Prepare for Rising Mortgage Interest Rates

Prepare for Rising Mortgage Interest Rates

Inflation is on the rise and this often signals an increase in interest rates. The rate of inflation for the three months ended March, 2017 was 1%, which lifted the annual rate to 2.2% – the highest it has been for about six years. However, much of this increase was due to food and energy prices which are notoriously volatile. These are usually excluded in measuring what is termed core inflation, which is the long term trend in prices. So while prices are rising, it is still likely that the Official Cash Rate (OCR) will not change until next year.

That said, the trend for mortgage interest rates is up. The OCR is just one factor which impacts on mortgage interest rates. Mortgage lenders borrow money offshore and rising interest rates overseas will have an impact, as well as ongoing high demand for mortgage lending. While many people fix their mortgages, those who fixed when interest rates were at their lowest point will be facing an interest rate reset soon. It is time to prepare for increases in mortgage repayments. Work out what new repayments will be by using mortgage calculators that are available on most bank websites. One way to prepare is to voluntarily increase your mortgage repayments now to close to what they will be at the higher interest rate,  if can do this without penalty. This will allow you to get used to higher payments while also reducing the size of your mortgage. If you can’t see a way of making increased payments, you may need to talk to your lender about extending the term of your mortgage or converting your mortgage to interest-only for  a period of time. These are last resort options, as it is best to pay off your mortgage as soon as possible.

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Home Buying Mistakes

Home Buying Mistakes

The fear of missing out is continuing to fuel the property market. Buying in a heated market can lead to impulsive decisions with negative financial consequences. Here are the top five mistakes people make when borrowing money to buy a house:

Relying on the lender’s analysis of how much you can borrow

The focus of the lender is on whether they are going to get their money back rather than on what is best for you. Applying most of your available financial resources to buying a new home may or may not be the best decision for your long term future even if you are able to afford the repayments.

Ignoring the possibility of rising interest rates

Low interest rates mean low loan repayments and potentially the ability to borrow more. Bear in mind that borrowing up to the maximum you can afford now means that when interest rates eventually increase, loan repayments may become unaffordable.

Not setting aside an emergency fund

If all your spare funds are tied up in the house, there is nothing to come and go on if you get hit with an unexpected expense or a sudden reduction in your income.

Underinsuring your house and yourself

Avoid underinsuring by getting a valuation done for insurance purposes. This is different than a market valuation that might be done at the time of purchase and will take into account additional factors such as landscaping features and demolition costs. Taking on an increased level of debt should also trigger a review of your life and income protection insurance.

Treating your house as an investment

From a strictly financial point of view, it makes sense to live in the lowest value house you feel comfortable living in while building up an investment portfolio, which may include other property.

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Health Insurance for Retirees

Health Insurance for Retirees

Health insurance is a popular product, with around 30% of the population having cover, often through a workplace scheme. However, there is a high cancellation rate amongst retirees due to the big increase in premiums as you get older. After paying premiums for some years, often without a claim, is it wise to cancel health insurance just at the age when you are most likely to need it? Premiums are higher in old age for good reason – there is a high probability of claim. Without insurance, you will be reliant on the public health system, which may mean going on a waiting list for health care. Insurance is a means by which we pass financial risk onto someone else. As with all insurance cover, there are three questions to ask.

  1. What are the risks? You may have a known existing health condition which is likely to get worse or lead to other problems. There may be a family history of certain medical conditions.
  2. What are the consequences of those risks? There may be loss of enjoyment of life resulting from non-urgent conditions that put you on a long waiting list. If you are still working you may also suffer loss of income through illness.
  3. How much risk are you willing to accept? If you have significant financial assets, it may be possible for you to cover private health care costs yourself without affecting your standard of living. Alternatively, you might choose to have an excess on your policy so you share the risk with your insurer and pay a lower premium.

There are many retirees with low incomes for whom health insurance is simply not affordable. Their best strategy is to live a healthy, active lifestyle and keep savings on hand for unexpected health care costs.

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Money for Retirement

Money for Retirement

Calculating how much money you will need in retirement is no easy task. With life expectancies around 90, there is a period of 20 to 30 years to plan for.  A simple planning framework can help get around some of the uncertainties to make it easier to work out how much money you will need.

There are three types of outgoings you need to plan for:

Money for daily living expenses. These are expenses that occur on a regular basis and predictable, such as food, petrol, rates, insurance, power, phone, clothing etc. NZ Superannuation (around $30,000 for couples and $20,000 for singles) will barely cover these costs but will not usually be enough to cover additional accommodation costs such as rent or a mortgage. Additional income from part time work or investments will give you a better standard of living.

Lump sum expenses. These are larger expenses which occur infrequently such as the purchase of a new car, an overseas trip, home maintenance and renovations, and large medical or dental bills. The easiest way to plan ahead for these is to break your expected retirement timeframe into shorter periods of say ten years. Generally, the first ten years is when you are likely to be more active and wanting to travel. The second ten years is the time when home maintenance is likely to be required, while the final ten years is when you need to consider what kind of aged care you may need – such as moving to a retirement village or paying someone to look after you. Typically, lump sum spending decreases over time.

Bequests. If you would like to leave a sum of money for family or for a charitable purpose, set these funds aside at the beginning of your retirement in a long term investment portfolio.

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Your Pre-Retirement Checklist

Your Pre-Retirement Checklist

Retirement is not what it used to be. There are many options for making the transition from full time work to being fully retired, ranging from early retirement to late retirement or a gradual shift through working part-time or choosing a less stressful job. Along with all these choices comes the dilemma of when and how to retire. It can be a nervous time because it is not always easy to get back into the workforce once you have left. So before you take the big leap, here are some things to consider:

  • What kind of retirement do you want and how much will it cost? Do a budget for weekly living expenses and big one-off expenses like travel and replacing your car.
  • Consider what your income will be, taking into account NZ Superannuation, other pensions, other Government benefits and any part-time work.
  • Calculate how big your retirement nest egg will need to be to finance your retirement lifestyle. There is a good retirement calculator at sorted.org.nz.
  • Review your current financial situation. Have you paid off all debt? Do you have a well thought through investment strategy that will enable you to achieve your retirement goals? Do you have some cash on hand as well as longer term investments? Have your insurance policies been reviewed?
  • Do a ‘dry run’. Try living for a few months on what your retirement income will be and see how it feels. Not only will this allow you to see how tolerable your retirement lifestyle will be; it will also allow you to save a bit more.
  • Do your financial housekeeping. Make sure your Will is up to date, set up Enduring Powers of Attorney and ensure all your important financial records are stored tidily and safely.

Now you are ready to make your choice!

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Traps for KiwiSaver Home Buyers

Traps for KiwiSaver Home Buyers

One of the best incentives for young people to join KiwiSaver is the ability to withdraw funds for the purchase of a first home. All but $1,000 can be withdrawn providing certain criteria are met. You need to have been a KiwiSaver member for at least three years and you must not have owned property before unless special circumstances apply. A Home Start grant of up to $5000 per person for an existing house and $10,000 for a new house is also available if your income and the value of the house you are buying are within certain limits, and you may also be eligible for a Welcome Home Loan, for which you only need a 10% deposit.

There are some traps to watch out for. If you purchase or inherit a piece of land on which to build a house, after that time you will not be a first home owner and you will not be able to withdraw your KiwiSaver funds. Funds transferred into your KiwiSaver from an Australian superannuation scheme are not available to purchase a house. To be eligible for a Home Start grant, you need to have been a contributing member of KiwiSaver for three years or more. If you stop work, for example by going on maternity leave, you may need to keep up contributions at a reasonable level to stay eligible. This can be done by contributing $20 a week directly to your KiwiSaver fund. It can take up to a month to process a Home Start grant and it is best to apply for a pre-approval for both the Home Start grant and Welcome Home Loan to make sure you are eligible. The pre-approval will last for six months, giving you time to find house with the knowledge that you have finance available.

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Living on NZ Super

Living on NZ Super

New Zealand is finally catching up with the rest of the world and considering changing the age of eligibility for NZ Superannuation from 65 to 67. However, the four-year process to make this transition doesn’t start for another twenty years. In the interim, the number of pensioners is burgeoning and life expectancy is increasing.

When the old age pension was first introduced it was intended to allow people to enjoy a few short years of rest before the end of life. That was in the days when people didn’t often live past their 70’s. NZ Superannuation is set at 65% of the national average wage. That’s enough to cover usual weekly expenses, but not enough to allow money to be saved to replace a car, maintain a house or enjoy overseas holidays. While it is possible to live from week to week on a low income for a few years, increased life expectancy means that retirees now face spending perhaps 30 years or so on a meagre income. During that time, there are many unexpected or unavoidable expenses which cause huge financial stress.

Statistics show that around 40% of pensioners rely solely on NZ Superannuation for their retirement income, and for a further 20%, NZ Superannuation makes up 80% of their income. The prospect of living on such a low income for a long time is a daunting one. For those pensioners who are lucky enough to have a retirement nest egg, investment returns are low. The combination of low pensions, low rates of investment return and increased longevity means that the elderly are facing an increasing probability of living in poverty in the final years of life. It is no surprise that 40% of people aged 65 to 68, and 20% of people aged 70 to 74, are still working.

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What to Expect From Your Financial Adviser

What to Expect From Your Financial Adviser

Financial service providers are regulated by the Financial Markets Authority (FMA). Part of the FMA’s role is to educate consumers of financial services and for that reason they have released a checklist of things you can expect from your financial services provider. Providers include financial advisers as well as KiwiSaver providers, fund managers and superannuation schemes. When dealing with a licensed provider, the FMA believes you are entitled to:

Competence. Your adviser should have the skills and experience to offer you the right product or service for your needs and should tell you if there are any limits to what they can provide and why.

Be treated honestly and fairly. Your adviser should balance their business with yours and tell you about any conflicts of interest, such as being paid a commission by a third party.

Be informed. Your adviser should help you understand your options and weigh up the pros and cons before you make a decision. They should keep in touch with you and help sort out any problems.

Know how much you are paying. Your adviser should tell you how much you will be paying now and in the future for their products and services.

Have problems and complaints dealt with properly. Your adviser should tell you how to make a complaint and be able to respond constructively. They also need to give you contact details for their dispute resolution scheme.

As a consumer of financial services, you need to make sure you ask the right questions to ensure you are receiving the information and treatment that you are entitled to. If you don’t get the right answers, walk away. If you are an existing customer and feel your entitlements have been breached, you can make a complaint to the provider or to their dispute resolution scheme.

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Money Management for Newlyweds

Money Management for Newlyweds

Relationships aren’t like they used to be a generation or two ago. The path to a ceremony is a more gradual one, with couples typically living together beforehand and sharing expenses. Women, through both necessity and choice, continue to earn an income after marriage and are confident in managing their own money. The result is that young couples are increasingly managing their financial affairs separately. Making a life-long commitment should be a trigger to review how money is managed within a relationship. Over a lifetime, a degree of financial interdependency can arise, especially if there are children. The ideal outcome is that each partner’s needs and wants are both respected and protected and money is managed effectively within the relationship to achieve common goals.

It is very common for partners to feel differently about how much money should be spent now rather than saved to spend later and how much money should be kept on hand as a slush fund in case of unexpected expenses. Some people are uncomfortable using credit cards, while others feel nervous about having debt. To avoid ongoing arguments about money, there needs to be agreement on these money basics. It is very important that each partner continues to have access to money of their own. There are two ways to achieve this. Incomes can be paid into a single account for joint expenses and goals with a transfer to each partner for personal spending. Alternatively, incomes can be paid to separate accounts with a transfer to a joint account for expenses and goals. It’s really a matter of deciding how much of each respective income should be used for joint purposes. In a healthy, committed relationship, allocating a high percentage of income to joint expenses and goals enables money to be used more effectively.

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Choosing When to Spend

Choosing When to Spend

There is nothing wrong with spending money. In fact money has no value unless it is spent. As they say, you can’t take it with you, so if you don’t spend your money during your lifetime, then someone else (the beneficiaries of your estate) will get the pleasure of spending it. During your working life and retirement, money will come to you on a regular basis unless something bad happens, such as the loss of your job, a business failure, or a severe health problem. How you fare in life financially will be determined by the timeframe in which you choose to spend the money you receive. As you receive money, you can choose whether to spend it now or later. If you choose to spend some later, you can choose how much later you wish to spend it.

Choosing to spend money later is called saving. Unfortunately, the word ‘saving’ has become associated with depriving yourself of enjoyment of life. The way to view saving is that in fact it increases your enjoyment of life – but in the future rather than now. There are three types of saving. Firstly, there is the saving you need to do to cover unexpected expenses and loss of income. Next, there is saving for big, one-off planned expenses such as holidays, a new car or home maintenance. These expenses occur in the medium term (the next five years or so). Then there is the saving you need to do for the long term, including retirement.

The art of managing your financial affairs prudently is to be able to correctly apportion your income into these different categories; money to be spent now, money for unexpected expenses and events, money for spending in the medium term, and money for spending in the long term.

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