Should I buy an electric car?

The government is promoting the purchase of electric cars, providing cash rebates for purchase of new or second-hand imported cars. A rebate of up to $8,625 is available for new electric cars costing less than $80,000. Up to $3,450 is available for used electric cars which have been registered in New Zealand for the first time. In addition to the cash rebates, electric cars aren’t currently required to pay road user charges. Road user charges for petrol vehicles are paid for through the tax on petrol.

The latest analysis from Gen Less suggests the total cost of owning an electric car is significantly less than for petrol cars over a five year period.

The five year cost for an electric vehicle was estimated to be $36,772 ($7,354 per year). That compares with $54,473 ($10,895 per year) for a petrol car.

However, you have to look behind the numbers

There are some key assumptions that affect the analysis of which option is better. The Gen Less estimates are based on:

Assumption 1: you purchase a new car

Most new cars are purchased by businesses or the self-employed because they can reduce their tax due to the high depreciation cost for new vehicles. Depreciation is an estimate for how much your vehicle declines in value on an annual basis. However, the tax reduction is only a portion of the fall in value of the vehicle.

The Gen Less analysis suggests the average new electric car will lose half of its value in the first five years. After five years the brand new car you purchased for 50,000 will be worth just $25,000. That’s a significant annual cost for owning a new car, costing you around $96 a week. That doesn’t include any of the costs involved with using your car.

The Gen Less analysis suggested the loss was even higher for petrol cars.  They were worth only 43% of their original price after five years. That means a new car purchased for $50,000 would be worth only $21,500, losing $28,500 over five years.

There are few second-hand electric cars on the market, so that may explain some of the difference in depreciation rates between electric and petrol cars.

Assumption 2: you can purchase your car with cash

This is a key assumption because debt servicing significantly increases the cost of car ownership. That applies whether you finance it through the mortgage on your house or through car finance. Financing a $50,000 car purchase through a top up on your mortgage will cost you an additional $13,560 in interest. That’s assuming you pay it off over ten years at an interest rate of 5%, with weekly payments of $122.23 a week.

Mortgage interest rates are currently increasing and may reach 6% during the next 12 months. That would add a further $3,000 to the total interest cost over 10 years.

There is still a cost to you if you use cash. If you purchase a cheaper second-hand car you will continue to earn interest on the money you might have spent on a new car.

Assumption 3: you travel 17,970 km per year

This is higher than the average of 11,000 km a year for the average passenger car in New Zealand. The less the distance you drive in a year the less the estimated savings from owning an electric car.

Assumption 4: the cost of electricity is based on commercial power prices

Because of the high proportion of new car purchases by businesses the estimates are based on a commercial electricity cost of 17c/kwh (GST excl.) Ministry of Business, Innovation and Employment estimates show a household electricity cost of 27.64 cents in the March 2022 quarter (before discounts).

Items not estimated were:

1. The cost of car insurance, which is higher when you have an expensive car.
2. The cost of battery replacement. The average new car in New Zealand is retired after 21 years, clocking up 232,000 km in that time. You should assume the battery will have to be replaced at least once. Before buying a new or second-hand electric car it is worthwhile checking what a replacement battery will cost. It is suggested that battery costs will decline as the volume of electric car production increases. Despite this, battery replacement is still likely to be a significant expense.
3. The cost of installing an in-home charger, which is a one-off cost, but a useful factor to think about now when buying a house.

Electric vehicles are currently exempt from road user charges, but the exemption is due to end by 31 March 2024. It is estimated the exemption currently saves electric vehicle owners around $600 a year.

There is a limited supply of second-hand electric cars in New Zealand, but supply is increasing. In the year to June 2022 there were 9,587 new fully electric cars imported into New Zealand and 20,482 hybrid electric cars. Over the same time period 3,767 second hand fully electric cars were imported and 29,724 hybrid cars.

It is important to research and understand the costs of time and money before making any purchase. “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” (Luke 14:28 ESV)

Conclusions

I recommend that you buy a used car, paying cash for one that will decline in value slowly. The world will sell you lots of reasons to buy a new car, but remember a car is simply a way to get from one place to another. Driving an older, reliable car is the best option financially.

Many households have more than one car and it is worthwhile looking at alternatives now available for transport to reduce the number of cars you own. The savings over a 40 year working life can be substantial.

Peter Crawford

Should we borrow for our daughter’s wedding?

Weddings can be very expensive, with costs amounting to more than $30,000 common in New Zealand.  That can be a significant financial burden for parents and some are tempted to borrow against their house to pay for the big day.  If that is what you are considering, there are some big questions to think about.

Do your homework to avoid the possible pain and stress of two mortgage payments. Analyse your income and employment situation, and put your pencil to the numbers to determine how much wedding you can afford without debt. Talk this over with your daughter and her fiance.

Does the wedding need to cost $30,000?

When our daughter graduated from university, her education fund was changed to the house deposit/wedding fund.  When she got engaged that was a helpful trade-off for her and her fiance to think about.  There was pressure to have a big wedding, but they both wanted to buy a house in the future.  That got them thinking about how they could have a special wedding without making it more difficult to buy a house.

Some of the areas you can look at to save money are:

1. Do your research on options for purchasing clothing for the wedding party. What can you borrow?  Is a good second hand dress or suit available online?  A friend of our daughter’s had recently purchased a cheap new dress online and was very happy with it.  The cost was just $80 compared with the $3,000 someone we knew paid for a similar dress made locally.
2. Ask friends to help you crowdsource flowers or consider whether you need flowers? Are there alternatives to flowers?
3. Photographs and video costs for the wedding can be very expensive. Are friends available to help out?
4. Venues can be very expensive to hire and may require you to use their catering for the reception. They are usually more attractive settings than your own church facilities, but how important is that.  What is the long-term cost of using an expensive venue?
5. Are friends willing to volunteer to do the catering or help the caterer to minimise your costs.
6. Alcohol can be a significant cost. If you choose to have it, you have to decide a limit to how much you are willing to pay.  When do the guests at the wedding need to pay if they want to consume more?
7. Are there other items, such as the wedding cake and bridal vehicles, which family and friends can help with as a practical wedding gift?

When Jesus told a crowd (Luke 14:25-33) to consider the cost of discipleship.  He gave an illustration: “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” This diligence and analysis is necessary for every big decision we face in life.

Frugal weddings are nothing to be ashamed of.  Years ago, a survey suggested that weddings featuring low costs but a high number of guests produced longer lasting marriages than high cost weddings with fewer guests.  That might reflect the level of wider friends and family support before and after the wedding, since many people like to know how they can help out.

Be encouraged and patient. I am not sure how long you have before the big day, but disciplined spending and saving now can help you avoid borrowing. My hope is that this information will help you show the maximum amount of love and support to your daughter and future son-in-law, with the minimal amount of financial stress.

Peter Crawford

Considering a Reverse Mortgage?

What is a Reverse Mortgage?

A reverse mortgage allows people aged 60 years and over to borrow against the value of their home. The amount of money you can borrow depends how old you are and whether you still have a mortgage on your house. The two providers of reverse mortgages in New Zealand (Heartland Bank and SBS Bank) will lend up to 15-20% of the value of your home if you are 60 or over.  If you are 80 or over you can borrow up to 35-40% of the value of your home.

Average house prices in New Zealand increased by nearly $300,000 between December 2019 and December 2021, so is this a good time to start borrowing against your home? The answer is probably no, but there are many aspects you need to consider before making a decision.

What is the cost?

There are a number of costs incurred at the beginning of a reverse equity loan, which take away some of the value of your house before you get any money. Heartland Bank lists valuation fees of $600 – $855 and an initial application fee of $920. Additional fees apply when you set up monthly payments to you and each time you make one-off withdrawals against your house.

The interest rate the bank charges against your loan is higher than the rate normally applied to mortgages. In February 2022 Heartland Bank was charging an interest rate of 6.1%, while Kiwibank was offering mortgages at a variable interest rate of 4.25%. Variable interest rate loans means the bank can change your interest rate at any time. Both banks offering reverse mortgages do not offer the option of fixing your interest rate. That level of difference in interest rates between mortgage and reverse equity loans has been consistent since reverse equity loans became available.

Interest rates are currently very low and the Reserve Bank has indicated it is likely to increase the Official Cash Rate (OCR) progressively over the next two years. That will result in increases in interest rates for mortgages and reverse equity loans, which means the size of the loan against the value of your house will get larger more quickly.

Are there any risks?

There has been strong growth in house prices in New Zealand over the past 30 years, but there have been periods where house prices have fallen, most recently during the 2009 Global Financial Crisis. There is no guarantee that house prices will not fall again.

The risk of a decline in house prices is higher now because of the extreme growth in house prices we have experienced over the past two years. There will also be an impact from the interest rate increases in 2022 and 2023 on households with high levels of debt, with some struggling to meet their interest payments.

It’s important to recognise that your ability to downsize to a better home might be limited if you accumulate too much debt against your home.

Options to consider instead of a reverse equity mortgage are:

1. Downsizing now to a smaller home, where the heating, insurance and rates costs will be lower.

2. If you have a large section, subdividing it is a possibility, but the initial costs are high.

3. If you have enough space, there are now options to add a new modern house for yourself on your section and have one of your children take over the main house. Many councils have changed their granny flat rules, with some allowing houses up to 80m² to be added without needing to subdivide.

4. Consider selling your house, or a part-share of it, to one of your children, so they can help you out with monthly or large one-off expenses. The cost of interest for them to buy your home is less than for a reverse equity loan.

This is a very brief overview of the pros and cons of taking out a reverse mortgage and the other options you could consider. It is important to consider the impact of the financial decisions you make now on the inheritance you leave for future generations.

If you have children, have a conversation with them about how to meet costs that you are struggling to afford, such as significant repairs to your home. If costs like insurance or rates are becoming too high, are there ways they might be able to help. It’s essential to get good independent financial advice and to talk to a lawyer about any of these options.

The Bible suggests we should pray, and seek wise counsel. ‘The Lord says, “I will guide you along the best pathway for your life. I will advise you and watch over you.” (NLT)

“Fools think their own way is right, but the wise listen to others.” (Proverbs 12:15 NLT)

Peter Crawford