from the tax cuts. One easy way is to compare your after-tax pay earlier in July with your pay for the first pay period covering just August dates — not a period that includes July dates. Or use the tax calculator on budget.govt.nz.

Step 2: Ideally add a bit more — say $5, $10 or $20 a week — an amount you won’t miss.

Step 3: Through your bank, set up a transfer of that amount out of your account every pay day. Where to?

• If you have credit card or other high-interest debt, reduce it. If the lender won’t accept small payments, save up in an interest-paying savings account and pay from that monthly.
• If you don’t have an emergency fund to call on if you lose your job or face expensive car repairs or whatever else might knock you back, build one up in a bank savings account. How much? It depends on your circumstance, but it’s good to have at least several thousand dollars.
• Once you’ve ticked off the above two, your best option is probably to transfer the money to your KiwiSaver account. Your provider should help you set that up. You don’t need to go through your employer and Inland Revenue to make extra payments. Not in KiwiSaver? Join! It’s even better for new participants, as you’ll receive the government contribution that current members already receive.
• Another option is to pay down your mortgage faster. This may build your wealth more than the KiwiSaver option if you’re in a lower-risk KiwiSaver fund with lower average returns. But it’s probably not quite as good as contributing extra to a middle to higher-risk KiwiSaver fund. Don’t agonise over KiwiSaver versus mortgage. Both are great.

Step 4: To see how much your debt will dwindle or your KiwiSaver balance grow, use the Debt Calculator, Mortgage Calculator or KiwiSaver Calculator (see “Top-up” under “Change your Future”) on sorted.org.nz. Over the years, there’ll be a significant difference.

The second opportunity is for people who are coming to the end of a mortgage term.

Step 1: Find out how much your new payments will be. They’ll be lower, because interest rates are decreasing.

Step 2: Tell the lender you want to keep your payments at the old level. And perhaps — as in Step 2 above — add a little extra to your payments.

Step 3. Use the Mortgage Calculator on sorted.org.nz to see how much faster you will get rid of the mortgage, and how much less interest you’ll pay over time. The numbers can be startlingly good.

One last point: Whenever you get a pay rise, use at least some of that extra money to either boost your transfers or mortgage payments still more.