Paying off your mortgage allows you to get stuck into some serious saving

You’ve paid off your mortgage. Yay! But what now?

One good thing about having a mortgage is that “investing” is simple. Alongside being in KiwiSaver, the best investment for most mortgage holders is to pay down the home loan as quickly as possible.

But once that’s done, what should you do with the money that used to go into mortgage payments?

Some people move to a more expensive home, and set off on the mortgage paydown path again. There’s nothing inherently wrong with that. But being mortgage-free gives you a great opportunity to get into serious saving for retirement, and perhaps also travel or other goals.

A couple we’ll call Paul and Paula have managed to pay off their mortgage in their early 40s.

“We’re fairly well settled with our work situation and where we are living, and our kids are still fairly young,” says Paula. “So we don’t expect any job change, change of abode or other such changes in the next two or three years at least.”

Nevertheless, it’s good to have, say, three months’ income accessible. You never know when there might be a job loss, or a big unexpected bill for car repairs, house maintenance or whatever.

Where should you keep emergency money? If you have a credit card and pay it off in full every month, perhaps invest in one-month bank term deposits. Then you can put emergency spending on your credit card and, by the time you have to pay that bill, your deposit money will have matured.

Paula and Paul should also check they have enough insurance, particularly life and loss of income insurance.

Once that’s set up, what next?

“We have not really thought about what to do savings and investment-wise once we reached this point,” says Paula. “Any tips on where to start with educating ourselves on this? We had put off joining KiwiSaver, but will now look into this for starters.”

Absolutely! Actually, I would have suggested the couple join KiwiSaver much earlier. Contributing enough to get the maximum government and employer contributions will usually be a better investment, over time, than paying down a mortgage.

The other big KiwiSaver pluses are that you’re diversified — not putting all your money into one property — and you’re learning about investing.

Paula and Paul should use Sorted’s KiwiSaver Fund Finder to choose a fund. Start with “Find the right type of fund for you”. Then compare funds of that type, and go for one that charges low fees.

It wouldn’t be silly to put all their retirement savings in KiwiSaver. But you do tie up the money until you reach NZ Super age. You never know when there might be a family financial crisis, or an opportunity such as starting a business. So consider doing extra saving in a managed fund or exchange traded fund outside KiwiSaver.

These are similar to KiwiSaver, but you can withdraw money at any time. For more information see the FMA’s ‘Funds for everyone’ guide at www.fma.govt.nz. Again, look for a low-fee fund.

What about other savings goals, such as travel, a new car when needed, or house renovations?

Perhaps a quarter of the money Paula and Paul used to spend on the mortgage could go into these other goals. If they expect to spend the money within about three years, it’s best to save in bank term deposits. For longer-term savings, a low-risk non-KiwiSaver fund can work well.

By the way, I’ve assumed the couple have no other debt.

If you owe money for anything else — except an interest-free student loan — pay if off as quickly as possible.

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This column is supported by the Financial Markets Authority to encourage women to take an interest in KiwiSaver and investing. Visit fma.govt.nz for more information. Mary’s views do not necessarily reflect those of the FMA.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.