How much will take home pay drop?

Stuff reports:

National wants Labour to say how much its policy to keep interest rates down will cost wage earners, calculating it would need to strip an extra 6 cents of every dollar earned to equal a 1 per cent interest rate rise.

Last week Labour announced its policies to help the Reserve Bank to control inflation, including a variable savings rate (VSR), which would alter the level of KiwiSaver contributions to ease the pressure to increase the Official Cash Rate (OCR), the benchmark against which almost all borrowing costs are set.

Speaking at the National Party’s northern region conference in Auckland yesterday, Economic Development Minister Stephen Joyce said the plans penalised wage earners in favour of farmers and home owners.

“KiwiSaver members are going to do all the heavy lifting for the whole economy.”

To make a material difference to interest rates a large chunk of take home pay would be stripped from them.

Joyce said Labour’s finance spokesman David Parker “has no idea how much KiwiSaver contributions would have to go up to make up for say a 1 per cent increase in interest rates.”

National had conducted “back of the envelope sums” which suggested that to prevent interest rates going up by 1 per cent, KiwiSaver rates would have to be lifted by 6 cents in the dollar.

I’ve seen that figure from a bank economist also. So what does that means if you are on say $60,000 a year. It means your take home pay will drop by $3,600 a year or a massive $70 a week to stop interest rates rising by 1%.

Now you may not even have a mortgage. Most people do not. Everyone who does not currently have a mortgage will have their take home pay slashed.

But what if you do have a mortgage. Say you have $300,000 owing on it. Let’s say the VSR means your interest rate is at 6% instead of 7%. What difference does that make to your weekly repayments? At 7% a $300,000 20 year mortgage costs you $536 a week. At 6% it is $495 a week so that saves you just $41 a week.

If you’re very wealthy, you’ll benefit from this policy. If your mortgage is say $1 million you’ll save $136 a week and your KiwiSaver contributions won’t increase as you’re self-employed.

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