Money Answers: do I pick KiwiSaver or the mortgage?

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,

With mortgage rates going up, and KiwiSaver performing pretty averagely, am I better to decrease my KiwiSaver contributions and put them towards the mortgage instead? Or even take a KiwiSaver holiday to be more aggressive with my mortgage?

Thanks,

S

Hi S,

Ah, my favourite hornet’s nest to kick! Investing versus paying off the mortgage. 

Just so that you know, this is one of those subjects even financial advisers can disagree on, and much of it comes down to your goals and life priorities. 

This time, the investing side is investing in KiwiSaver, which changes the conversation somewhat.

I land on the side of “why not both?”, even when we're just talking about mortgage versus investing. But especially if we're talking KiwiSaver, you don't want to take a KiwiSaver holiday unless you really, really need to. Here's why.

The mortgage argument

Yes, it’s a good idea to pay off the mortgage early, particularly as you say, when interest rates are going up. 

A general rule of thumb is that your mortgage costs you twice. Once in the purchase price that you agree on, and then about the same amount again in interest costs and fees, over the life of a 30-year mortgage. 

That’s the power of compounding interest for you. It adds up. 

So, paying off an extra dollar on the mortgage also saves you a dollar in what it would have cost you in the future. 

It’s a powerful extra payment that I’m a big fan of and can wipe years off your mortgage. 

Here’s the problem with cutting KiwiSaver to make extra payments though. 

KiwiSaver perks

You don’t want to miss out on the government and employer contribution to your KiwiSaver. By the time your employer matches your 3% contribution, and the government chips in $521.43 (as long as you're putting in about $20 a week), you're doubling your money.

That's before you even get any investment returns. 

You only get that employer and government contribution if you're putting in money. If you don't put in money each year, you don't get those contributions back later. 

It's free money. As a general rule of thumb, you want to make sure you take advantage of it. 

The other side of it is that while KiwiSaver may be performing “averagely” at the moment, that’s only if you were wanting to cash it in right now. 

When the account is down, that means any money you put in is buying investments cheaply. So, it’s a great time to put money in, not a good time to take money out. 

You're not getting the sugar hit of seeing your money soar in value, but you're laying the groundwork right now for that to happen in the future.

There’s also a risk that you take the KiwiSaver holiday and simply don’t put the money towards your mortgage. 

The good thing about KiwiSaver is that it’s done automatically, and you won’t miss a single payment. Can you be that reliable with extra mortgage payments, or do you run the risk of frittering the money away on random things? 

I know which one I’d be in danger of.

What to do?

In your current situation, I think you’d be better off to keep contributing to KiwiSaver at 3% of your salary, to make sure that you get the full contribution from your employer, and the government tax break. 

If you miss out on those, it’s like missing out on a pay rise, which you don’t want to do. 

After that, go through your budget and see how much you could set aside each week in order to make extra contributions to your mortgage. Even $5 a week is worth it, but can you commit to $20, $50, or $100? 

To make the most of these extra contributions, talk to a mortgage broker about whether you’d be better off considering a floating mortgage, revolving credit, or putting it into savings and be ready to pay off a chunk when a fixed term comes up for renewal. 

If you keep putting just enough into KiwiSaver to get the free money perks, then focus your extra efforts on the mortgage. I think you'll find that's the sweet spot. 

Send questions to [email protected] if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received, or offer individual financial advice. 

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.