NZ Herald 7 February 2015

AHang in there! There are some big positives in your situation:

• You have a mortgage-free home.
• You have a PhD. While you haven’t got a full-time job yet, there’s sure to be something on reasonable pay for you.
• You have a good plan — to upgrade and rent out the sleep-out.
• In inner city Auckland, your home is likely to be worth more than $1 million. I understand why you don’t want to move, but if push comes to shove — or later down the track — you could live elsewhere and free up several hundred thousand dollars.

So how do you make your plan for the sleep-out work?

“Unfortunately this is not an uncommon scenario,” says mortgage adviser Karen Tatterson. “And while anyone would of course want her to be able to hold onto the family home, some really good planning is definitely needed.

“In stressful situations it can be easy to make a decision that’s not necessarily the best option for the future. So first of all, my advice is to get all the necessary information together and carefully consider all scenarios.”

First things first. Could you get a mortgage? “It is likely that she would get a mortgage with the addition of assumed rental income from the garage conversion,” says Tatterson. “However if the home is in joint names, her ex-husband would need to act as a guarantor and the bank would require a full application and statement of position from him as well. In reality she would need to have him on board as part of the process.”

How much might you need to borrow? “To convert a sleep-out to something rentable, she would need somewhere in the vicinity of $20,000 to $100,000 — a big variance I know — but something she would need to be very clear on before entering into lending,” says Tatterson. It would be wise to get a couple of quotes early on, so you know where you stand.

“Also in some situations, if the completed conversion constitutes a minor dwelling, consent may be required from council, and this certainly ups the cost.” Check this with the council early on in the process.

Next question: how long would the mortgage term be, given your age?

“Depending on the bank she may be limited to a shorter loan. However, in this case where the advance is to improve property value, it is likely that the term could be extended as far out as 30 years,” she says.

It would be good to get a longer term, even though you would hope not to be making payments at 87! It keeps your payments down now, and you can speed them up when your income is higher and the kids leave home.

To give you a rough idea of payments, let’s say you’re borrowing $50,000 at 5.75 per cent. On a 20-year loan you would pay $351 a month. On a 30-year loan it would be $292, and on an interest-only loan it would be $240.

If you borrow $25,000, halve the payments. If you borrow $100,000, double the payments.

It wouldn’t be wise to pay interest-only indefinitely, but it would be an option at first, says Tatterson — perhaps until you get a well-paid job.

She adds some further tips: “The rental income can be used as ‘income’ for the purpose of the loan approval, and she would need to provide a rental assessment/appraisal from a local real estate company.

“More information is needed to work out what the maximum loan at a comfortable level would be. Things like the actual rental income on the garage conversion and whether her young adult children are not dependents. If they are dependents then the potential loan value drops quite significantly.”

If the amount you can borrow is not enough to make the sleep-out rentable, perhaps you could wait until you have a full-time job. With a higher income, you could borrow considerably more.

Adds Tatterson, “There are a lot of variables here and information we don’t know, so some sound advice on all the facts and figures and guidance on what she needs to consider is definitely the first thing to do.”

You can get free advice from a mortgage adviser, as they’re paid by the lender that gives you your mortgage. So that would be a good first step.

Tatterson is a board member of the Professional Advisers Association, and she says the association is “a good first call for people looking for an adviser to work with, and for guidance on what they should expect from the advice relationship.”

Good luck!

AGood question, given that roughly half the investments in a balanced fund are growth assets — mainly shares but sometimes also some property.

Over the long term, we expect shares to bring in higher returns than term deposits, but the returns are more volatile. The rest of a balanced fund’s investments are typically lower-risk fixed interest, which usually waters down the volatility, but it’s still there.

We never know when a share market will fall. So there’s always a danger that you’ll move a large amount of money into a share investment right before a big drop.

The way around this is to move the money gradually. Looking back, you will inevitably wish you had moved more at what turns out to have been a good time. But that certainly beats realizing you moved the lot at a bad time.

On the other hand, you don’t want to muck around forever, once you’ve made your decision to move money. I suggest you move say a third now, a third in three months and a third in six months.

AIt’s disappointing that your provider isn’t giving you guidance on this. They should.

You might want to consider switching providers as well as funds. The KiwiSaver Fund Finder on www.sorted.org.nz will help you find other providers to consider. Then you can check those providers’ websites to see if they offer helpful advice.

Regardless of which provider you use, your thinking is good. Over 30 years your account is likely to grow much more in a growth fund. But, like the previous correspondent, you don’t want to move all your money to a higher risk fund right before a downturn.

It would be great if you could time your move. But even the experts often get that wrong. So I suggest that you, too, make your move gradually over several months.

Most KiwiSaver providers will let you invest in more than one of their funds, and will also permit several moves between funds within a year.

AGenerally, it’s better to reduce a mortgage than to invest the money.

Let’s say your mortgage interest rate is 6 per cent. If you pay $100,000 off the mortgage you will no longer have to pay $6000 in interest each year. Avoiding paying that amount improves your wealth just as much as earning 6 per cent on an investment.

It’s possible that hubby’s pension is earning more than 6 per cent after tax and fees. But you don’t earn that sort of return without taking risk. And paying down the mortgage is risk-free.

Having said that, there might be other reasons to favour the status quo, so it could be good idea to see an authorized financial adviser, or AFA.

One way to tell if an adviser is independent is to look at how they are paid. I think it’s best to use an adviser who charges you a fee and gives you any commissions they receive from the investments they put you into. That way their choices aren’t affected by how much commission they get.

For more on this, and a list of advisers who charge fees, see the Info on Advisers page on my website, www.maryholm.com.

Footnote: Don’t confuse AFAs with registered financial advisers. RFAs can help you only with simpler financial products, such as insurance, bank term deposits and mortgages. They’re not qualified to give advice on investments or people’s broad financial situations.