Mary Holm: Freeing up wealth when your savings have dried up

OPINION:

Q: We are fortunate enough to own our own home and a small holiday home, both mortgage-free. Estimated value $2 million and $600,000.

My partner just turned 65 and is on NZ Super. I am 63, have terminal cancer and I’m on Supported Living.

Our problem is we have eaten through the savings over the last few years due to reduced income.

I would love to keep the holiday home a little longer to build memories with my daughter and grandchildren. Also for my own mental health. Even better, leave them the property to continue building memories where we all love spending time together.

Is it feasible or even possible to get an interest-only loan up to $100,000 to enable this to happen for the next five years, rather than give up on the dream now?

The loan would be used for essential repairs and interest payments, outside what we can meet on reduced income. I would prefer to progressively draw down the loan rather than get it all upfront, to keep interest cost down. And payable early if circumstances changed.

We do have life insurance if the inevitable occurred within the next five years. It’s lower than it was as we made an earlier terminal illness claim on mine and used it to repay our mortgage in 2016. Outliving your diagnosis has a downside financially.

This would give me time to come to terms with having to sell something I worked very hard to achieve, and reduce the feeling it was all for nothing. Is this foolhardy or worth consideration?

A: There’s a way to make this work. You are a fairly wealthy couple, with your two properties. It’s just a matter of freeing up some of that wealth.

I suggest you get a reverse mortgage on your home. There are no regular payments, you can gradually increase your loan as you need the money, and you can repay all or part of the loan at any time.

Reverse mortgages are usually repaid when the house is sold, or the owners move into long-term care or die. If you move in the meantime, you can often transfer the loan to the new property.

The loan would compound over the years. And usually I warn people against taking out a reverse mortgage in their sixties, because the compounding might continue for several decades. Interest rates are higher than on ordinary mortgages, and with rates rising, the loan would grow fast.

But with a $2m property you’ve got wriggle room.

For example, the reverse mortgage calculator on Heartland Bank’s website says you might be able to borrow more than $400,000.

If you go with just $100,000, the loan would grow to nearly $690,000 in 30 years at the current interest rate of 6.45 per cent. But your house would be worth more than $4.8mby then, if it grows by 3 per cent a year.

What if we raise the interest rate to 9 per cent and reduce the house price growth to just 2 per cent — because who knows what the future holds?

Your loan would grow to nearly $1.5m, but your house would be worth $3.6m, so there’s still plenty of leeway. You could actually borrow $200,000, which would double your loan to nearly $3m, and you’d still be okay, even under our conservative assumptions.

Heartland and SBS Bank are the two main providers of reverse mortgages.

You’re going through some hard times. Let’s lighten them with many more family days at the bach.

Giving it away

Q: Our problem is different from most of your correspondents.

We married fairly young — my wife has always been the homemaker — and as we worked hard I gave her some property to give her income for the work she provided to the family.

We now have two children, three grandchildren and seven great-grandchildren. We have saved all our lives — no inheritance — and have cash and assets of close to $6 million.

Our two children have done very well in life. They have substantial businesses and no need for money. Our three grandchildren are smart. All have degrees in law and are married to professionals. They have no need for cash either.

Our problem: we would like to distribute some help to the community. We feel there are too many people feeding on the gravy train, clipping the ticket on the way to the bank. Can you assist to a direct donation to a worthy New Zealand cause?

A: This is not as simple as it seems.

“Giving can become unstuck when people give and then are horrified by the experience for all sorts of reasons — some completely off the wall, some completely reasonable — but which could have been avoided through a better process up front,” says a friend of mine with wide experience working with charities and donors.

“The bigger the money, the greater the fallout for all parties can be. Of course, only engage with charitable organisations registered with Charity Services, which is part of Internal Affairs.”

She recommends that you check out Philanthropy NZ, at https://philanthropy.org.nz/personal-giving. There you’ll find questions to ask yourselves, and the various ways you can make donations.

You can give directly to an organisation or more indirectly, for example through a community foundation. “These suit some people because they let the donor stand back and contribute to an intermediary, which manages and directs their funding. CFs are established with particular beneficiary communities in mind. Most have a primary geographical focus (e.g. to support need in the South Auckland area), then a subsidiary focus (youth, arts, etc.)

“The advantages of channelling money through a community foundation are that the donor can keep a distance, and the foundation (probably — always check) has well established accountability, funds distribution and reporting procedures.”

You should expect some of your money to go to admin. “I’d be wary of any charity that claims that every cent of their money will go to the beneficiaries. There are guidelines about what’s reasonable that I expect Philanthropy NZ can provide or direct donors to,” says my friend.

On choosing a cause, “I would be asking them to consider if they are drawn in any particular direction arising out of their own personal life experiences. Do they want to reward/celebrate excellence? Fund innovation? Are they more attracted to addressing inequity … helping the ‘down-trodden’ or disadvantaged in some way?

“My guess from the letter is that, whichever causes they chose, these people will want to assure themselves that the funds are spent as carefully as they themselves have practised over many years. That can be through direct oversight or via a trusted intermediary (trustees they appoint if they decide to establish their own trust, for example).

She adds, “even though inheritance isn’t an issue, it would be wise for everyone in the family to be informed and aware of what the parents choose to do. What if one son or daughter lost all their money for whatever reason and asked for help from the parents?

“They need to get legal and accountant advice of course, but I’d do that once they’ve given some upfront consideration to their desires.” Don’t just go with a charity your lawyer recommends. “It cheapens the whole philanthropic process by ignoring peoples’ values, beliefs and comfort level around types of giving.

“Philanthropy is emotionally driven for most people, it’s not like other types of expenditure. Having said that, though, I have met donors who just want to get on and do it, then forget about it. Motivations for giving vary. As do donors’ views on having their gifts made public — there can be various degrees of this so it’s not all or nothing.” Plenty of food for thought there. And good on you.

KiwiSaver or the bank?

Q: I am 75 and have $70,000 in a conservative KiwiSaver fund. I will need some of this over the next few years. As the fees and losses for KiwiSaver are both substantial, is it better for me to withdraw all KiwiSaver funds and invest them in term deposits?

A: Conservative funds — in and out of KiwiSaver — are perhaps misnamed. Between 10 and 35 per cent of their investments are growth assets — usually shares but sometimes also commercial property.

With up to a third of their investments in these riskier assets, a conservative fund’s unit price will drop noticeably when the sharemarket is performing badly. In time, the prices will recover, and over the long term a fund with more shares will probably perform better than one with fewer shares.

But if you’re planning to spend the money within about three years, or you just can’t cope with downturns, consider moving into the lowest-risk category, defensive funds. Less than 10 per cent of their investments are growth assets, and some — called cash funds — usually hold no growth assets. Cash fund balances shouldn’t ever fall noticeably.

But there are still fees in all funds. Would you be better off in bank term deposits? Returns on cash funds are probably a bit higher than on term deposits. And you can withdraw your money whenever you want to, although it may take a few days.

It’s always wise to check KiwiSaver fees. The Smart Investor tool on sorted.org.nz lets you compare the fees on your fund with others in the same risk group. Consider moving to a low-fee provider. Just ask the new provider, and they will move your money.

Dividends on dividends

Q: I read that Genesis Energy is introducing dividend reinvestment. Is this a good thing to do with shares? It would mean no brokerage fees to obtain more shares, but it is not as easy to understand like compounding interest.

A: Generally, it’s good to sign up for a dividend reinvestment plan. Instead of receiving a cash dividend, you get extra shares bought with that cash and added to your shareholding in the company.

I suspect many people whose cash dividends are deposited into their bank accounts don’t do anything specifically with that money — especially if it’s a relatively small amount. It’s just spent on groceries. But with dividend reinvestment, over the years the small amounts add up to something significant.

As you say, Mercury Energy has just announced a dividend reinvestment plan. It will be interesting to see how many of its 75,000 shareholders take part. Many of them bought their shares in 2013 when the National Government sold off 49 per cent of the company, then called Mighty River Power.

Other companies that offer them, according to the NZ Shareholders’ Association, include Arvida, Auckland Airport, Chorus, Contact Energy, Fletcher Building, Fonterra, Freightways, Heartland Bank, Infratil, Meridian and Spark.

From the company’s point of view, dividend reinvestment lets them keep more of their profits. They might use the money to expand, or to pay down debt.

From the shareholders’ side, it’s an easy way to grow your shareholding and, as you say, you don’t pay brokerage. It works rather like compound interest, but turbocharged. The number of shares you own gradually increases but also, with a bit of luck, the value of each share increases.

Sometimes, too, the company offers you the shares at a small discount. On its upcoming dividend, Mercury Energy is offering a 2.5 per cent discount from the market price, although that may not apply to future dividends.

Another advantage of a dividend reinvestment plan is that you benefit from what’s called dollar cost averaging. For a given dividend, you’ll receive more shares when the price is down, and fewer when it’s up. So your average share price will be lower than the average market price.

However, these plans are not for everyone. Obviously, if you are living on dividend income, perhaps in retirement, you’ll want to keep receiving the cash.

There’s another, subtler issue too. If you hold shares in just one or a few companies, and they are a major portion of your long-term savings, reinvesting dividends further concentrates your share holdings. That’s risky. It’s wiser to hold many different shares.

You would probably be better to take the dividends in cash and buy shares in another company By the way, taxes are unchanged under a dividend reinvestment plan.

– 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 [email protected] 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.

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