Personal Finance

  • We update our comparison of bonus saver interest rates and compare them and their features to term deposit offers

    With interest rates falling for savers, are you better off just using a Bonus Saver account?

    When we last looked at this in January, they paid an average of 4.12% (4.01% by the main banks). Today they pay just 3.59%, 3.48% on average by the main banks.

    The -53 basis points (bps) drop basically reflects the fall in the Official Cash Rate (OCR) over the period.

    Over the same period the average one year term deposit interest rate has fallen -61 bps to 3.84%.

    Lower rates are likely. When the Reserve Bank does its next Monetary Policy Statement review on September 10 another -25 bps OCR cut is expected taking it to 2.75%. Bonus saver interest rate offers will probably fall in unison. Recent history shows that term deposit offers reduce more gradually and relentlessly and the reductions end up more than for Bonus Savers over similar periods.

    Bonus saver accounts pay a premium interest rate if you add to them each month and forsake withdrawals.

    They are ideal for building savings for a specific goal such as a house or car deposit because you can withdraw them at call or a minimal notice period.

    The are also effective because they still pay more than CPI inflation which means your savings grow in real terms. But the advantage is getting narrower.

    And there are catches.

    First up, the IRD takes tax from your interest monthly. Even though interest is credited monthly, it turns out to be much less that you might otherwise assume because of the withholding tax deductions. Use our handy deposit calculator to see this effect.

    And secondly, the penalty for not meeting the 'bonus terms' is usually loss of almost all your interest. The Kiwibank product is not as fierce in this regard, but neither does it reward you as well for meeting the terms.

    There are also surprising benefits. The interest rate paid is often better than for longer fixed term deposits.

    And if you are starting out you can get a much better rate with a low balance saved.

    But there is also risk.

    Banks want you to choose the 'bonus saver' option because when they reduce interest rates they can reduce what they pay you immediately. This is not so with a term deposit where they are committed to the original interest rate until the end of the term. These days, interest rate offers only seem to go down, so it is an important consideration. If you are needing to save to about a year or longer you will want to think about this aspect.

    And if you choose choose to go the term deposit way you should also think about a term PIE deposit as you can then get an embellishment to the after tax return - that is, many people will get a lower tax rate than for a standard term deposit.

    We recommend you 'do the numbers' on an after-tax basis and the best way to do that is to use our deposit calculator.

    Here are the current bonus saver rates on offer by banks today:

    (These rates are taken from our comparison page here.)

    Bonus savers compared Minimum
    Balance
    Base
    Rate
    +
    Bonus
    interest
    +
    Potential
    Rate
    =
    nearest
    equiv.
    Term
    Deposit
    September 1, 2015
        req'd % % % %
                   
    ANZ Serious Saver $1 0.10 3.65 3.75 1 year 3.70
    ASB Savings Plus $1 0.75 2.90 3.65 1 year 3.70
    BNZ Rapid Save $1 0.10 3.55 3.65 9 mths 3.65
    Kiwibank On-line Call* $2,000 1.75 1.00 2.75 4 mths 3.60
    Westpac Online bonus $1 0.10 3.50 3.60 1 year 3.55
                   
    Co-operative Bank Step Saver $1 0.50 3.20 3.70 1 year 3.70
    RaboDirect Premium Saver $1 1.00 2.90 3.90 1 year 3.80
    SBS Bank Incentive Saver $1 0.50 3.25 3.75 1 year 3.80

    * Kiwibank also offers a Notice Saver account where you can earn 3.30% if you give them at least 32 days notice to withdraw and 3.75% if you give them 90 days notice to withdraw. Kiwibank Notice Saver accounts require a minimum balance of $2,000 for these rates to become effective.

    TSB Bank deals with bonus interest differently to other banks. It's core everyday offer is its Premier account. This has a tiered interest rate offer that pays 2.50% for balances of less than $20,000, 2.75% of the portion of the balance from $20,000 to $35,000, 3.00% on the balance from $35,000 to $50,000, 3.50% on the balance from $50,000 to $100,000 and 3.90% on the portion over $100,000.

    Even if you had $100,000 in the account all year you would not earn 3.90% gross from TSB Bank. You would earn $3,112.50 or 3.11% pa before tax. And they only pay this interest once a year at March 31.

  • QV says high migration and lack of supply have pushed Auckland house prices up 20.4% in last 12 months

    Average home values across the country rose by 11.3% in the 12 months to August and 20.4% in Auckland, according to the latest figures from Quotable Value (QV).

    That pushed the average home's value nationwide to $534,331, while in Auckland it surged to $874,851.

    "Values in Auckland continue to rise rapidly at the fastest rate since mid-2004 with the market there continuing to be driven by high net migration and lack of supply," QV national spokesperson Andrea Rush said.

    Within the Auckland region the biggest rise in average values was in Papakura where they rose by 25.5% in the year to August, followed by north west Manukau at 24.9% and central Manukau at 24.6%. (For full regional and district values see chart below). 

    "The upward trend in values seen in upper North Island centres near Auckland is also continuing, with the Hamilton market now accelerating and values in Tauranga, Whangarei, Hastings and the Hauraki District continuing to rise.

    "The new rules set to come in over the next couple of months requiring a 30% deposit for investment property in the Auckland region and a softening of the LVR rules for the regions may also be a factor incentivising this activity," she said.

    In Hamilton the average dwelling value was $400,811 in August, up 10.3% compared to a year earlier and in Tauranga it was $493,054, up 8.6% compared to a year earlier. However the Wellington and Christchurch markets remain relatively flat, with the Wellington region's average value up just 2.4% for the year to $546,914 in August, while in Christchurch it rose 3.1% for the year to $476,317.

    See below for the average housing values in all parts of the country and their movement over the last 12 months and interactive graphs showing the movement of average values in all regions since June 1974.

    QV House Price Index August 2015

    Territorial authority Average current value 12 month change % 3 month change %
    Auckland Region 874,851 20.40% 5.6%
    Wellington Region 457,266 1.70% -0.1%
    Main Urban Areas 637,912 13.90% 4.4%
    Total NZ 534,331 11.30% 3.9%
           
    Far North 318,869 6.10% 5.1%
    Whangarei 353,402 4.60% 1.0%
    Kaipara 363,663 9.90% 6.0%
    Auckland - Rodney 752,114 9.70% 4.2%
    Rodney - Hibiscus Coast 742,137 8.40% 3.9%
    Rodney - North 763,926 10.80% 4.5%
    Auckland - North Shore 1,030,064 20.10% 5.8%
    North Shore - Coastal 1,174,413 18.40% 5.5%
    North Shore - Onewa 845,538 24.60% 7.2%
    North Shore - North Harbour 979,487 18.30% 4.9%
    Auckland - Waitakere 703,242 23.90% 7.1%
    Auckland - City 1,032,460 20.40% 4.1%
    Auckland City - Central 889,787 17.30% 3.9%
    Auckland_City - East 1,282,105 19.90% 3.3%
    Auckland City - South 945,957 23.50% 5.0%
    Auckland City - Islands 873,774 12.10% 4.6%
    Auckland - Manukau 738,037 22.00% 7.1%
    Manukau - East 956,068 18.70% 5.6%
    Manukau - Central 575,372 24.60% 9.8%
    Manukau - North West 620,426 24.90% 7.6%
    Auckland - Papakura 546,791 25.50% 8.0%
    Auckland - Franklin 546,187 16.60% 6.6%
    Thames Coromandel 526,962 4.30% 1.0%
    Hauraki 263,593 16.00% 2.8%
    Waikato 309,819 9.00% 3.8%
    Matamata Piako 286,896 2.30% 1.0%
    Hamilton 400,811 10.30% 5.7%
    Hamilton - North East 508,304 10.80% 5.6%
    Hamilton - Central & North West 373,562 10.10% 5.6%
    Hamilton - South East 368,178 10.70% 6.2%
    Hamilton - South West 352,986 10.60% 6.3%
    Waipa 362,249 6.60% 1.5%
    Otorohanga N/A N/A N/A
    South Waikato 134,552 6.50% 4.0%
    Waitomo N/A N/A N/A
    Taupo 353,748 6.20% 2.5%
    Western BOP 441,642 7.20% 4.0%
    Tauranga 493,054 8.60% 2.6%
    Rotorua 273,754 0.90% -1.1%
    Whakatane 299,398 1.50% -0.1%
    Kawerau 101,670 -6.10% -2.0%
    Opotiki 203,767 -6.60% -3.4%
    Gisborne 229,039 -0.80% 1.6%
    Wairoa 141,757 -5.20% -5.2%
    Hastings 312,185 5.90% 1.7%
    Napier 332,720 2.40% 1.2%
    Central Hawkes Bay 204,394 -3.40% -5.7%
    New Plymouth 361,993 3.60% 0.9%
    Stratford 201,891 -0.80% -2.0%
    South Taranaki 183,734 2.20% 0.1%
    Ruapehu 127,588 -6.70% -6.0%
    Wanganui 181,207 1.60% -0.6%
    Rangitikei 141,893 -1.90% 0.0%
    Manawatu 244,562 1.40% 1.3%
    Palmerston North 294,294 3.60% 1.3%
    Tararua 149,455 0.60% -2.2%
    Horowhenua 207,073 2.30% -0.6%
    Kapiti Coast 382,257 2.60% 0.4%
    Porirua 380,751 2.10% -0.4%
    Upper Hutt 334,954 -0.20% -0.7%
    Hutt 373,074 1.30% -0.8%
    Wellington 546,914 2.40% 0.3%
    Wellington - Central & South 554,268 2.00% 0.3%
    Wellington - East 593,768 3.30% 0.5%
    Wellington - North 481,129 2.10% 1.1%
    Wellington - West 626,611 3.30% -0.3%
    Masterton 233,416 -2.70% -4.1%
    Carterton 271,064 1.10% 2.0%
    South Wairarapa 301,264 -1.80% -1.5%
    Tasman 424,510 2.90% 0.8%
    Nelson 415,682 3.20% 0.8%
    Marlborough 353,157 1.90% -0.2%
    Kaikoura N/A N/A N/A
    Buller 191,486 -7.60% -8.3%
    Grey 221,101 3.00% 2.5%
    Westland 234,359 1.00% 3.8%
    Hurunui 356,025 4.00% 2.1%
    Waimakariri 417,430 3.00% 0.4%
    Christchurch 476,317 3.10% 0.4%
    Christchurch - East 361,162 5.00% 1.6%
    Christchurch - Hills 641,937 3.00% -1.0%
    Christchurch - Central & North 557,121 3.00% 0.2%
    Christchurch - Southwest 454,205 2.40% 0.2%
    Christchurch - Banks Peninsula 490,844 2.00% 1.3%
    Selwyn 516,716 2.20% -0.7%
    Ashburton 327,010 3.60% -0.4%
    Timaru 307,866 9.20% 2.3%
    MacKenzie 304,367 7.20% -0.9%
    Waimate 198,610 1.20% -4.9%
    Waitaki 229,153 4.20% 0.7%
    Central Otago 331,673 2.10% 1.6%
    Queenstown Lakes 731,093 9.50% 1.9%
    Dunedin 299,508 3.70% 2.1%
    Dunedin - Central & North 310,933 4.80% 2.8%
    Dunedin - Peninsular & Coastal 275,543 3.90% 0.5%
    Dunedin - South 284,394 1.60% 1.8%
    Dunedin - Taieri 309,753 3.50% 1.4%
    Clutha 165,313 -0.50% -1.8%
    Southland 213,474 3.80% 1.4%
    Gore 186,950 0.40% 2.9%
    Invercargill 207,960 1.30% -0.2%

  • Paul Goldsmith says banks are capable of setting their own competitive credit card rates, despite Aussie authorities pulling banks up for overcharging customers

    The Government’s happy to continue leaving New Zealand banks to set their own credit card interest rates, despite the Reserve Bank of Australia (RBA) staging an intervention on the issue.

    The RBA last week made a submission to an Australian Senate inquiry into credit cards, pulling banks up for increasing credit card interest rates even though their cost of funds has been falling since the Global Financial Crisis.

    Australian credit card interest rates are at similar levels to those in New Zealand where neither the Commission Commission or Reserve Bank of New Zealand is mandated to follow the RBA's lead. And nor is Minister of Commerce and Consumer Affairs Paul Goldsmith about to get involved.

    “We watch what goes on in Australia with interest, but ultimately, what are the levers that you pull? My sense at the moment is there’s no strong call for any significant intervention in this area," Paul Goldsmith told interest.co.nz.

    “Ultimately it’s for the banks themselves to explain the interest rates they charge, and they’ll be under competition pressure if a gap emerges over an extended period of time between the OCR and the credit card rate," Goldsmith said.

    Reserve Bank figures show a total of $6.147 billion of credit card lending outstanding as of the end of June, with $4.013 billion of this bearing interest. The weighted average interest rate on personal interest bearing lending was 17.6%.

    9 percentage points

    The RBA said the interest rate on bank credit card portfolios is about 9 percentage points above banks' cost of funds, while the spread for those borrowers who are paying interest is about 14¾ percentage points.

    “These spreads rose significantly in the global financial crisis (when funding rates fell significantly but credit card rates fell by much less) and have remained at that level or drifted modestly higher since," the RBA said.

    Furthermore, when the RBA cut official rates in February, Treasurer Joe Hockey said he expected rates on all credit products to fall “immediately”.

    “I expect the banks to pass these cuts on immediately… I also expect this to be passed through, particularly for small business owners and to be passed through for everyone that has a credit card. We expect this to cut through right across the spectrum of credit," Hockey said.

    Goldsmith has a different take, saying the Official Cash Rate (OCR) is one of many factors that influence credit card interest rates. He said banks also have to take a risk and rewards structure into account when setting rates.

    He said credit card interest rates aren’t volatile in the sense that they don’t move as fast as the OCR. (See a chart comparing rates and OCR changes over time here).

    Goldsmith: banks are competing & borrowers must behave responsibly

    Goldsmith is confident the Commerce Commission will intervene if it finds banks to be behaving anti-competitively.

    However he defends the banking sector, saying a “high-level” Treasury investigation done in 2013 and 2014, that's not publicly available, found there is reasonable competition in the sector.

    Goldsmith also said people need to take responsibility when borrowing money.

    “It’s a matter of consumers understanding what they’re up for in terms of credit card interest rates and I encourage people to be savvy about their debt and make sure they don’t expose themselves to high interest rate if they can avoid it.”

    He said the government has been focused on education and delivering financial literacy campaigns.

    78 years to pay off $2000 of credit card debt doing min. repayments

    The government has also beefed up consumer credit laws through the Credit Contracts and Consumer Finance Amendment Act 2014.

    The new rules, most of which took effect in June, focus on lender responsibility. Included is the introduction of minimum repayment warnings on credit card statements. However, last year's Credit Contracts and Financial Services Law Reform Act, to the chagrin of Labour and the Greens, stopped short of introducing interest rate caps. This was after Australia had set interest rate caps for payday lenders at 20% up front, and 4% monthly for the life of a loan.

    Meanwhile, this interest.co.nz calculator shows that if you borrow $2000 on an ANZ Standard MasterCard, and only make the minimum repayment of 2%, it’ll take you 16 years to repay your debt.

    Paying interest at the current rate of 20.95%, you will have racked up $2541 in interest, leaving you to pay a total of $4541 to get out of the red.

    If you use a BNZ American Express Classic Everyday card, it’ll take you over 25 years to repay your debt, while using a Westpac Standard MasterCard will take you a whopping 78 years, according to interest.co.nz's calculator.

    Goldsmith repeats a New Zealand Bankers’ Association’s line, that only between 1% and 3% of New Zealand credit card customers make the minimum repayment each month.

    He also pointed out half of credit card customers pay off their balances in full during the interest-free period, compared to about a third in the US and Australia.  

    Goldsmith concludes, “I think we’ve got good grounds for optimism around the way New Zealanders deal with their credit card debt. Yes, we’ve got to make sure there’s good competition in the system.

    “Ultimately it’s up to the banks to explain the interest rate that they’re putting on things. That’s as it should be.”

  • NZIER calls for govt to strengthen KiwiSaver scheme, to get ageing population diversifying investments beyond NZ property

    New Zealanders are being warned our retirement kitty is too heavily exposed to the domestic economy, so risks being drained if we suffer a major economic downturn.

    The New Zealand Institute of Economic Research (NZIER) says 95% of our private wealth in tied up in assets held here – mainly in the form of land and property.

    With the majority of our eggs in one basket, we could take a painful hit if we were to suffer from natural disasters or some other economic crisis.

    The NZIER report, ‘KiwiSaver and the wealth of New Zealanders’, explains there are two ways retired New Zealanders get an income; public financing through New Zealand Superannuation and private savings through KiwiSaver.

    The report’s lead write Aaron Drew says KiwiSaver has the most diversified exposure, as funds are invested overseas.

    NZ Super

    While NZ Superannuation has a diversified portfolio, he points out NZ Super is predominantly financed by tax revenues.  

    If we have lower levels of income growth, the government’s tax revenue decreases, as do its Super payments.

    Furthermore Drew says, “A poor period of performance or a large “shock” (e.g. another natural disaster or international financial crisis) could also be large enough that a government chooses to change entitlement to NZ Super to meet its fiscal constraints.

    “Even absent any such “shock”, or period of poor performance, there is nothing preventing a government from changing NZ Super’s parameters.”

    Private savings

    As for the private saving New Zealanders use to supplement their Super, Reserve Bank figures show 95% of these assets are held in New Zealand. Looking specifically at the financial assets New Zealanders have, 90% are held in New Zealand.

    Of all the assets on the New Zealand household balance sheet, 49% ($580.8 billion) are tied up in housing and land, 33% ($396.5 billion) in equity and investment funds including KiwiSaver, NZ Super Fund and ACC, 12% ($137.0 billion) in NZ registered bank and other deposits, and 7% ($84.8 billion) in other financial assets such as insurance reserves.

    Drew says, “Compared with many OECD countries, private wealth in New Zealand tends to be highly concentrated in New Zealand assets, in particular residential property”.

    So if property prices come off the high they’re on; the gains retirees may have been hoping to live off go.

    He sees a couple of headwinds slowing the property boom:

    “The fact that New Zealand’s population is ageing and many regions of New Zealand will face flat or declining population levels over the next few decades… reducing the demand for housing (particularly traditional family-sized homes).

    “The widely-held view that house prices in New Zealand are over-valued, particularly in Auckland given the decline in rental yields to very low levels (under 3% gross) and the large increase in house price-to-income ratios (from around 4 a decade ago to over 8).”

    Furthermore, Drew says if the Government stops pumping as much money into NZ Super, the wider economy and thus property prices will take a hit.

    He concludes, “Reliance on a single risky asset or country carries concentration risk and higher potential for poor outcomes compared to a more diversified portfolio”.

    At a national level, our retirement kitty is accordingly vulnerable.

    KiwiSaver

    Drew sees KiwiSaver is a solution to achieving the diversification we need.

    He says, “Most KiwiSaver accounts are broadly diversified portfolios of domestic and foreign assets, with the level of foreign assets (and expected long run returns) increasing as a portfolio’s risk profile is increased given the greater exposure to international equities.

    “As such, KiwiSaver is a mechanism to reduce the financing risk and achieve the benefits of portfolio diversification (a higher return per unit of risk). As KiwiSaver portfolio balances grow with time, this benefit will also rise.”

    Drew says New Zealand’s tax rules contribute towards this “home bias”, as they encourage people to invest in property, while KiwiSaver subsidies redirect asset allocations back to financial assets, particularly those abroad.

    Accordingly, he says the government should be doing what it can to attract people to the scheme.

    He says the $1000 kick start bonus on signing up to KiwiSaver, which the government did away with in the 2015 Budget, was a small cost in the bigger scheme of things.

    He criticizes the government for not taking a more forwarding-looking approach to KiwiSaver.

    From a fiscal perspective, he says “The eventual net tax take [on KiwiSaver fund earnings] will turn positive in favour of the Crown, in the same way the Government’s got more money out of the Super Fund than it’s put in”. See this interview with the NZ Super Fund CEO for more on this.

    Drew also says the $1000 kick start is a small cost compared to incentives, like on-going tax deductions, offered overseas.

    Since its inception in 2007, 2.5 million people have signed up to KiwiSaver, with 75% of those aged 18 to 64 being members. Before KiwiSaver only around 15% of the workforce were in occupational savings schemes and the number was declining.

  • Elizabeth Kerr looks at financial vision, how to get one and the downsides of navigating life’s spending/investment decisions without it

    By Elizabeth Kerr

    Righty, welcome back to another exciting week everyone.

    Please be seated and let's clasp our hands together and perform three deep ‘Ohms’, please.

    Ooohhmmmmmmmmmmmmm” – Ha! Just joking! I wouldn’t make you do that!!!

    This week I’m writing about your vision, but I don’t need you to light candles and get on all fours to find it.

    I’m talking about your financial vision – as in the yardstick you use to evaluate which spending opportunities you say yes or no to.

    This is different from goal setting. Goal setting is what other people do.

    No, if you’re interested in early retirement and financial independence, then you need to take it one step further than that. You need a VISION!!!

    A path

    Vision is the path between here in your present and your future. It gives your daily actions and habits some meaning and value.

    A financial vision is the way in which you see money and its purpose within your life.

    Why would anyone forgo spending money on something today if they didn’t have a financial vision for their future to keep them accountable?

    Why would you bother following a budget without a purpose?

    Why would you even bother working once you’ve got your non-negotiable needs met at all come to think of it?  

    Just as you need to have a vision for your life, and seeing as money facilitates life in this era, then you had better have a financial vision to go with it. Is part of the reason we are a country deep in personal debt we all work until mid-60s because few bother to establish for themselves a meaningful financial vision for otherwise?

    You see, there are so many spending choices we are presented with and investment paths you can take in your life. Having a vision gives you a template to evaluate all of these decisions by.

    Looking at options

    For example, say you want to reduce your working hours to part-time, but that will impact your vision of retiring in three years, then that’s a “no” to that idea obviously. Take a holiday or pay off your mortgage? Well, if early retirement in a debt free home is part of your vision then you can have all the holidays you want once that is done, so of course you are going to pay off your mortgage first. Invited to an overseas wedding but saving for a new house? Well, you’d better just send a card then. Vision clearly makes navigating your life’s spending decisions easier.  

    Additionally, with vision you become free from comparing yourself with others around you and their approval is no longer addictive. Comparison is a slippery slope to jealousy, which will take over and control your spending if you can’t redirect yourself back to your vision. Zoning in on what you don't have just makes it bigger in your brain and only someone with a sound vision can look jealousy dead in the face and say: "Bugger off. I'm good, thanks."

    Vision makes people appreciate what they have now. They enjoy their work, or at the very least are happy to endure it, and sometimes they go without stuff, because they know how their effort will make a tangible difference to their future.

    Let's take the old fable of the bricklayers as an example of what happens when you have vision and use it to motivate yourself.

    There were three brickies working on a wall. Someone asked them: “What are you doing?"

    “I’m laying bricks,” said the first.

    “I’m building a wall,” said the second.

    The last brickie exclaimed: “I’m building a great cathedral!”

    Who do you think is going to produce the best outcome and work the hardest? 

    Giving a reason

    A vision gives you a reason for why you get up and work each day, over and above just paying for the bills. It makes the wincing through mind-numbingly boring meetings, fluffing the egos of your boss, working a public holiday or participating in that stupid staff development day all the more bearable.

    If you don’t have a vision you will be handed one by expectation of those around you. Marketing and advertising professionals work really hard to give you a vision for their products, so without a vision of your own you’ll be suckered into the next feel-good tactic they use to manipulate you into buying what they’re selling. Add to that the overwhelming desire to conform and gain approval from your peers and you are just one free set of steak knives with your nutri-bullet away from the work-debt-work-die hamster wheel.  

    Can't seem to find a vision that gets you excited?   

    It is my personal belief that a financial vision is one of the most important steps in any early retirement or financial independence journey. All of your investment strategy hangs off your vision so its worth the time to define it. The person who has a vision for just a few extra hundys to top up their govt super would have a different investment strategy than the one wanting to lead a nomadic lifestyle travelling the world by luxury cruise.   

    A great place to start is by paying attention to what you enjoy doing the most with your time and ask yourself how you’d feel being able to do it whenever you like.

    It's your vision

    Maybe getting on to the golf course while it is nice and quiet mid-week takes your fancy, or never having an alarm clock again, lots of travel or roasting your own coffee beans on your own self-sustainable lifestyle block surrounded by a bunch of grandkids? It’s your vision so go crazy!!! Why not make it part of your conversation with your kids? Obviously your spouse has a say in it too, but you could ask your friends for ideas, read blogs from the heaps of really cool people sharing their early retirement stories online, and take notes from Escape to the Wild (wed Tv3 @ 7.30pm).

    Definitely take some time to holiday and rest with it, spend time with your God, basically get off your chuff and put the effort in to defining your vision because it is totally worth it!!! Don’t begin to think that how you live your life is detached from your financial vision because the two absolutely go hand in hand.

    Our modern world is full of things that can distract you so the most valuable thing in the world today is your attention. If you give your attention to defining your financial vision, which then feeds your lifestyle design, then it becomes easy to say no to spend or investment decisions which would detract from your vision.

    Once you have a vision make a point to revisit it every year, refine it and add to it and make sure your financial goals are working towards supporting it. A vision isn’t just a line in the sand – it is also a living testament, it is there to serve you and help you prioritise and organise your finances to get the most from your working hours.

    If you’re a bit stuck with your vision why not ask the amazing readers here for their thoughts, or email me at Elizabeth.Kerr@interest.co.nz.

  • RBNZ's Grant Spencer points out almost one-third of new borrowers take out mortgages equivalent to more than 6 times their incomes

    The Reserve Bank expects its move to make banks establish a new asset class for loans to residential property investors will see the average risk weight on investor loans increase by about six basis points.

    Deputy Governor Grant Spencer said this in his speech on property delivered in Auckland on Monday. The new asset class rules for loans to residential property investors commence for new lending from October 1 with banks having until October 1, 2016 to reclassify existing loans.

    "Loans in this asset class will attract a higher risk weighting than owner occupied mortgages, requiring banks to hold more capital against them. For banks following the standardised approach to capital adequacy, the average risk weight for investor loans will increase by about 6 percentage points. For the larger banks, that will be developing new internal risk models, our expectation is that average risk weights on investor mortgages will increase by a similar amount," Spencer said.

    Currently the so-called standardised banks including Kiwibank and the other NZ owned banks, have an average portfolio risk weight of just under 40% on home loans. The average risk weight for the big four Australian owned banks, who are all allowed to use the internal ratings based (IRB) approach, is around 30%. Spencer's comments suggest IRB banks will continue to have lower risk weights on residential mortgage loans than standardised banks after the new asset class takes effect, and thus hold less capital against such lending.

    In June a Reserve Bank spokesman told interest.co.nz the prudential regulator expected any impact from the new asset class on IRB banks' loan pricing and capital to be "quite modest and certainly no more than 15 to 25 basis points, if even that much."

    We can expect to see banks offering home loans for both owner-occupiers and investors, much like the current "specials" offered to borrowers with at least 20% equity, and the higher "standard" loan interest rates on offer now. See all banks' advertised, or carded, home loan interest rate offers here.

    Almost a third of people taking out new mortgages are borrowing more than 6x income

    Elsewhere in his speech Spencer highlighted NZ's high levels of household debt.

    "On average, household debt is running at around 155% of household income and 30% of new borrowers are taking on mortgages at greater than 6 times income. At these ratios, it would not take much of an increase in interest rates to substantially erode mortgage affordability," he said.

    Meanwhile, Spencer also said the Reserve Bank recently began collecting data on the debt to income ratios (DTI) of new borrowers.

    "Provisional data suggests that a much greater share of investors (than owner-occupiers) have high DTIs and that investor DTIs have been growing over the past year," Spencer said.

    See more on Spencer's speech here.

    *This story was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

  • Rapidly rising house prices in south Auckland wipe out benefits of lower interest rates for first home buyers

    A big jump in the lower quartile selling price of homes in south Auckland over the last two months more than wiped out the benefits of falling mortgage interest rates for first home buyer households, according to the interest.co.nz Home Loan Affordability Report for July.

    The report shows that the REINZ's lower quartile selling price of homes in the Auckland region has dropped from $616,500 in May to $602,000 in July, and that combined with recent falls in interest rates has improved affordability for first home buyers in most parts of the region.

    Between May and July the average bank interest rate on two year fixed rate mortgages dropped from 5.61% to 5.17% and that combined with the drop in the lower quartile selling price would have reduced the mortgage payments on a lower quartile priced home in the Auckland region from $821.83 a week in May to $767.89 in July, a saving of $53.94 a week for typical first home buyers.

    However not all parts of Auckland benefited from the lower interest rates.

    Although lower quartile selling prices in central Auckland, the North Shore and west Auckland were all lower in July, they kept rising strongly in south Auckland to hit an all time high of $580,100 in July, up from $541,400 in May, and that more than wiped out the benefit of lower mortgage interest rates, pushing weekly mortgage payments on a lower quartile priced home from $714.38 a week in May to $737.86 a week in July.

    Around the rest of the region, the weekly mortgage payments on a property purchased at July's lower quartile price would have been $739.50 in central Auckland (within the boundaries of the former Auckland City Council), $918.62 on the North Shore and $756.10 in west Auckland.

    Mortgage payments are considered affordable when they take up no more than 40% of a couple's take home pay (when both are working), and even with the latest falls in prices and interest rates, lower quartile priced homes throughout the Auckland region remain significantly unaffordable for typical first homes buyers, with mortgage payments taking up between 46.49% of their take home pay in central Auckland, to 56.09% on the North Shore and 50.32% on a region-wide basis.

    That suggests lower quartile dwelling prices in Auckland would need to fall by around 20% before they got back to the upper limit of the affordability range for first home buyers.

    Around the country housing remains affordable for first home buyers in all regions apart from Auckland, the Report found.

    The table below shows what the weekly mortgage payments on a lower quartile priced home in each region of the country would be, and how much they have changed over the last two years.

    The most expensive region outside of Auckland is Central Otago Lakes at $476.32 a week and the cheapest is Southland at $166.88 a week.

    That means the mortgage payments on a lower quartile priced house ranged from 11.64% of a first home buying couple's take home pay in Southland to 33.89% in Central Otago Lakes.

    In Wellington the mortgage payments on a lower quartile priced house would take up 23.52% of a a typical first home buying couple's net pay and in Canterbury the mortgage payments would take up 27.7% of their pay.

    So lower quartile priced housing remains affordable for typical first home buyers in all parts of the country except Auckland, where high prices are putting it of reach for first home buyers with average incomes.

    Weekly household Mortgage Payments on a Lower Quartile Priced Home
      July 2013 July 2014 May 2015 July 2015
             
    Northland $283.45 $301.35 $309.19 $303.24
    Auckland $576.62 $690.95 $821.83 $767.89
    Waikato/BoP $282.02 $307.02 $319.63 $315.72
    Hawkes Bay $230.41 $243.04 $249.81 $245.77
    Manawatu/Whanganui $208.69 $208.48 $186.68 $195.41
    Taranaki $274.99 $326.32 $275.28 $259.07
    Wellington $382.99 $400.63 $406.05 $367.56
    Nelson/Marlborough $359.33 $375.96 $362.84 $354.25
    Canterbury/Westland $367.75 $446.28 $429.08 $419.13
    Central Otago Lakes $435.39 $459.46 $496.19 $476.32
    Otago $234.12 $242.67 $226.97 $219.00
    Southland $170.13 $168.28 $159.56 $166.88
    --------- ---------- --------- --------- ---------
    All NZ $330.73 $366.00 $376.15 $357.82

    Home Loan Affordability Report methodology:

    The Home Loan Affordability Reports calculate the mortgage repayments on the REINZ's lower quartile selling price in each region, and calculate how much of a typical first home buying couple's income that would consume.

    The mortgage payments are based on a 25 year mortgage at the average of the major banks' average interest rates for a two year fixed rate loan, while typical first home buyers' after tax incomes in each region are based on the regional median income of a couple aged 25-29, which is taken from Statistics NZ's Linked Employer-Employee Data Survey.

    The deposits needed to buy a lower quartile-priced house in each region are calculated as the lesser of 20% of the purchase price, or the amount that would be accumulated if the couple saved 20% of their net income for four years, and earned interest at the average 90 day bank deposit rate.

    The July 2015 home loan affordability report for typical buyers (30-34 yrs) is here and this gives links to all regional reports.

    The July 2015 first home buyer affordability report (25-29 yrs) is here and this gives links to all regional reports.

  • Kiwis appear stuck with high credit card interest rates despite Aussie crack-down, with the Commerce Commission leaving them to market forces

    New Zealand regulators are continuing to turn a blind eye to our high credit card interest rates, despite the Reserve Bank of Australia (RBA) cracking down on the issue. 

    Even though New Zealand credit card interest rates are as high, if not higher, than Australian ones, the Commerce Commission - which oversees consumer credit laws - says it has no mandate to follow the RBA's lead.

    The RBA has pulled banks up for gouging millions of dollars from credit card holders, in its submission to a Senate inquiry into credit card interest rates.

    It asserts that even though it’s become cheaper for banks to fund themselves since the global financial crisis, they’re upping their credit card interest rates.

    So not only are they not passing RBA cash rate cuts onto their credit card holders, but they’re charging them more.

    The same thing is happening in New Zealand, but our regulators aren't doing anything about it.

    OCR down, interest rates up

    Credit card interest rates here have not fallen as much as they might have against the backdrop of the Official Cash Rate (OCR) falling to 3.00% now from a peak of 8.25% in 2008. 

    As displayed in the table below, standard credit card purchase rates sat at around 22% in 2008, and dropped to just under 20% between 2009 and 2014 when the OCR was between 2.50% and 3.50%.

    Just this year, credit card interest rates have been inching higher, up a percentage point to just under 21%, despite the OCR falling 50 basis points and being expected to continue its downward trend.

     

    Aug 08

    Aug 09

    Aug 10

    Aug 11

    Aug 12

    Aug 13

    Aug 14

    Aug 15

    Purchase Rate (%)

    ANZ

    MasterCard

    Standard

    22.20

    19.95

    20.95

    Low Rate

    14.90

    13.90

    ASB

    MasterCard/ Visa

    Standard

    22.20

    19.95

    19.45

    19.95

    20.95

    Low Rate

    12.50

    12.00

    19.95

    13.60

    13.50

    BNZ

    Visa

    Classic FlyBuys

    22.20

    19.95

    20.95

    Lite

    13.75

    13.25

    13.50

    13.90

    Westpac

    MasterCard

    Standard

    21.90

    19.95

    20.95

    Low Interest

    14.85

    12.95

    12.99

    12.95

    13.45

    OCR

    8.00%

    2.50%

    3.00%

    2.50%

    2.50%

    2.50%

    3.50%

    3.00%

     
    Our credit card interest rates are also higher across the board than in Australia.

    While we’re paying just under 21% for the standard cards listed above, Australians are paying just under 20% for similar cards.

    Our cash advance rates (the rates we pay when we draw money using our credit cards) are also generally over a percentage point higher than in Australia, at just under 23%.

    NZ regulators: Let the free market’s 'invisible hand' do its thing

    The RBA’s Payments System Board will finalise new rules governing credit card fees in the Australian market in coming months. These are expected to see credit card fees lowered.

    However the RBNZ can’t follow suit, as it operate under a different mandate to the RBA.

    It says: “The Reserve Bank of New Zealand regulates banks, insurers, and non-bank deposit takers (NBDTs) at a systemic level - i.e. to make sure the financial system remains sound. 

    “We don’t regulate from an individual customer protection perspective and don’t have comment to offer about pricing of products and services offered by banks, insurers and NBDTs. 

    “The way that banks, insurers, NBDTs (and indeed all other businesses) in New Zealand interact with customers (including pricing) is governed by well-established consumer protection laws. 

    “Other than a small handful of price-regulated industries (wholesale prices for electricity transmission and some telecommunications are well known examples), businesses are quite within their rights to set prices, fees, charges etc within the competitive market in which they operate – and consumers are free to shop around for the best deal.”

    As for the Commerce Commission, a spokesman says: “There are no restrictions on interest rates so constraint is provided by the competitive market. It’s not an issue we would investigate unless evidence emerged of collusion between banks to set rates at a certain level.”  

    Labour calls for government to step in

    Against this backdrop Labour’s consumer affairs spokesman David Shearer is calling for the Government to step in and demand a better deal from the Australian banking giants.

    He accuses the Australian banks of “creaming” Kiwis, as they make higher profit margins here than they do across the ditch.  

    “They are some of the most profitable banks in the Western world, generating a return here of 1.6 per cent pre-tax profit as a percentage of total assets last year, compared with Australia’s 1.28 per cent. (The US was 1.1 per cent and the UK 0.39 per cent)” Shearer says.

    “New Zealanders delivered them a net profit after tax of $4.4 billion last year – a giant step up from $3.6 billion the year before.”

    Bankers: Changes to NZ regulatory framework driven by customer demand 

    The chief executive of bank lobby group the Bankers’ Association, Kirk Hope, says "New Zealand banks operate in a different market and regulatory framework compared to their Australian counterparts. Any changes in New Zealand are more likely to be driven by customer demand.

    "Our banks are very responsive to consumer concerns and that’s reflected in their high customer satisfaction ratings. 92% of bank customers are satisfied with their bank, according to Consumer NZ."

    Hope says credit card interest rates are higher than mortgage rates, because the lending is unsecured, so is risker.  

    “It's important to note there's a range of credit card options available to meet a variety of customer needs. Many people pay no interest on their credit cards, or they have a low interest credit card. Often they go for the higher interest product because of the loyalty offerings and because they pay the card in full before the interest-free period ends" he says.

    “Banks also offer very competitive deals to attract new customers. Incentives to switch often include extended interest-free and low interest periods for the transferred balance from an existing credit card.

    Furthermore, Hope says New Zealanders seem better informed about credit cards and how to manage them.

    “In New Zealand over half of credit customers pay off their balance in full in the interest-free period, compared to only a third in Australia and the US.

    “Only between 1% and 3% of New Zealand credit card customers pay the minimum each month. This figure is significantly lower than in the US and UK, where as many as 13% to 14% make the minimum repayment each month.

    "As we can see, New Zealanders’ credit card behaviour is different from that in Australia and other countries. What may be an issue there may not be a concern here.

    “Another point to note is that there are low barriers of entry to the New Zealand payments market, which keeps it very competitive.” 

          New Zealand
    as at August 20, 2015 Annual Cash Adv Purchase
          Fee $NZ % %
               
    ANZ MasterCard Standard 30.00 22.95 20.95
        Low Rate 58.00 22.95 13.90
               
    ASB Visa Standard 24.00 22.95 20.95
        Low Rate 40.00 22.95 13.50
               
    BNZ Visa Classic FlyBuys 30.00 22.95 20.95
        Lite 60.00 22.95 13.90
               
    Westpac MasterCard Standard 44.00 22.95 20.95
        Low Interest 65.00 22.95 13.45

     

          Australia
    as at August 20, 2015 Annual Cash Adv Purchase
          Fee $A % %
               
    ANZ MasterCard First 30.00 21.49 19.74
        Low Rate 26.00 15.64 15.64
               
    CBA MasterCard Awards 59.00 21.24 20.24
          59.00 21.24 13.49
               
    NAB Visa FlyBuys Rewards 95.00 21.74 19.99
        Low Rate 59.00 21.74 13.99
               
    Westpac MasterCard 55 Day 30.00 21.29 19.84
        Low Interest 59.00 21.49 13.49

  • Elizabeth Kerr looks at a low stress P2P model where you have time to go and make yourself a cocktail

    By Elizabeth Kerr

    Peer-to-peer (P2P) lending is really gaining some momentum here in NZ, with second and third providers due to hit the scene soon. As you know, I am a big fan of the whole sharing economy. I love that people can cut out the middle man, create win-win outcomes with their money and trust the intentions of their fellow man.

    So just humour me this week and imagine a P2P lending world where the investor never lost any money, or the borrower was never taken advantage of by being charged extortionate interest rates? Sounds good right?!

    Welcome to another side of P2P lending

    You see, there are two types of P2P lenders in this world of ours. The first are what I call the “pick and choose your own adventure” type (Harmoney falls into this category). P2P platforms under this category mean you (the investor) get to choose the loans you fund, therefore becoming a quasi credit expert reliant on the ability of the platform owners to weed out the wheat from the chaff of borrowers so to speak. If you don’t have any experience in credit risk analysis, then you’re left using your own judgey-pants for intuition.

    Lots of investors love this approach. They feel empowered and they get into the nitty-gritty, developing spreadsheets with fancy algorithms and adopting all sorts of lending rules for the loans they will invest in to get the best outcome. They often log in to check if there are loans available which match their lending rules, and enjoy that frequent contact with the platform.

    My Harmoney experiment has taught me that I am not this type of person. In this season of life I am more of the "set it and forget it" type of person, because quite frankly my other investments take up a lot of mental energy (right now one of them is mashing a sandwich into the back of my couch).

    In this category there is no real fool proof way of knowing whether one loan will perform well or go into default; so as an investor we are told to diversify as much as possible and just take the risk on the chin by building it into our expected return.

    But there is another way…

    Enter in the second model of P2P lending originating from the UK. The most notable example of this type is RateSetter, originating in London. This P2P model says to me in a calming voice “Stop… go make yourself a cocktail... you don’t need to worry about picking and choosing loans – that’s what we're experts at... you just understand our P2P business platform, provide your funds and we'll use our skills and diversify on your behalf… just relax and watch your money machine grow…”. Well don’t mind if I do thank you very much. But let’s look at what makes this model so different… dare I say it, stress free:

    1. A provision fund. RateSetter was the first to introduce the “Provision Fund”, making investors around the world sleep easier at night. In simple terms this is a bucket of money used to pay an investor, should a borrower default on their loan obligations at any time. The money for this fund comes from a little bit extra the borrowers repay on top of the base interest rate for their loan. This money is not refunded to the borrower - it remains in the provision fund. Given that most borrowers don’t default, there is a healthy assumption that there will always be money available to pay you back should one of your borrowers go awol.

    2. You tell the platform what your borrowing rules are and it just does it all for you as the demand becomes available. For example, if I want to lend my money towards 1 and 3 year loans only, and at 7% return. Boom… the platform does it automatically until all of my money is invested/reinvested.

    But there is an interesting third thing which I think will slowly weed out the first generation category of P2P lenders. (Bold statement, I know!) And that is supply and demand (or greed and contentment).

    Under the first “pick and choose” category, a borrower is assigned an interest rate depending on their risk profile. It’s up to them to decide to accept it or go elsewhere. Under the second model the borrower, once qualified as a customer, can go onto the platform and choose a loan which meets their needs and risk. Need bridging finance for a car, then no problem; choose a month at the best interest rate available. Who sets that rate? The lender does.

    Remember above I said the lender tells the platform what interest rates and terms they are prepared to lend to; well that tells the borrowers what loans are available. So if individual investors get greedy then presumably borrowers won’t choose to accept their loans over more reasonable interest rates. Theoretically this means the rates would naturally sit lower/closer to market rates or borrowers would take their demand elsewhere. This solves the argument that investors are extorting borrowers by charging them such high interest rates.

    So is this right for you?

    Well if you’re looking for something as easy as putting money into a bank account, and not looking at it again, then this UK type P2P lending model would be more your thing. But if you like hands on, choose your own adventure style investments, then Harmoney will keep you excited for the time being.

    But there is no P2P lender like this in NZ yet?

    Yes and no. Squirrel Money plans to open for business next month and will follow this approach by having a provision fund and interest rates that will be set by the supply from investors. If you’re an investor and want to diversify into a bigger market, then thanks to the Trans-Tasman Mutual Recognition Regime, investors can access RateSetter. It started operating in Australia in October last year and to date can boast that it has had NO defaults in that time. They can accept investors from NZ, but the only downside is you need to send your money to the platform in Australia. Now that there are P2P currency exchange platforms in place such as CurrencyFair.com, making it ‘cheap as chups’. See P2P is popping up everywhere now!

    In closing

    I don’t know if little ole NZ provides the borrower demand for some of these bigger P2P lenders to come and operate here, but with more local P2P lenders starting up shop, I think they would do well to adopt some of the strategies evolved from the UK P2P lending scene, particularly the provision fund to protect and incentivise new investors. What are your thoughts?

  • Rents on Trade Me Property flat in most places over winter but falling in Christchurch

    Housing rents have remained flat over winter but are still well ahead of a year ago, according to Trade Me Property.

    The national median asking rent for rental homes advertised on the website was $420 a week for the fifth month in a row in July.

    However that was up 6.3% compared to July last year.

    The figures suggest the rental market has followed its normal seasonal trend, with most of the increase in rents occurring over the summer months at the end and beginning of each year, when demand for rental properties is traditionally at its highest as students re-enter the accommodation market and many people move around the country for work reasons.

    In Auckland, the median asking rent was $495 a week in July, unchanged from June but up 7.6% compared to July last year.

    In Wellington the median asking rent was $400 a week, up 5.3% compared to last year and in Christchurch the median was $430 a week, down 2.3% compared to last year.

    Trade Me Property's monthly rental report said median asking rents in Christchurch were declining for all types of residential properties.

    "This is very different from a year ago when annual increases in rents were recorded in double digits, another clear indication that the rebuild peak has been crested and the Christchurch rental market is slowly settling into its new reality," the report said.

    To read Trade Me Property's full rental report for July, click on the following link:


    Our free Property email newsletter brings you all the stories about residential and commercial property and the forces that move these huge markets. Sign up here.

    To subscribe to our Property newsletter, enter your email address here. It's free.

    Email:  

     
Subscribe to Personal Finance