NZ Herald 26 April 2025

AI suppose it’s fair enough to “borrow” a letter from someone else, if you think the “random person” worded it better than you would.

It’s a complicated issue, comparing investing in shares — which is what equities are — and investing in your own home.

Firstly there’s the money side of it. While share returns might grow faster than house prices — although that’s not always the case — that can be offset by the fact that people usually borrow to buy a house, but not shares. While borrowing to invest can go horribly wrong if you’re forced to sell in a downturn, it usually boosts your returns. You get gains on the bank’s money as well as your own.

Another financial issue is accessibility of your money. If you own your home, you may be able to add to your mortgage if you want to start a business, for instance. And you can also raise money by taking in a boarder, subdividing, converting part of your home into a flat or, in retirement, taking out a reverse mortgage or home reversion.

But none of this is as easy as just selling some of your shares.

Then there’s the non-financial side.

Owning shares might mean investing in a boring but solid share fund, or getting entertainment — or sometimes stress — out of picking which companies to invest in and when to buy and sell.

Owning a home means you have a base. You can decorate and garden as you please, and many people feel a pride in ownership. You won’t suddenly face an unexpected rent increase, or be moved out by a landlord, which can be particularly important if you have children at local schools. And over the years you’re acquiring a place to live in your old age — or a property you can sell to fund a retirement home.

On the downside of home ownership, it’s a much bigger hassle to move than if you’re renting. And you’re responsible for maintenance — although some people enjoy that work.

In short, it’s not clear whether a share investment or a home is better financially. I think most people decide for other reasons, and that’s as it should be.

AYou’re quite right that it’s wise to adjust for inflation when looking at returns. But inflation hasn’t been nearly as high, most of the time, as you seem to think.

In the ten years ending December 2024, CPI inflation averaged 2.8% a year, according to the Reserve Bank’s inflation calculator. Meanwhile, over that period, the average annual return on the lowest-risk KiwiSaver funds, according to Morningstar, was 4.2% after fees but before tax. By the time we add tax, even at the top PIE tax rate, the return is just above inflation, as our graph shows.

At the next risk level, the average return, after fees but before tax, was 4.7%. Then it went 6.7% for balanced funds, 8.3% for growth funds, and 9.3% for aggressive funds. Even after adjusting for tax, all are well clear of inflation.

The graph also shows that, over time, higher-risk funds are more volatile but grow more. A $10,000 investment in an aggressive fund ten years ago has grown to more than $22,000 now. Meanwhile, in a conservative fund, it’s less than $14,000.

It can be argued that higher-risk funds are actually lower-risk, because investors have a much better chance of beating inflation over the years. That’s why it’s best to keep just the money you expect to spend in the next few years in a low-risk fund.

We should note, though, that from 2022 to 2023 returns fell, especially for higher-risk funds, while inflation increased. You do get blips along the way.

AThat’s great thanks. Now readers can start making plans for when the scheme starts, on July 1.

AI can see where you’re coming from, but it’s not a good idea to borrow more than you need. The interest you pay on that extra money will reduce what you could be saving for retirement.

Reading between the lines, I assume your income covers your everyday spending. If not, try to budget better. But I’m guessing you need extra money for home maintenance work or other big expenses.

Good on the bank for suggesting you use your savings first. What you need to compare is:

• The interest or other return you’re getting on your savings — let’s say it’s 3% after tax.
• The interest you would pay on the mortgage — let’s say 5.5%.

Go for the lower interest rate. Losing out on 3% on your savings — because you’ve spent that money — is better than paying 5.5% on a loan.

Meanwhile, though, it seems you’re worried that you’ll need money in the future and won’t be able to borrow as you get older. And it’s true that banks are less willing to help older people add to their mortgages.

But I would far rather see you aiming to pay off your mortgage before you retire. It’s a wonderful feeling to own your home debt-free. And if you find you need extra money in retirement, your council may offer rates postponement. Beyond that, you could look into either home reversion or a reverse mortgage — which I’ve written about in depth in recent weeks.

Sure, you pay higher interest on a reverse mortgage than on an ordinary mortgage. And, similarly, home reversion is not ideal financially. But if you borrow more than you need now, you’ll be in debt for longer. That will be a worse deal for you.

ALovely to hear the readers’ entries in the book draw brought you sunshine through the storm and ants!

On information about reverse mortgages and home reversion, here are a couple of good sources:

• The equityrelease.co.nz website. Run by economist Cameron Bagrie, this site compares reverse mortgages and home reversion. And readers can ask him for an assessment of their suitability for these products. This might work well for you.

  Bagrie also plans to shortly offer another option for people ineligible for either of the two products. “I’m finding many people’s situations fall outside the current home reversion offering’s conditions, and am looking at providing an option in that space. Call it a bespoke offering.

  “My Equity release NZ website will still provide independent analysis of the options,” he says. “People need to understand the maths of a reverse equity mortgage vs home reversion.”

• Two economists, Thomas Benison and Trinh Le, have written a readable 40-page working paper for Motu, “Do New Zealand home equity release schemes provide value for money?”, which compares reverse mortgages and home reversion.

  They conclude: “In short, it depends on the retiree and their circumstances. If current savings and income is not enough to sustain a comfortable standard of living, and the preference is to remain in the home forever, then home equity release may be a suitable form of retirement income.

  “If finance is needed for significant expenditures in the future, such as long-term care or healthcare costs, then home equity release may not be suitable.”

  You can read the paper here.

AIf you can afford to increase your KiwiSaver contributions to 8%, and you have other easily accessible money you can use in an emergency, go for it — regardless of what the markets are doing.

Having said that, you might consider putting the extra money into a similar non-KiwiSaver fund. You never know when you might want to withdraw the money before you turn 65. And it might not be because of hard times. Perhaps you’ll want to do up your home, or support a family member starting a new business.

To make contributions, you can set up an automatic regular transfer out of your bank account into your fund on the day after payday.

On the market situation, it’s always impossible to predict. But at least you’re looking at what’s likely to happen over several years, rather than weeks or months. And yes, in the long term it would be really surprising to see anything but an upward trend.

I can only applaud your footnote — and thank you for your kind comment. For other readers, Mr. Micawber said, “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.

Short questions please!

These days I’m receiving more and more letters that I really want to answer, but I can’t fit them all in. When you send a letter, if you stick to the 200-word maximum length you’re more likely to be published.