BusinessDesk investments editor Frances Cook responds to emails from readers each week to answer questions about money. Below, you will find her expert advice. Send your own questions to [email protected].

Hi Frances,

I own a home with my husband, and we have a huge mortgage (about $600,000). We both work and have KiwiSaver, contributing 3% as we can't afford any more than that. 

We are average income earners, earning about $150,000 per year together, before tax. 

My father-in-law has told us a few times he thinks we should ditch KiwiSaver and put the same amount of contributions into our home loan because, in the long run, loan interest is more than what we make off the employer/government contributions plus investment gains. 

I wish I could do the maths to figure out if he's right.

Is there a way to figure out if we would be better off doing what he advises? 

We have stayed in KiwiSaver because we want to invest in our retirement and feel we shouldn't miss out on free money from our employers and the government, but it's demoralising to see how much interest we pay on our home loan – and anything to cut it sounds smart too. What do you think?

Thank you for reading!


Hi E

It makes my toes curl a little to step into a family debate … but I’m going to do it, because I’m afraid your father-in-law is wrong. 

Let me soften the blow by starting with where he’s right. He’s right to be looking at paying off debt as similar to an investment return. 

If you pay off a debt that’s costing you 6% per year, you can consider that the same as an investment that earned you 6% in the year, because you’re saving yourself rich. 

He’s also right that the built-up interest of a mortgage, over a period of 30 years or so, is shockingly expensive. 

But he’s fallen apart on the numbers, because you just can’t beat that KiwiSaver employer contribution and the government tax break. 

How it compares

This will have to stay fairly general, because you haven’t told me how long you have left on your mortgage, or the interest rate you’re paying. I also don’t know if your KiwiSaver is in a conservative or growth fund. 

Here’s the thing: even without knowing that, in the worst-case scenario, your KiwiSaver would still beat your mortgage. By a lot.

You put in 3% of your current pay. Your employer then puts in 3%, although it will be slightly less than yours, because they pay tax on it. No matter, because then you also get the government tax credit of $521 a year. 

Between the government tax credit and employer match, depending on how much you're paid, you've about doubled your money right at the start.

But then you also get investment returns. 

Seeing as you're already homeowners and I assume you have more than 10 years until you retire, I would assume a growth fund would be a good choice for you.

If you’re in a growth fund, you can expect around 7% returns per year. If you’re in a conservative fund, you can reasonably expect to get around 3% returns per year. 

That’s already accounting for things like fees and taxes, before your father-in-law gets upset with me. Before taking those into account, a growth account could give about 10% growth per year in raw figures. 

Meanwhile, there’s a general rule of thumb with a mortgage. You pay about twice – once in terms of the original figure you agreed to buy the house for, and the same again in mortgage interest and fees. 

So even if you only took the employer and government contribution on your money, which doubles it, you would already be winning with KiwiSaver. But when you add in investment returns as well, even on the lower return conservative funds, there’s just no competition. 

KiwiSaver wins hands-down.

The KiwiSaver numbers

Let’s run some numbers to really truly put this argument to bed. 

You say the two of you earn $150,00 per year, so I’ll take your income as being $75,000. 

That means you put in $2,250 a year to your KiwiSaver, as your 3%. 

Your employer puts in the same, but they have to pay the employer superannuation contribution tax (ESCT) on that, which means you actually get $1,575 a year from them. Then add in government tax break of $521.43. 

So, you get a grand total of $4,346.43 per year. That’s a 93% increase on your money, before even getting any investment returns. 

If we whip out the compound interest calculator, now let’s see what that could look like in a few decades from now. 

If you have it in a growth KiwiSaver, I’m assuming 7% investment returns per year (remember, I’m starting with about 10% per year, but taking away points for inflation, taxes, and fees). Then those returns compound over 30 years.  

Final number? $410,337.66. Nice. 

If you’re in a conservative KiwiSaver? Then I assume 3% per year, over 30 years, and you end up with $206,667.61. 

The mortgage numbers

OK, so what if you put the money into your mortgage, instead?

Without the employer contributions and government tax break, you have $2,250 extra into the mortgage per year. ANZ is New Zealand’s biggest bank, so I’ve gone for its two-year rate, 6.49%. 

Pulling up the ANZ mortgage calculator, it says that a $600,000 mortgage over 30 years would currently cost you $3,788 per month. 

I increase that by your KiwiSaver contributions of $187.50 per month. 

Your new mortgage lasts for 26 years and two months – you’ve shaved off almost four years, which is fantastic. 

But you’ve only saved $115,389. Which again, is fantastic. But it’s almost a quarter of what that KiwiSaver growth fund would have built for you in the same amount of time. 

It’s roughly half of what a conservative fund could have built you. 

To put it simply: KiwiSaver absolutely smokes the mortgage contribution. 

An olive branch

Your father-in-law is right, though, that even small extra payments early in the mortgage can wipe off thousands in what you would have paid. 

I can also appreciate that it’s no fun looking at a mortgage early in your career, and thinking good grief, that’s so much debt to deal with. 

Here’s my suggestion. 

Do just $5 a week extra for now. 

Not out of your KiwiSaver fund, just a little $5 extra on to the mortgage. Hopefully, you can manage that much, although no judgement from me if you can’t – I trust you to understand your own financial situation. 

At first, this won’t make much difference. You can check this out for yourself if you’d like – just pop into a search engine, put in whichever bank you’re with, and then ‘mortgage calculator’. 

They all have some type of mortgage calculator on their website.

I’ll stick with the ANZ calculator for now, because that’s what we’ve been using so far. 

If you pop an extra $5 a week on your mortgage, you wipe five months off the term and save $15,302 off your total payments. 

That might not seem like a lot, when we’re talking $600,000 overall. It’s easy for it to become Monopoly money when we’re talking about sums this big. 

But if someone offered to drop $15,000 into your account right now, you’d probably be pretty pleased. So, it’s money that’s absolutely worth having. 

More to the point is the mental game it creates. You put in $5 a week extra now. You get a little pay rise in the future, you decide to stick that on the mortgage, too. 

If you can even increase it to $20 a week, you’ll save $53,233, and wipe almost two years off your mortgage time. 

Maybe in the future you can build up to more than that. But you have to start somewhere. Knowing you've started with a small amount makes it more likely that you'll increase it when you're able to.

Start with small wins, keep stacking up those small wins, and they’ll become big wins. 

But, whatever you do, keep the KiwiSaver going. It simply can’t be beaten, I’m afraid. 

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Information in this column is general in nature and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.