Mary Holm: Don’t wait for disaster before making sure you’re covered

OPINION:

Q: There’s nothing like a mobile phone alert advising of an earthquake to get you wondering about the adequacy of your house insurance, as happened to me this morning. That and a builder neighbour telling me that materials have almost doubled in price due to supply chain delays and shortages.

Thank goodness there is the Cordell sum insured calculator online, enabling you to check whether your home is adequately insured.

In August 2019 I moved into my current house, and Cordell told me to insure for around $350,000. Two-and-a-half years later, that figure stands at around $650,000 — the full replacement cost for a three-bedroom 1960s weatherboard and iron roof house in Tauranga. I was surprised at the increase.

So, my advice to all your NZ Herald readers is to check your sum insured and use the Cordell calculator to verify it, so that in a worst-case scenario you don’t turn out to be grossly underinsured.

A: Your letter sounds like an ad for the Cordell calculator, which is run by CoreLogic. But given that it’s free, and seems to work well, let’s accept your letter at face value!

You’re quite right. The cost of rebuilding a home after a fire, earthquake, flood, eruption or other disaster has been rising alarmingly.

While the chance of a home being destroyed is probably low, the consequences of having it under-insured could be dire. The grief and inconvenience would be bad enough, without adding huge financial problems.

When I tried out the calculator on my home, I was surprised at how much “they” knew — the number of rooms of different types, building materials and so on. Where does that information come from, I asked?

“CoreLogic acquires the rights to use and display property data from a range of sources, which includes councils in NZ, LINZ, amongst other sources,” says a spokesperson.

I also noticed a few items were incorrect.

“We pre-fill the fields to the best of our knowledge and with the data we have available,” she says.

“It may be that the data displayed is incorrect at the source or has only recently changed. However, we would be interested to work with you to understand what those inaccuracies are.”

In my case it was only minor stuff, so I just corrected it. And my changes would have been incorporated into the calculation, says the spokesperson.

I also asked what the calculator’s rebuild cost estimate is based on. “Think of us like virtual builders — we obtain costs of materials from our large group of suppliers and we build virtual house models from the ground up, accounting for the elements required to construct that house,” she says.

“This not only includes the material costs, but labour and time, transport, professional fees and demolition costs — all of which are specific to a property location.”

I found my house was under-insured by about $40,000 — a fairly small amount as I’d been keeping an eye on the sum insured in recent years. And to my delight, when I phoned my insurance company to get that adjusted, I was told the premium wouldn’t change. Fifteen minutes work for peace of mind!

You can find the Cordell calculator on the CoreLogic website, and several insurance companies’ websites include links to it.

KiwiSaver for the girls

Q: We are parents to 13- and 10-year-old girls. We have been crap in setting up savings accounts for them, due to all manner of financial challenges. However, we’re in a better position now and would like to start KiwiSavers for them both.

Is there a calculator that could tell us what they would’ve had in their accounts if we had started them when they were born?

I can find calculators that work with present day forward numbers, but none that work backwards.

We’d like to make their savings up to the present day, then do a regular payment to ensure they both have a deposit of sorts for a home when they’re ready.

A: Your plans are great. While children don’t receive KiwiSaver government contributions or compulsory employer contributions until they are 18, it’s still good if you get savings going for them. Hopefully it will encourage them to pick up the ball later.

The fact that you’re looking backwards doesn’t affect your calculations. You just need to look at what happens over any 10 or 13 years. And funnily enough, the lack of government and employer contributions makes your calculation simpler. Don’t use a KiwiSaver calculator, which will include those contributions. Instead use, say, the savings calculator on sorted.org.nz.

What interest rate should you insert? Let’s assume you will use a KiwiSaver growth fund, which is not as volatile as the riskiest aggressive funds, but invests mainly in shares and should give you good growth over the years. Sorted’s KiwiSaver Fund Finder tells us that growth fund returns have averaged 9 per cent over the last five years, which is near enough for our purposes.

If you’re saving $500 a year, the calculator gets you to $8872 over 13 years. But wait. If you scroll down a bit you’ll see that number is adjusted for inflation. Turn that off and you get $11,477. For your 10-year-old, you get $7596 after turning off the inflation adjustment.

Interest on interest …

Q: I started laddering my term deposits a few years ago after reading about it in your column. At first I used to withdraw the interest on maturity but now leave it in and compound the interest. So there is interest on the interest.

A: And then interest on that interest, and on and on. Over a long period you will end up with much more money.

Laddering term deposits, as described last week, is when you set up a series of five-year deposits so you have one maturing this year, one next year, and so on. Or it could be, say, three-year deposits with one maturing every six months. You get the higher interest rates that usually go with longer terms, but also some money available each year.

It also means that, if interest rates are rising, at least some of your deposits are maturing to grab those higher rates. And if interest rates are falling, at least some of your money is still in the old higher rates. You don’t get the best, but you avoid the worst.

Term deposits

Q: It appears fine to invest in a term deposit when interest rates are stable or likely to fall. But at a time of high inflation, interest rates are likely to rise. And if, say, you are in a five-year term deposit you are locked into a lower interest rate. Even six-month deposits can be caught by rising rates.

A: That’s not how it works.

Let’s start with why interest rates tend to be higher on longer-term deposits. Basically it’s because banks want people to tie up their money with them for longer.

But rates are also affected by what the experts expect will happen over the next few years:

• If they think interest rates will fall quite far, that can cancel out the tying up money effect, and longer-term rates will be lower. This is fairly unusual.
• If they think interest rates will remain about flat, longer-term rates will tend to be somewhat higher.
• If they think interest rates will rise, longer-term rates will be noticeably higher. That’s what is happening now.

For example, at the time of writing, Kiwibank was offering 2.3 per cent for one year on $10,000. Then 2.5 for two years, 2.75 for three years, 3.0 for four years, and 3.1 for five years.

If you make a five-year deposit, sure, you might find that within the next five years interest rates have risen to more than 3.1 per cent. But in the meantime you’ve been receiving a higher rate than if you had stuck with a shorter term, or just used a savings account.

What’s more, rates might not rise above 3.1 per cent before 2027. Generally, you’ll do better to be in longer-term deposits than in shorter-term ones.

However, as noted above, a good option is to ladder your term deposits, to spread your risk.

Spread the mortgage

Q: I was reading your Saturday Q&A last week. While laddering works well for term deposits, I am wondering will laddering work for a mortgage? We have a mortgage of $900,000 which is currently fixed for one year at 2.05 per cent, but it is expiring in June. What would you suggest please?

A: Yes, you could sort of ladder your mortgage, as long as your lender is willing.

Mortgage rates tend to follow the same rules as term deposit rates. Back in the 2007-08 global financial crisis, when mortgage rates plunged from around 10 to around 6 per cent, the rates were generally lower on five-year mortgages than shorter ones.

But since then, despite a gradual downward trend until recently, the rates have reverted to normal — higher for longer terms.

Currently, with mortgage rates expected to rise, you are faced with choosing between, say, 3.7 per cent for one year, 4.3 for two years, or 5.2 for five years.

If you go for five years, nobody knows whether rates will fall within those years and you’ll wish you had stuck with a shorter term. On the other hand, they might rise — noting the 10 per cent in 2007-08 — and you’ll be happy with your choice.

I suggest you put some of the loan on five years or longer, some on two or three years, and some on one year. You’ll always be happy with one or two of the loans and unhappy with the other one. It beats being unhappy with the whole lot.

This is not quite the same as laddering term deposits, where you put several equal amounts on the same term but maturing at different times. But the basic idea, of spreading your risk, can work well.

Spend and save

Q: I liked your advice last week to couples to sit down each month and look at their finances. When we retired, a friend told us to set up a spreadsheet with all our assets listed, and update it each month.

We never budgeted and, like many other seniors, we have lived rather frugally and actually denied ourselves some toys. I should have taken my son’s advice when I turned 50. “Don’t forget Mum, save some, spend some!”

We have always kept our accounts and investments separate, so on the second of each month we update an Excel spreadsheet listing balances in current accounts, many laddered term deposits, a few managed funds in different risk levels, KiwiSaver, and credit card debits. Home and cars are not included.

When looking at the total each month, it is really useful to know where you are going so you can spend and give accordingly. However, this still doesn’t tell you what you spend each month, if that is important to you.

A: It’s good for each couple to find what works for them. Given that you have separate accounts and investments, it’s particularly important that you know where one another stand.

A few comments:

• Not everybody has to budget. If your income is more than your outgoings, and you are saving enough for your current and future needs, you don’t need to keep a close track on spending.
• It sounds as if you might want to splash out on a few “toys”. You didn’t at 50, but why not now?
• You mention credit card debits. I assume you pay your card in full each month. If not, it would be wise to use some of your investments to get rid of that high-interest debt.

– Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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