Plans by the Government to allow homeowners to use the KiwiSaver savings scheme to help pay off their mortgages have had a cautious welcome from lenders and advisers.
Minister of Finance, Michael Cullen, has announced that savers will be able to divert half of their KiwiSaver contributions to mortgage repayments. This is one of several proposed changes announced to the controversial scheme, whose implementation has been delayed by three months, from April next year to 1 July. In its original form the voluntary scheme proposed that money would go exclusively into investment funds managed by appointed managers.
However standard financial advice for people who have mortgages is to concentrate on repaying their debt before building savings because debt costs more to service than returns available on investments.
In its proposed new from KiwiSaver will allow contributors to put half of the minimum contribution of 4 per cent of wages towards mortgage repayment.
However to take advantage of this option it will be necessary for a saver’s scheme provider and lender to provide facilities to do so. Mortgage diversion will be available after a saver has made 12 months of contributions. The Inland Revenue says it will not be compulsory for scheme providers to offer the mortgage facility and savers will have to ask their scheme providers and mortgage lenders if they offer it.
Sam Knowles chief executive of Kiwibank said: “In terms of what you would call sensible practice, the idea of establishing a savings record and paying off your home loan quickly makes sense.”
However, Knowles said he wanted to know more about how the administration of the mortgage-diversion system would work.
“If it can be done in a way that does not have high compliance costs it makes sense.”
Craig Dealey, general manager of financial adviser New Zealand Financial Planning agreed that the theory was good but was concerned that savers would not aspire to investing more than the amount necessary to repay their homeloans.
“It is positive enough and might make KiwiSaver more balanced for those who say they can’t save because they have to pay off their mortgage.
“There is always the worry that people think ‘I am saving anyway’ so won’t think about (doing) any more.’
Savers should aim for a spread of investments for retirement, said Dealey. Simply relying on a freehold property would not be enough.
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