Three Good News Tips for First Home Buyers

For first home buyers the next few months are shaping up to a good time to buy and there are three reasons for this.

Firstly, we are seeing a decline in property prices as winter sets in. Some property investors have reacted to the last budget by choosing to sell and this has had an impact at the lower end of the market.

Mortgage interest rates are expected to increase over the next few months and this will help keep property prices in check.

The second piece of good news for first home buyers is that from 1 July, 2010 you can you use some of your KiwiSaver funds for your house purchase providing you meet certain criteria.

You must have been a member of KiwiSaver for at least three years and the house you buy must be one that you plan to live in yourself for at least six months.

You will be able to withdraw the contributions you have made to KiwiSaver plus your employer contributions and investment returns. As well, you may be eligible for a subsidy of $1,000 for every year you have been a member of KiwiSaver up to a maximum of $5,000. To be eligible, your income and the value of the house you are buying must be within certain limits.

Thirdly, you may also be eligible for a low deposit loan through Housing New Zealand’s Welcome Home Loan scheme.

With this scheme, you can borrow up to $200,000 without a deposit and up to $280,000 ($350,000 in some areas) with a 15% deposit on the amount above $200,000. That means you can buy a $280,000 house with a deposit of $7,500 and your KiwiSaver money (contributions plus subsidy) will count towards your deposit.

Now is definitely a good time for first home buyers.

Top Up or Miss Out

The end of June is an important date for KiwiSaver members. The financial year for KiwiSaver runs from 1 July 2009 to 30 June 2010 and if you have contributed at least $1,040 to KiwiSaver during that time, you will be eligible for the full amount of Government tax credit to be paid into your KiwiSaver account in July.

The maximum value of the tax credit is the lesser of $1,040 or the total of your contributions for the year. If you have put in $900 through deductions from your pay, then your tax credit will only be $900. By putting an extra $140 into your account before the end of June you will get the full tax credit of $1,040.

If you are contributing 2% of your pay into KiwiSaver and you earn less than $52,000 a year, or if you are contributing 4% of your pay and you are earning less than $26,000 a year, you will need to top up your KiwiSaver account to get the full tax credit.

To find out how much you need to top up your account by, check your contributions with either your product provider or your financial adviser.

If you are self employed or not working and under the age of 65, you can still become a KiwiSaver member by joining directly with the provider of your choice.

By contributing $1,040 a year as a either a single payment or $84 a month you will get the full benefit of the tax credit. It is not too late to join now. New members will receive the Government kickstart payment of $1,000 and a tax credit for the first year based on the number of days of membership.

Get your payments in as soon as possible to allow time for processing!

Are you Missing out on Free Cash?

Many New Zealanders are still missing out on an opportunity to double or even treble their money. Recent statistics show that over 60% of Kiwis who are eligible to join KiwiSaver have not yet done so. The principal benefits of joining KiwiSaver are:

• An initial Government kickstart of $1,000
• An annual tax credit of up to $1,040
• An employer contribution of 2% of your pay

These amounts are all paid into your chosen KiwiSaver fund where they will be added to your contributions, invested, and made available to you at retirement age.

There are three main reasons why those eligible don’t join and therefore miss out on free cash.

The first reason is skepticism. Having heard ‘if it sounds too good to be true, it probably is’, some people are still pondering what the catch is and taking a wait and see approach. They may be waiting for some time, because there really is no catch.

The second reason given is not enough spare money to contribute to KiwiSaver. With the minimum contribution now being only 2% of pay, there should be a very small number of people on low incomes who can’t afford to put in the equivalent of a few cups of coffee a week.

The third reason, particularly for younger people, is retirement is still a long way off and there is plenty of time to save. If only these people could talk to retirees about the benefits of starting retirement saving early!

Around half of existing KiwiSaver members have joined a default scheme without advice and run the risk of being in a fund that is not appropriate for their needs.

The best way to join KiwiSaver is to contact a financial adviser who can help you choose the best fund for you.

Mortgage Holidays a Last Resort

One of the biggest expenses in most household budgets is mortgage repayment, especially for young couples who have scraped together the minimum deposit to buy a house.

A big mortgage usually means a high level of financial commitment that leaves little room for saving. Without saving, unplanned expenses or unplanned loss of income can mean the difference between struggling by and financial crisis.

In the current economic climate, loss of income is a real possibility as businesses and Government Departments shed staff. When times are hard, a mortgage holiday can provide welcome relief.

Most banks have had a policy of offering mortgage holidays to people struggling to meet payments. Don’t think, however, that banks are motivated to do this purely out of kindness towards their customers.

Of course, there is an element of good will, but mortgage holidays are a good way for banks to avoid the expense of having to manage a customer who is behind on payments or, at worst, having to arrange a mortgagee sale.

They are also a way for banks to make more money, because throughout the period of the mortgage holiday interest on the mortgage keeps on compounding.

A mortgage holiday may be a good short term solution when money is tight, but in the long term it means that more interest is paid and the mortgage takes longer to be paid off in full.

Prevention is always better than cure and when you are taking on debt, don’t commit yourself to the extent that you have no room for saving.

Sometimes it is not the mortgage that is the problem but credit card and store card debt that gets out of control after the mortgage has been taken up.

Keep a lid on your commitments and make sure you have an emergency fund to tide you over when unexpected things happen.

If you have a change in circumstances, take action sooner rather than later. Review your budget and be prepared to let go of things that are costing you money and which you can do without until the bad times are over.

You should consider a mortgage holiday if

• You have reviewed your budget and still can’t make ends meet
• You have a large amount of credit or store card debt that is increasing because you can’t keep up the payments
• You are suffering from stress due to financial worries
• You feel confident that at the end of the mortgage holiday you will be able to keep up with your financial commitments.

Once you have arranged the mortgage holiday, use the spare funds to pay off any other debts you might have and, if there is anything left over, keep it on hand to cover unexpected expenses.

Whatever you do, don’t take a mortgage holiday so that you can spend more.

A mortgage holiday is a good way to avoid a financial crisis, but it comes at a cost and should be considered as a last resort.

KiwiSaver Update

KiwiSaver Tax Credits for Employers

Most employers should be viewing the compulsory employer KiwiSaver contribution as an opportunity rather than a threat.

From 1 April, 2008, all employees over the age of 18 who are enrolled in KiwiSaver must be paid 1% of their gross pay by their employer into their KiwiSaver account. The percentage will increase by 1% each year until the employer is contributing 4%.

However, employers are eligible for a tax credit of up to $1,040 a year to help towards the cost of making their contribution.

It follows that in the first year, the net cost to employers of this contribution is zero for any employee earning $104,000 or less.

That’s because the employer contribution of 1% of pay will be $1,040 or less and this will be entirely offset by the tax credit of up to $1,040, which will match the employer contribution up to that amount.

The tax credits are obtained by deducting the amount of the credit from the amount of PAYE you need to pay each fortnight or month.

Next year, when the employer contribution increases to 2%, there will still be zero net cost to employers for employees earning $52,000 or less (this is well above the average wage).

Good employers who are genuinely interested in the welfare of their employees should be actively encouraging them to join KiwiSaver.

I have come across a number of people employed in small businesses operating on small margins who have been reluctant to join KiwiSaver because of the burden that this would impose on their employer. Hopefully such people can see that, at least for the first two years, there should be minimal or no impact on their employer.

For self-employed people, there are tax savings of up to several thousand dollars a year to be had by becoming a PAYE paying employee of your own company.

As an employee of your company enrolled in KiwiSaver, you will contribute 4% of your salary to KiwiSaver.

You will receive the initial kick start of $1,000 and an employee tax credit of up to $1,040 a year which is matched against your contributions.

As an employer, your contributions of up to 4% of pay to KiwiSaver are exempt from withholding tax. You will also receive the employer tax credit of up to $1,040 a year. Becoming a PAYE paying employee is something that you should discuss with your accountant, as there are a number of other considerations to be weighed up before you decide whether this is the best arrangement for you.

Employers with staff who are struggling to be able to contribute 4% of their pay to KiwiSaver can help such employees for minimal cost.

Under the transition arrangements that are in place, employers can agree to contribute 2% to match a 2% contribution from employees.

The employer tax credit will help to minimise the cost of this to the employer, especially for employees on low incomes. Contributions from the employer and employee will increase over time under the transition arrangements until both are contributing 4%.

So there you have it.

There are a number of reasons why KiwiSaver makes good sense for good employers, so encourage those employees who haven’t yet enrolled to take another look at it.