A good start for the young

QI am hoping you can help. I run HR for a small company that employs quite a few graduates. Many of them are first time contributors to KiwiSaver.

Most just sit with the default fund they get allocated to when signed up. I try to tell them they should shop around to see if there is a better fund. I am not a financial adviser so don’t want to give them any advice, much as I would like to.

Is there a one-pager anywhere that can give new KiwiSaver contributors a guide as to what type of fund they should be investing in — depending on what they think they should be using their KiwiSaver for?

AGood on you for caring. Perhaps you could give them copies of this Q&A.

Hey young ones! I know retirement is too far away to think about. But how about owning your own home? A great way to make that happen — sooner rather than later — is to make the most of KiwiSaver from the word “go”.

Spend an hour or so online, and then you can get back to exercising or partying or reading or going to the beach or whatever you love to do.

Start by answering the three questions in the KiwiSaver Fund Finder on sorted.org.nz. That will tell you which level of risk is best for you. It will then give you a list of KiwiSaver funds at that risk level, starting with the ones that charge the lowest fees. If you click on the fund names, you get more info about them.

I suggest you choose from the low-fee funds, as fees can make a big difference to your balance over the years.

If you also want to take ethical investing into account, the Mindful Money website tells you how each KiwiSaver fund invests.

Don’t agonize for too long about your fund choice. It’s impossible to know, in advance, which one will be best. Choose a fund that appeals, then contact that provider and they will arrange to have your money moved to them.

Once you’ve done that, the main message is: don’t take savings suspensions. Keep that money rolling in, and compounding returns will work their magic.

The only time you need to do more about fund choice is when you get within about ten years of buying a home. At that stage, if you’re in a higher-risk fund, it’s good to gradually switch to medium risk — perhaps transferring a quarter or your money each month for four months.

Then, when the home purchase is three years or so away, gradually move to low risk. Those moves will prevent your balance from suddenly dropping when you’re about to buy a home.

‘A very bad idea’

QAm I correct that if I go to live with my parents and let my house, becoming a landlord, I can claim back the interest I pay on my mortgage?

Further, if I swap houses with my neighbour and we rent from each other, thus both becoming landlords, we can both claim back the thousands we pay in interest on our mortgages. Why wouldn’t we?

ANot so fast!

Broadly speaking, your first idea — moving in with Mum and Dad and letting out your house — could work, says tax expert Terry Baucher of Baucher Consulting. Eighty per cent of your mortgage interest would be deductible from April 1, and the whole lot from April 1 next year.

But Baucher is not at all keen on your house swap plan. “What’s proposed is a very clear case of tax avoidance, and the Commissioner of Inland Revenue can use their powers to make it null and void,” he says.

“Furthermore, the Commissioner could view the arrangement as representing an ‘abusive tax position’, and if so can impose ‘shortfall penalties’ of up to 100 per cent of the tax involved.

“For example, if the arrangement reduced the correspondent’s tax bill by $25,000 the shortfall penalty could be $25,000. Shortfall penalties are in addition to the tax payable, and use of money interest of currently 10.92 per cent will also apply. In summary it’s a very bad idea.”

Baucher adds that “The changes to interest deductibility in 2021 made this a complicated topic and it will remain so until 1st April 2025, when full interest deductibility will be restored. Landlords should keep detailed records of when they borrowed money and for what purpose so they can maximise their interest deduction.”

More on mortgage interest

QCan you explain how you see the deductibility of mortgage interest for landlords making sense?

If I’m buying a house to live in, I’m at an immediate disadvantage in terms of what I can afford versus a landlord. This pushes the price of properties up and stops people being able to buy houses to live in, creating a vicious circle of people who could and would otherwise buy a house helping to pay a landlord’s mortgage.

Glad to see you are in favour of a capital gains tax, though. From a (fortunate) homeowner in Auckland.

AI understand where you’re coming from. I don’t like to see high house prices either. But I don’t think meddling with tax deductions is the way to solve that problem.

New Zealand’s tax system is in many ways less complicated than in other countries. For example: most people don’t have to file an annual tax return. Roughly the right amount of income tax is deducted before we get our money.

Part of our system is to tax businesses — including rental property — on their income after they’ve deducted their expenses. Changing that, by disallowing one particular expense, complicates things. For example, it gives a relative advantage to the wealthiest landlords who don’t have to borrow to buy a property.

At the same time, as I said last week, gains on rental property and all other investments should be taxed. And, by the way, the International Monetary Fund recommended this for New Zealand this past week. That might put off would-be investors at least as much as the allowance of interest deductions attracts them.

New Zealand must also attack the housing shortage, which is basically what’s behind the huge increase in house prices — relative to incomes — of recent decades. The new Government is making noises about doing that. Here’s hoping.

And more still

QA thought experiment: two groups of potential buyers attend a residential house auction.

Group A will receive $1 back from the government for every $3 interest they pay on their mortgage, Group B do not receive anything back. Questions:

  • Who is more likely to win the auction, someone in Group A or Group B?
  • What effect will this have on house prices overall?
  • What do you expect to happen to the relative number of houses in private ownership (Group B) compared with those owned by landlords (Group A)?

As landlords can write off interest payments, in the interest of equity and not skewing the market, surely private homeowners should also be able to claim a tax deduction for mortgage interest paid.

From an extremely fortunate boomer who originally paid three years’ income for a house that had a rateable value of more than 20 years’ income at retirement — a return of over 10 per cent annually compounded for 35 years.

ASure, someone in Group A, the landlord group, is likely to pay more in the auction. And the resumed deductibility of mortgage interest — looked at on its own — is likely to push up house prices. And the change may also increase the number of rental properties versus owner-occupied homes.

But that ignores how a capital gains tax would dampen landlord enthusiasm, as discussed above.

On homeowners deducting mortgage interest, that isn’t really logical. We don’t pay that interest in order to make a taxable profit. Also, to be consistent, owner-occupied homes should be included in a capital gains tax. I don’t think so!

Before I’m flooded with letters, it’s unimaginable that this country would do such a thing. More on mortgage interest deductions next week.

Little old lady image

QI’ve read and enjoyed your columns and even cut them out of the newspaper for years. However, in the letter last week about landlords’ image, they refer to a “little old lady or gentleman” as likely investors.

Did you know it was once a NZ School Cert English question about how “little old lady” encourages stereotypes (over 40 years ago). And you repeated the writer’s comment! Isn’t that reinforcing these attitudes?

Incidentally my mother was a landlady at 25. On being widowed in the mid 1960s she had no choice but to buy a small block of flats. Otherwise us three kids would have been split up due to finances. Needless to say she did all right in the end, but she’s no longer with us.

We appreciate mum’s legacy and no, she doesn’t fit the “little old lady” description because she never lived to collect her Super!

AGood on your Mum. And sorry to annoy you.

The correspondent was pointing out that many landlords are not “heartless capitalists in top hats”, and he came up with the “little old lady and gentleman” image as a contrast. I picked up on this in a spirit of fun.

When I think about it, in stories both factual and fictional, a “little old lady” is often feisty and gutsy. I wonder if anyone answering that School Cert question wrote about the Little Old Lady from Pasadena, immortalised in the 1964 song for driving her sports car “real fast” and “real hard…The guys come to race her from miles around, But she’ll give ’em a length, then she’ll shut ’em down.”

Bless my socks

QJust want to honor you for your outstanding reply on the landLORD letter.

That system I call right wing, white male capitalism, set up by capitalists for capitalists, so the rich get richer and the poor, poorer, working for their benefit like compound interest! Bless your little cotton socks.

AThanks. I don’t quite go along with your take on the system, though. For one thing, not all landlords are male. See the Q&A above.

Laddering disappointment

QAbout seven years ago I set up a schedule of laddered term deposits. All went well for a while with rates around 4 per cent or so, then they started dropping. Now I have some five-year deposits at between 1.3 per cent and 2 per cent. Recent rollovers are 5 per cent plus, but the average is well below current rates.

I agree laddering keeps your term deposits theoretically at the best available five-year rates. But in my scenario I haven’t achieved an optimal outcome.

APerhaps I’ve oversold laddering — or perhaps you’ve overbought it!

When you ladder, you set up term deposits so, say, a quarter of your money matures in one year, a quarter in two, a quarter in three and a quarter in four. Then, when each one matures, you reinvest it for four years. See last week’s column for more on this.

It means you get access to some of your money frequently, while at the same time receiving the higher interest that usually applies to longer-term deposits.

Currently that’s not the case, because the markets expect interest rates to fall. But that’s unusual. We will undoubtedly move back to higher rates for longer terms soonish. And while current five-year rates might not look appealing now, it’s highly likely they will look good by the time they mature.

Meantime, I think you would find that if instead you had put your money in one-year deposits from the start, you would be worse off over all.

Laddering usually works well over any period of more than a few years.

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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.