- Fortnightly mortgage payments not all they’re cracked up to be
- When the overnight money goes in and out of bank accounts
- How to organize retirement savings
- The downside of using rental property for retirement savings
- Last week’s correspondent exaggerated his woes
QWell done, Mary. Your recent letter on whether now is a good time to buy a house was right on the button — concise, clear, caring and likely very helpful to the correspondents. (I suppose I think it’s good cos I agree with what you say, but that’s folks for you.)
I hope someone tells them to arrange mortgage payments fortnightly and not monthly.
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.
QJust a question on the trading banks’ nightly processing of debits and credits. Why are debit transactions processed before credit transactions?
A recent situation involved setting up a forward dated transfer of funds into one account with money to then pay a credit card account. The payment to the credit card account was rejected due to insufficient funds, as the credit card payment (debit) was done before the transfer of funds (credit). All accounts are with the same bank, Westpac.
I am at a loss (no pun intended!) to understand why banks debit accounts before they credit them. Or is it another way to increase profits by charging interest on unpaid items!
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.
QMy parents are about to hit 65 and have no retirement financial plans or investment strategy. They have some savings in bank term deposits. I found an earlier column where you said something along the following lines:
- Keep the next 6 months of required income in cash, in bank accounts.
- Keep the next 2.5 years of required income in bank term deposits or government stock of appropriate maturities to maintain the cash requirement.
- Keep the next 7 years of required income in high-grade corporate bonds of appropriate maturities.
- Keep the rest in New Zealand or international shares, where it will grow faster.
As the respective items mature, put what you need into cash and reinvest what’s left over to try and keep the term deposit and corporate bond maturity structure intact.
That was in 2008, before the full impact of the global financial crisis and the economic woes in Europe. How would you tweak it for today?
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.
QMy husband and I are approaching 65. He will continue to work for the next few years hopefully. We own our own home and have an investment property. The mortgage on the rental house will be paid off in a few months time.
My question: should we hold onto this house and continue to pay insurance, rates, maintenance etc or sell it and invest the money, and if so where? We are great believers in the safety of banks.
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.
QWhat a joke for your first correspondent last week to suggest that using fund managers charging 1–2 per cent fees and incurring some investment gains and losses is equivalent to having money stolen by an investment adviser (like the recently convicted Bradley).
Your correspondent is not even close to being a victim like the Bradley clients, many of whom have had their lives totally wrecked.
AIndeed. Many fund fees are too high, but still.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding 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.