Question:

My husband and I, in our 30s, both work for the government with combined income of $180,000 annually. But I am looking at going part-time later this year to start a family. That will reduce our pay to $120,000.

We have a $150,000 mortgage with the fixed rate expiring in the middle of the year. We have savings in the bank of $100,000. Should we pay that amount off the mortgage, or take advantage of the low interest rates to buy another property?

We didn't join KiwiSaver. Instead we are with work superannuation, because the employer is contributing dollar for dollar and we can withdraw the money at the age of 55. I thought this was better compared to KiwiSaver now, since KiwiSaver will not match our full contribution till a few years later.

Answer:

Mary Holm: Put the $100,000 into paying off the mortgage as soon as the fixed term ends. This is generally the best advice for anyone, and it's a particularly good idea when you are starting a family, and security becomes a bigger issue for a couple of decades.

Before the downturn, it was common to hear people worrying that paying off their home mortgage meant they had too much equity - the difference between the value of a property and the mortgage - sitting there "doing nothing". That prompted some to borrow against that equity to invest, usually in rental property.

However, I've always thought that having lots of equity in your home - or, better still, owning it mortgage-free - is a great strategy. If you do that, you are in a strong position to:

* Cope if one or both of you should reduce your income or lose your job, or if your expenses should suddenly increase. If your mortgage is low, the lender is more likely to let you make lower or no payments for a while, or to increase your loan. And if you no longer have any mortgage, it's surprising how little you can live on for a few months - going out less and postponing spending on clothes and so on.

* Help out family members or friends if they should need financial support or if they are starting a new business or similar. With a low or no mortgage, it should be easy to get a new loan for this. And if you have no mortgage, you might be able to afford to transfer money regularly to a family member.

* Take more risk with future investments. Once you are mortgage-free, you can get into a share fund or rental property knowing that, if things go badly, you're much less likely to be forced to sell at the wrong time - which is how many people suffer big losses.

Mortgage repayment also tends to beat investment if you look at risks and returns on your money.

If you pay off a 6 per cent mortgage, that will improve your wealth as much as an investment with a return of 6 per cent after fees and taxes. It's easier to find such an investment than it was when mortgages were at 10 per cent, but you still have to take considerable risk, whereas mortgage repayment is pretty much risk-free.

The alternative you are considering, buying a rental property, is quite risky these days. Your return might be well over 6 per cent a year, but you could also do abysmally, especially over the next few years.

You're right that current interest rates are relatively low, but there's no guarantee they will stay that way. Nor can you be certain rents won't fall.

House prices are a worry, too. For all the speculation that prices may have reached the bottom of this slump, I can't look past what the OECD reported a couple of months ago.

New Zealand wasn't the only country to see its house prices soar since the turn of the century. But more relevant is the ratio of house prices to disposable income - in other words, how affordable are houses. That ratio rose by an astonishing two-thirds between 2000 and 2008 - more than for any of the other 18 countries the OECD looked at.

Sure, immigration is boosting New Zealand house prices somewhat - or at least slowing the decline. But in the end, the main influence on prices must be how much New Zealanders can afford to pay. With incomes unlikely to soar, I'm not putting my money on house prices rising over the next few years.

What about your future savings? In pre-KiwiSaver days I would have suggested you also put that money into your mortgage until it's paid off. But KiwiSaver has changed that.

Firstly, I need to correct you about KiwiSaver not matching your contributions. Now that the maximum employee contribution is 2 per cent of pay, employers must match that, and you also receive the government's $1000 kick-start and annual tax credit matching your contribution up to $1043 a year.

KiwiSaver is, therefore, quite a lot more generous than your super scheme. Certainly, withdrawal at 55 is attractive. But you will surely want to spend some of your retirement savings after NZ Super age, so it can't hurt to have some of the money tied up until then.

In your strong financial position, I suggest you do both KiwiSaver and work super. You probably won't be able to receive employer contributions on both. But KiwiSaver with just the government contributions is still a great way to save - better than repaying your mortgage.

Put the minimum into KiwiSaver to get all the incentives. For employees, that means contributing 2 per cent of pay, if necessary topping that up to $1043 to get the full tax credit. Beyond that, it's best to put any extra saving into mortgage repayment.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.