This article was published on 20 August 2016. Some information may be out of date.

Q&As

  • Borrowing to invest in shares raises risk — and rewards
  • Buying shares directly versus using a KiwiSaver fund
  • Reader shouldn’t worry that KiwiSaver first home withdrawal will stop

QWe are in our early 40s, and while we have a fairly modest income we have recently managed to become mortgage-free thanks to renovating our previous homes. We also have a couple of rentals which have some equity in them, and all expenses are paid for totally by rent.

I am now putting the maximum into KiwiSaver and wondering whether to borrow money to invest, perhaps into an exchange traded fund, or just to drip feed into similar. With interest rates so low borrowing seems likely to be more feasible?

Any advice would be greatly appreciated.

AI’ve got a couple of questions for you:

Let’s say you’re a skier standing at the top of a mountain. Do you head down the steep slope, knowing it will be thrilling but you might crash in a heap, or do you take the gentle, well groomed slope that will be less exciting but safer?

Or let’s say you’ve invited new friends around for dinner — people you would like to impress. Do you make a dessert soufflé you’ve never tried before, knowing it will be fabulous or embarrassing, or do you stick with the tried and true but boring apple crumble?

If you’re a risk taker, borrowing to invest in shares might be for you. But you must be prepared to face a bad outcome.

It might go something like this: You borrow $100,000 — perhaps by getting a revolving credit mortgage — and put it in an exchange traded fund that invests in New Zealand shares. All goes well until the market slumps. Your investment falls to $80,000, then $70,000.

You panic and bail out. With the proceeds, you pay back part of the loan. But you’re left owing $30,000, with nothing to show for it.

That’s the big difference with borrowing to invest, a.k.a. gearing. Without gearing, the worst that can happen is your investment becomes worthless. With gearing, add a debt. Ouch!

On the other hand, if the share market continues its recent growth, your $100,000 might double over a few years. You pay back the debt and you’re left with a tidy profit.

To do well out of gearing a share investment, you need to earn a return — including dividends and after fees and tax — that’s higher than the interest you pay on your borrowing. And given the risk, you would want it to be lots higher.

There’s no way to know in advance whether you’ll achieve that. But the following will help:

  • Invest in a widely diversified fund.
  • Keep fees low. Your choice of an exchange traded fund will help with that.
  • Promise yourself that you’ll stick with the investment through market downturns.

Are you up for it? You have years to go before retirement, so there’s time to recover from an investment mistake. And you seem to be in a strong position financially. But would you hang in there if your $100,000 turned into $70,000?

If not, stick to drip feeding into a fund. It’s less risky because you’re not borrowing. And you buy in both high and low markets, which reduces your risk even further.

Footnote: There is no maximum investment in KiwiSaver. You could do your geared investing or drip feeding into your KiwiSaver fund if you wish — contributing directly to your provider — although the money is of course tied up.

QI see you sometimes suggest investing in shares, particularly if you are in for the longer haul and don’t need to access that money until retirement.

I’m in my early 50s. If I have $200,000 inheritance to invest and was thinking of growth shares — and I know I don’t need it until retirement — could I just put it straight into my KiwiSaver provider’s growth fund?

Then I could access it when I reach 65 or maybe a bit older if I can hold off.

Would that plan work similarly to having a share broker, and maybe would be less hassle?

AMore or less.

One reason I often discourage direct investment in shares — which is what you would probably do if you used a share broker — is that you need enough money to buy a wide range of shares.

But $200,000 could get you plenty of diversification. And with direct investment you avoid fund management fees.

On the other hand, there is more hassle with direct investing — including handling dividends, tax and so on. In KiwiSaver, all that is done for you.

The trick is to find a KiwiSaver fund that charges low fees. I suggest you use the KiwiSaver Fund Finder on www.sorted.org.nz, and consider switching to a low-fee provider.

Note that as you get within eight or ten years of when you expect to spend some of the money, it’s wise to transfer that amount it to a middle-risk balanced fund. And within a couple of years of spending, transfer it to a low-risk fund. That way you don’t suffer from a market downturn right at the time you want to spend.

By the way, I’m not sure what you mean by “growth shares”. Are you interested only in higher-risk shares? These have higher expected returns, but there’s also more chance that they will perform badly.

KiwiSaver growth funds generally invest in all sorts of shares and sometimes some property. And that’s probably best for you. The broader the diversification, the better.

QI have recently returned to the workforce part time, so I joined KiwiSaver and pay a small amount into it each week. I am a single parent and I receive the accommodation supplement which covers about 15 per cent of my Auckland rent, around $3500 a year.

I cherish a little dream that one day I will be able to own my own home. While it seems unrealistic at the moment, my child is approaching school age, and I expect my income to increase as I am able to return to work full time. I am in my early thirties. In the meantime, I budget carefully and put a little bit aside each week.

I am writing to you because I am expecting to inherit about $6000 from my grandmother, who died last year. If I add this amount to my bank account I will no longer be eligible for the accommodation supplement as I will have over $8000 in cash assets.

I am considering adding the money to my KiwiSaver so that I can have a headstart on saving for my dream when my situation improves. But I am concerned that a policy change over the next few years will end the provision allowing for withdrawal to buy a first home.

I missed the $1000 kick-start, and the way that change was rushed through contributes to my concerns.

You seem to have advised other readers to use KiwiSaver to save for their deposit in previous articles. I do not want the money I intend for my deposit to be locked into KiwiSaver. Am I right to be wary? Is there anything in the legislation to reassure me?

AWell done, on several counts: joining KiwiSaver, saving a little in challenging circumstances, investing rather than spending your inheritance, and setting yourself a goal.

I don’t think you should worry about losing the KiwiSaver first home withdrawal. But first, you don’t seem to be correct about the $8000 cutoff for getting the accommodation supplement.

Assuming you are not a beneficiary, the cash value of your assets has to be less than $8100 for a single person, but the cutoff is $16,200 for sole parents like you and for couples. For more on this see tinyurl.com/ASupplement.

But those are the cutoffs for getting any accommodation supplement at all. If your assets total somewhere between $5400 and $16,200, the amount you receive decreases as your assets increase.

“You will only be eligible for the full rate of accommodation supplement if your cash assets remain under $5400, assuming all eligibility criteria are met,” says a Ministry of Social Development spokesman.

So your idea of putting your inheritance in your KiwiSaver account is good. It means the money won’t be counted as a cash asset (unless you were someone who could access their KiwiSaver money in retirement).

But can you be confident you’ll be able to withdraw your savings to buy a house?

It’s true that there have been too many changes to KiwiSaver — more than 20 in fact. Major changes have included: the axing of the $1000 kick-start and $40 annual fee subsidy; the halving of the tax credit; increasing tax on employer contributions; changes to minimum contribution levels; and changes to the first home rules.

While many of the changes have been bad news, the first home changes have largely been positive. The government has increased the house price caps for the HomeStart grant, and doubled the grant amount if you buy a new home. And you can now withdraw tax credits, which previously had to stay in your KiwiSaver account.

It’s important to note, too, that none of the changes to the scheme would make anyone wish they hadn’t joined or contributed to KiwiSaver up to that point. It’s the opposite actually — many people are glad they joined when the kick-start was there and the tax credits higher.

No government can make any guarantees of what a future government will do. Laws can be changed. But with so many people saving for a first home in KiwiSaver — and first home buying such a challenge these days — it’s inconceivable that any government would prevent KiwiSavers from withdrawing their savings to buy a home.

At worst, a government wanting to stop the practice would surely let people earmark their savings up to that point for first home withdrawal, or let them withdraw that money and deposit it elsewhere.

Sure, the government stopped the $1000 kick-start with no warning. But that was presumably to stop a huge rush of sign-ups by people who hadn’t bothered until then — unfortunately including you. There wouldn’t be a similar problem with stopping first-home withdrawals.

How can I be so confident? We live in a democracy. Governments don’t unfairly sabotage the plans of hundreds of thousands of would-be homebuyers, plus all the other voters who would be appalled at such a move.

Having said all that, you might want to park a small portion of your inheritance in a savings account in the short term. Why?

As a part-time worker, you may be earning less than $34,762 a year. If so, and you’re contributing the usual 3 per cent of your pay to KiwiSaver, your annual contributions will total less than $1042. That means you’re not receiving the maximum annual tax credit of $521.

If that’s the case, each June work out how much more you need to bring your total contributions above $1042, and deposit that into KiwiSaver from your savings account. You’ll get 50c for every dollar you put in — well worth getting.

I like your attitude. I bet you’ll make it into home ownership. Let me know.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.