Should I Pay Off the Mortgage or Invest?

Almost everything written about this question was written for another country. That matters more than it sounds, because the two things that decide the answer, how your returns are taxed and whether your mortgage interest is deductible, are exactly the two things that differ between New Zealand and the places most of that content comes from.

This page works the question through on New Zealand rules and ends with a decision rule rather than “it depends”.

The comparison almost everyone gets wrong

The usual framing is “my mortgage is at X%, the sharemarket returns about Y% on average, so if Y is bigger than X I should invest”. That comparison is wrong in three separate ways, and each one pushes in the same direction.

• It compares a guaranteed number with an average. Paying down your mortgage returns exactly your mortgage rate. Not on average, not usually. Exactly, every time, no matter what any market does. A long-run market average is a description of the past that includes decades you might not personally get.
• It compares an untaxed return with a taxed one. This is the big one, and it is covered in its own section below.
• It ignores what the money is for. Money in a mortgage is very hard to get back out. Money in a fund can be sold on a bad day, which is usually the day you need it.

The honest version of the comparison is: your mortgage rate against your expected return after tax and after allowing for the risk you are taking to get it. Once you write it that way, the answer moves a long way toward the mortgage.

Why the tax point is a New Zealand point

Interest you do not pay is not income, so it is not taxed. Every dollar of mortgage interest you avoid is worth a full dollar to you.

Investment returns are not like that. If you invest through a New Zealand fund, it is almost certainly a portfolio investment entity and its income is taxed at your prescribed investor rate, which is 10.5%, 17.5% or 28%. If you hold overseas shares directly and they cost you more than NZ$50,000, the foreign investment fund rules generally tax you on 5% of your opening value each year whether the shares paid you anything or not.

So a mortgage at a given rate is not matched by an investment expected to return the same rate. It has to return more, before tax, just to draw level. On the part of a return that is taxed, someone on a 28% prescribed investor rate needs roughly 39% more gross to end up in the same place, and that extra has to be earned by taking risk they would not otherwise have taken.

To be fair to the other side of the argument, the gap is narrower than that sounds, and it is worth knowing why. A portfolio investment entity is generally not taxed on gains from New Zealand and most Australian shares, so part of a diversified fund’s growth is not taxed at your prescribed investor rate at all. The tax drag is real, but it applies to some of the return rather than all of it. Anyone telling you either that the tax is irrelevant or that it eats everything is selling you a conclusion.

And here is the part that makes overseas advice actively misleading here. In the United States, mortgage interest on an owner-occupied home can be tax deductible, which lowers the effective cost of the debt and genuinely tilts the answer toward investing. In New Zealand it is not deductible on the home you live in. An American article recommending you keep the mortgage and invest is giving correct advice about a mortgage that costs less than yours does.

The thing that beats both, and it is not close

Before you choose between the mortgage and an investment account, check that you are actually collecting the money already sitting on the table.

• Your employer’s contribution. If you are contributing through your pay, your employer must contribute a minimum of 3.5% of your before-tax pay. Employer superannuation contribution tax comes off that, so slightly less lands in your account, but it is still an immediate return on your own contribution that no mortgage rate approaches.
• The government contribution. Contribute at least $1,042.86 between 1 July and 30 June and the government adds $260.72. Below that it adds 25 cents for every dollar you put in. You need to be 16 or over, earning taxable income of $180,000 or under, and living mainly in New Zealand.

Twenty-five cents on the dollar, received within months, is not a return any mortgage competes with. If you are not contributing enough to collect the full government contribution, that is the first call, ahead of both options in the title.

One timing note worth knowing: from 1 April 2026 the default employee and matching employer contribution rate rises from 3% to 3.5%, and it rises again to 4% in 2028. If you are on the default rate you will start investing slightly more without deciding to. A temporary rate reduction back to 3% is available for between 3 and 12 months if that does not suit your cash flow.

A decision rule you can actually apply

In rough order, and stopping at the first one that is not yet true:

1. Any debt costing more than your mortgage goes first. Credit cards, personal loans, buy-now-pay-later. A 20% interest rate is a 20% guaranteed return, and nothing in this discussion beats it.
2. Contribute enough to collect the employer contribution and the full government contribution. See above. This is free money with a deadline of 30 June.
3. Hold an emergency fund you can actually reach. Three to six months of expenses is the usual shape. Its job is to stop a broken car turning into new debt, and money already inside your mortgage cannot do that job unless you have a revolving credit or offset facility.
4. Then compare properly. Your mortgage rate against your expected return after tax at your prescribed investor rate. If they are close, the mortgage wins, because its return is certain and the other one is not.
5. Then consider your timeframe. If the money is needed within about five years, the mortgage or a low-risk option is the sensible home for it. Over twenty years the case for growth assets is much stronger, because you can sit through the bad years rather than sell into them.

What actually changes the answer

Four things shift it, and they are worth checking against your own position.

• Your prescribed investor rate. Someone on 10.5% keeps far more of an investment return than someone on 28%, so the same mortgage rate produces a different answer for two people with identical loans. If you have never checked yours, do that before doing anything else here.
• How close you are to fixing or refixing. Most New Zealand mortgages are on fixed terms with limits on how much extra you can repay without a break cost. The window when a fixed term rolls over is when a lump sum can go in freely, and that timing is worth planning around rather than discovering.
• Whether you sleep at night. This is not a soft factor. Someone who will sell a fund the first time it drops 25% will do worse investing than they would have done paying down the mortgage, no matter what the arithmetic said beforehand.
• Whether the mortgage is on the house you live in or on a rental. The deductibility position is different, which changes the after-tax cost of the debt, and therefore changes the whole comparison.

The answer most people arrive at

It is usually not either-or. Collect the free money, keep a cash buffer you can reach, then split what is left between the mortgage and long-term investing in a proportion that matches how long the money has to work and how much certainty you want. The mortgage payment gives you a guaranteed return and a shorter loan; the investing gives you an asset that is not your house and money you can reach without selling it.

What is worth avoiding is the version where the question stays open for three years and the surplus quietly gets spent instead, which is the outcome that beats neither option.

Where these figures come from

The KiwiSaver figures on this page were read from Inland Revenue on 20 August 2026:

• The compulsory employer contribution of 3.5% and the government contribution of $260.72 for $1,042.86 contributed, the 25 cents in the dollar rate, and the age, income and residence conditions: Inland Revenue, KiwiSaver benefits.
• The default contribution rate rising to 3.5% from 1 April 2026 and to 4% from 1 April 2028, and the temporary rate reduction: Inland Revenue, KiwiSaver changes.

Mortgage rates change constantly and no rate is quoted here on purpose. Use the rate on your own latest statement, which is the only one that applies to you. Prescribed investor rates and the foreign investment fund threshold are covered on the pages linked below, each with its own Inland Revenue source.

This page is general information and not personalised financial advice. The right answer depends on your loan, your tax position, your timeframe and how much certainty you want.

Related

• Is your KiwiSaver taxed at the wrong PIR?
• Do I pay tax on overseas shares, and when do the FIF rules start?
• Work out the gap between what you have and what you could have
• What does a financial adviser cost in New Zealand?

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