- Who earns the interest while money moves from bank to bank over holidays?
- What is investment risk? And how to reduce it
- Use savings to pay down mortgage
QI just wanted to highlight an issue that other readers would be interested in. On 1 January 2017 at 1 pm I transferred 400K from my Kiwibank bank account app to my TSB Bank and Rabodirect accounts. The Kiwibank app stated that the transfer would go through in one hour or more up to the hours of 9 pm I think it was.
The funds landed in my TSB and Rabodirect accounts on 4 January 2017 at 10 am. I’m just querying out of interest — not a pun (I was very annoyed at the time) — which party earns the interest on the 400K on 1, 2, 3 January?
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.
QWhat follows is more of a comment than a question, but it may help your readers to better understand the intricacies of risk.
Many people, including most commentators, see risk as equating to loss. However, the modern definition amongst people who manage the effects of exposure to risk is that it is simply “things will not always turn out as planned or expected”.
It should be realised that the result of exposure to risk may turn out to be better than expected or worse, and the management of risk involves working to improve the result and lessen any downside that may eventuate.
In the final analysis all profit-making businesses make their profit by taking risks, and managing that risk taking.
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.
QMy question may be old and familiar but I hope you can help.
I have currently $27,000 invested with SIL, which I’ll have access to this year when I turn 60.
I also have $38,000 in KiwiSaver (and growing), which I know I can’t touch until I’m 65.
On the other hand, I have a house which has one mortgage I’m due to pay off when I’m 67 ($67,000) and another which I won’t be able to pay off till I’m 80 ($119,000).
What should I do with the SIL funds when I turn 60? Should I:
- Take it and use it to reduce either of the mortgages (which one?)
- Leave it alone and access it later. Then, at say 65, pay off remainder of smaller mortgage?
- Take it out and merge it with KiwiSaver?
I currently work four days per week and my annual income is about $70,000, which doesn’t add up to much in Auckland.
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.
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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]holm.com 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.