NZ Herald 23 May 2020

AA difficult situation. But there’s lots of free help out there for you.

The first reaction to your letter of a lawyer with experience in this area was to say, “I always strongly advise people never to be guarantors for family members, as I have seen so much hardship arising from this.”

That’s because, if the people with the mortgage don’t make payments, the bank can go after the guarantors for the money.

But it seems you were under pressure to sign — and perhaps not fully aware of what you were signing. What can be done about it now?

Firstly, the situation with the bank needs to be clarified. “Did he receive independent legal advice when he signed as a guarantor?” asks the lawyer. “If not, he could seek to challenge the validity of the guarantee.”

You signed in front of a lawyer, but were they representing your interests or your parents’ interests?

Time to bring in some more expertise. “From the situation you’ve outlined, it’s not clear whether the son is guarantor or co-borrower for his parents’ lending?,” says Sarah Parker, deputy Banking Ombudsman.

“A guarantor is not usually on the title of the property, and wouldn’t usually get letters about arrears (unless the lending was restructured or the bank was looking at calling on the guarantee). It may be that he has signed up as co-owner and co-borrower for his parents’ house.”

Parker says the Banking Ombudsman Scheme can help you sort that out. This service is free to you.

“We could certainly help him understand what he has agreed to and ensure the bank has met its obligations to him. If the bank has not treated him fairly, the bank would need to make it right by putting him, as much as possible, back in the position he would have been in.”

There are also other sources of free or low-cost professional advice. “If he lives in Mangere, he can approach the Mangere Community Law Centre. Otherwise there is a Law Centre in Otara,” says the lawyer.

And you can contact your local CAB, who will give you a free 10-minute appointment with a lawyer. “He might not see someone who practises in this area. The lawyers are volunteers and cover a wide range of issues. But it is worth taking the free appointment to see what the person says,” she says.

“I also recommend approaching his local budgeting service to see if they will help him to approach the bank.” Go to www.moneytalks.co.nz and click on “Find a local service” to find a financial mentor near you. This service is also free.

Tim Barnett, chief executive of FinCap, which runs MoneyTalks, confirms this. “Yes, a mentor would be able to help the reader with talking to their bank and to the Banking Ombudsman Scheme. They can also support the person with negotiations with the lender of the loan. This will need to be done with the parents’ permission since the loan is under their name.”

He adds, “The reader seems fairly savvy with their financial knowledge and good at saving money, given the KiwiSaver balances that they have accumulated and their position to be able to buy a home if they can use their KiwiSaver. This is really great.”

However, he suggests you encourage your parents to seek financial mentoring advice.

“There are many services in Mangere that work with people from the Pacific Islands, speaking their languages and understanding the cultural context. Financial mentoring might help his parents to get out of the cycle of debt that they are currently in and help prevent further debt.”

On using KiwiSaver to buy a home for you and your wife, “If he is able to divest himself of any interest or share in his parents’ property, he may be eligible for a KiwiSaver first-home withdrawal if he is a ‘qualifying previous home owner’,” says Parker. There is more on this here.

Your first step is to contact the Banking Ombudsman Scheme or MoneyTalks or both.

Please get back and tell me how you go.

AOh dear. You are an accountant, and might find tax details fascinating, but I suspect most readers don’t need every I in “income” dotted and every T in “tax” crossed while reading their weekend paper.

Explaining PIE tax rates is complicated. You’ve got to look at your taxable income without PIE income, and then your taxable income plus PIE income, and both of those numbers over the last two years.

At all income levels, some people pay lower tax on their PIE income than on other income. And you’re right, some people — in some years — can pay 28 per cent on PIE income when they have no other income. But they will end up paying lower PIE tax in future years, even if they’re earning heaps.

Okay, how many other readers are following all this? It’s simpler at the top tax rate, so last week I thought that would do when giving the broad picture. Sorry if I oversimplified.

As for my many other answers, I doubt if I’ve favoured the top tax bracket, but will certainly watch out not to in future.

Now, would it be fair to point out that your sums are a bit dodgy? Sixty-six per cent plus 14 per cent doesn’t come to 70 per cent! But we all slip up sometimes!

AI love that you, at 90, are making provisions for your old age — somewhere down the track!

It’s never a bad idea to spread large term deposits around several banks — if only to keep you aware of differing interest rates. You can check rates on interest.co.nz.

But how safe is the Co-operative Bank? Or, for all those other anxious people, any other bank?

You can check on any New Zealand bank using the Reserve Bank’s Financial Strength Dashboard. It might look a bit daunting, but it’s easy to understand.

Firstly, check the different banks’ credit ratings — from three big international agencies — at the top. You’ll find that S&P and Moody’s don’t rate Co-operative, but Fitch rates it BBB, along with Heartland and SBS but several steps below the big banks.

What does this mean? Another resource on the Reserve Bank website, called “Know Your Credit Ratings”, tells us that a BBB rating is “Adequate”, with a 1 in 30 probability of default over five years.

By comparison, Kiwibank is rated AA by Fitch, meaning there’s a 1 in 300 probability. The big four banks — ANZ, ASB, BNZ and Westpac — are rated slightly below that at AA minus. (Note, though, that S&P rates the big four ahead of Kiwibank, and Moody’s rates them equally.)

Credit ratings aren’t always accurate, as the global financial crisis showed. But they’re helpful.

The first graph on the dashboard is about capital adequacy. If you click “What is this?” at the top, a short video explains it. Co-operative looks good on this measure, and on the next one, non-performing loans. You can work through four more measures to get a total picture.

Note that the Dashboard’s data is for the quarter ending last December 31. So it gives a picture of how the banks were placed before the Covid-19 disruption.

On May 29 the Dashboard is due to be updated, with data for the three months ending March 31. You might want to make some notes now on your bank’s numbers, and see if they change much.

AI was writing about KiwiSaver and, as a Simplicity spokesperson puts it, “within our KiwiSaver suite of products, we only allow for one fund.”

However, “With our Investment Fund products, there are no restrictions. We have five types and in theory, you can have five, although whether that makes sense is another question.”

AWhat we’re looking at here are two forecasts: what will happen to house prices and what will happen to share prices — given that your two growth funds will be largely invested in shares.

A year or two from now, will you wish you had bought a property now, or wish you hadn’t because you would have been better off leaving your money in shares?

On house prices, the forecasts for the next year or two all seem to be downwards, although some experts are saying only 1 per cent while others say up to 12 per cent.

And it’s important to note that the New Zealand housing market is far from homogeneous. Regions have always differed, and the Covid-19 disruptions may make that worse.

Core Logic said recently that, unsurprisingly, Queenstown house prices are likely to be worst hit, followed by Christchurch and then Auckland. Meanwhile, Whangarei prices are least likely to fall much, followed by Hamilton and Invercargill.

That might affect your decision. But remember, the experts could be wrong. The following influence house prices: mortgage rates, unemployment, construction rates, construction costs, land values, consumer confidence and immigration. Question marks hang over all of those.

Turning to share prices, the range of possibilities is wide, from gains — although nobody is expecting big gains — to considerable losses.

So what should you do? I suggest you buy when you want to, and then don’t dwell on whether that turns out to have been bad timing. It seems unlikely you will be forced to sell your home later at a loss if prices fall.

In the meantime, I recommend gradually turning your non-KiwiSaver money into cash, and move the KiwiSaver money into low risk, so you don’t get caught by another share market plunge.

Over your lifetime you’ll probably buy and sell a few properties, and some will turn out to have been good “investments” while others won’t. But hopefully they will all have been comfortable places to live, and you’ll realise that’s what matters most.

AHouse prices probably won’t keep rising, at least for the next couple of years, so that’s probably one worry off your list for a while.

How much of your savings should go into your house deposit? I suggest all but, say, $20,000, which could be left in a share fund. As I said last week, it’s good to have some savings in shares for diversification and other reasons. But given that you want to get rid of your mortgage fast, keep the loan as small as possible from the start.

Oh, and also make sure you have three months of income accessible for rainy day money — or ask your lender if you could add to your mortgage if needed.

Meanwhile, you’re building up your deposit, and I admire your wonderful wide diversification. But, given that you expect to buy within five years, I recommend moving the deposit money into lower-risk funds or bank term deposits. See above.

When to buy? With a two-year-old it might be good to get into your own place sooner rather than later.

AI don’t have to ask the government, because I know what they’ll say. Sorry, but no.

Broadly speaking, the government is helping companies expected to be financially viable after the Covid-19 disruption is over — not those that got into trouble before the pandemic even started.

FE Investments was placed into receivership on April 1. You may still get some of your money back but, as you say, you’ve learnt a lesson. FE no doubt paid higher interest than the banks, but for a reason!

At least you’re young, with plenty of time to get over this setback. And if you have to delay your house purchase, prices might fall in the meantime — so this could turn out to be good luck!

But this time around, you know where to keep your deposit savings.

AI think it’s fine to put all the money into a home — apart from keeping a bit for a rainy day, as noted above. “Sinking” is not the right word for it. You’re investing in a fresh start.

Co-ownership is a possibility but I agree that it can bring problems. You have to get along really well, have similar views on maintenance and improvements and, importantly, both want to sell at the same time.

It’s simpler to get a place of your own, even if it’s modest. After that you can get into building up that KiwiSaver fund for retirement. Forget about doing the impossible — timing the housing market. Start looking now.

Footnote: You — and the above three correspondents — should bargain hard for a house. There won’t be many other buyers around.

Is that mean to sellers? Not really. Most of them will have done nicely, thank you, with house price inflation over the last decade.