- Repaying a mortgage — on a home or rental property — almost always better than saving with term deposits.
- KiwiSaver works well for children.
- 3 Q&As on charitable Christmas giving.
QWe have kept an interest-only mortgage on our rental property on advice we received two years ago that it was better to keep the mortgage on a rental property to gain the tax breaks.
We have a sum coming off term deposit in January with which we could pay off the mortgage on the property.
Can you advise if, in the current situation of declining property values, it would be better to pay off the mortgage or to reinvest the money please.
APaying off a mortgage on a rental isn’t quite as good as paying off a mortgage on a home. More on that below. Nevertheless, not only would you probably be better off repaying your rental mortgage now, but you probably should have done it a while back.
Perhaps your adviser two years ago meant that it’s good to fully pay down your home mortgage, on which the interest is not deductible, before repaying the rental mortgage, on which the interest IS deductible.
But once you’ve got rid of the home mortgage, there’s usually little point in keeping the rental mortgage whilst also holding considerable term deposits — regardless of what house prices are doing.
The only time that would make sense is when term deposit interest is higher than your mortgage interest rate. That could happen occasionally, if you have a long-term fixed mortgage rate and market rates rise after that. But it’s unlikely to be the case for long.
Generally, mortgage rates are higher than term deposit rates. How else would banks cover their costs and make a profit?
If your mortgage rate on your rental is 8 per cent, after tax it will cost you 4.88 per cent (in the top 39 per cent tax bracket) or 5.36 per cent (in the 33 per cent bracket). Meanwhile, if you are earning 6 per cent on a term deposit, after tax that comes to 3.66 or 4.02 per cent.
Avoiding paying an expense has exactly the same effect on your wealth as earning a return. If you use the term deposit money to repay the mortgage instead, you avoid paying the mortgage interest — getting the equivalent of 4.88 or 5.36 per cent instead of 3.66 or 4.02 per cent. You’ll retire richer.
What about other tax breaks on property? Tax deductions such as rates, insurance, maintenance and depreciation are not affected by whether you have a mortgage.
Why else might you stick with a mortgage and also hold term deposits?:
- If the mortgage is fixed and there’s a penalty for repaying it early, it might pay to wait until the term ends to avoid the penalty.
- If you set up your term deposits so that some mature every month or so, that might give you more accessibility to your funds in an emergency than if you have paid off the mortgage.
But there are counter-arguments:
- Many lenders will let you keep a zero-balance mortgage, so you can borrow again later. Often, you could get money faster this way than waiting for a term deposit to mature.
- Some people would be more tempted to spend money in term deposits than to re-borrow mortgage money.
- While there’s usually no real difference, in terms of security, between having a $100,000 mortgage plus $100,000 in term deposits and having neither, in tough times many people prefer to keep debt to a minimum.
In the vast majority of cases, repaying a mortgage wins hands down.
What about a mortgage on your home?
The above five points apply equally to a home mortgage. What’s more, because interest on home mortgages is not tax deductible, when comparing the return on term deposits with the equivalent “return” from repaying a home mortgage, you should look at the basic mortgage rate.
In our example above, you would be comparing earning 3.66 or 4.02 per cent on a term deposit with 8 per cent on repaying your mortgage. No contest.
QAlthough I feel quite knowledgeable on KiwiSaver, I have read very little on what to do with children.
I have two children, my son is five and my daughter is two. Do you think it’s a good idea for them to be signed up to KiwiSaver? If so how does it work?
I guess they would be allowed the $1000 start up, but they are not eligible for the tax credits. But do we as mum and dad have to pay in contributions regularly, or could we just take the $1000 and leave it in an account to earn interest? What happens when they turn 18?
ALike every adult under 65, every child can benefit from being in KiwiSaver — although as you say the rules are different.
The downside for under 18s is that they don’t get tax credits or compulsory employer contributions. The upside is flexibility. You can sign up a child and many providers will let you contribute just a token amount or nothing at all.
If you do that, the $1000 kick-start will sit there, receiving the $40-a-year fee subsidy and hopefully growing after fees and taxes are deducted. Even if the account decreased, the child would still get something for nothing.
What if the child gets a job? Under 18s are not automatically enrolled in KiwiSaver when they take a new job. But if, say, your son is already in KiwiSaver and he gets a PAYE job, 2 per cent of his pay — assuming National makes its proposed changes — would go into KiwiSaver.
If he doesn’t want that, he can take a contributions holiday as long as he has been in KiwiSaver for more than a year. But you might want to discourage that. If your son puts aside a portion of his pay, right from the start, he’s likely to retire comfortably. Of more immediate relevance, he may be able to get a KiwiSaver first home subsidy.
Also, as a contributor, he will probably take more interest in KiwiSaver and so learn more about investing.
Generally, though, I don’t recommend that parents, grandparents or others contribute to a child’s KiwiSaver account. With no tax credit or employer contributions, there’s no advantage over saving in some other account. And the money is locked up, when it might otherwise be spent on tertiary education or setting up a business.
On the other hand, you might want to lock up the money, perhaps to stop the child or a parent from dipping into it.
When a child turns 18, the game changes. They will get compulsory employer contributions and tax credits. If your son or daughter is studying, it would be great if you helped him or her to contribute enough to get the maximum $1043 tax credit. It’s a pity not to take advantage of a government handout.
QI read your column last Saturday about giving a little closer to home at Christmas and thought you may be interested in another example.
Habitat for Humanity is all about giving a ‘hand up not a hand out’ to people that need a home, and this year they are giving people the chance to donate nails — to build a house.
Something a little different on the give a goat or chicken theme, but very relevant for New Zealand where affordable housing is hard to come by and indeed unobtainable to many.
Habitat for Humanity’s phone number is 0800 44 22 48, and their website for more information www.habitat.org.nz
QHow delighted and grateful we are to you for mentioning the organisations that are promoting “Gifts that Grow”.
My husband and I have been privileged — through his involvement during his “retirement ” as chairman of one of the NGO’s mentioned — to visit many third world countries on behalf of that NGO (in a voluntary capacity).
We have witnessed first hand, the huge difference those gifts make to a village, whether it be in Africa, India, Brazil, Thailand, South America or any other country where poverty, disease and starvation are rampant.
We understand well that many believe charity begins at home, and we applaud their generosity. However, It is not until you have personally seen and shared the desperation which these children suffer, from the day they are born, that the average Kiwi will ever realise what poverty really means.
We Kiwis may suffer hard times, but we will — thank God — never starve to death, or die a slow death for the need of a few dollars worth of medicine, food, or clean water.
These people, believe me, are not looking for handouts, but rather a hand up. “Gifts that Grow” provide just this — a chance to improve their lot. For example, breeding goats provides milk and meat, with any surplus being sold or exchanged for other food. Poultry provides nourishment through eggs and meat. These and other animals are appreciated and well cared for.
To see the joy and gratitude on their faces, in return for the little help they get, is not only thrilling, but also very humbling.
We would encourage your readers to find out more by contacting one of the organisations you have listed, and then make a firm commitment to help a desperately needy child somewhere in the world. Such generosity brings it’s own rewards!
“Nobody made a greater mistake than he who did nothing because he could only do a little.” Thank you again.
AAnd thank you for writing. Your letter will give us all food for thought.
QI just read last Saturday’s column. We appreciate your having us in there but the address is slightly wrong: currently you have www.giftsforlife.co.nz. It should read www.giftforlife.co.nz.
ASorry. For good measure — and for those who missed last week’s column — we’ll run the full list again.
From the following charities, you can buy a gift for a person in need, on behalf of your friend or relative, who receives an acknowledgement that they have given anything from a book or seeds to a tractor or a clean water system:
- ChildFund New Zealand: 0800 223 111 or www.childfund.org.nz
- Fred Hollows Foundation: 0800 227 229 or www.hollows.org.nz
- Leprosy Mission: 0800 862 873 or www.leprosymission.org.nz
- Oxfam: 0800 600 700 or www.oxfamunwrapped.org.nz
- Save the Children: 0800 167 168 or www.wishlist.org.nz
- TEAR Fund: 0800 800 777 or www.giftforlife.co.nz
- Unicef: 0800 243 575 or www.unicef.org.nz
- World Vision: 0800 245 000 or www.giftsofhope.org.nz
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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.