The age-old financial dilemma of mortgage repayment versus Kiwisaver investing has never been more complex than in today's New Zealand economic landscape.
Through all market phases and cycles, I’ve helped people navigate the intricate world of personal finance. As you’d expect, this has helped me understand the nuanced decision-making process that goes into balancing debt reduction and investment growth.
Navigating your financial journey is like sailing a complex ocean with the wind against the tide. Your mortgage is the anchor that keeps you grounded, while KiwiSaver is the wind in your financial sails. Just as a skilled sailor balances multiple elements to navigate successfully, you must balance debt reduction and investment growth.
Key Points
Understand the financial implications of mortgage repayment
Explore KiwiSaver investment potential
Learn strategies for balanced financial planning
Make informed decisions about your financial future
Understanding the Financial Crossroads
The decision between paying off your mortgage and investing in KiwiSaver is not a simple mathematical equation. It's a complex financial strategy that depends on multiple personal and economic factors. Years of financial consulting have taught me that there's no one-size-fits-all solution to this financial puzzle.
New Zealand's unique financial landscape adds another layer of complexity. With housing prices varying dramatically across different regions and KiwiSaver offering government and employer contributions, the decision requires careful consideration of multiple variables.
Think of your financial strategy like cooking a perfect meal. Paying off your mortgage is like creating a solid, hearty base – your financial foundation. Investing in KiwiSaver is like adding the right spices and garnishes that make the dish truly memorable. Too much of one ingredient can throw off the entire recipe, just as an unbalanced financial approach can derail your long-term goals.
“The optimal strategy often involves finding a balance between these two financial objectives, rather than pursuing an all-or-nothing approach.”
The Case for Mortgage Repayment
Paying off your mortgage faster offers several compelling advantages. The psychological benefit of reducing debt can be incredibly motivating. Each additional payment reduces the principal amount, potentially saving tens of thousands of dollars in interest over the loan's lifetime.
In the current New Zealand economic environment, mortgage interest rates play a crucial role in this decision. If your mortgage interest rate is higher than potential KiwiSaver returns, focusing on mortgage repayment might make more financial sense. For instance, a mortgage with a 6-7% interest rate could justify prioritising additional repayments.
Building home equity provides a form of financial security that goes beyond pure monetary value. Increased equity offers future borrowing options, potential renovation opportunities, and a sense of financial stability.
Additional mortgage repayments can significantly reduce your loan term. A few extra payments each year can potentially shave years off your mortgage, providing long-term financial freedom.
The Advantages of KiwiSaver Investment
KiwiSaver offers unique benefits that make it an attractive investment option. The government contribution of up to $521.43 annually and potential employer contributions create a compelling case for an investment that can’t be liquidated very easily.
Different KiwiSaver funds provide varying investment strategies. Conservative funds offer stability, while growth funds present opportunities for higher returns. The ability to choose a fund that matches your risk tolerance and financial timeline is a significant advantage.
The flexibility of KiwiSaver is another key advantage. First-time homebuyers can use their KiwiSaver funds for a home deposit, and the fund provides a structured approach to long-term retirement savings.
A Balanced Strategy: Why Not Both?
The most sophisticated financial approach often involves a balanced strategy that incorporates both mortgage repayment and KiwiSaver investment. Real-life case studies demonstrate the effectiveness of this approach and for most clients I come across, this makes the most sense.
Consider three distinct scenarios:
Case Study 1: Sarah, Age 32, Christchurch, Young Professional
With a $450,000 mortgage at 5.5% interest, she found the best outcome for retirement in Planolitix (our planning software) by:
Increasing her mortgage repayments by $200 monthly.
Maintaining consistent KiwiSaver contributions at 6% (plus her employers 3%), revising her providers and allocation strategy.
Planolitix result at age 60:
Saved $87,910 in mortgage interest, reduced her mortgage term by 5 years.
Gained an additional amount to re-invest of $1,063,000 at age 60 from KiwiSaver savings.
Achieved $42,000 of extra income for retirement (in today’s money).
Case Study 2: Mike and Emma, Ages 42 and 41, Auckland, Mid-Career Education Professionals
With a $550,000 mortgage, they implemented a strategy to:
Maximise their KiwiSaver government and employer contributions.
Make an additional $300 of monthly mortgage repayments (50% of their surplus funds after their mortgage and P&I mortgage expenses).
Maintain their KiwiSaver contributions of 6% each, but revise their allocation and risk vs reward strategy.
Add an investment fund incase they can retire earlier than age 65, contributing 20% of their surplus funds.
Purchase a high yielding investment property using the collateral from the equity in their home, investing 30% of their surplus funds into topping up the shortfall of their rent minus the OPEX (operating costs).
Increase their existing low-level of income protection they purchased years ago, extending it to pay until age 65 (worst case), then stop their premiums going up every year with a level premium, long-term savings estimated at $41,256.
Add beneficiaries to their life insurance, so the money would get to each other within a couple of days, instead of being handled by the lawyer and taking weeks.
Planolitix result by age 65:
Saved $155,976 in mortgage interest, reduced their mortgage term by 6 years.
Gained an additional amount to re-invest at age 60 of $69,167 (investment fund) then another $1,320,000 at 65 (KiwiSaver).
This was modelled to achieve $55,603 of extra income for retirement (in today’s money).
Case Study 3: John, Age 55, Information Technology Professional, Approaching Retirement
With a $200,000 mortgage, optimised his strategy by:
Focusing on debt reduction by increasing his mortgage repayments to $500 per month.
Shifted his KiwiSaver to a better provider, reduced his risk with a mix of conservative (20%) and a balanced fund (80%) without losing potential returns, and reduced his contributions to 3%.
Once his mortgage was paid, he then focused on building up his KiwiSaver contributions.
Planolitix result by age 70:
Saved $32,200 in mortgage interest, reduced his mortgage term by nearly 5 years and got the monkey off his back.
Gained an additional amount to re-invest of $521,000 at age 65.
This was modelled to achieve $10,680 of extra income for retirement (in today’s money).
These cases illustrate a crucial principle: the most effective approach is rarely about choosing between mortgage repayment or KiwiSaver, but about creating a balanced, personalised strategy that considers your unique financial circumstances.
Professional financial advice helps you create a personalised strategy that considers your unique circumstances, risk tolerance, and long-term financial goals.
Factors to Consider in Your Decision
Several key factors should influence your decision between mortgage repayment and KiwiSaver investment:
Your current age and proximity to retirement
Current mortgage interest rates
Your risk tolerance
Overall financial stability
Potential investment returns
Younger individuals might lean more towards investment, while those closer to retirement might prioritise debt reduction. Your personal financial situation will ultimately guide the most appropriate strategy.
Consider your overall financial health. Do you have an emergency fund? Are you managing other debts? These factors should inform your decision about mortgage repayment and investment.
Regular financial reviews are crucial! We aim to review your situation about every 1 to 2 years because your optimal strategy usually changes as your personal circumstances and economic conditions evolve.
Conclusion
The decision between paying off your mortgage and investing in KiwiSaver is not about choosing one approach over another. It's about creating a holistic financial strategy that provides security, growth, and flexibility.
FAQs
Q: How much should I contribute to KiwiSaver?
A: Aim to contribute at least enough to receive full employer and government contributions.
Q: Can I use KiwiSaver for my first home?
A: Yes, KiwiSaver can be used for first home deposits under certain conditions.
Q: What's the best KiwiSaver fund?
A: The best fund depends on your age, risk tolerance, and financial goals. See this video here to understand how to choose a Kiwisaver fund.
Q: Should I make extra mortgage repayments?
A: Consider your interest rates and overall financial strategy. And, use technology to take the guesswork out of it. See here.
Q: How often should I review my financial strategy?
A: Annually to bi-annually, or after significant life changes.
Hope this helps!
Chris George | Financial Adviser
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Note: Any information provided is for general and educational informational purposes only and is not personalised advice. Your circumstances are unique and there’s no templated road to a cushy retirement! For personalised advice, please book a Strategy Call.