Mortgage diversion

2008 mortgage diversion regulations allow member contributions to be withdrawn from KiwiSaver and applied to a mortgage over principal residence.

KiwiSaver Amendment Regulations (No 2) 2008

The mortgage diversion regulations provide a facility that allows member contributions¹ to be withdrawn from a KiwiSaver scheme and complying superannuation fund and applied towards amounts that are secured by a mortgage over a member's principal residence, if the provider and the mortgagee (bank) choose to participate.

The KiwiSaver Amendment Regulations (No 2) 2008 amend regulation 23 governing which types of mortgages qualify for participation in the mortgage diversion facility. The measure was approved by Order in Council signed on 15 September 2008, with effect from 16 October 2008.

The intent of the regulations is to ensure that a mortgage over a member's principal residence is eligible, provided that the mortgage secures amounts (including principal interest and other amounts) used or acquired in connection with the member's principal residence (defined as a home loan facility) regardless of whether the mortgage also secures other obligations. This recognises that most mortgages are "all obligations" in nature, and they secure many different loan types or credit facilities, and that it will not be practical to restrict eligibility to those mortgages that secure only advances used in connection with a member's principal residence.

This is achieved by stipulating two conditions which must be complied with at all times in order to qualify for mortgage diversion:²

Contributions diverted from the member's KiwiSaver scheme may be applied only to the payment of amounts (including principal, interest, or any other amounts payable) that are owing under the home loan facility secured by the qualifying mortgage (subclause 2).
If contributions are diverted to a home loan facility, the member must not be able , without making a specific application to the mortgagee (bank), to access, withdraw, or redraw (as applicable) the amount of any diverted contributions (in whole or in part).

The policy rationale for the words "without making a specific application to the mortgagee (bank)" is to prevent members having an automated ability to withdraw diverted contributions because the purpose of mortgage diversion is to help reduce debt. Therefore, some positive action on the part of a bank employee needs to occur in order to comply with this requirement. If the bank cannot comply with this condition the mortgage securing the loans does not qualify.

This condition strikes a balance between acknowledging that re-financing through the use of a mortgage cannot be realistically prevented, and ensuring that members cannot immediately access diverted contributions.

Example 1

John's mortgage secures an instalment (table) loan, an interest only loan, and a non-reducing revolving credit facility with his Bank.

John's mortgage will qualify, provided that:

the mortgage is over his principal residence
the mortgage secures obligations that arise under the home loan facility
the table loan and interest only loan are primarily used or acquired for purposes in connection with the member's principal residence
the diverted contributions are applied to the payment of amounts that are owing under the table loan and interest only loan secured by the mortgage
John cannot, without making a specific application to the bank, access, withdraw, or redraw the diverted contributions.

The instalment (table) loan and interest only loan satisfy the definition of "home loan facility". The contributions cannot be diverted to the 10% non-reducing revolving credit loan because this type of loan is specifically excluded from the definition of home loan facility.

Example 2

Laura's mortgage is a variable rate mortgage and her bank allows her to re-draw amounts that she has paid over the minimum payment stipulated by her repayment schedule. Laura's mortgage will qualify, provided that:

the mortgage is over her principal residence
the mortgage secures obligations that arise under the home loan facility
the variable rate home loan was primarily used or acquired for purposes in connection with her principal residence. If Laura's variable rate home loan was
used to finance the purchase of an investment property, or to finance a business, then the mortgage will not qualify
Laura's diverted contributions are applied toward the payment of amounts owing under the variable rate home loan secured by the mortgage
Laura's bank can ensure she cannot, without making a specific application to the bank, access the diverted contributions.

Example 3

Amelia has a reducing limit revolving credit facility, where she can repay and draw down funds up to a set limit, but that limit reduces on a regular basis. Amelia's mortgage will qualify, provided that:

the mortgage is over her principal residence
the mortgage secures obligations that arise under the home loan facility
the reducing limit revolving credit facility was primarily used or acquired for purposes in connection with Amelia's principal residence
the diverted contributions are applied to the payment of amounts that are owing under the reducing revolving credit facility
Amelia cannot, without making a specific application to the bank, access, withdraw or redraw the diverted amount.

¹ A member may divert up to half of the total contribution.

² This is in addition to the mortgage being over the principal residence and that it secures obligations arising under a home loan facility, whether or not the mortgage also secures other obligations (see regulation 23(1).