Should You Pay Off Your Mortgage Early?
Extra mortgage repayments vs. investing — the maths depends on your interest rate, tax situation, and risk tolerance.
Should You Pay Off Your Mortgage Early in New Zealand?
Paying off your mortgage early can save you thousands of dollars in interest over the life of the loan. But should you prioritize mortgage repayment over investing your money in other assets? The answer depends on your individual circumstances, including your interest rate, tax situation, and risk tolerance. Let's dive into the maths to help you make an informed decision.
The Case for Paying Off Your Mortgage Early
In New Zealand, paying off your mortgage early can be a smart move if you have a high-interest home loan. For example, if you have a $500,000 mortgage with an interest rate of 5% and a 30-year term, you'll pay a total of $844,919 over the life of the loan, including interest. By making extra repayments, you can significantly reduce the amount of interest you pay and become mortgage-free faster.
| Mortgage Term | Total Interest Paid | Total Repaid |
|---|---|---|
| 30 years | $344,919 | $844,919 |
| 25 years | $242,919 | $742,919 |
| 20 years | $141,919 | $641,919 |
As you can see from the table above, reducing your mortgage term by just 5 years can save you over $100,000 in interest.
The Case for Investing
On the other hand, investing your money in other assets, such as shares or a KiwiSaver account, can potentially earn you a higher return than the interest rate on your mortgage. For example, if you invest $500 in a Sharesies portfolio with an average annual return of 7%, you'll earn $35 in interest per year, or $875 over 25 years. While this is a modest return, it's still higher than the interest rate on your mortgage.
| Investment Term | Total Interest Earned | Total Returned |
|---|---|---|
| 25 years | $875 | $5,125 |
| 20 years | $685 | $4,125 |
| 15 years | $495 | $3,125 |
However, it's essential to consider your tax situation and risk tolerance before investing. If you're in a high tax bracket, you may be better off investing in a tax-efficient vehicle, such as a Portfolio Investment Entity (PIE) fund, which can help you keep more of your returns.
Tax-Efficient Investing
In New Zealand, PIE funds offer a tax-efficient way to invest in a range of assets, including shares, property, and bonds. With a PIE fund, you can earn a higher return than a standard investment account, as the fund distributes its income to investors, rather than the investor being taxed on their individual investment returns. For example, if you invest $10,000 in a PIE fund with an average annual return of 8%, you'll earn $800 in interest per year, or $16,000 over 20 years.
| Investment Term | Total Interest Earned | Total Returned |
|---|---|---|
| 20 years | $16,000 | $26,000 |
| 25 years | $20,000 | $30,000 |
| 30 years | $24,000 | $34,000 |
Frequently Asked Questions
How much should I save each month to pay off my mortgage early in New Zealand?
To pay off your mortgage early, you'll need to make extra repayments each month. A good rule of thumb is to pay an additional 10% to 20% of your regular mortgage payment. For example, if your regular mortgage payment is $2,000 per month, you could aim to pay an additional $200 to $400 per month to make extra repayments.
What are the tax implications of investing in a KiwiSaver account in New Zealand?
In New Zealand, KiwiSaver accounts are taxed on their investment returns. However, the government provides a tax credit of up to $521.43 per year for members who contribute to a KiwiSaver account. This means that you'll get a tax-free top-up to your investment returns, which can help you keep more of your earnings.
Can I access my KiwiSaver account before age 65 in New Zealand?
In New Zealand, you can access your KiwiSaver account from age 65, or earlier if you meet certain conditions, such as resigning from employment or becoming disabled. However, if you withdraw your KiwiSaver funds before age 65, you may be subject to fees and penalties.
Summary
Paying off your mortgage early can be a smart move in New Zealand, especially if you have a high-interest home loan. However, it's essential to consider your individual circumstances, including your interest rate, tax situation, and risk tolerance, before making extra repayments. Investing in other assets, such as shares or a KiwiSaver account, can potentially earn you a higher return than the interest rate on your mortgage. By understanding the maths and making informed decisions, you can achieve your financial goals and live a more secure and prosperous life.
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