NZ Herald 17 November 2007

AThe quick answer is: because shares are riskier.

Whenever a bank lends on an asset, it wants to feel pretty comfortable that, if you stop making payments on your loan, it can sell the asset in a mortgagee sale for more than the balance on the loan, and thus get its money back.

If the security on the loan is shares in a single company, there’s a fairly high chance that their value will have fallen below the loan, especially if it’s a 90 per cent loan.

On a property, that’s much less likely — although I don’t say that as confidently as I might, given the current environment. I wouldn’t be surprised to see 90 per cent mortgages drying up in the next little while, as house prices look more and more iffy.

But that’s another story. Basically:

• Share prices are more volatile than property prices. Generally, the highs are higher, and the lows are lower.
• If you borrow to invest in shares, property or anything else, you increase the risk — and so does the bank that lent you the money.

If follows, then, that borrowing or lending for a share investment is a pretty high-risk game.

So far, though, I’ve talked about shares in one company. If you invest in shares in a wide range of companies, or in a share fund that invests in lots of shares, that is a much less risky investment. While some shares might perform badly, there’s a good chance that will be offset by other shares performing well.

Banks should, therefore, be more willing to lend to someone investing in a broad portfolio or a share fund. And sometimes they do, although admittedly not nearly as often as on property.

However, people with revolving credit mortgages — on which the balance fluctuates and you pay interest on whatever is the outstanding balance — can easily use extra credit in their mortgage to buy shares.

You can also arrange to borrow to invest in shares through a sharebroker.

Just remember that by borrowing you’re making a pretty risky type of asset even riskier. If shares plunge, your investment plunges still further. In a share market crash, you can end up with no assets and a debt to the bank.

Mind you, the same thing can happen in a property crash if you’re forced to sell a rental property for less than the mortgage — perhaps because you lose your job or your health and you can’t keep up the mortgage payments over and above the rental income.

Landlords should keep that in mind these days.

AFirstly, good on you for saving for your grandchild. It’s a lovely way to encourage her into a savings habit that should stand her in good stead later on.

The teller’s advice is sort of correct, but it sounds as if you have misunderstood her a little.

Firstly, you do have to contribute something to get the KiwiSaver account started. But — depending on the provider’s minimum contribution — it could be as little as $1. At least one provider will accept that small an amount.

After that, you don’t have to put in any more, and nor does your granddaughter — until she takes a job that has PAYE tax taken out of it. At that point, 4 per cent of her pay will go into KiwiSaver.

However, as long as she has been in the scheme for more than a year, she can take a contributions holiday if she wishes, which will stop those 4 per cent contributions.

I’m suggesting, though, that parents encourage their kids not to take contributions holidays, and instead to get into the habit of having 4 per cent taken from their pay.

If they do that all their lives, and they work for much of that time, they’re likely to retire as millionaires — perhaps willing and able to shout you that last big world trip in your dotage!

Getting back to your contributions, you can keep putting in money over the years if you wish. And it certainly will earn interest — or dividends or rent if you choose to invest in a KiwiSaver share fund or property fund.

But the point behind the teller’s comment is that children under 18 don’t receive either the government’s KiwiSaver tax credit of up to $1043 a year or compulsory employer contributions.

That means that your granddaughter isn’t gaining anything, over and above the initial $1,000 kick-start, by having further savings accumulate in KiwiSaver as opposed to elsewhere. And there’s more flexibility if the money is saved in another account. Read on.

ADon’t do the bank account. Do KiwiSaver minimally — as suggested above — and get the $1,000 kick-start for the little girl.

After that, though, you may want to make further savings in another savings vehicle, because the money is then available for the child’s tertiary education or perhaps to help set her up in business.

Note, though, that your granddaughter’s KiwiSaver isn’t necessarily tied up until she reaches NZ Super age.

After three years in KiwiSaver, anyone can take out their own contributions, any employer contributions, plus interest and other returns earned on all the money to use as a deposit on their first home. The government’s $1,000 kick-start and tax credits would remain in KiwiSaver.

There is no income limit on this, but the money must be used for a home you will live in, not an investment property.

Furthermore, if your household income is less than $100,000 a year (or $140,000 for three or more KiwiSavers), you can get a first home subsidy.

The subsidy is available only if you buy a house in the bottom 25 per cent of houses, by price, in your area. The government will publish lists of the cut-off price in each region.

After three years in KiwiSaver, the subsidy is $3,000, rising to a maximum of $5,000 after five years. And if two of you are in KiwiSaver, you can each get the subsidy.

It’s an attractive feature of KiwiSaver, especially for the young.