NZ Herald 28 January 2017

AI hope this didn’t spoil your new year! Even though you were transferring a lot of money, it’s surprising how little interest we’re talking about over just a few days.

Let’s say your account pays 1 per cent interest. Over three days that would earn you $23 after tax at 30 per cent. Even if your account pays 3 per cent — lucky you — it’s only about $69.

Still, every penny counts. It’s a good habit to always be conscious of interest you’re earning — or not earning.

Given your question involves several banks, I went first to the bank regulator, the Reserve Bank. It doesn’t comment on specific bank’s practices, but a spokesman described the money transfer process.

Obviously, it’s simpler if a payment is to a customer or account in the same bank. But “when a customer instructs a bank to make a payment to another customer’s account or to another bank, a whole chain of events happen,” he says.

“The transfer may be almost instantaneous, but if the payment process includes non-business days then the chain of events may be slower. In your example, the customer issued a payment instruction on 1 January, while the next business day was 4 January. This is likely to have slowed down the processing.

“Sending a payment to a customer or account at a different bank involves sorting, batching and processing within the sending bank; record keeping within the sending bank (e.g. updating the customer’s account statement); sending funds and instructions to inter-bank payment and settlement systems operated by the Reserve Bank or other third-parties; value delivery and settlement within those third-party systems; acceptance within the receiving bank; and record keeping within the receiving bank.”

Gosh! Moving money makes moving house look simple.

Reading through that list got me wondering, so I asked the Reserve Bank spokesman: “Is it possible that no bank earns interest for a period, especially when there are non-business days involved?”

His reply: “Other than when it was briefly passing through our payment and settlement system (likely to have been only a few seconds), the money will have been either at Kiwibank or at the receiving banks.

“Wherever it was during the public holiday period, the terms and conditions for that bank will determine how it was accruing interest, who the interest is paid to, and how it is paid.”

Given the dates involved, “it is highly likely that the money was still within Kiwibank,” he says. “That’s something the customer may wish to verify with Kiwibank.”

I did that for you.

Because you took the action on a non-business day, “the funds were withdrawn from the account and held in a suspensory account in preparation for transfer on the next business day to the other bank,” says communications manager Bruce Thompson.

“The bank would earn interest on the composite funds held in the suspensory account awaiting transfer to the other bank.”

He adds, “The information Kiwibank displays when making a payment is: ‘Payments to Kiwibank accounts are processed immediately. Payments to other banks are sent every hour between 9am and midnight on business days. Processing time for other banks may vary.’ Note the “on business days” bit — which you must have read right past.

Nevertheless, Thompson says that if you contact him, “we will reimburse the lost interest, as this was clearly a misunderstanding.”

To avoid similar problems in future, you can “future date” a transfer — setting the date as the next business day.

ASimilarly, all investors make bigger returns by taking risks and managing them.

You could argue that the lower returns we make on bank term deposits — in the form of interest — are really just payments to keep up with inflation and to compensate us for not having the use of the money to buy things. We take little risk, and so make little profit.

But once we invest in property, shares or other riskier assets, things indeed don’t always turn out as expected. To “lessen any downside”, as you put it, you can:

• Diversify. Spread your money over many different assets, and different types of assets. They won’t all do badly at once.
• Watch your timing. Put money you expect to spend in the next ten years in lower-risk investments, so they won’t be in a trough when you take the money out.
• Take little notice of past performance. If the investment has performed particularly well lately, it’s likely that won’t be repeated. In fact, past high performance often signals higher volatility, so there’s a stronger likelihood that future performance will be poor.
• Be savvy. Understand how the investment returns are generated. If it’s not obvious — such as rent from property or dividends from shares — stay away. Many dodgy or highly risky investments are deliberately marketed in a way that confuses investors.
• Spread investments over time. Gradually buy into shares, for example, so you don’t buy them all at what turns out to be a market high. This happens automatically with KiwiSaver.
• Sit tight. Avoid the temptation to trade frequently or try to time markets. Even the experts often get this wrong, and trading costs money. You should be prepared to let the investment be for ten years or more.
• Be wary. Avoid any investment that looks too good to be true.

But of course, as you say, sometimes the results of riskier investments are better than expected. Anyone who wants to make returns well above inflation needs to take risk. Just do it wisely — or as the business world puts it, manage your risk.

AIt’s nearly always better to pay off a mortgage than to invest the money elsewhere — except in KiwiSaver, when government and employer inputs make it hard to beat.

Let’s say you’re paying 5 per cent interest on your $67,000 mortgage. And the annual return on your SIL investment is also 5 per cent, after fees and tax. Here are two scenarios:

• You leave the SIL investment where it is. Your wealth grows by 5 per cent of $27,000 — which is $1350 a year. But meanwhile you’re paying 5 per cent of $67,000 — which is $3350 — in mortgage interest, as well as paying down the principal. When you balance the SIL earnings and the interest payments, you’re paying a net $2000 a year.
• You use the SIL money to pay down the mortgage from $67,000 to $40,000. You get no more SIL income, but the interest on your mortgage drops to 5 per cent of $40,000, which is $2000 a year.

You’ve got the same net result.

To put it simply: Getting out of paying 5 per cent interest on a sum of money improves your wealth as much as earning 5 per cent on that money in an investment.

But note an important difference. For your SIL investment to get a 5 per cent return after fees and taxes, it would have to be in a fairly high-risk fund. That means the returns would fluctuate, and your balance would fall in some years.

In other words, the first scenario is much riskier than the second one. Given they have the same result, the second scenario is better.

Sure, you could reduce the first scenario risk by investing in a lower-risk SIL fund. But then your returns would be less than 5 per cent. The second scenario wins again.

What if you withdrew the SIL money and put it into KiwiSaver? While I said above that KiwiSaver can beat repaying a mortgage, contributing a lump sum of SIL money wouldn’t attract any extra money from the government or your employer, so it would be just like a non-KiwiSaver investment. Mortgage repayment beats it.

Which mortgage should you pay down? The one charging the higher interest. Then ask the bank to keep your mortgage payments at the old level, so you pay off the loan faster.

I suggest that when you gain access to your KiwiSaver money, you also use it to pay down the higher-interest mortgage — and then the other one if you have money left over. Getting rid of both mortgages as soon as possible will free up more of your NZ Super for spending in retirement.

You might also consider moving at retirement to a cheaper house, so you have more spending money.

P.S. If one of the mortgages is on a fixed rate, ask the bank if there’s a penalty for paying it off early. It might be better to pay down the other mortgage. If both are fixed, you may well be better off waiting until one of the fixed terms expires. Your bank should help you work this out.