This article was published on 31 January 2009. Some information may be out of date.

Q&As

  • Several options for 20-year-old who worries that the state of the world makes KiwiSaver iffy.
  • 5 Q&As about reader who was offered a mortgage deal that was too good to be true.

QI am a 20-year-old student considering signing up with KiwiSaver. I could afford to save up to 8 per cent of my wages, and understand it would be a great investment in my future — but nevertheless I’ve still got some worries to overcome.

My main concern comes from the possibility of future calamities such as peak oil and climate change having an effect on the economy and our way of life. I suspect there is a fair chance that with these changes would come resource conflicts, as well as food and water shortages.

With that in mind, I feel more inclined to keep my retirement savings in a more accessible medium, should some crisis dictate that I need it before reaching retirement age.

Putting that aside, I would prefer to sign up for one of the “responsible” KiwiSaver plans. However, should it eventuate that climate change is not a big deal, I am concerned that the value of any responsible or sustainable investment would significantly drop.

Either way it seems to me that, despite the incentives, I should be wary of joining KiwiSaver. Do you have any advice for this dilemma?

AThere are several levels of commitment to KiwiSaver.

If you don’t have a job you can do one of the following:

  • Sign up and get the $1000 kick-start and never pay in anything. Several providers will let you do this.
  • Contribute up to $1043 a year, which will be matched by the tax credit, doubling your money.
  • Contribute more than $1043 a year. You’ll get only the maximum $1043 tax credit, so the only reason to do this is to tie up savings that otherwise you would be tempted to spend.

If you have a PAYE job you can do one of the following:

  • Contribute 4 per cent and then reduce it to 2 per cent in April, when the minimum contribution level drops. After you’ve been in the scheme for a year, go on contributions holidays and put in no more money ever. You’ll get the kick-start and a year of tax credits and employer contributions.
  • While on contributions holidays, contribute up to $1043 a year. You’ll get the matching tax credit.
  • Keep contributing 2 per cent of your pay over the years. You’ll receive the matching tax credit and employer contributions.
  • If your pay is less than $52,150 a year — which means that at 2 per cent you will contribute less than $1,043 a year — top up your contributions to $1,043, so that you receive the maximum tax credit.
  • Contribute 4 per cent or 8 per cent of your pay, or add extra lump sums to your KiwiSaver account. Once you’ve put in more than $1043 a year, there are no particular advantages to doing this other than tying up your money so you won’t spend it.

So there you have it. You can “do” KiwiSaver pretty minimally and still receive some incentives, whilst tying up little or none of your own money. If you’re really worried about the future, that might be the way to go.

But given that you can afford to save 8 per cent of your pay, I suggest you consider saving 2 per cent through KiwiSaver — with a top up if necessary to get the full tax credit — and save 6 per cent elsewhere where you can get your hands on it. That will give you all the KiwiSaver incentives.

It will be interesting, actually, to see which savings fund ends up bigger — your KiwiSaver one or the other one, which will receive three times as much of your money. Those KiwiSaver incentives are pretty powerful at boosting savings.

As for “socially responsible” KiwiSaver funds, there are a good number of options now. Chances are they will perform about as well as other funds over the decades. But if prospects started to look poor, you could easily transfer to another fund.

QI was interested to read last week’s letter from a reader regarding an advisor who could substantially reduce the term of their mortgage for a fee of $2500.

My wife and I were approached by a similar advisor offering to reduce our remaining term of 9 years to 4 years after a brief, free, no-obligation consultation. The cost of taking up his offer was a mere $4000.

Being curious about how this might be achieved, we went all the way to the point of signing on the dotted line, but after asking probing questions, and figuring out exactly how it was to be done, I asked ‘why would I pay you $4000 to find out what I already know’?

After doing the figures, I discovered the method he was selling was definitely possible, but it required far more discipline and lifestyle change than either myself or my wife were prepared to commit to, and certainly wasn’t worth the fee.

AThat lifestyle change is a big worry. Last week’s correspondent was told he could slash the term of his mortgage by a third or half without making extra payments or altering his lifestyle. That’s where it all starts to sound impossible.

A friend of mine looked into a similar deal for relatives of his. The advisor helped them to come up with a budget of roughly $3000 a month. Given their income was about twice that, the plan counted on their paying an extra $3000 each month off their mortgage. No wonder it would slash the term to a fraction of the time.

“Hmmm,” said my friend to the advisor, “If they are spending only half their income, how come they haven’t been saving hugely already?” The answer was, of course, that the budget was totally unrealistic.

QA couple of years ago I was approached by a company offering a similar mortgage deal to the one discussed in your last column.

After filling out a form or two for them, they came back to me saying they could keep the length of my mortgage the same (15 years), but I would be paying $500 a month less, on the same interest rate. Noticing that the monthly payment was barely enough to pay off principal, I pushed a bit harder and got him to show me the figures over the full 15 years.

At year 15 there was still an outstanding balance of approx $60,000. That would have been paid off a revolving credit facility, but they did not consider it a mortgage repayment as I had would still have access to it.

They wanted to charge me $5000 to set the facility up. I hate to think how many people that don’t have the understanding, unwittingly sign up to these schemes.

ASo do I. The idea that a mortgage is not a mortgage just because you have access to the money you have repaid defies logic.

QI am a lawyer and I see many mortgages. Some years ago a client of mine brought in his broker to explain the mortgage savings you refer to.

From what I could see the savings were achieved by careful management of the “free” interest period on credit cards offset against a floating loan. You manage the payment of bills so that the interest-free period is used to its maximum advantage, and time payments against income.

The broker offered a service to manage this cash flow, and I could see that through careful management there were some savings to be had. By leaving the mortgage payments unchanged, the term of the loan can be reduced by the savings. That is my understanding of the process, which looked too complicated and anal to do oneself, and costly to employ another.

AI’m sure you’re right, although it’s not all that hard to make at least some gains through using a revolving credit mortgage.

You set things up so that all your income comes straight into the mortgage account as quickly as possible. And most spending goes onto your credit card, which you pay from the mortgage account by automatic payment on the last payment date.

That means a fair bit of money sits in your account for several weeks, temporarily repaying some of your mortgage. As a result, your interest payments are lower, so more of your mortgage payments go towards principal, reducing the loan term.

If you’re disciplined enough not to increase your spending with such a mortgage, it can work well. But anyone can set this up, without paying an advisor.

And it’s not something for nothing. For one thing, you lose the interest income you might otherwise have made in a savings account using a similar strategy. Sure, that interest wouldn’t be as high, especially after-tax, as the “return” you get by reducing your mortgage, but there’s still a loss there.

And in any case many people already have revolving credit mortgages. They are hardly an exciting new secret.

QI’d guess the financial advisor your questioner referred to was talking about making good use of revolving line of credit mortgages.

If so, the questioner could get the same advice, explained very well, for the cost of an online subscription to Consumer — or an afternoon reading Consumer at the library.

There is an excellent article from last August that compares different strategies for repayments.

AThere is indeed.

QI’m the person whose letter you published last week about reducing my mortgage. Since I wrote to you, in December, I’ve learnt more about the deal I was offered.

There are lots of Indians who are getting lured into this and only find out that the advice they give is nothing great, they prepare some fancy XL graphs and tell you how to budget etc which is no brainer.

If anyone got on to websites like www.sorted.org.nz they can get good budgeting tips for free.

Interestingly, using similar tips, I went and saw my banker before Christmas and was able to reduce my term from a 25-year mortgage to 13-year period — without making dramatic changes to my lifestyle. What’s more I saved $2500 from not paying that financial advisor.

AWell done. Despite my suggestion that your advisor let me in on his secrets in exchange for getting a free plug in this column, I haven’t yet heard from him. Sigh.

Next week I’ll run another reader’s letter with a good idea on mortgage reduction.

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.