It’s Money Week. This year we’re being encouraged to make a date with our money. The idea is to set aside some time to take stock of your financial situation and make a plan for the future. It’s about not waiting for a significant life moment, like buying your first house, to get financially sorted.
Personal money management and financial goals often end up as lower priorities in our busy
lives, where work and family pressures can take precedence. The irony is that if you can sort
yourself out financially, or at least know where you’re going with your money, it can often
alleviate pressures in other areas of your life.
Traditionally we tend to think about personal financial management and planning when
facing big life events like leaving home, going studying, buying a house, starting work,
getting married, or retiring.
Of all of those events, buying a house looms large on the list. Home-ownership has always
played a big part in who we are and how we see ourselves. New Zealand is still very much a
property-owning democracy. Around 65% of households are either freehold or have a
mortgage. Most of us see owning our home as a good investment and way to provision for
the future. Owning your home is one of the pillars of a secure retirement, which also include
private savings and access to New Zealand Superannuation and public health care.
So it’s no surprise that housing affordability and the Reserve Bank’s new lending restrictions
are top of mind right now. From 1 October banks will be required to restrict new residential
mortgage lending with loan-to-value ratios over 80% to no more than 10% of the dollar value
of their new housing lending flows.
While the merits of the move are debatable, the fact remains this will impact a range of
people seeking low equity loans, including small businesses trying to raise investment
capital and home-owners moving across the high LVR threshold to get a top-up loan for
renovations. Most of the focus, however, has been on first-home buyers and how they might
get around the new restrictions.
There has been plenty of speculation that first-home buyers who don’t have at least a 20%
deposit will be pushed into the hands of second and third tier lenders providing unsecured
loans at much higher interest rates.
Another avenue for first-home buyers comes through family members providing financial
assistance, access to equity in their homes, or loan guarantees. In the spirit of Money Week,
if you’re thinking helping out a family member in this way, there are a few questions you
might want to ask yourself. What are you committing yourself to, and what are the risks?
You’re effectively investing in the property too, so you need to be able to satisfy yourself that
it’s a sound proposition and you have some recourse if things don’t turn out quite as you
expected. As with any major financial decision, it’s always worth getting some professional
advice.
The Commission for Financial Literacy and Retirement Income’s 2013 Financial Knowledge
and Behaviour Survey revealed that banks are New Zealanders’ main source of financial
advice. Not surprising perhaps, as most of us have a relationship with a bank. Family and
friends are the second most popular source of financial advice, with financial advisers
coming well down the list. While you’re likely to trust family and friends, they may not be best
placed to advise on financial matters. Seeking professional advice, whether paid or unpaid,
makes sense for the most significant financial decisions of our lives. If you get the big stuff
right, it’s much easier to deal with the small stuff. It’s all about knowing what you’re getting
into and making informed choices to improve your financial well-being.
If, having weighed up all the relevant factors, you decide to assist a family member to borrow
to buy a property, it’s important that everyone involved is up front with the bank. As
responsible lenders banks will seek a range of information from the prospective borrower,
including the source of the deposit, other commitments, and ability to service the loan. Being
open about all the relevant information is in everyone’s interests.
In the meantime, why not make a date with your money? You don’t need to wait for a big life
event to get yourself financially sorted. Do it now. You won’t regret it and your finances will
thank you for it.