Put money into KiwiSaver or pay off your mortgage.

A homeowner with some extra cash, who wants to improve their financial position, is faced with a tricky question: is it better to reduce my home loan or contribute to KiwiSaver?

Usually, debt repayment is always a priority over investment. Paying off debt is a safe way to get a guaranteed improvement in your financial position; and often the interest rate you're paying on your debt is higher than what you're earning on your investments.

But when it comes to KiwiSaver versus your home loan, it's a bit more complex because KiwiSaver has some unique benefits.

Why KiwiSaver is special

If you stopped paying into your KiwiSaver account and instead put all that money into your home loan, you would pay off your mortgage faster. However, you would also miss out on the government contributions and potentially employer contributions, plus you'd miss the compounding returns over the time it takes to repay your home loan.

The team at Sorted¹ has calculated that someone earning $50,000 and contributing 3% of their salary to a balanced KiwiSaver fund, with employer contributions too, is earning a 117% return over the year. Because of the employer contributions, that's a better rate of return than you could expect from any other legitimate investment or any debt repayment.

Making at least the minimum KiwiSaver contributions

Even if you're not an employee, contributing at least enough to qualify for the maximum government contribution each year is likely to provide a rate of return which outperforms the benefits of home loan repayment. For the first $1042.86 you contribute each year, the Government will also contribute $521.43. That's a 50% return on your money.

If you're already putting in enough to get the government contribution, any additional funds could be put toward debt repayment. The most cost-effective way to reduce debt is to repay the highest-interest loans first and make a plan to tackle the rest.

Balancing a low interest rate with potential investment gains

When the interest rate on your home loan is very low, your KiwiSaver fund (or another investment) may pay a much higher rate of return.

However, there are always risks and fees associated with investing which do not apply to repaying your home loan. You will need to weigh up the potential gains and risks of investing, compare them to debt repayment, and make a decision based on your personal financial plan.

Increasing your home loan repayments

If you're in a position to make additional payments on your mortgage, there are several ways to do it. You can make lump sum payments of any size onto any floating balance or set up an automatic payment to pay extra money onto your floating home loan balance each month.

With a fixed term home loan, your ability to repay your loan quickly is more limited – break fees may apply to large repayments. However, with a Westpac home loan, you can increase your regular repayments by up to 20% of your minimum repayment. Check the terms of your loan or contact one of our home loan specialists for more information.

¹ References to non-Westpac websites are provided for your convenience only. Westpac accepts no responsibility for the availability or content of such websites. Neither BT Funds Management (NZ) Limited nor Westpac New Zealand Limited is associated with, or endorsed by Sorted.

BT Funds Management (NZ) Limited is the scheme provider and Westpac New Zealand Limited is a distributor, of the Westpac KiwiSaver Scheme (Scheme).

The information above is subject to changes to government policy and law, and changes to the Westpac KiwiSaver Scheme from time to time.