Your own home makes up a big part of your personal wealth, but owning it outright sometimes feels like an impossible dream. Brenda Ward asks the experts how to get the most out of your home loan.
A house, plus savings
Want to say goodbye to work? Pay off your mortgage as quickly as you can, says financial educator Lisa Dudson. But don’t use all your money for that.
She says: “When you get to retirement, you want two buckets – a lifestyle bucket, which has your home, your bach, your boat and your car in it; and your investment bucket, which is going to provide you an income along with the New Zealand superannuation.”
That’s why she suggests you balance repaying your mortgage with growing an investment nest-egg.
“When you get to the point of retirement, you want to have your home all paid off, because that lowers your costs; and you want enough in your investment bucket to fund your lifestyle.”
So, start by paying off your mortgage, and as soon as you’re able, start boosting the amount you put into your KiwiSaver account, or a high-interest savings account.
Retirement Commissioner Diane Maxwell agrees the ideal scenario is to reach your 60s mortgage-free, with savings.
“If you want to ‘age in place’, you will need some cash to pay for ongoing maintenance costs, rates and so on. Dipping into the equity of the property is an alternative if you’re ‘asset rich but cash poor’, and there are some better products available now than 10 years ago, that manage the risks more actively.
“If you can live off the income of your savings and not dip into the capital, that’s clearly going to give you a better chance of having your money last as long as your body does.”
Using your KiwiSaver account
If you have been a member of a KiwiSaver scheme for a minimum of three years, haven’t purchased a property before and you intend to live in the property you purchase, you might be able to use the balance, minus $1,000, as a deposit on your first home.
You’d expect Retirement Commissioner Diane Maxwell to oppose people draining their KiwiSaver account for their first-home deposit, instead of using it for their retirement. But no.
She’s concerned that as we’re living at home longer, buying later and taking on more debt relative to incomes, we’re more likely to reach our 60s with a mortgage.
She says: “I’m supportive of people using their KiwiSaver account to get into their first home because for some, it will be their only way in.
“Paying down a mortgage is an enforced savings habit. It’s easy to fudge savings, convince yourself you will do it tomorrow, or next year, but a mortgage demands payment now, and the rewards feel tangible and immediate – you own your home. In that sense, it’s a great discipline.”
Visit kiwisaver.govt.nz for more information on the KiwiSaver first-home withdrawal and the HomeStart grant.
Getting a deposit
There are three ways to save for your first house, says Craig Barker, Kiwibank’s Head of Specialist Distribution.
“You can save up by putting money aside regularly into a savings account; you may qualify for the KiwiSaver first-home withdrawal; and you may qualify for the KiwiSaver HomeStart grant.”
Tip: If you’re saving for a deposit, check out Kiwibank’s Roadmap to Independence at kiwibank.co.nz.
The tool can recommend a potential savings account and ways to help you stick to your plan.
Missing out on interest
There are pros and cons to dipping into your KiwiSaver to buy a house, says Dudson.
“Using KiwiSaver for a deposit helps young people get into their first home, but, when they cash in that $30,000 to $40,000 at age 30, they’re losing out on the growth of that money over the years through compound interest.
“Then again, if they keep it in KiwiSaver, they might not get into a house for a couple more years.”
So, it’s all about weighing up what’s right for your circumstances.
Fast-track your loan
Dudson says to set yourself some targets – such as trying to pay off $10,000 every three years – and talk to your bank or mortgage broker about the products they have, to help you achieve
When you get a windfall, put a lump sum on the mortgage. It’ll be more beneficial in the
long term than leaving it in a savings account.
If your interest rate drops, keep your repayments the same, instead of decreasing them. This can speed up how quickly you pay it off.
Play around with tools available on bank websites and Sorted.org.nz, to see how much faster you could pay off your mortgage just by increasing your payments by, say, an extra $50 per fortnight. You’ll be amazed at what a difference it can make.
Pay fortnightly if you can
If you’re making monthly mortgage payments, change to paying fortnightly, says Dudson.
“The advantage of paying fortnightly is that you’re making 26 payments a year instead
of 12. There are 26 fortnights in a year, because not all months have the same number of days.”
For example, a 30-year loan of $400,000 can be cut to 23.5 years just by paying $1,200 fortnightly instead of $2,400 monthly, saving you $98,000 over the life of the loan.
Fixed or floating?
A floating or ‘variable’ home-loan rate is flexible and is affected by changes to the wholesale price of money and the official cash rate set by the Reserve Bank. A fixed-rate term locks in the interest rate for a set period of time, so whether rates go up or down, your repayments stay the same.
Says Barker: “People who want to be able to pay off the loan a lot faster often select a variable rate, because there’s no penalty for paying that loan off more quickly, whereas with a fixed rate you’re capped at repaying no more than 5 per cent over the minimum.”
A fixed-rate term is useful for people who are working to a tight budget, he says, because it gives them certainty.
He says many customers ‘hedge their bets’, with a large portion fixed and a smaller part on variable rates that can be repaid without penalty.
If you get stuck on a high rate when interest rates are going down, it’s possible to get out of a fixed-rate contract, but there’s likely to be a ‘break fee’ – a charge for doing this. Interest.co.nz has a handy break fee calculator to help you work out how much the fee might be.
The offset solution
An ‘offset’ mortgage looks and feels just like a standard variable rate, but the mortgage balance is ‘offset’ by savings in any of your bank accounts – except term deposits, KiwiSaver and PIE funds, says Barker.
Say you have a $20,000 offset home loan, but you have $4,000 combined in all your savings accounts. That’s all tallied up, so the interest on your mortgage repayments will be calculated on $16,000, not $20,000.
You won’t earn interest on the accounts linked to your offset mortgage, but you’ll be saving more than the interest you would’ve earned. Visit kiwibank.co.nz/offset for more info.
Offset Mortgage is not available to companies, trusts or sole traders. A customer may have more than one Offset Mortgage.
The revolving credit money-go-round
Used properly, a revolving credit mortgage can drastically reduce the amount of interest you pay over the life of your loan, because all your money is going into it.
“However, you need to be very disciplined and focused – and have a plan,” Dudson warns.
Barker agrees. He says it’s like a big overdraft. “You pay it off and withdraw as you like, up to your limit. Because all your money is in one account, you can be tempted to keep redrawing the funds.”
Be sure to do your research before deciding if this option is right for you and your personal circumstances.
When you retire
A lot of people feel rich because their house has grown in value during the recent buoyant market so as retirement looms, many consider downsizing their home, which can have the benefit of reducing the mortgage or enlarging that retirement nest egg.
But is your house going to make you a millionaire when you retire? Don’t count on it, says Dudson.
“That’s right now, but what about the future?” she says. “It wouldn’t surprise me if we have a very flat market coming. People have very short memories.”
She suggests you either plan to pay off the house, sell it and put half into an investment fund; or stick with the cheaper house and have a savings plan, until you have enough for the investment component.
Diane Maxwell says Kiwis need good rental stock available, and sound tenancy laws to ensure renting is a viable option if they don’t own their own home.
“But we do need to acknowledge the vulnerability of renting in retirement. Moving house is physically and emotionally demanding: packing and unpacking, and leaving behind the familiar.
“It’s harder still when the decision and timing is controlled by someone else, in this instance the landlord.”
Written with the help of...
Lisa Dudson is an investor, author, speaker, and financial adviser.
Diane Maxwell is the Retirement Commissioner.
Craig Barker is Head of Specialist Distribution at Kiwibank.
First published Autumn 2018
Story by Brenda Ward
This article is intended as general information only. It does not take into account your financial situation and goals, and is not personalised advice. For advice about your particular circumstances, please see your financial adviser.
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