Paying off mortgage or KiwiSaver?

A reader who is close to retirement asks whether it is better to pay off a mortgage using Kiwisaver funds or continue to contribute as usual.

I am 65 years of age and working fulltime. I am still contributing to KiwiSaver and my employer will continue to contribute until I am 68 years of age. Our mortgage and KiwiSaver savings are similar balances. I wonder - should I pay the mortgage off now with what I have got in my KiwiSaver, or do I keep paying it off whilst I am still working? I have until July 2019 to pay off my mortgage. I have been in KiwiSaver for more than five years, so now that I am 65 I can apply to withdraw the money if I want to.

You are fortunate that your employer is willing to continue making their contributions until you are 68, as they are not obliged to do so (except for those members who join KiwiSaver between the ages of 60 and 65 - their employers should contribute for five years).

You are asking a good question. Many people would say it is a good idea to pay off your mortgage as you can't guarantee that your KiwiSaver will give you a better return.

You know what your mortgage is costing you in interest, but you don't know what you will get from your KiwiSaver. But mortgage rates are at record lows, so wouldn't your KiwiSaver give you a better return?

Conservative KiwiSaver funds have averaged 5.25 per cent per annum after fees and tax at 28 per cent for the five years to June 30, 2016 (according to the Sorted FundFinder tool).

This sounds good, however, the average for both conservative and balanced funds for the past two years has been below 4 per cent per annum.

This will be less than the interest rate you are currently paying on your mortgage. The problem is, with interest rates so low fund managers will be scratching to achieve good returns from the fixed interest component of their KiwiSaver investments. And a conservative fund may have around 80 per cent in cash and fixed interest.

But it's not just about comparing interest rates. How disciplined are you at budgeting and saving?

If you withdraw most of your current KiwiSaver balance to repay your mortgage you must replace the money you have withdrawn, as well as continuing with contributions from your wages.

If your current mortgage repayments are say $250 per week, you will need to set up an automatic payment or direct debit with your fund manager to pay this amount into your KiwiSaver account.

If you delay in doing this, you may get used to having that extra money in your bank account each week and it will get harder and harder to put the savings plan in place.

If your budget allows it, you can even put in a bit more (after all, you can access this money if you need to at fairly short notice as your KiwiSaver is no longer locked in).

Right now you want to be debt free and that is motivating you to pay off your mortgage. You may not be quite as motivated to rebuild your KiwiSaver balance, as you won't get the same instant gratification you will get from paying off your mortgage.

If you are an organised and disciplined person who is good at long term planning then using your KiwiSaver to pay off your mortgage makes sense. If you are more of a 'she'll be right' kind of person then stick with the status quo.

- Shelley Hanna is an authorised financial adviser FSP12241. Her free disclosure statement is available on request by calling 06 870 3838 or go to www.peak.net.nz. The information in this article is general and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz.