Mortgage diversion well worth it for many
The term “mortgage diversion” will be on more and more lips as KiwiSaver approaches its first anniversary in July.
It’s not too early to think about whether this feature of the scheme — available after 12 months membership — would work well if you are already in KiwiSaver, or could attract you into the scheme.
For one thing, not every KiwiSaver provider permits mortgage diversion. You may want to switch to one that permits it, or choose your provider with that in mind.
With mortgage diversion, you can divert up to half your own KiwiSaver contributions — but not employer or government contributions — towards mortgage payments on your own main home.
It doesn’t really work for non-employees. You are better off simply contributing $1,043 a year to KiwiSaver, and putting the rest of your savings directly into mortgage repayments.
But for employees earning more than $26,000 a year, it can work well.
Why the $26,000 cut-off? Well, you can’t get the KiwiSaver tax credit — which matches your contributions up to $1,043 a year — on money diverted out of KiwiSaver. And if you make less than $26,000, in most cases your contributions will total less than $1,043. So any money you divert will miss out on the tax credit, which is too good to miss.
If you earn between $26,001 and $52,000, you should divert less than half your contributions, ensuring that you leave $1,043 in your KiwiSaver account each year.
If you earn more than $52,000, simply divert half your contributions. You will automatically leave more than $1,043 in KiwiSaver anyway.
Your best use of mortgage diversion depends on which of these two situations describes you:
- You feel you can’t afford to join KiwiSaver or you are reluctant to tie up 4 per cent of your pay.
Ask if your mortgage lender will accept money diverted from KiwiSaver as part of your regular mortgage payments. If they won’t, consider moving to a mortgage lender who will.
By using mortgage diversion, you are effectively putting as little as 2 per cent of your pay into KiwiSaver, because some of it comes straight out again to help pay a bill that you would otherwise have paid with other money.
- Putting 4 per cent of your pay into KiwiSaver is not a big deal, but you want to invest as efficiently as possible.
In this case, ask if your mortgage lender will accept diverted KiwiSaver money as extra mortgage repayments, over and above regular payments. Again, if they won’t, consider switching.
Why does this work? Repaying your mortgage faster than necessary has always been a great risk-free “investment”. Then along comes KiwiSaver, which gives you an unusually high effective return on your contributions — because of the government and employer contributions. True, KiwiSaver isn’t risk-free, but you can invest in a low-risk fund if you wish.
If you join KiwiSaver and then divert up to half your contributions towards your mortgage, you can get the best of both worlds. As long as you leave $1,043 per year in KiwiSaver, you will still receive all the KiwiSaver incentives, including full employer contributions. And if you divert the rest into extra mortgage payments, you are doing probably the best thing you can do with that money.
Note, too, that this effectively frees up some of your KiwiSaver money. If you use it to repay your mortgage faster, you should be able to borrow back that money later if you need it.
One last point: You can’t divert KiwiSaver money into a revolving credit mortgage.
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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.