NZ Herald 24 January 2009

AAs many an economics professor will tell you, there’s no such thing as a free lunch. Same goes for mortgages.

Unless the lender is being kind to you — and I don’t like your chances of that — you can’t reduce the term of a loan without increasing your payments.

People sometimes get excited about reducing their term by switching from monthly mortgage payments to fortnightly payments of half the amount. But the term is shortened only because the change is not from 12 full payments to 24 half payments, but from 12 full payments to 26 half payments. You are simply paying more in total each year.

For example: On a $200,000 25-year mortgage at 8 per cent, monthly payments are $1544, which total $18,528 year. If we halve those payments to $772 a fortnight, the 26 payments a year would total $20,072. Sure, you would pay off the mortgage in 20 years instead of 25, but that’s what you would expect from paying more each year.

I’m not knocking fortnightly payments. They can work well, especially if you are paid fortnightly. But there’s no magic there.

Your man, on the other hand, is offering a much bigger reduction in the term of your loan for no extra payments. Does he by any chance wear a top hat? And are there any rabbit whiskers peeping out from under it?

What’s more, it all hangs on info that only he is privy to. You’ve got to ask yourself: “If a bank came up with a way to reduce the terms of mortgages without extra payments, why wouldn’t they tell the world, and pick up heaps more customers, rather than whispering it to an advisor and then having to pay him commission?”

One sign of a scam is that the perpetrator has secret information he or she can’t share with you. Another is reluctance to explain the service being offered.

But maybe I’m being unfair. Tell you what, Mr Financial Advisor: How about you write and tell me how it’s done? If it looks good, I promise I won’t tell anyone your secret. I’ll just name you and suggest that readers of this column go to you, and you’ll get lots more business. Have we got a deal?

Meanwhile, I suggest our correspondent might be wise to look into other mortgage options while we await the advisor’s response. Something tells me he might take a while.

AThere might indeed be some angry young people in the future — the ones whose parents didn’t bother to sign them up for KiwiSaver.

They will have missed out on the government’s $1000 kick-start — which as you say could be phased out — plus accumulating returns on it over the years. And in most cases they can get that money without ever putting in any of their own, or their parents’, money.

You probably don’t realise just how little commitment there is in KiwiSaver. Many providers will let children — as well as other non-employees — join with zero contributions.

And once the child starts work, generally they can take repeated contributions holidays for the rest of their lives.

The one exception to this occurs if — during their first year in KiwiSaver — the child gets a job that pays more than $2,340 a year. At that level, they must pay PAYE and therefore compulsory KiwiSaver contributions. But that’s only 4 per cent of pay, which they can drop to 2 per cent from this coming April. And after a year in KiwiSaver they can take their first contributions holiday.

To take a holiday, all they have to do is download and send in a simple form, and they can repeat that every five years if they wish. Unless KiwiSaver becomes compulsory, it’s hard to imagine any future government removing the right to take contributions holidays, given that the government saves money by not contributing to those on holiday.

You also ignore other advantages of signing up kids for KiwiSaver. For one thing, it can get them past the “first year barrier”.

The fact that KiwiSaver employees have to contribute for 12 months before they can take a contributions holiday could discourage some young adults from joining. But if they get their first year of membership over and done with before they ever work, they can take contributions holidays whenever they wish after that, and then contribute whatever amount suits them.

Also, knowing a few young adults, I reckon many simply wouldn’t get around to joining KiwiSaver themselves — or would opt out if they were automatically signed up. But if they are already in, and they understand how the scheme works, they’re more likely to participate as adults, picking up tax credits and perhaps employer contributions as well as the chance to get a $3,000-$5,000 first home subsidy.

I bet, for thousands of young people, KiwiSaver will start them on a stronger financial path than they would otherwise take.

As for your “catch” about the money being tied up, it’s hardly a catch. Many of us have always acknowledged that — for many people — the tie-up is the biggest negative of KiwiSaver. That’s why I advocate contributing only as much as necessary to receive all the incentives. And for under 18s, who don’t get the tax credit, that means contributing nothing.

What about your objection to the money being in managed funds? It sounds as if you don’t realise how wide-ranging KiwiSaver investment can be. In response to your list:

• Several providers offer investment into property funds, which enjoy similar capital gains to direct property investment, take up much less time and give much better diversification.
• One provider — ABN AMRO Craigs — permits active investing, letting you pick the shares you go into. And many others give you great flexibility on which funds you invest in, and when you move your money — if you really want to move frequently, which I don’t advise.
• In almost all cases, repaying your mortgage won’t be as lucrative as being in KiwiSaver. I’ve gone into this in depth in this column, and no doubt will again. Briefly, young, non-employee KiwiSavers who are conservative investors might be better off repaying their mortgage. But they should still at least join KiwiSaver to get the kick-start, even if they don’t contribute after that. All others with mortgages are almost certainly better off in KiwiSaver, paying the minimum to get all the incentives and putting further saving into their mortgage.
• Investing directly in a business isn’t possible in KiwiSaver. But through share funds you can invest in a wide range of businesses. As with property, this will take much less time and give much better diversification than doing it directly.

That’s not to deny that investing in your own business can be enormously profitable — if you are skilful and lucky. But few people start their own businesses under 18 anyway. And if they do, being in KiwiSaver won’t affect that.

Given that no KiwiSaver contributions are necessary, if you really are going to teach your child about investment using one of the vehicles you mention — and realistically I doubt that many parents would do it without having KiwiSaver to prompt them — there’s nothing to stop you doing that as well.

If KiwiSaver weren’t a government initiative, I would agree with you that it’s too good to be true. But KiwiSaver is so good because taxpayers are pouring millions of dollars into it. What’s more, almost all KiwiSaver funds are PIEs, which means they pay lower taxes than many other investments.

In the end, though, if you don’t want yourself or your children to get their share, that’s fine with me. It will put that much less pressure on my tax dollars.

A“Only about KiwiSaver” is stretching it, but I have written lots about it. Trouble is I keep getting many more questions about the scheme than other topics.

In any case, just signing up doesn’t mean you are getting the best out of KiwiSaver. It seems, from feedback I get when running seminars, that even the experts are surprised to learn aspects and ideas they didn’t know.

Still, I take your point. While occasionally the KiwiSaver stuff is so complex it needs the whole column, I will try my darnedest to include at least one non-KiwiSaver Q&A in each column this year.