24 Aug 2017

Mary Holm on balancing debt and savings

From Afternoons with Jesse Mulligan, 2:24 pm on 24 August 2017
floating piggy bank

Photo: 123RF

Where should your money be going – to your credit card debt, mortgage or KiwiSaver account?

Mary Holm has some guidance.

Getting rid of high-interest credit card debt is always a terrific idea, Holm says.

“If you’ve got credit card debt, hire purchase debt or car loans – anything with a higher interest rate than a mortgage, the first thing you want to do is get rid of it.

“People that get into the habit of running up credit card debt, they’re going to retire with perhaps $100,000 less over their lifetime. It’s big money we’re talking about here.”

Effectively, paying off a credit card is equivalent to investing money at that same interest rate, she says.

“Paying down a 19 percent interest credit card improves your wealth as much as an investment giving you a 19 percent return, after fees and after taxes. What’s more, it’s like a zero-risk investment.”

If you’ve got credit card debt you’re paying 20 to 30 percent interest on and a mortgage you’re paying 5 to 6 percent interest on, moving your debt to the mortgage and converting high-interest debt into low-interest debt is advantageous, she says.

The downside is that adding to a 20-plus-year mortgage will give you longer-term debt.

“If you just let it add to the mortgage and pay it down over the next 20 or 30 years, then you’ll probably pay more total interest on it because you’ve borrowed it for much longer.”

Once you’ve added it to the mortgage, pay that money off as fast as you can. Banks will usually let you do this, she says.

“If there are penalties for paying it off earlier, then once your term is up you make some of your mortgage a floating rate mortgage – so you’ve got a fixed mortgage but part of it floating. On the floating one you can pay it back as fast as you like without any penalties.”

Contributing to KiwiSaver is a excellent deal for most people, she says.

“If you’re earning $60,000 your money is almost exactly doubled, if you’re earning less than that it’s more than doubled.

"For someone earning $20,000, it’s multiplied by 2.3."

If your employer takes their KiwiSaver contribution out of your pay (which they’re legally able to do in a process called ‘total remuneration’) it’s still worth your while because you’ll get the government tax credit contribution to your KiwiSaver account every year, Holm says.

And KiwiSaver also allows you to diversify.

“If you’re paying down your mortgage furiously all of your investment is going into that one single property, whereas if you're in KiwiSaver you’ve got money in the sharemarket, in the bond market, in other markets as well. And that gives you a much better spread, it reduces your total risk.”

And it's the obvious best place to save for a first home, Holm says.

“You can take your money out and the government’s money out – everything but $1000 out. That includes money you wouldn't have had if you weren’t saving in KiwiSaver to put into the home.”

She says be sure to find out whether you qualify for a government housing grant.

“As long as you’ve got not too much income and are buying a fairly cheap house, then you can get $5000 if you’ve been in [KiwiSaver] for five years or more, $3000 if you’ve been 3, $4000 for 4… If you're a couple you can get 5K each as long as you both qualify.”

If you’re buying a newly built house you will get double that – “so a couple can get a $20,000 gift from you and me and all the rest of the taxpayers towards buying a first home.”

Many people don’t realise that if the government deems you to be in the same position as a first home-buyer you may also qualify for a grant to buy a house, Holm says.

These grants can help people who've been through bankruptcy or a marriage breakup and don't currently own a house or have a lot of assets.

For further information, Mary Holm recommends sorted.org.nz and the Housing New Zealand website.

She discusses money matters with Jesse Mulligan every second Thursday. Check out previous episodes here.