Q&As
QI am 56 and a recently new widow. My three children are adults and doing well in their respective fields. None lives near me.
I am feeling a bit lost and am considering packing up my life and becoming a digital nomad in Asia. I have about $20,000 cash in the bank and no debt. My car would fetch about $20,000 if I sold it. My one real asset is my home, which is mortgage-free.
What do you recommend I do with my home? Do I sell it and put the money in some sort of investment account or do I rent my home out? This will give me rental income whilst retaining my asset, but I have heard so many rental horror stories that I am a bit concerned about this option. I would appreciate your thoughts.
AI take my hat off to you.
I wasn’t quite sure what a digital nomad is, but Wikipedia explains. “Digital nomads are people who travel freely while working remotely using technology and the internet. Such people generally have minimal material possessions and work remotely in temporary housing, hotels, cafes, public libraries, co-working spaces, or recreational vehicles.”
So we’re not ruling out earning a living while you’re away, and possibly sending money home to add to your retirement savings as you go. Even if you don’t — and you end up entering retirement with considerably less money than if you had stayed home and done the conservative thing — you’re sure to gain plenty in other ways.
And, importantly, you don’t have Wikipedia’s “minimal material possessions”, but a mortgage-free home — which I suggest you keep and rent out.
You’re right, that has its risks. As I often say, it can be tricky to own a rental property that’s not near where you live. When things go wrong — from a leaky roof to a tenant who is not paying — it’s easier to solve if you are on the spot.
But you have a big advantage: no mortgage. That means you should have plenty of income to more than pay rates, insurance and maintenance, plus a competent property manager.
Ask around and search online for information about who is a good manager, and then interview them carefully. You want to be confident that they will be diligent and reasonable, able to run your property without calling on you often.
You’ll also need to line up someone to take care of your taxes. But there should still be money left over to build up your savings in either KiwiSaver or another managed fund.
Sure, things could go wrong. But if you sell the house and invest the money elsewhere there are other worries — the big one being that house prices rise faster than the returns on your investment, so that when you return you would be unable to buy a house of similar value.
Get things sorted for renting your house, and go and have a wonderful time!
QI see there were a few letters in last week’s column regarding financial mentors and budget advisers, and the good advice you have provided.
Can I just add a few comments? As a part time financial mentor following a banking career, it gives me job satisfaction when we can assist clients make the right choice for them.
Initially clients often say they are embarrassed to come and see us, not realising that many of our clients are in worse financial situations than themselves.
Our first session with a client is what we call a “Discovery” session whereby we listen to their story, ask questions, and generally make them feel more at ease and build up a relationship with them. This often leads the client to “opening up” more about their total situation.
At the next session we can start to work on various options for them to consider. It may take several sessions before the client makes a decision as to what suits them best, and we can then assist them through the process.
Our advice is free and confidential, and often we can come up with solutions that the client has not thought of. In the present climate applications for KiwiSaver hardship are increasing, and in many cases we can suggest alternatives so that their KiwiSaver balance can be kept intact.
We are easy to find. Just Google “Financial Mentors” in your town or city.
AThanks for your letter, which I’m sure will reassure people considering taking up this excellent free service. I particularly like that you are assisting people not to raid their KiwiSaver accounts.
QI would like to suggest that the siblings in the first Q&A last week sell the run-down house and rent.
In New Zealand we are rent averse. At their ages (63 and 60) it makes sense. They are not long off receiving superannuation. They can top this up with interest income.
Say they had $500,000 to invest and they took out $50,000 a year, they would be covered for more than ten years. Plus they would be able to enjoy their lives without as much worry.
I am an accountant and I find people don’t understand that there comes a time when it’s quite alright to spend capital. If they looked at what they have, and how long it would take to spend it all, they would be surprised.
AI agree that home ownership is overrated in this country. As long as you have plenty of savings to cover accommodation costs throughout retirement, you don’t have to own the roof over your head.
And it’s certainly wise to consider selling any rental property you own once you’re retired — especially if you’re short of spending money.
However, despite the growth in build-to-rent projects, long-term leases are still not common in New Zealand. Most retired people want to know they can stay in their home — whether they own it or rent it — for as long as it suits them.
The correspondent last week said she and her brother are considering a reverse mortgage, and I think that might be a better way to use some of the equity in the property.
Still, you make a good point, and perhaps they would consider your idea.
Note that if the home owner received $500,000 for the house, and the siblings spent $50,000 a year on rent and other expenses, the money would last considerably longer than ten years. That’s because, in the meantime, they would be earning interest or other returns on it.
QI read with interest last week the advice from Jeremy Sutton, who says parents can arrange legal loans and give these loans to their kids to buy houses.
When we tried to do this with two of our children their banks, who were providing most of the funds, refused to have anything to do with formal loans by parents to children to buy a home.
We were given only one option — our financial input had to be in the form of a gift. And a signed certificate had to be given stating that our money was a gift and not a loan. If this signed certificate was not produced the bank would withdraw its offer of a home loan to our children.
This rule applied in both New Zealand and the UK, where we did assist our children to buy a home.
We have heard of a case in Australia where parents were allowed to give a loan to their child to buy a home, probably because no banks were involved. But when the couple split, their child could or would not pay the loan back.
The parents were left with the unenviable task of taking their child to court if they wanted to get their money back. The parents could not do this of course.
A further problem can happen if there are other siblings, and parents want to make sure all are treated equally. Let’s pretend one child is gifted $100,000 and there are three other siblings. When we are promoted to glory (or warm places as the case may be), then we must make sure the other three siblings have $100,000 extra each available to them to ensure they are all treated equally.
This may sound simple. But let’s say both parents finish up in rest homes. Then that $300,000 may in fact be spent on fees, and the sibling with the $100,000 will have this amount extra because they got their money first.
So just because a loan to a child is all legally tied up, complications can still arise with repayments, when or if circumstances to any of the other parties’ change.
AOn your first point, Jeremy Sutton did say last week, “Often banks won’t lend if the deposit is in fact a loan from parents, as it contravenes the LVR rules. Frequently the bank will require documentation to show the source of the funds.”
And I added, “Check with lenders before setting this up.” Your letter underlines the importance of doing this, so thank you.
Note, though, that other banks might be more obliging. A mortgage broker might help your child find one.
Your second point is also something to consider. In most family circumstances, it’s really important to treat all your children equally — or, if one child has greater needs, to explain what’s happening to their siblings. In too many families, bitterness arises from unequal treatment.
QFollowing on from last week’s topic ‘Helping the Kids’ — the idea of helping your parents to stay in their home by way of a loan was raised. I just wanted to alert you to an issue if they then need to go into Residential Care.
I loaned my mum $100,000 so she could stay in her own home. A lawyer drew up an Acknowledgement of Debt repayable on her death. But, when my mum needed to go into hospital care I discovered the MSD requires the debt to be enforceable, i.e. there needs to be a defined date for repayment. This meant the loan was seen as being my mother’s asset and she was denied a Residential Care Subsidy.
We appealed the decision and won, but it was very stressful and we had to pay over $50,000 in care fees while it was being sorted out. (This was reimbursed.)
If your readers are looking to set up a loan for their parents, you might suggest they ask the MSD for a copy of their Debt Mapping Policy to ensure they meet the criteria. I talked to a couple of lawyers during this process and neither was aware of this.
AThanks for the warning. What happened to you and your Mum could happen to anyone. So I asked the Ministry of Social Development for their take on this.
“All applications for a Residential Care Subsidy are considered on a case-by-case basis. When assessing someone’s eligibility, one of the things we look at is any assets belonging to them or their partner (if they have one),” says Paula Ratahi O’Neill, general manager Contact Centre and Digital Services:
“In calculating the value of these assets, we deduct any genuine liabilities and outstanding debt. One of the factors we consider when deciding if a debt is genuine or not, is whether repayment is legally actionable.
“So, our advice to anyone who is intending to lend money in a similar way to your letter writer, and wants to avoid being in a similar situation, would be to seek legal advice on how to word the loan agreement appropriately so that it is legally actionable if the recipient was to require residential care,” says O’Neill.
If your lawyer is not familiar with this issue, perhaps show them this Q&A.
O’Neill adds, “Anyone who wants to know if the financial actions they’re considering could impact their entitlement to a Residential Care Subsidy can also contact our Residential Subsidy Unit on 0800 999 727 to discuss this with us.” That sounds like a helpful service.
There’s more info on how MSD assesses assets and debt here.
Gosh! Helping family members — whether children or parents — is clearly a complicated business. More on this next week.
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.