Pay Down Your Mortgage Or Save Into Your KiwiSaver?

It’s a question we get asked a lot. If we have an extra amount of money in our salary, should we use the money to pay down our mortgage or deposit the money into our KiwiSaver?

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Pay Down Your Mortgage or Save Money Into Your KiwiSaver?

The first and most simple thing you need to do is compare the interest rates.

Mortgage rates are ~4% as of April 2019.
The 10 year average for a conservative KiwiSaver is 6.1% but you are taxed on this profit so after tax this becomes ~4.4%.

What does this mean? Well, with a $1,000 you would receive approximately $44 of income on your KiwiSaver in a year. The same $1,000 paid onto your mortgage would save you $40 of interest costs.

It's fairly neck and neck. $4 difference on $1,000.

What interest rate should you be using for your mortgage?

Is it fair to use the current 1, 2 or even 3 year mortgage rate if you are viewing the long term benefits of where to put your money? In the example above, we looked at the average return on a Conservative KiwiSaver over 10 years. That's the most data for KiwiSaver returns that we've currently got.

On average, what interest are you going to pay on your mortgage over the next 20-30 years?

That's anyones guess but consider that our interest rates are currently at historic lows. It's fair to assume that the average interest rate for mortgages in the future will be higher than current. A fair guess over 20-30 years could be 7% interest rate.

How much are you going to earn on KiwiSaver over the next 20-30 years?

In our example, we used the average 10 year return for the Conservative KiwiSaver but if you have 20 - 30 years until you retire, it seems reasonable that your KiwiSaver would be invested in a higher risk fund for the majority of the time.

The 10 year average for the Balanced Fund is currently 8% and 9.5% for the Growth Fund. Based on this we could assume a 9% return. This is after fees but before tax so would mean an after tax return of 6.5%.


So an average mortgage rate for 30 years could be 7%, and an after tax return of KiwiSaver seems like it's around 6.5%. We didn't get any further, did we? The estimated average mortgage rate over the next 30 years is reasonably close to the long term returns for a higher risk KiwiSaver.

So, if there are no massive dollar benefits to paying down your mortgage versus savings into KiwiSaver, is there anything else to consider?

Locked-In Funds

One thing to consider is that money put into KiwiSaver is locked in until you are 65, whereas a mortgage that has been reduced has equity that can be redrawn.

Pros of Locked-In Fund

The benefit of putting money into your KiwiSaver is that you can't be tempted to spend it. It is available again once you're 65 years old and, until then, the only way to access you funds is to apply for financial hardship. This can be of benefit if you are the type to spend any money you have access to on frivolous things. If you feel the need to upgrade your 68" TV to the 72" because Harvey Normans has a sale, this may be a strategy to consider.

Cons of Locked-In Fund

Financial Hardship is a difficult thing to prove. It doesn't just mean you can't afford to go to a restaurant. To prove financial hardship, you need to show you have made every effort to cut your expenses. This means extreme budgeting, reducing expenses (trading your car for a smaller, more efficient engine) and removing "excessive" expenses like Sky TV and takeaways.

This means you can't rely on your ability to retrieve your KiwiSaver funds on a whim. Even something that may be reasonably important - like private surgery - might not meet the criteria of hardship if you are on the public waiting list.

The reason for this is to protect your retirement savings from being used for unnecessary events.

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Should I pause my KiwiSaver to pay down my mortgage?

If you don't like the thought of your savings being locked into KiwiSaver until you are 65, it may be tempting to pause your KiwiSaver until you have paid down your mortgage. But there are a couple of reasons why you wouldn't do this. These are covered in more depth in our "worst decision you can make" blog but covered in brief below:

Member Tax Credit

If you put in $1, the government will refund tax of $0.50. This is up to $1,042.86 per year (meaning a maximum tax credit into your KiwiSaver of $521.43). That same $1,042.86 would get you save you just over $60 of interest on your mortgage meaning you are around $460 better off by putting the money into KiwiSaver.

Employer Contributions

If you're a salaried employee and your employer will match your contributions, then it is definitely not good to pause your KiwiSaver contributions.

As an example: an employee who earns $50,000 per year could put 3% of their salary into KiwiSaver. This would be $1,500 per year. Their employer would put another $1,500 per year which would be (unfortunately) taxed. However this would still be around $1,200 extra that is deposited into their KiwiSaver or a total of $2,700 ($1,500 from the employee and $1,200 after tax from their employer). If the $1,500 had been used to pay down a mortgage rather than being put into KiwiSaver, the interest saved the following year would be around $95-$100; far less than the $1,200 received from the employer.

The takeaway from this section; if you have an employer who will match your contributions, it is highly likely worth contributing rather than paying down your mortgage. Typically you would contribute up to the maximum your employer would match you. If you can put in 4% and your employer will also put in 4% (even if it's taxed), that is well worth it. I have seen employers that put in 13% if their employees put in 9% (meaning after tax, the contributions are dollar for dollar). You would be absolutely mad to no take advantage of this unless you couldn't make ends meet without the money.

Leveraged Purchasing and Capital Gains

If the dollar benefits are minimal between paying down your mortgage and saving into KiwiSaver, what else could be we think about when considering where to put our savings/spare money?

One other thing to consider is what you can buy with your dollar. $30,000 can buy you $100,000 of property (with a mortgage attached) but only $30,000 of shares.

In this case, a 5% gain in both the stockmarket (net after tax) and property market (which is currently capital gains free) would be a $1,500 gain for your KiwiSaver and a $5,000 gain for your property.

This example doesn't work if you only have one property because a payment of $30,000 of your existing mortgage doesn't increase your potential capital gains. However if you can take that $30,000 and purchase a second (investment) property, then you can get increased capital gains from that money.

Investment Properties and Tax Deductible Interest

In our first example, we assumed an average 30 year mortgage rate of 7%. You, of course, have had to earn income (and therefore pay tax on that money) in order to pay that interest.

So let's imagine you've paid off all of your personal mortgage and only have a fully tax-deductible mortgage.

Remember, for personal mortgages we have assumed a 7% interest rate and for KiwiSaver we have assumed a net return of 6.5%. Without tax taken into account the difference was minimal.

But with an investment mortgage, you get around 3% tax back making the net cost of an investment mortgage ~4% (7% mortgage minus 3% tax back).

Outcome of paying an investment property mortgage off versus saving into KiwiSaver

So an investment property costs you around 4% and we're still getting (on average) 6.5%. That means paying down $1,000 off your investment property mortgage will save you $40 in the following year (4%) or gain you $65 in your KiwiSaver. Over 30 years, that is going to amount to a significant difference.

Based on these numbers alone, it would seem far more beneficial to put money into your KiwiSaver rather than pay down a fully tax-deductible mortgage on an investment property.

A note on Interest Only versus Principal and Interest payments

In our investment property example, we are assuming that no principal is being paid off your mortgage. Currently banks are allowing this to occur for up to 5 years before requiring you to pay down principal. Despite our calculations showing it might be better to pay into KiwiSaver, at some point you are going to be forced to either being principal payments or move banks to restart the "5 year Interest Only" clock.

Recap of our findings

So far, we have established that for investment property, interest only, fully tax-deductible mortgages, it might be more beneficial to put money into KiwiSaver. We have estimated you are receiving 6.5% on your KiwiSaver over 30 years versus a 4% savings by paying down your investment property.

But as we saw in the section: "Leveraged Purchasing and Capital Gains", it would be better (by a factor of around 3 times) to purchase more investment properties than invest in shares. But you can't buy more properties if you are pouring your money into KiwiSaver (it's locked in, remember) so if you are looking to purchase more investment properties, it may be worth paying down your investment property mortgage so you can grab that equity out to purchase your next property.

Questions to ask yourself

So here is the questions you should ask yourself on whether you should pay down your mortgage or pay money into KiwiSaver:

  1. Is your employer going to match your contributions into KiwiSaver? If you put 3%, often your employer puts 3% into as well. You can read more about the benefits of this here. This should be a priority for any spare money up to the point where your employer match you dollar for dollar.
  2. Do you have personal, non-deductible mortgage? It might be worth paying this down. You can get that money back to purchase investment properties in the future.
  3. Do you want to buy more investment properties? If yes, then keep paying down your mortgage, even if they are tax-deductible so you can use the released equity to purchase more investment properties in the future. If not, then it could be more beneficial to put your money into KiwiSaver because of the tax benefits on investment interest expenses.


You can see the question of whether to put your money into KiwiSaver or paying down your mortgage is complicated. It depends on your risk tolerance, time until retirement, stage of life, expected returns on KiwiSaver, the average interest you're expecting to pay on your mortgage and much, much more. There is no one right answer for everyone so we would suggest talking to a financial planner for a definitive answer.

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