Should I use my KiwiSaver to pay off my mortgage?

For many New Zealanders, their Kiwisaver fund is the single largest lump sum in their name.

And for many people in or approaching retirement, there’s the desire to eliminate monthly mortgage payments to reduce their monthly expenses.

So they ask us whether it’s a good idea to use their Kiwisaver retirement savings to pay off the outstanding mortgage.

The answer is – it depends.

That’s not a cop-out. We all have a different mix of assets and debts, and our lifestyles and personal circumstances are unique. Your financial situation is unique. You need tailored advice.

So before you go any further, I suggest you book an appointment with your financial advisor. The information below is simply an overview if you’re looking at a mortgage in retirement. (And remember, we don’t sell Kiwisaver products, so we have no skin in the game.)

Here are some things to keep in mind.

Are you in your 50s or early 60s but still working?

Remember that Kiwisaver is designed to be withdrawn after your 65th birthday. So if you haven’t turned 65 yet, you don’t have the option of using it to pay off your mortgage.

But there’s something you can do: Get an idea of the amount likely to be outstanding on your mortgage if you continue with your current trajectory of repayments. Here’s a calculator that can help you work out how much will be left on your mortgage.

Once you know that number, you can decide whether to boost your mortgage repayments, or look at increasing Kiwisaver contributions or other investments to provide more options in retirement.

Are you over 65 but still have a mortgage?

Maybe you’ve left the workforce or scaled back your involvement. Before deciding whether to pay off your mortgage early, you should figure out whether you have enough to live on.

Can you survive on NZ Super alone? Do you need your Kiwisaver to top up your income? Do you have other income sources? Think carefully about whether you should use your Kiwisaver fund to clear your mortgage. You may need that money to fund living expenses in retirement.

We know older people who still have a mortgage in their 70s. They don’t use their Kiwisaver funds to get rid of the mortgage. Instead, they live off withdrawals from their Kiwisaver and continue servicing the loan.

Their plan is to leave their mortgage in place so the lender can recover the money from their estate when they eventually pass away.

This won’t be the right option for everyone, but it might be for you.

Is your Kiwisaver earning a higher rate of return than the interest on your mortgage?

It’s also possible that you may have a high-performing Kiwisaver fund and a low interest rate on your home loan. In that case, it makes sense to keep investing in Kiwisaver while servicing your mortgage debt.

Of course, the opposite also applies. If you have some expensive debt (e.g. credit cards), then you should look to retire that debt first.

Now let’s look at some related financial decisions.

Is it best to withdraw Kiwisaver funds as a lump sum or as you go?

If you’re over 65 you can withdraw all or some of your Kiwisaver funds at any time. But if you don’t actually need this money to live on, and it’s earning a good return, it may be best to leave it invested so it continues to grow.

Alternatively, you can set up regular Kiwisaver withdrawals to supplement any other pension or income you have. That might be the difference between a penny-pinching lifestyle and a comfortable one. It depends on your personal situation.

However, there are circumstances when it does make sense to withdraw a lump sum.

For instance, if you are carrying expensive debt, then it makes sense to use your Kiwisaver to pay this off. And if you are facing a large one-off expense, such as a home renovation, it might be better to draw down a lump sum from your Kiwisaver to fund this.

And here’s a note of caution. For some personality types, getting a lump sum feels like winning Lotto. A splurge follows – and then the money’s gone. If you suspect this would be the case, then beware the temptation to withdraw your Kiwisaver in a lump sum. Drip-feeding may work better for you.

You know yourself best. Be honest about your ‘money personality’, and consider getting some guidance from a professional advisor.

Should you pay off your mortgage early?

The biggest reason to pay off your mortgage early is to reduce the total amount you end up paying the bank. Mortgage interest really adds up over the decades.

On the flipside, if you boost your monthly repayments now, you can slice years off your mortgage.

In one case, we worked out that a client could afford to repay an extra $40 per month on their mortgage. That’s the cost of a few bottles of wine or a light meal out, i.e. no big sacrifice. Yet by putting this money towards their monthly mortgage payment instead, this client knocked a staggering nine years off the mortgage term.

It follows that if you’re looking at retirement within 10 years, you might not even need to use your Kiwisaver to pay off your mortgage. Simply increase your monthly mortgage repayment now, while you’re still in the work force. Here are some tips and insights that might help.

When is it best NOT to pay off your mortgage early?

We generally advise our clients to become mortgage-free as soon as possible. However, there are some exceptions.

The first is when your retirement goal is to effectively leave the house to the bank. Some people are happy to carry a mortgage in retirement, and have set things up so the bank will get its money back from their estate…eventually.

The other exception is when you have a mortgage on an asset that produces income.

For example, you might have a commercial property that you run like a business in retirement. You service the mortgage, write off the expenses, and it pays you an income. If it’s ‘washing its own face,’ then you might be better off servicing the mortgage and also hanging onto your Kiwisaver as a separate pot of money.

Another example is borrowing to build a minor dwelling on your property. If the sums add up, it could be worth servicing this mortgage instead of paying it off with your Kiwisaver.

We also know people who have taken out a mortgage to finance share options from an employer. If these shares are paying good dividends, then you may not need to pay off the mortgage early.

In the end it’s a business decision. If the mortgage has been used to buy an asset that is generating income, then you can keep paying the mortgage, and keep your Kiwisaver too.

Some final thoughts on mortgages and Kiwisaver

Kiwisaver was created to give New Zealanders more financial stability in retirement (with an option to help first-home buyers get on the property ladder – but that’s another story).

The pros and cons of using Kiwisaver to pay off your mortgage depend on whether you have other savings, what sort of lifestyle you have (or aspire to), the possibility of financial hardship, and whether you have other debts that should be tackled first.

These are questions a good financial advisor can address, once she or he has looked at your situation.

We simply suggest you have a plan. The great thing about plans is that they can change as your circumstances evolve.

And if your plan includes having the best possible mortgage for your needs, then we’re here to help.

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