Life is a bit surreal at the moment to say the least. New Zealand is in Level 4 lockdown and so is much of the rest of the world.
We’ve heard a lot in the media about mortgage holidays and rent freezes to help ease the financial pain that many are feeling right now.
So how do these work and how might they help?
NZ Mortgage holidays
A mortgage holiday sounds like a great idea – I would love to take a holiday from my mortgage! But it’s not a fun as it sounds. Taking a mortgage ‘holiday’ really just means that you put off paying your mortgage for a bit, but the costs still mount up.
Think of a mortgage holiday like an actual holiday that you’ve put on your credit card. If you went on holiday and paid for all of it on your credit card, you still need to pay it all back when you get home. Also, there will be interest waiting for you too, so it will cost you more than if you had paid from savings.
How do mortgage holidays work?
A mortgage holiday or ‘repayment deferral’ as it’s also known, involves putting off paying your mortgage for a set period of time.
It doesn’t mean that you pay less on your mortgage or that you are getting any financial benefit from doing it. The interest is still building up while you are not making payments and this increases the amount you will pay on your mortgage in the long run.
Mortgage holidays: The upsides
A mortgage holiday can be a real lifeline when things are tough financially. Its main advantage it to help with cashflow. If you don’t have enough money coming in for a while, having a mortgage holiday in place means that you are not defaulting on your payments, or breaking the terms of your mortgage agreement.
When things get better, and you have enough money coming in again, you’ll be able to catch up on the payments that weren’t made during the ‘holiday’.
A mortgage holiday can give you breathing space for a short period of time if you are struggling to get by financially.
Mortgage holiday: The downsides
It actually costs you more in the long run. To start with, once the holiday ends, you’ll still have to repay your mortgage as usual. Depending on how the mortgage is structured, the weekly payments may be more to go towards the additional money owing from the holiday period.
But more importantly, if you’re not paying your interest or principle for 6 months, you’ll still have to pay that back during the life of your mortgage, costing you more overall, or extending your mortgage term.
Alternatives to a mortgage holiday
If you’re struggling to get by and you’re in survival mode, then a mortgage holiday could be a good option to take the pressure off for a while. If you think you can still make payments as usual, then it’s best not to take the holiday.
There are also alternatives to taking a mortgage holiday that could still reduce your weekly payments, but not increase the life of your mortgage quite as much. Banks may be able to offer things like:
Reducing your payments to the minimum
If you’re paying more than the minimum repayment, you could ask about dropping this payment down. This may involve restructuring your mortgage and there could be fees involved, so talk to your bank first.
Paying interest only
Again you’ll need to discuss with your bank, but paying just the interest off your mortgage still works out better than a full mortgage holiday in the long run. The payments will be less per week and although the principle won’t be reducing, it also won’t be getting any bigger due to interest adding up.
Mortgage holiday maths
Here’s a rough breakdown of the maths behind the different mortgage options. Every mortgage is different, so please use this as an example only and talk to your bank about the actual numbers that apply to you.
Say my mortgage repayment is usually $400 per week, made up of roughly $200 interest and $200 principle repayments.
A 6 month mortgage holiday will add roughly an extra $10,000 to my mortgage (not including fees and charges). Over the life of my loan, this could lead to an extra $2,000-$5,000 in additional interest (depending on how interest rates change over time) that also needs to be repaid.
- With a $500k mortgage, I would pay around $26,000 extra in interest
- With a $750k mortgage, I would pay around $40,000 extra in interest
NZ mortgage holiday articles
Here are some articles about New Zealand mortgage holidays that we found helpful:
- Coronavirus: 6 month mortgage holiday (Newshub NZ)
- Mortgage holiday scheme begins today, 27 March 2020 (RNZ)
- Banks not sharing the pain with mortgage ‘holidays’ (Newsroom NZ)
- Here’s what you need to know before you consider a mortgage holiday (Stuff NZ)