QUESTION: Should I join KiwiSaver or pay off my mortgage first?
ANSWER: Usually repaying debt takes precedence over savings. This is because with debt there is a certainty of having to pay interest every day, while the return on investments can be uncertain.
However, with KiwiSaver there are more factors than just investment return to consider. Let's assume you are on a salary of $60,000 pa and contribute two per cent of your income ($1200 pa) to a KiwiSaver account. On top of your contributions you will also get two per cent from your employer, plus $521 from the Government in "tax credits" each year. This equates to a return of 143 per cent pa on your investment of $1200. With mortgage rates starting at around 5.6 per cent pa, this is considerably better than the "return" you would get by putting an extra $1200 on your mortgage each year.
Those who say "I am not going to join KiwiSaver until I've paid off my mortgage" are missing out on years of Government contributions and employer contributions as well if they are in paid work. And how many are actually putting that two per cent on to their mortgage instead of into KiwiSaver?
I believe that many people use their mortgage obligations as an excuse not to sign up to KiwiSaver, when in fact they just haven't got round to it. Inertia is recognised as a major contributing factor to the behaviour of investors in schemes like KiwiSaver. It works both ways - the majority of those who are automatically enrolled stay in but if they have to sign up, many don't.
In a few cases it would make sense to deal with your mortgage first, for example if you are on such a high income that 2 per cent would make a considerable difference to your mortgage balance and/or if your mortgage is very large and causing you a great deal of worry.
But if you have just been using your mortgage as an excuse not join KiwiSaver I suggest you reconsider.
Shelley Hanna is an authorised financial adviser FSP12241. Her disclosure statement is available on request and free by calling 8703838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email email@example.com.