Whether you have owned a house for a while, or have just bought one (possibly with the help of your KiwiSaver money) you may be looking at the size of your mortgage and thinking - should I stop or reduce my KiwiSaver contributions and put more towards my loan repayments?
It’s a big question. And here’s the short answer - don’t put it all on the house at the expense of getting the most out of your KiwiSaver account. Why? It’s all about the unique benefits which KiwiSaver offers.
Conventional financial wisdom is that, in most cases, repaying mortgage debt is better than investing because the interest rate on your mortgage is likely to be greater than the potential returns, after tax, from your KiwiSaver investments.
But when you look at paying off your mortgage vs. paying into your KiwiSaver account, it’s not just about the investment returns. You also need to take into account the contributions your employer makes, and the annual ‘member tax credits’ the government adds to your account…all of which can be considered ‘money for jam’.
If you stop contributing to your KiwiSaver account, you could be missing out on your employer’s matching contributions. Then there’s the maximum $521.43 member tax credit the government gives you if you contribute $1,042.86 each year to your KiwiSaver account.
You’ll also be missing out on the “little bits add up over time” benefit of continuing your KiwiSaver contributions. Not to mention the effect of compound interest on your investment earnings.
So if you have a significant mortgage and are a KiwiSaver member, it could be beneficial for you to make the minimum contributions necessary to your KiwiSaver account to get the maximum benefits. And then putting the rest of your money to work on repaying your mortgage as fast as you can.
If you’re employed, that means contributing at least 3%, or higher if your employer matches a higher rate, plus topping up your account, if you need to, to get the maximum tax credits from the government.
If you’re self-employed, your focus might be more on contributing at least $1042.86 to get that 50% return from the government ($521.43) each year.
The good people at Sorted have done some maths on this debate, and here’s what they came up with – ‘KiwiSaver and debt’.
Your nest vs. your nest egg
Paying off your mortgage and contributing to KiwiSaver aren’t mutually exclusive. Both are key parts of retirement planning.
Having a house that you own without debt is a very important retirement goal.
But as the saying goes, you can’t eat your home. It will provide a roof over your head in retirement but (unless you rent out a room or take on a reverse mortgage) it won’t provide you with an income. So most of us will also need to have some savings to complement the basic level of income NZ Super provides.
Or to put it another way, in retirement you need to have a nest egg, as well as a nest.
Struggling with the after-effects of withdrawal
If you have just used your KiwiSaver money to help buy your first home, you should think carefully before cutting your contributions, unless you really can’t afford it. Yes, that mortgage balance is scary, but don’t forget about your retirement savings goals and the benefits you could be missing out on.
Remember how quickly your KiwiSaver balance grew again after you made your first home withdrawal; think about how big it could be in 20, 30, 40 years…and what a difference that could make to your lifestyle in retirement.
Have a go at working out how much you could have when you retire by using our retirement forecast tool.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.