Pay off your mortgage or save?

Should you be paying off your mortgage as quickly as possible, and then starting on a savings plan, or should you be setting up a savings plan at the same time as paying off your mortgage?


Different people will have different views on this and there is no right or wrong answer here – other than you should be doing something rather than spending!


Having a large mortgage, especially if you have a student loan, can mean you feel you have no money at all.  But then you may get a promotion or raise, or interest rates reduce and your principal is reducing so you suddenly have some more cash available weekly. What should you do with it?

By all means treat yourself to something.  Depending on the amount, this may be a holiday or new furniture for the house, or maybe just a night out at a special restaurant. While it will be very tempting to spend the extra on an ongoing basis, you will gain more by either further reducing your mortgage or starting a savings plan.


For me the choice is a numbers game and this is explained in more detail below.  Here’s some thoughts to help you choose whether to do one or both:


  1. If you can earn more by saving then continue to pay the minimum off the mortgage and invest the rest. For example:
    1. If your mortgage is costing you 3% pa then if you can earn more than that after tax (usually a gross return of around 5%) then you are financially better off by paying the minimum off your mortgage and investing any surplus amount. It is unlikely that you can earn a 5% return from term deposits or bonds in the current market but you may be able to earn this level of return on the sharemarket.  For example the NZX50 Smartshares has increased by 9% in the last 3 months (or around 6-7% after tax) BUT this is not a predictor of future returns.  Similarly, if you have a high interest loan eg at 7% and you would earn less than this on term deposit or in the sharemarket, then you may decide to pay off your mortgage first.  This is a numbers game.
    2. If you can buy shares in the company you work in and the shares are increasing in value, then you may want to buy those.
  2. If you already have a savings scheme underway, for example through KiwSaver, with significant contributions or a high contribution amount such as 10%, you may prefer to reduce the mortgage.
  3. Put the funds into a revolving credit account to reduce mortgage interest payments.
  4. Pay off a lump sum from your mortgage, unless there are break fees for early repayment. Usually you can pay off a limited amount without incurring fees.  If you pay that and still have surplus funds then use them to start a savings plan.
  5. Your personal preference and comfort level. Some people would instinctively prefer to pay off their mortgage before starting a savings plan – and this makes sense if it keeps things easier for you to monitor and manage.  Others see their mortgage as a long term plan so would prefer to start a separate savings plan.

Taylor’s $300,000 mortgage was split in two with $150,000 at 4.99% and $150,000 at 3%.  Appointment to a more senior role resulted in backpay of $10,000.  Taylor found that the NZX50 Smartshares had provided a return of 9.09% (after fees and taxes) for the last 3 months.  While there was no assurance that such returns would continue, Taylor was comfortable with the mix of shares and decided to put the backpay into the shares rather than paying off some of the mortgage, as the return from the shares over time was expected to continue and remain higher than the cost of either of the mortgages.  If Taylor was basing the decision on the return over the last year of only 3.62% (covering the COVID-19 impact period) they might have decided to use the $10,000 to pay off some of the mortgage.

In the end though the decision as to whether to use increased income or a one-off lump sum to pay off the mortgage or start or add to a savings plan isn’t material; the important thing is to do something useful with the money so it is not frittered away.


The information in this blog does not purport to be financial advice and no reliance should be placed on it. It is of a general nature only based on my experience as a Chartered Accountant in practice and specific advice should be sought for your particular situation.