- Should couple sell their house, and buy again later?
- The high price of not organising your automatic payments well
- When you should and shouldn’t repay your student loan quickly — and future prospects
- 2 Q&As on what happens to KiwiSavers when they retire
QMy Mum suggested I send you an email as you have loads of great advice.
We own our own home and our mortgage is $291,000. My husband is very worried that there is going to be a big downturn in the market after the World Cup and that he could lose his job. This would see us unable to pay our mortgage — although rent would be about the same, less normal homeowner expenses.
He thinks we should put our house on the market in October (when our mortgage comes off fixed) and rent for a while. I worry we may not get back in the market once we are out. We would come out with roughly $100,000 for a deposit and he thinks the next time there is a lull in the market we could re-buy.
What is your opinion?
AStay put. People who try to time the property market — choosing when to get in and out — don’t usually do as well as those who stick with their investments. Nobody, not even the experts, can predict price changes.
While the outlook for house prices is hardly buoyant, anything can happen. Your worry about ending up on the housing sidelines is real.
The same applies to shares and bonds. But there’s an extra factor in property: It costs heaps to sell a house, what with agent’s commissions, legal fees, and so on. Buying isn’t cheap either if you get valuations and other assessments.
And that’s before we look at the hassle. In January, houses took a national median of 51 days to sell, says the Real Estate Institute. With bad luck, yours could be on the market for several stressful months.
Then you have to find a place to rent — also not easy these days. And moving into the rental, and then back out later, all takes time and money.
Note, too, that while rent might be about the same as your current mortgage payments, part of those payments is paying down your loan. That’s savings for you. And your spending on insurance, rates and maintenance should over the long term be more than covered by capital gains.
I know I’ve said before that renting can work just as well as buying, provided you also save for your retirement accommodation. But given that you prefer home ownership, I would stick with it.
So how can we allay hubby’s worries? On the question of a post-Cup downturn, let’s turn to Mark Twain, who said, “I am an old man and have known a great many troubles, but most of them never happened.”
Beyond that, perhaps your husband could take a part-time course or other steps to improve his employability. And the two of you could make a concerted effort to save this year, to build a buffer for hard times.
You could also ask if your mortgage lender is willing to reduce payments by extending the term of a mortgage, or even suspend payments, to help borrowers through a rough patch. Many lenders will do that.
Footnote: Last week we started with a daughter concerned about her mother. This week it’s the reverse.
QI heard you say on Kerre Woodham’s radio show recently that it’s good to set up automatic payments to a savings account the day after one’s pay goes in. Good advice.
I found a bank statement on the roadside a wee while ago. It was a young guy (low pay). He had set up the AP for the same day as his pay went in. But he didn’t realise that the AP comes out at 2am, the pay goes in at about 8am. So the bank stung him $25 for “no funds”, each week. Ouch.
One bank used to write to the payee when an AP failed. Perhaps they don’t now.
I suppose he did something about it, but might just have glanced at the statement and its bottom line and tossed it out?
AHere’s hoping he did the former. It’s worth taking a few minutes to check statements. While $25 seems awfully steep, it really is up to customers to keep an eye on what’s happening in their accounts.
QI have a question about student loans. How does the interest work?
I know the interest is written off while I’m studying, but when I graduate I’ll have roughly $100,000 borrowed, and the IRD website doesn’t seem very clear about whether the interest is still written off when I get a full-time job.
I have a reasonable amount saved and invested conservatively, probably enough to cover about two thirds of the $100,000 by the time I graduate, but that still leaves $30,000.
From your previous answers it appears that as long as I don’t leave New Zealand for more than 6 months the loan is interest-free. Is this true?
AYes. But once you start to earn more than $19,084 a year you will have to start repaying your loan, Compulsory repayment are 10c for every dollar above $19,084 — although that cutoff is likely to rise a bit after March 31.
A more interesting question is whether you should put your savings towards faster loan repayment. That’s a good idea with most loans, because the interest you pay is higher than the expected return on your savings — except in KiwiSaver.
However, it’s different with student loans. As you say, as long as you stay in New Zealand, the loan is interest-free. So you’re better off leaving your savings where they are, earning a positive return.
True, the government has introduced two incentives to repay student loans:
- The student loan repayment bonus. If you make voluntary repayments — above the compulsory amounts — of $500 or more in an April-March year, your balance is reduced by 10 per cent of the voluntary repayments.
However, as I’ve explained in previous columns, number crunching shows that it’s not worth taking advantage of that until you get to the point at which your compulsory payments will fully repay the loan within the next three years. At that point, repay the loan all at once, if you can. But that’s a while away for you, with such a big loan.
- A new $40 a year administration fee, expected to be charged on every student loan Inland Revenue holds at 31 March each year, starting next year. But $40 a year won’t change the maths.
There are, however, some other issues. Many people just don’t like having a big debt. Or they don’t like seeing their student loan repayments rise whenever they get a pay increase. It feels as if they are being taxed heavily.
If that’s you, go ahead and pay off as much as you can when you graduate. I’m sure the government would appreciate it.
We should note, too, that there’s talk of the government restarting interest on student loans after graduation — partly because of the extra pressure on the Budget from the Christchurch earthquake.
But that’s not the only reason. The Savings Working Group said it in its final report that it “has some concerns about the messages being sent to young people as a result of the interest-free nature of the Student Loan scheme.
“While the SWG does not support charging interest while students are studying, it is concerned that the system encourages young people to think it’s fine to have a large debt — other than a mortgage. Anecdotal evidence suggests this can lead to a blasé attitude to debt, with former students unconcerned if they run up large credit card bills. Such an attitude could lead to a lifelong habit of being in high-interest debt rather than saving.
“The SWG recommends that the Government considers charging low interest on student loans after a student has graduated. Young people would learn debt management skills whilst repaying those loans.”
It’s a good point — even if I say so as a member of the Savings Working Group. And it could give the government a great justification for reintroducing low interest on student loans for graduates.
That doesn’t mean students should stop borrowing money they need for their studies. But they would be wise to take care not to borrow unnecessarily.
QI am recently retired and wondered if there is any value in continuing to contribute to KiwiSaver? I do not intend to draw on it for some years to come.
ACertainly keep contributing for as long as you can get the tax credits — which match your own contributions up to $1043 a year.
For most people, the tax credits stop when they reach NZ Super age, currently 65. But if you join when you are over 60, they run for five years.
Everyone gets at least five years’ worth. And given that KiwiSaver started in mid 2007, the tax credits won’t have stopped yet for anyone.
Unlike when you were you were working — assuming you were an employee — you will no longer receive employer contributions. But the doubling of your money is still well worth getting.
After your tax credits stop, contributing to KiwiSaver becomes less attractive. However, at the same time you gain access to your money. So, if you like the way your fund is run, there’s no good reason not to put any further savings into it, knowing you can take out the money at any time.
QA dumb question: I enrolled with KiwiSaver when the scheme started and have accumulated around $11,000-plus. Easy money really. I will be 65 shortly and may retire then.
When the scheme winds up at 65, do I have to withdraw funds and manage the investment, or is there a pension option?
AThere’s no such thing as a dumb question — in this column anyway.
As I said above, you will continue to receive tax credits until five years after you joined KiwiSaver. So keep contributing $1043 a year until then — even if you have to borrow to do it.
Once you reach the five-year mark, you can withdraw any or all your money, or leave it in the account for the rest of your life.
At this stage only one KiwiSaver provider offers a pension or “annuity” option — paying a regular amount until you die. That’s Fidelity Life. However, some other providers will help you set up regular withdrawals, and some offer advice for retired KiwiSavers.
At the risk of looking as if I’m plugging my book, “The Complete KiwiSaver”, it has a section on which providers do what for retirees. It might be worth moving your money to a retiree-friendly provider.
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.