Mortgage or KiwiSaver: where should your next dollar go?

With mortgage rates rising again and KiwiSaver contributions increasing automatically, many households are asking where their next spare dollar should be directed.

Paying down a mortgage provides a relatively certain benefit because every dollar of additional repayment reduces the interest charged on the loan. If your mortgage rate is 5.5%, reducing the balance by $10,000 could save approximately $550 in interest over a year, before allowing for changes in the loan balance and interest rate.

KiwiSaver and other investments offer a different proposition. Returns are not guaranteed, but a diversified investment portfolio may provide greater long-term growth potential, particularly for people with many years until retirement.

A useful framework is:

• Build an emergency fund first so an unexpected expense does not force you to borrow at a high rate.

• Contribute enough to KiwiSaver to receive available employer contributions and government incentives.

• Review high-interest or expensive debt before increasing risk-based investments.

• Consider your time horizon: money needed in the next few years should generally be treated differently from retirement savings.

• Compare the peace of mind of faster mortgage repayment with the potential long-term benefits of investing.

• Avoid making the decision based only on what rates or markets have done recently.

  
  

There is no universal answer. A household with a large mortgage, limited cash reserves and an uncertain income may benefit from prioritising debt reduction. Someone with a manageable mortgage, a secure income and a long investment timeframe may reasonably choose to invest more.

Often, the most suitable approach is a combination of both: maintain regular KiwiSaver contributions, make additional mortgage repayments where practical and review the structure each year as circumstances change.

We can help you compare these options using your own numbers, priorities and time horizon. Whether your focus is reducing debt, building retirement savings or creating greater financial flexibility, we can help you develop a strategy that works for your household. Get in touch to arrange a conversation with one of our advisers.