- Who gets the money when mortgage rates increase?
- 2 Q&As on whether the tax rate on second jobs is fair.
QCould you explain where the extra money goes that people with mortgages and other borrowers pay, when the official cash rate is increased by the Reserve Bank, and consequently the banks charge higher interest.
Does it end up in the Government coffers?
AMost of it goes to the people who lend money to the banks.
That includes: New Zealanders with savings accounts, who provide about 10 per cent of banks’ funding; New Zealanders with term deposits, who provide 40 to 50 per cent; and non-residents, who provide about 30 per cent, says Massey senior lecturer in banking David Tripe.
When interest rates on mortgages and other loans rise, so do rates on savings.
Market forces make that happen. If one bank boosted its mortgage rates but didn’t boost its term deposit rates, it would rapidly lose term deposit customers to competitors offering better deals.
As a result, the gap between rates on loans and rates on savings — the money the banks use to cover their costs and make a profit — stays roughly constant.
Let’s have a look at trends over the last year.
The average floating mortgage rate has risen 0.49 percentage points.
The average one-year fixed rate has risen 0.81 percentage points.
And the five-year fixed rate has risen 0.16 percentage points.
Meanwhile, six-month term deposit rates have risen 0.63 percentage points.
And three-year deposit rates have risen 0.38 percentage points.
Enough! My fingers are getting tired. The average of the three mortgage rises is 0.49 points, and the average of the two term deposit rises is 0.51 points.
These rough calculations suggest that savers have been helped as much as mortgage holders have been hurt.
You wouldn’t think so, though, watching media coverage. That may be because many people in the media are of an age when they are more likely to have a mortgage than large term deposits.
Also, mortgage rate rises probably have more dramatic effects on people’s lives than term deposits rate rises.
But rest assured that many older people — plus younger ones saving for their first home or some other goal — are pretty happy with the way interest rates have moved lately.
There is a grain of truth, though, to your suspicion that the government gains from higher interest rates.
“The Reserve Bank invests the proceeds of note issues on the money market,” says Tripe. “So when interest rates rise its returns go up a bit. But it’s a minor impact.”
Another point: The interest we pay on home mortgages is not tax deductible — although interest on investment mortgages, for rental properties and so on, is deductible.
But the interest we earn on all term deposits and other savings is taxable.
When interest rates rise, then, taxable income rises more than deductions rise. That must boost tax revenue. “But again that’s probably relatively minor,” says Tripe.
All in all, I doubt if the government likes to see interest rates rise. It upsets too many voters.
QI am a fisherman on a commercial vessel and I work seven weeks on and seven weeks off.
If I take on another job during my weeks off, I am taxed at the secondary tax level, which is really high. At the end of the tax year I don’t seem to be able to claim any of it back.
For example, if I make $30,000 fishing and $10,000 in other work, my total tax is higher than someone earning $40,000 in just one job.
This also happened when I was employed full-time and also did weekend work in a bar.
Don Brash said he was going to ditch the secondary tax rate because it was unfair, but now that won’t happen.
Why should you take two jobs in New Zealand to try to get ahead?
ABecause you do, in fact, end up being taxed the same as if you earned all the money in one job — at least if you and your employers handle things properly.
The rate of tax deducted by employers from your pay depends on how you fill out your IR330 tax code declaration form.
You can have only one primary source of income, so all other PAYE (pay as you earn) deductions must be made at secondary rates, says Inland Revenue.
These are higher than primary rates because the primary rates make allowances for rebates for people earning less than $9880 or less than $38,000.
Each eligible person can get those rebates only once, so it doesn’t make sense to allow for them on more than one lot of income.
The secondary tax rates are:
- “S”, 21c per dollar if your total income, from all sources, is less than $38,000.
- “SH”, 33c per dollar on total income is between $38,000 and $60,000.
- “ST”, 39c per dollar on total income of more than $60,000.
But if you don’t fully complete the IR330 form — including your name, Inland Revenue number and tax code — employers are legally required to use the no-declaration rate of 45c per dollar.
Perhaps that’s what has happened to you. From now on, insist that the employer gives you that form.
But even if you did fill out the form properly, in the example you give you would be taxed too highly at first.
The $30,000 income from fishing would be taxed at the M rate (as the main source of income), says Inland Revenue. That rate would make allowance for the under $38,000 rebate.
When you fill out the IR330 for the second $10,000 job, you would note that your total income is between $38,000 and $60,000. So all the income from the second job would be taxed at the SH rate of 33c per dollar.
Two things are out of whack here. You shouldn’t have got the under $38,000 rebate on the fishing income. But you’re paying too much tax on some of the $10,000. Only the $2000 that takes your total income above $38,000 should be taxed at 33c.
Balancing the two things out, you would be paying too much tax.
That’s easily solved, though. At the end of the tax year, ask Inland Revenue for a statement of earnings and a worksheet.
Through that, you work out what your tax would have been if you had earned all your income in one job. If you have overpaid, request a personal tax summary. You will end up with a refund.
Any problems with all this? Ring Inland Revenue on 0800 227 774.
QI’ve recently changed from having one full-time job, to two part-time jobs, totalling 37.5 hours.
I was surprised to find I will be taxed at a much higher secondary rate for the 0.4 FTE (full-time equivalent) job. It was my understanding that you only paid secondary tax if you worked more then 40 hours.
The IRD assured me that I was mistaken, and the woman I spoke to could not recall a time when the situation was different.
I’d like to know if you and your readers think this is unfair (more tax paid, but no increase in hours worked or amount earned), and to suggest we lobby parliament for a change to the regulations!
AHold the protest plans. Like the correspondent above, you won’t be taxed any more than if you earned the same total income in one job, once everything comes out in the wash.
The way we are taxed has nothing to do with the number of hours worked, just the total income earned, says Inland Revenue.
The previous answer largely applies to you, too. Your secondary tax rate is higher because it doesn’t allow for the under $38,000 rebate. And, depending on where your income falls in the tax brackets, you may also be paying too much tax on some of your secondary income.
It’s also possible you are simply paying the wrong secondary tax rate.
You, too, should get a statement of earnings at the end of the year, and hope for a refund.
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.