Should KiwiSavers with mortgages keep contributing?
This year’s changes to KiwiSaver make it debatable whether members with mortgages should keep contributing to the scheme.
There’s no doubt that it’s still wise for everyone eligible to join KiwiSaver, partly to get the $1000 kick-start. But non-employees don’t have to contribute at all, and employees can take contributions holidays after a year. Should you stop contributing?
Not if you have no debt. The tax credit — now 50c for every dollar you contribute up to a maximum credit of $521 a year — is still well worth getting, even though it has been halved. And for employees, the employer contribution of 2 per cent of pay, rising to 3 per cent from April 2013, is also attractive, even though it will be taxed from April this year.
However, if you have credit card or other high-interest debt, you will almost certainly get more bang for your buck by stopping KiwiSaver contributions and using that money to repay your debt as fast as possible.
For KiwiSavers with mortgages, it’s a bit more complicated. Let’s start with net worth, which measures how well off you are. It’s your assets minus your debts.
Say you have a house and other assets worth $500,000, a $200,000 mortgage, and no other debt. Your net worth is $500,000 minus $200,000, which is $300,000.
To increase your net worth, either add to your assets or reduce your debt. In this context, either contribute to KiwiSaver or make extra mortgage repayments.
Which is better? We need to compare:
- The return you expect in KiwiSaver — how much your savings will grow, taking into account government and employer contributions. This has to be a guesstimate.
- The “return” on repaying the mortgage. This is the mortgage interest rate — the interest you don’t pay because you have reduced the loan.
Before the halving of the KiwiSaver tax credit and taxation of employer contributions, number crunching showed that contributing to KiwiSaver was likely to improve your net worth more than making extra mortgage repayments.
And from now on, most employees with mortgages will probably still be better off continuing with KiwiSaver — although you should contribute only enough to get all the incentives. That means 2 per cent of pay, rising to 3 per cent in April 2013, and boosted if necessary to $1043 a year to maximize your tax credit. Any saving beyond that should go into repaying the mortgage.
It’s different, though, if you are a non-employee, self-employed or an employee who effectively pays your own employer contributions because your take-home pay is reduced by the amount of those contributions. You might be better off diverting your savings to reduce your mortgage.
I say “might” because there are other factors to take into account. Sticking with KiwiSaver will help you learn more about how investment markets operate. And you will diversify your savings away from just housing. These are big pluses.
On the other hand, if your mortgage is close to the value of your house, or you are worried about job security, or you plan to stop work for a period, it would be good to reduce risk by paying down the mortgage.
Still can’t decide? Over the years, there probably won’t be a lot in it. Both contributing to KiwiSaver and repaying the mortgage are good moves. Go with what feels right.
Footnote: If you stop KiwiSaver contributions, make sure you reduce your mortgage rather than just spending the money, by immediately setting up an automatic payment.
And once you have repaid the mortgage, get straight back into KiwiSaver contributions — assuming the incentives are still as good as they are now.
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.