The upcoming Tax Cuts: Pitiful… or Potential?

Thanks to recently-announced new tax thresholds, the government will be putting a little extra in our pockets each payday.  For many of us, that’s where it’ll stay - in our pockets, to help with the rising cost of household expenses. But what if you were to put your tax relief to your mortgage, or KiwiSaver? That little could turn into a lot.

A quick look at the latest inflation figures shows our cost of living here in New Zealand has increased by around 5% in the last 12 months. And late last year, the figure was sitting at 7% for the previous 12 months. That’s about a 10-12% jump in our cost of living in around two years! Without an income increase to offset it, households are going backwards financially.

To add insult to injury, mortgage interest rates have risen sharply over the past couple of years (in a bid to get inflation under control).
There’s no doubt about it - the average Kiwi family is being squeezed pretty hard right now.

So - these tax cuts coming up are going to be welcomed by most households, and those doing it tough.

Based on the average NZ income, the approximate ‘in the hand’ benefit of the tax cuts will be around $20 per week.

Now I don’t know about you, but I don’t think $20 goes very far these days. If I want to treat myself to some lunch (my go-to is Sushi) I’m spending at least $15, and if I’m shouting my 21-year-old some takeaways I’m down about $30 at least! It’s highly likely that for many families, the extra income will be quickly absorbed into household cashflow. 

However, if you’re able to manage your household cashflow as it is, you could turn that $20 a week into tens of thousands…

A quick disclaimer here: These examples are general in nature and designed to raise awareness; they’re not intended as personalised financial advice. Everyone’s circumstances are different, so getting independent financial advice for your personal situation is recommended. If you don’t know what your next best step should be (or perhaps more aptly: you don’t know what you don’t know), getting some independent financial advice can help you save money and even make money. 

Put it on the mortgage
Let’s say you have a mortgage of $500,000, with 20 years remaining on your loan term, and an annual interest rate of 6.5%

Putting that extra $20 onto the mortgage is going to have it repaid about 1 year faster.

But even more impressively, this would also save about $20,000 in interest charges, compared to staying with minimum mortgage repayments.

Paying off the loan a year earlier also means you are freeing up what you would normally be paying on your home loan for that year. In this example, you’re talking about $44,000 in mortgage repayments you won’t have to make!

What else could you do with that sort of money? You could put it away for an easier retirement, help with family education expenses, go on a dream holiday (or two!)…

Just check the terms of your mortgage first, to make sure you’re able to make extra repayments without penalties. Most home loan products have an allowance for increased repayments, but some loans don’t.

Putting it on your KiwiSaver

The life expectancy  here in NZ is about 80 for men and 83-84 for women. That’s several years - even decades - of retirement you need to be able to fund. So, what would happen if you put that extra $20 a week into your KiwiSaver?

Your position will be unique to you, but let’s use this example: a 40-year-old on a salary of $75,000, with a current KiwiSaver balance of $35,000, invested in a Growth fund, assuming an average annual investment return of 7.5% and paying the minimum contribution of 3%.

As-is, this person would be on track to an expected balance of around $515,000 at retirement age (65).

However, if our hypothetical person put that extra $20 into their KiwiSaver, through the magic of compound interest, the expected future balance becomes $583,000 – an increase of $68,000!

The extra $20 a week on its own adds up to an additional $26,000 of your own money, but $42,000 extra is created just through compounding interest. Now that’s making money work for you. And if you have a significant other and you both put the extra $20 into KiwiSaver? Well… let’s just say there’ll be even more gold for those golden years.

What could you do with a bonus $68,000 or more? That’s the fun part - planning (and looking forward to) what you’ll do when you no longer need to work, and your time is your own.

To sum up: if you’re able to manage your household expenses at the moment, it’s a great idea to consider giving your tax relief to ‘future you’ – they’ll thank you for it!

As always, we’re here to help – seeing hardworking Kiwis thrive financially is what gets us up in the morning.
Contact Craig (mortgage broker and professional financial advisor) and let’s chat!

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker/financial advisor to ensure it is suitable for your circumstances.