Paying down a mortgage – or any other debt – improves your wealth as much as an investment. Photo / 123RF
Columnist
OPINION:
Q: There is a great way to save with US shares. I have an 8 per cent return in the last four days. Please ring me if you have an interest.
A: Here we
At 8 per cent every four days, in a year $1000 would turn into a little more than $1.1 million. The dollars will be reproducing like rabbits.
It’s not impossible for the US sharemarket to briefly rise that fast. In 1933 the S&P500 sharemarket index rose 16.6 per cent in just one day. And there have been six days — four around the Great Depression of the early 1930s and two around the global financial crisis in 2008 — when the index rose by more than 10 per cent in 24 hours.
It seems likely, though, that you are investing in individual shares rather than, say, a fund that invests in all the S&P500 shares. And individual shares certainly can rise dramatically — as well as fall dramatically.
Maybe you have discovered what nobody, up until now, knows — how to work out exactly which shares to buy and sell, and when. If so, I have one key question: why are you sharing your secret with me, a total stranger, instead of quietly getting hugely wealthy yourself?
Could you be making money not from share trading, but from signing up suckers to some system that doesn’t really work? Let’s give this one a miss.
P.S. It’s interesting to note that the biggest S&P 500 one-day gains happened around the time of huge sharemarket plunges. That’s why nobody should bail out at those times. Recoveries can be sudden.
Q: Here’s an issue I haven’t seen raised in any of your KiwiSaver discussions.
I do freelance work and temp work, both intermittent. I make monthly contributions to KiwiSaver that total over $1042 per year. I don’t receive the government contribution, because I’m over 65.
Presumably, the rationale for ending the contribution at 65 is that over-65s are assumed to be receiving NZ Super. But I’m not eligible for NZ Super, because I receive an overseas retirement benefit.
Wouldn’t there be a case for giving the $521 bonus to over-65s who don’t receive NZ Super? It might result in more people making voluntary contributions.
A: Hmmm. Anyone who gets no NZ Super because they receive an overseas pension is probably getting at least as much as NZ Super recipients. And if they are still contributing to KiwiSaver — as opposed to withdrawing from it — they probably also receive other income.
To put it bluntly, you and others like you are probably not struggling financially as much as many others.
The change to government KiwiSaver contributions I would most like to see is beneficiaries getting an extra 3 per cent of their benefit paid into a KiwiSaver account set up for them. They wouldn’t have to make any contributions themselves. When they get off the benefit, they would have a good start on their KiwiSaver journey.
This was a recommendation in the Retirement Commission’s 2019 Review of Retirement Income Policies. It said the cost would be fairly modest, “as at jobseeker rates of $245 a week, or $12,740 a year, 3 per cent would be in the order of $382 a year per member, at a total annual cost to the taxpayer of around $114 million.”
The report went on to say, “We know that KiwiSaver exacerbates the wealth gap over time, as some New Zealanders can’t afford to save and so miss out on the compounding benefit of saving even a small amount of money over time.
“Our terms of reference stress the importance of providing options to lift retirement outcomes for the most vulnerable.” This proposed change would really help with that.
Okay, it’s confession time. I worked on that review, and helped draft that recommendation.
The Government’s response has been disappointing. In a letter to Retirement Commissioner Jane Wrightson last December, Minister of Commerce and Consumer Affairs David Clark said, “The ongoing welfare overhaul, and work on the Ministry of Health’s funded family care arrangements, are already considering changes to policy settings for beneficiaries and for carers in the welfare and health systems.
“For this reason, the Government does not propose to consider any changes to the application of KiwiSaver to beneficiaries, or the introduction of care credits [another recommendation], at this time.”
Come on, Minister Clark! Think about the psychological boost that belonging, and having hope for your future as you watch your KiwiSaver balance grow, would give beneficiaries. Please reconsider.
Getting back to our correspondent, I’ve strayed a long way from your letter, and not given the answer you wanted. Sorry.
Q: I am 37 years old, living with my wife and two young kids (4 and 10 months old). I have a home mortgage, which I fixed in May for one year at 3.99 per cent. I also have a revolving credit facility which allows me to accelerate mortgage payments.
After completely paying the revolving credit (no interest is being accrued on it), I have some $50,000 in cash, which I have saved over the last year. Should I accelerate the mortgage repayments — so as to quickly pay it off — or invest in stock markets/managed funds e.g. Sharesies etc. to generate more return?
In the current environment, what should be the best way ahead?
A: Your “pay down the mortgage versus investing” question comes up often. My reply changed somewhat a couple of years ago. Where are we now?
Paying down a mortgage — or any other debt — improves your wealth as much as an investment that earns whatever the debt interest rate is. So your choice is between:
• Reducing your loan, which is equivalent to earning 3.99 per cent on the money. There is no risk.
• Investing in a wide range of shares or a share fund where, on average, you will probably earn more than 3.99 per cent. However, it’s risky. How would you feel if your share investment headed downhill for some time?
A while back, when mortgage interest rates were at record-breaking lows, the decision was more of a toss-up. Over time it seemed highly likely a share fund would earn more than 1 or 2 per cent.
But with mortgage rates rising, I’m back to suggesting a mortgage paydown is better — especially for someone in your situation, with a young family. It gives great security to own your home debt-free.
By the way, you probably can’t pay a large sum off your fixed mortgage without penalties. You could if you were repaying the revolving credit portion, but that balance is zero. You may have to wait until the one-year term expires — in which case put the money in a term deposit in the meantime.
One other point: I’m assuming you haven’t got other rainy day money. Check with your mortgage lender that you could add back to the mortgage in an emergency — which is often permitted if you’ve made extra mortgage payments. But if not, I suggest keeping some of the $50,000 readily available in short-term deposits or a cash fund or similar.
Q: I am a 67-year-old widow whose three children are finally independent. While I have always worked — and still do — it has been challenging financially for the last 15 years to keep afloat, including throwing a “leaky home” into the mix.
I now own an apartment worth about $1.3 million with a $300,000 mortgage, 10 years to go — of which $65,000 is floating. And I have $10,000 owing on my credit card (my bad, I know).
I have about $100,000 in my KiwiSaver, mostly in balanced but a portion in high risk. Lately I have raised my contribution to 10 per cent. I currently earn about $130,000 plus NZ Super and would like to retire in the next three to five years.
What is the best use of my money? Should I withdraw from my KiwiSaver and pay off my credit card? With single-income expenses and mortgage payments I find it hard to save more and pay it off.
And should I also pay off the floating part of my mortgage so that I could save more? I will continue to contribute to my KiwiSaver until I retire, and will probably have to sell my apartment for a cheaper one then.
A: You didn’t need that leaky home! But you’re in not too bad a financial situation now.
Your first move is clear. You can withdraw KiwiSaver money whenever you want over 65, so pay off that credit card debt straight away. Following on from the Q&A above, getting rid of a card that charges, say, 20 per cent interest is equivalent to earning 20 per cent on the money, risk-free. You can’t beat that.
On withdrawing more to pay down your floating mortgage, the question is: can you earn more in a KiwiSaver balanced fund than the mortgage interest rate? Hard to say. I would cut into the mortgage.
That would leave you with a $235,000 fixed-rate loan. Let’s try to get rid of that before you retire.
When the fixed-rate term expires, you could use the rest of your KiwiSaver money — which hopefully will have grown somewhat given your 10 per cent contributions — to reduce your mortgage still further.
At the same time, cut your KiwiSaver contributions to 3 per cent so you can increase your mortgage payments to shorten the life of the loan. Your lender should help you to set that up.
Note: I’m assuming that your employer didn’t stop paying 3 per cent into your KiwiSaver when you turned 65. If they did, there are no big advantages to being in KiwiSaver. So it would probably be best to stop all contributions when your fixed-rate term expires and put that money, too, into mortgage reduction.
With a mortgage-free home in retirement, you might find you can stay there, living on NZ Super and perhaps a reverse mortgage — which I’ve written about before. See tinyurl.com/NZRevMortgage
Q: I have just read your article where you advise a lady what to do with her $350,000 house with a $60,000 mortgage. Can’t argue with your advice, but why do you punctuate your reasoned commentary with such primitive words? I find it hard to believe you are so short of appropriate English words that you have to lower your standards to be woke, or is it laziness?
I challenge you to be appropriate in your word usage and not fall into the intellectual trap of elitism, wokeness or slothful use of unintelligible non-English.
Your use of “Aotearoa” is symptomatic of your racist and bullyboy sycophancy. We are NEW ZEALAND, and no pseudo intellectual use of other names for our New Zealand heritage is acceptable to honest loyal Kiwis. Shame on you Mary Holm, shame shame shame.
A: Ka aroha hoki ki a koe me tō whānau e kore koe e aro atu ki te reo Māori. Ā tona wā pea mōu?
Written for me by a friend of a friend, this means, “How sad it is for you and your family that you don’t appreciate te reo Māori. Perhaps one day you will?”
Non-Māori New Zealanders with open minds and hearts are learning so much from Maori culture. Try it!
In my reply to the letter last week — about getting help through moneytalks.co.nz — there were actually only two words in te reo — Aotearoa and kai. “Kai” was in this context: “Importantly we make sure that a person’s immediate needs are met, have they got enough kai, is their power connected etc.”
I doubt if many people would have found that word unintelligible. And everyone knows “Aotearoa”.
And, by the way, neither of those words was mine. They were in quotes from Ange Smart of Money Talks. But I love the way more and more Māori words are becoming part of New Zealandish.
One more thing: How come you call New Zealanders Kiwis?
– Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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
ma**@ma******.com
. 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.
About Author
