The mortgage or KiwiSaver?

Finding extra money in your budget to pay for mortgage cost increases can mean weighing up other spending decisions. Photo/ Getty Images.

The Reserve Bank is expected to increase the official cash rate again tomorrow putting more pressure on mortgage holders budgets.

But should you cut your KiwiSaver contributions and divert the money into paying for higher loan costs?

Absolutely not, if you can afford it, says Nigel Tate, a Waikato based financial adviser and president of the New Zealand's Institute of Financial Advisers.

"For employees it's a no brainer to keep going with KiwiSaver," he says.

That's because of the employer's minimum 3 per cent contribution which means you are getting close to a 100 per cent return on your 3 per cent contribution before the money is even invested.

And then there is the government's contribution on top of that - a $521 annual top up as long as you invest at least $1043 a year.

The official cash rate has already risen from 2.5 per cent to 3 per cent pushing floating mortgage rates to around 6.25 per cent.

The Reserve Bank has indicated further increases to the cash rate are likely to send floating rates to around 7 per cent in the next year or two.

But Tate says even that change is not going to tip the balance in favour of the mortgage.

For every half a per cent mortgage rates head up its costs an extra $10 per week per $100,000 borrowed.

"From that perspective it's not a huge amount."

Even those who are self-employed and don't get an employer contribution can still get $521 from the Government for KiwiSaver if they contribute $1043 per year - effectively a 50 per cent return on their money.

Tate believes most people should be able to cope with the increasing mortgage interest rates without cutting off KiwiSaver.

"I'd like to think when the bank gave them the mortgage it gave them some leeway."

Tate says those most likely to find it tough are first home buyers who have just bought property.

But he says those buyers should be on fixed mortgage rates so they are less exposed to increases.

He believes in most cases people can trim back their spending to match the reduced disposable income brought about by higher mortgage rates.

"In most cases people's living expenses expand to fit their income.

"For new home or first home buyers they may have to opt out of KiwiSaver for a period of time until they get a pay rise."

Jordi Garcia, an Auckland based financial adviser, says the returns on KiwiSaver are way better than the returns on your mortgage.

"If you think about KiwiSaver one of the really big advantages is not only are you putting in your own money you are getting the government contribution and also your employer contribution.

"It's way better than any return on your mortgage."

Garcia says if you are self-employed the story might change a bit, but he says only if you are struggling financially does it make sense to divert the money to the mortgage.

"The funny thing about human nature is that if you have money taken away at the start, before it goes into your bank account, you don't tend to miss it unless you are on subsistence living."

Garcia says studies have shown that if your employer asked you to take a cut in pay so the company could continue to survive it would take around six weeks for people's lifestyles to adjust.

"It suggests that most people should be able to set aside 5 to 10 per cent of their income and adjust their standard of living without noticing too much difference."

But weighing on the other side of that is the high property prices in Auckland and Christchurch which have encouraged some people to borrow up to the hilt.

Reserve Bank figures for household debt as a percentage of disposable income show New Zealand is heading back up to pre-GFC levels and that's a concern says Garcia.

"It means a large chunk of society are strapped."