Finance

KiwiSaver Myths – What You Need To Know

Shai Patel

KiwiSaver has been around now for over a decade.

I have helped people to understand and make their KiwiSaver funds work for them, but I still sit down with many people that still have some common misconceptions.

Some of the common ones are highlighted in this article: KiwiSaver Myths

I would be happy to answer any other questions that you may have regarding KiwiSaver and if you wish help get you on the right track.

Please feel free to contact me or call on 09 551 3500.

Will OCR change next week?

Shai Patel

The Reserve Bank is expected to leave the official cash rate at 1.75% next week and continue projecting very little increase for the next three years because inflation has slowed in an economy that’s has been on a faster than expected track, BusinessDesk reports.

The Monetary Policy Statement next Thursday will provide a new set of forecasts and adjusted are expected because both the currency and inflation aren’t where the central bank was expecting back in November and Stats NZ has recalculated its measure of gross domestic product for the 2016 and 2017 March years.

The Reserve Bank will also have to consider the deflationary impact of free first-year tertiary education.

Fourth-quarter inflation of 0.1% was a third of the pace the bank forecast in November and the annual rate slipped back to 1.6%, a bigger drop than it expected.

The November MPS didn’t price in a 25 basis point hike until March 2020 and on that basis the RBNZ could be overtaken by the Federal Reserve this year after chair Janet Yellen repeated there would be gradual increases in the federal funds rate, currently in a target range of 1.25% to 1.50%.

The trade-weighted index was recently at 75.02, above the 73.5 level that the RBNZprojected for the first quarter.

Weaker inflation, the higher kiwi and the impact of the government’s tertiary education policies “are likely to see headline inflation retreat towards the lower end of the target band once again,” said ANZ New Zealand senior economist Phil Borkin in a note.

“The RBNZ will be mindful of the potential implications of this for the formation of inflation expectations.”

The ANZ Roy Morgan consumer confidence survey published today shows Kiwis wound back their expectations for inflation in the next two years.

The survey showed a net 3.2% general increase in prices is expected, down from a 3.5% rise seen in the previous month’s survey.

National house price expectations rose to 2.9% from 2.4%.

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12% of Kiwis pay interest on ‘free’ loans

Shai Patel

Nearly half of Kiwis have made the most of deferred interest deals to purchase items with what could be called a “free” loan, but consumers are getting caught out by not repaying the loan in time, new research from CreditSimple.co.nz has found.

While most Kiwis paid off the loan within the interest free period, 12% did not complete the payments in time and paid interest on their purchase.  Almost half of those 12%, took more than a year to pay back in full and ended up paying a significantly higher price for the item.

According to CreditSimple.co.nz analysis, 18% of people with a personal loan were overdue on monthly repayments at least once in the past 12 months.

Interest rates charged on store cards can be as high as 26% – higher than credit cards and personal loans from banks, the research showed.

CreditSimple.co.nz spokesperson Hazel Phillips said paying off a hire-purchase interest-free deal on time is doubly positive: borrowers avoid having to pay interest and it can help improve their credit score.

“Young people setting up their first house or flat often lean heavily on credit cards and interest-free deals to buy furniture and appliances. Our own data shows that missing a payment on a finance deal is one of the biggest factors impacting your credit score.”

Phillips said a good credit score is 500 or more on a scale of 0 to 1,000. Falling behind in regular payments soon starts to affect someone’s credit score – a high score means better deals from banks, insurance and utility companies, she said.

“Some people get into the habit of paying as late as they can every time, but that’s not a good strategy. The reality is with banks now reporting ‘positive’ credit behaviour such as paying on time, late payers stand out.

“You may earn a few cents extra interest by delaying bill payments. But it’s just not worth it if it’s wrecking your credit score, as it can affect your ability to get credit down the track, ” she said.

CreditSimple.co.nz said most New Zealanders have a credit score between 400 and 600.

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Reserve Bank announces cash rate call

Shai Patel

The Reserve Bank of New Zealand (RBNZ) has today held the Official Cash Rate at 1.75%.

In a statement by Reserve Bank Governor Graeme Wheeler:

Global economic growth has increased and become more broad-based.  However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Headline inflation has increased over the past year in several countries, but moderated recently with the fall in energy prices.  Core inflation and long-term bond yields remain low.  Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has increased by around 3 percent since May, partly in response to higher export prices.  A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.

GDP growth in the March quarter was lower than expected, with weaker export volumes and residential construction partially offset by stronger consumption. Nevertheless, the growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade.  Recent changes announced in Budget 2017 should support the outlook for growth.

House price inflation has moderated further, especially in Auckland.  The slowdown in house price inflation partly reflects loan-to-value ratio restrictions, and tighter lending conditions.  This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices.  These effects are temporary and may lead to some variability in headline inflation.  Non-tradables and wage inflation remain moderate but are expected to increase gradually.

This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

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Reserve Bank delivers cash rate call

Shai Patel

The Reserve Bank of New Zealand (RBNZ) has this morning left the official cash rate unchanged at 1.75%. 

Governor Graeme Wheeler said in a statement, “House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Canstar general manager Jose George said it is an uncertain environment for home owners and warned on the increasing pressure for mortgage holders.

“As recent statistics show, while house prices have started cooling in  Auckland and other larger cities, mortgage rates are starting to trend upwards,” said George.

“Independent of OCR, the costs of servicing a mortgage are rising. Couple this with rising inflation and the flow-on effect this could have on other living costs, you have a situation where an already stretched household budget will not be able to take the added pressure for most NZers.

“For savers the situation is more positive.  Despite a series of drops in OCR, term deposit rates have remained largely untouched over the last 12 months or so. We are now starting to see increases in deposit rates, reinforcing the belief that banks are keen to grow their existing domestic deposit book.

The full statement by Reserve Bank Governor Graeme Wheeler is below:
Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Source

Mortgage rate rises expected to continue

Shai Patel

As part of their Asia-Pacific banking outlook series, S&P Global Ratings analysts discussed their forecasts for New Zealand’s banking sector.

During a live webcast last week, the key points made were that the New Zealand credit cycle appears to be maturing and risks stemming from rising house prices and household debt levels are expected to stabilize this year.

Bank performance is expected to remain strong although they forecast credit growth within New Zealand’s banking system to slow.

Factors contributing to the stabilization include the expected continuation of increasing residential mortgage rates, funding gaps, margin recovery and macro prudential measures reducing the number of participants in the mortgage market.

Analysts said bank margins are facing a number of headwinds including higher funding costs; higher ‘core’ funding requirements; and likely higher capital requirements. They expect slower lending growth to help meet some of the funding requirement.

Financial Services Ratings associate director, Andrew Mayes said, “We don’t expect to see house prices fall, but we do expect them to slow,” as the more recent round of restrictions appear to have had an impact.

“Other indicators of heightened risk within the system still remain,” he continued, including interest only loans, household debt and limits to the extent of the Reserve Bank’s influence, particularly if migration remains strong and housing supply remains insufficient.

Mayes said he doesn’t see debt-to-income restrictions being introduced during an election year.

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New Zealanders unaware of rate rise impacts: survey

Shai Patel

It’s no secret that interest rates are on the rise and most people with a mortgage anticipate the increase, a new BNZ survey shows.

But worryingly, it also found the majority intend to make no changes to their mortgages in response the rate increases.

The BNZ Financial Futures research found that home owners with mortgages were in the dark about how the impact a 1% interest rate rise would have on their household – three out of five people underestimated how much extra people will pay on the average mortgage size.

BNZ’s director of retail and marketing, Paul Carter said, “It’s concerning that despite 70% of people with mortgages anticipating interest rates will rise this year, 67% of mortgagors are not considering making any changes to their mortgage.”

The survey found 24% of people said they regularly monitor interest rates and proactively restructure their mortgage.

A BNZ spokeswoman told NZ Adviser many homeowners tend to have the mentality of ‘setting and forgetting’ their mortgage.

“This probably comes down to people not appreciating how small changes to their mortgage repayment schedule can reduce the lifetime of their mortgage and how much interest they’ll pay,” she said.

“Our main concern is that people will end up paying unnecessary interest over the lifetime of their mortgage.

“For most homeowners interest rate rises will change their household budget and it’s important they consider how they can react – they might want to fix a bigger part of their mortgage or increase their repayments slightly while rates are still near their lowest level in a generation.”

She said the third party channel can help increase awareness on the issue with their clients, having conversations about how their mortgage is set up and what repayments they can manage.

One in five home owners said they were likely to extend the term of their mortgage if their mortgage payment increased by $120 per fortnight, the research found. Nearly one in three said they’d look to reduce utilities like insurance, petrol, heating and power.

Carter said it’s important New Zealanders understand all their budgeting options in a changing mortgage environment.

“New Zealanders will still be enjoying some of the lowest rates in a generation. So it concerns me that too many people are jumping straight into what seems to be the easy option, which is a couple more years on the mortgage – especially when the changes we’re talking about are small.

“BNZ, like most New Zealand banks, stress-tests people with mortgages at an interest rate higher than the current rates, so we know that budgets and incomes can manage rate rises much bigger than this.

“So while we know our customers have room to move within their budgets to absorb any rises, it’s particularly concerning that 20% of people with mortgages would extend the term of their mortgage if their repayments increased by $120 or more, as this is only going to set them back in the long term,” he said.

“It’s a good idea to occasionally have a sobering conversation about the household budget and consider some ‘what ifs’.

The BNZ Financial Futures research was conducted by Colmar Brunton, a New Zealand Market Research Company surveying a total sample size of 2,000.

Please contact us if you have any questions. 09 551 3500
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Why Review your KiwiSaver?

Shai Patel

It is becoming more and more important for you to review your KiwiSaver and see how it is tracking to enable you to have the best retirement.

People are seeing their balances grow each year they are in KiwiSaver. Many people have a substantial amount to now consider KiwiSaver as an investment that will make a difference at retirement.

Please click here for reasons to be looking at your KiwiSaver.

NZ superannuation changes: what they mean for you

Shai Patel

Prime Minister Bill English announced that the age of eligibility will rise from 65 to 67, in gradual steps, from 2037.

The changes will be phased in from July 2037 and will not affect anyone born before July 1972.

The age of eligibility will increase six months each year from July 1, 2037, until it reaches 67 on July 1, 2040.

What does that mean for you?

Will the Super changes affect me?
If you are born on or after July 1, 1972, yes. You will have to wait until you are 67 to get your pension. But you will still be able to access your Kiwisaver at 65.

What if I’m born on June 30, 1972, or earlier?
Nothing will change. You will still get NZ Super when you turn 65.

What if I’m an immigrant?
If you’re a resident or citizen in New Zealand now, nothing will change. You will still get Super if you live in NZ for 10 years (five of those years after 50).
If you arrive after the law is changed (possibly next year), you will have to live in NZ for 20 years to get Super, five of them over the age of 50.

Will I still get my SuperGold card at 65?
Not once the retirement age is lifted. The age for a SuperGold will go up to 67 too.

Will the payments change?
No. they will remain at 66 per cent of the average wage (currently $335.50/week per person for a married couple or $443.50/week for a single person living alone)

What if I’m rich? Will Super be means-tested?
No. There are no plans for asset testing or income testing.

What are the expected cost of Super in the future?

With 1.1 million people expected to be retired in 2030 the forecast cost would rise to $20 billion a year equivalent to 6.2 per cent of the country’s output (GDP) against $11b a year and 4.8 per cent now.

The changes would lower the cost by 0.6 per cent of GDP – from 7.2 to 6.6 per cent of GDP – in 2045.

How does it compare with other countries?

Australia is at 65 now, rising to 67 by 2023.

Britain is 65 now rising to 67 in 2028 and to 68 at a later date.

The United States is 66 now rising to 67 in 2027.

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