NZ Herald 27 October 2012

AAfter such a nice letter, I feel mean raining on your parade. But I think the fortnightly mortgage payment thing is overrated.

There are two ways the idea of fortnightly payments is presented:

• Instead of paying, say, $1000 a month, which comes to $12,000 a year, you pay $500 fortnightly. Because there are 26 fortnights in a year, you pay a total of $13,000 each year — $1000 extra.

That’s good. You’ll pay the loan off faster and therefore pay less total interest. But the fact is that you are simply paying more. It’s not magic. You could do the same thing by increasing your monthly payments to $1083ish.

• People sometimes take the above into account, and say that if you switch from monthly to fortnightly payments, you should divide your total annual payments by 26 — so that you’re not actually increasing annual payments. In our example, you would pay about $462 a fortnight.

This should lead to a slight cut in total interest paid, because you are a little bit ahead on payments — with about half the money going in a couple of weeks early each month.

But it won’t amount to much, given that you miss out on earning interest on the money you pay early. Sure, savings interest is lower than mortgage interest, especially after tax, but we’re not talking big dollars here.

Probably a more important advantage of fortnightly mortgage payments is to do with timing and budgeting. If you’re paid weekly or fortnightly, it might be easier to manage your money if the mortgage payments are made fortnightly.

On the other hand — and this is something that financial experts tend to ignore — you miss out on bonus months.

Back when I was paid fortnightly and made monthly payments on the mortgage and several other bills, I used to love it when, during two months each year, I got three pay cheques. There was spare money. Sometimes I saved it, sometimes I splurged on a treat. The point is that it was a little ray of sunshine. We all need those.

ASuch cynicism!

A Westpac spokesman says that when the bank is processing overnight payments it applies credits before debits, as it doesn’t want heaps of unhappy customers.

But your situation is different. At around 9 or 10 pm, before the bank gets to the overnight money-go-round, it processes future dated payments such as the two payments you set up.

It would have checked there was enough money in your original account to make the first transfer, and then queued that money up to be transferred overnight. But the money wasn’t actually moved until some hours later.

Meanwhile, at around the same time, it checked the balance in the account from which you were making credit card payments, and found there wasn’t enough there. Hence your problem.

There are two ways to avoid this:

• If possible, make the credit card payment directly from the first account — although I realise that in some accounts that isn’t allowed.
• Set up the payments a day apart. Sure, you’ll lose a day’s interest. But it’s chicken feed. Even on $10,000, 4 per cent interest is about a dollar a day, and less after tax.

It’s a bit like the situation in the previous Q&A. While it’s always good to count pennies, we sometimes make an effort for trivial gains.

Another example is moving money — even large amounts — for a short period to another bank that pays higher interest.

Say you move $100,000 from an account paying 4 per cent to one paying 5 per cent for a week. You’ll get $67 instead of $54 in interest, after tax at 30 per cent. Whoopee!

It’s worth working through a simple example first — not forgetting to allow for tax.

AI wouldn’t tweak it much at all, except perhaps to lengthen the bonds period a little — especially if your parents are conservative.

That would mean the money you invest in shares is money you don’t expect to spend for maybe 11 or 12 years or more. Given that markets seem to have become more volatile, most retired people wouldn’t want to be in shares over the short or even medium term. But I still think that over the long term shares are likely to do better than alternatives, as well as giving protection against inflation.

Do warn your parents, though, that the value of their shares will go down sometimes, and they mustn’t panic and sell if that happens. If they couldn’t cope with downturns, they’re better off putting all their longer term money in high-grade bonds.

Another thing: unless thay have more than, say, $100,000 to put into shares, they won’t be able to get enough diversification by buying shares directly, so they should use a low-fee share fund.

AThere’s no rush to sell the rental property, but you might want to in the next few years. There are two basic problems with using a rental property as a retirement investment:

• You can spend only the rental income, minus expenses. Unlike bank deposits, corporate bonds or shares, you can’t gradually spend the capital as well. So you may have less fun in retirement, and your heirs get more.
• Rental properties can be a lot more hassle than the alternatives, particularly as you get older. You can pay a property manager, but that eats into the money available for you. And a manager can’t protect you from periods when you get no rent — because of a shortage of tenants or tenants who don’t pay or do damage.

So what are the alternatives?

If you insist on sticking with banks, you could just use term deposits.

Let’s say the proceeds from selling your rental property are $300,000. You could set up term deposits so that initially $15,000 matures each year for you to spend.

Because of compounding interest, you could take out a little more each year to cover inflation. As long as interest rates stay above inflation, your money should last somewhat longer than 20 years.

Most retired people spend less as they get older, so by the time the money has run out, you’d probably do okay on NZ Super.

Another option is to invest your money as outlined in the previous Q&A.

You could do this yourself, or get a good authorised financial adviser to help choose your investments, set up a plan for gradually moving the money from shares to bonds and so on.

You’re likely to end up with more spending money through retirement than if you stick with all term deposits. But if some volatility would worry you, it might not be worth it. Your choice.

By the way, you didn’t mention KiwiSaver. If you’re not members, I hope you both join before you turn 65 and are no longer eligible. At 60-plus, KiwiSaver is a very good deal.

If you put in five lots of $1043 over the next five years, the government puts in the $1000 kick-start plus five lots of $521. You end up with a total of $8820 plus returns on the money — so your contributions are roughly doubled. And you tie up your money for only five years.

What’s more, if your husband is an employee and he contributes 2 per cent of his pay, rising to 3 per cent next April, his employer will also contribute. He’ll end up with even more “free” money. You’re silly to miss out.

AIndeed. Many fund fees are too high, but still.