Housing Investment DISASTER!

Debbie asks: I’m looking to buy my first home in Auckland and have been saving for a deposit for years. Unfortunately I’ve been priced out of the area I wanted to rent at – you know how the Auckland housing market is! So I’m considering investing but don’t know much about that really. What about looking at bank bonds? And will I need a stockbroker? 

Investing can be incredibly intimidating – especially when you have been saving for years. Not only is it intimidating, but it is also costly, risky and headache inducing. Because of this, young people forgo ever considering investing.

Personal financial advisor Mary Holm recently answered a very similar question to this one. She suggested sticking with either short-term bank deposits or a cash PIE fund from which you can withdraw money at any time.

She said, “PIE funds are taxed a bit more favourably and sometimes pay higher interest after tax.

Why not go for higher returns in bank bonds? For one thing, in the uncertain current market, you won’t necessarily get higher interest. Even if you do, you are taking more risk.

A major risk with bonds is that, when you come to sell, you get less than you paid for them.

Let’s say you buy a bond that pays 5 per cent and want to sell it a year later. If other bonds of similar risk are paying 4 per cent at the time, your bond will be in demand and you’ll sell it for more than you paid for it. But if other similar bonds are paying 6 per cent, nobody will want your bond unless you sell at a discount. You write about “not much of a gain”, but it could quite easily be a loss.

Another factor is the bank’s creditworthiness. If its credit rating drops – which suggests it’s riskier – you’ll get less on sale than you otherwise would have.

And if things got really bad, and the bank defaulted, it would fully pay its depositors and probably some other creditors before you got a cent back – although you would be paid before shareholders got anything.

Then there’s the time and expense of working through a stockbroker rather than a bank.

Is the possible extra return worth the risk and hassle? Maybe for people in a strong position to take some risk.”

In short, she suggests to keep your eye on the prize. And I would to. Afterall, getting a house is the goal. And it’s not worth taking a risk that could halve the amount you have when it’s not even what you want.

Please note: The information in this article is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and should seek independent financial advice.

 

Jo Davis

I enjoy being a parent, cooking, and pretty much anything online, especially online businesses.

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