KiwiSaver vs Paying Off Mortgage: Which Should You Prioritise?
One of the most common financial questions for New Zealand homeowners: should you put extra money into KiwiSaver or use it to pay down your mortgage faster? This guide explores the trade-offs to help you make an informed decision.
Important Note
This article provides general information only and does not constitute financial advice. The right choice depends on your individual circumstances, including your age, income, mortgage size, risk tolerance, and financial goals. For personalised advice, consult a licensed Financial Advice Provider.
The Core Question
When you have extra money beyond your minimum KiwiSaver contribution (3%), you face a choice:
Option A: More KiwiSaver
Increase your KiwiSaver contribution rate to 4%, 6%, 8%, or 10%
Option B: Extra Mortgage Payments
Make additional payments to reduce your mortgage principal faster
Always Do This First: Get the Free Money
Regardless of your mortgage situation, always contribute at least 3% to KiwiSaver if you're employed. Here's why:
Employer Matching = 100% Instant Return
Your employer contributes 3% on top of your 3%. That's an instant 100% return on your money before any investment gains. No mortgage payment can match this.
Government Contribution
Contribute $1,042.86/year and the government adds $521.43. That's a 50% return just for participating.
Bottom line: Never drop below 3% KiwiSaver contribution while employed. The employer match is guaranteed free money that beats any mortgage interest rate.
Comparing the Two Options
Benefits of Extra Mortgage Payments
Guaranteed Return
Paying off a 7% mortgage is a guaranteed 7% return. No investment can guarantee this.
Tax-Free Return
Mortgage savings aren't taxed. KiwiSaver returns are taxed at your PIR rate (10.5%-28%).
Reduced Total Interest
Extra payments early in your mortgage term can save tens of thousands in interest over the loan life.
Flexibility and Security
Lower debt means lower required payments if your income drops. Provides financial security and options.
Earlier Mortgage Freedom
Pay off your home sooner and redirect those payments to investments or lifestyle.
Benefits of Extra KiwiSaver Contributions
Higher Long-Term Returns (Potentially)
Historically, share markets have returned 7-10% annually over long periods. This may exceed mortgage rates, though past performance doesn't guarantee future results.
Diversification
Your home is one asset. KiwiSaver diversifies your wealth across shares, bonds, and property globally.
Forced Savings Discipline
KiwiSaver locks away your savings until retirement (with limited exceptions). This prevents spending temptation.
Government Contribution
Extra contributions can help ensure you maximise the $521.43 government contribution each year.
Compounding Over Time
Money invested early has decades to compound. Starting higher contributions earlier can significantly boost retirement savings.
The Simple Math
Compare your after-tax mortgage interest rate with your expected after-tax KiwiSaver return:
Example Calculation
| Your mortgage interest rate: | 7.0% |
| Expected KiwiSaver return (growth fund): | 8.0% |
| Your PIR tax rate: | 28% |
| KiwiSaver return after tax (8% × 0.72): | 5.76% |
| Result: | Mortgage wins (7% > 5.76%) |
Note: This simplified calculation doesn't account for employer matching, government contributions, or investment volatility. The 3% employer match makes the first 3% of KiwiSaver contributions always worthwhile. Beyond 3%, the calculation becomes more relevant.
Common Strategies
Strategy 1: Minimum KiwiSaver + Extra Mortgage
Contribute 3% to KiwiSaver (get employer match), put all extra money into mortgage.
Best when: Mortgage rates are high, you want guaranteed returns, you're close to paying off mortgage.
Strategy 2: Balanced Approach (50/50)
Split extra money between higher KiwiSaver contributions and extra mortgage payments.
Best when: You want diversification, uncertain about future rates, have a long timeframe.
Strategy 3: Maximise KiwiSaver First
Contribute 6-10% to KiwiSaver, make minimum mortgage payments.
Best when: You're young, have a small mortgage, expect high investment returns, mortgage rates are low.
Strategy 4: Revolving Credit Hybrid
Use a revolving credit facility to park emergency funds against mortgage, freeing up income for KiwiSaver.
Best when: You have discipline, want flexibility, have stable income.
When Extra Mortgage Payments Make Sense
- •Your mortgage interest rate is above 6-7%
- •You value guaranteed returns over potential higher returns
- •You're risk-averse and market volatility stresses you
- •You're close to paying off your mortgage (under 10 years left)
- •You want the security of owning your home outright
- •Your income is variable and lower debt provides flexibility
When Extra KiwiSaver Contributions Make Sense
- •Your mortgage interest rate is below 5%
- •You're young (20s-30s) with 30+ years until retirement
- •You're comfortable with investment volatility
- •You haven't maximised the government contribution ($521.43)
- •You want to diversify beyond property
- •You need the forced savings discipline KiwiSaver provides
Frequently Asked Questions
Can I use KiwiSaver to pay off my existing mortgage?
No. KiwiSaver can only be withdrawn for first home purchase (deposit), not to pay down an existing mortgage. Other withdrawal options are retirement at 65, significant financial hardship, serious illness, or permanent emigration.
What if interest rates change?
When mortgage rates drop, extra KiwiSaver becomes more attractive. When rates rise, mortgage payments become more valuable. You can adjust your strategy as conditions change—increase your contribution rate or redirect to mortgage as needed.
Should I take a contributions holiday to pay off mortgage faster?
Generally not recommended if you're employed. You'd lose the employer 3% match, which is an instant 100% return on your contribution. The employer match is almost always better than mortgage savings.
I'm self-employed. Does the calculation change?
Yes. Without employer matching, the KiwiSaver advantage is smaller. The government contribution ($521.43) is still free money if you contribute $1,042.86+. Beyond that, the mortgage vs investment comparison is more straightforward—just compare rates.
Quick Summary
- 1.Always contribute at least 3% to get employer matching—this beats any mortgage rate.
- 2.Ensure you get the full government contribution ($521.43) by contributing $1,042.86+ annually.
- 3.Beyond that, compare rates: If mortgage rate > expected after-tax KiwiSaver returns, favour mortgage. If mortgage rate < expected returns, favour KiwiSaver.
- 4.Consider your personal factors: Age, risk tolerance, job security, and goals all matter.
- 5.Get professional advice for your specific situation from a licensed Financial Advice Provider.
Compare KiwiSaver Options
If you decide to increase your KiwiSaver contributions, make sure you're with a provider that offers competitive fees and strong returns.
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