During the 2008-2009 financial downturn,  Prime Minister John Key recommended  a 12-month mortgage holiday. This year, the government has offered  homeowners the same remedy once again amidst the Covid-19 crisis. 

But what’s a mortgage holiday? How does it impact your mortgage? Is it the only option available for homeowners during financial hardships?

Read on and find out more about mortgage holidays.

What’s a mortgage holiday?

A mortgage holiday is not a gift. It’s an additional debt which is extended by the bank under special circumstances. Homeowners are allowed to freeze mortgage payments for a while. However, interest continues to mount.

Mortgage holidays have always been available under normal circumstances. They are offered as a safety net program for borrowers undergoing financial hardships.

But these are not ordinary times for everyone. The  economic effects of the Covid-19 health crisis are far-reaching and will impact  the mortgage markets. This was the motivation behind the government’s move to strike a deal with the banks and fast-track mortgage holiday process.

How does a Mortgage Holiday Work?

Mortgage holidays often feel like the perfect remedy for homeowners facing financial hardships. But they are not good for everyone. This is because you’ll end up paying more.

According to researchers at Moneyhub, a 6-months mortgage holiday on a loan balance of about NZ$500,000, at 4 per cent and a remaining term of 20 years will inflate the costs by an additional NZ$15,000.

You may get a brief break. But the interests continue to mount, and the ‘holiday’ snowballs to a giant additional cost.

What options do homeowners have?

Convert the Mortgage Payments to Interest-Only 

You can reach out to the lender and request for a conversion of the mortgage payments to interest-only. This significantly reduces the value of each instalment. But more importantly, it doesn’t accrue additional costs, unlike the mortgage holiday.

It’s a great plan to keep payments at the minimal. At least until the crisis is over.

Nonetheless, it’s hard to find a homeowner who’s dealing with one loan – the mortgage.

Most kiwis have to find ways to settle their credit card balances, and other consumer loans besides the mortgage payments. Therefore, a more holistic view is more appropriate.

Take a Top Up and Use the Cash to Settle High-Interest Debts

Mortgage holidays are great. But they don’t answer the question about what to do about revolving debt and other short-term debts. These high-interest debts could be the reason behind the cash strain.

You can consider taking a top-up loan on your mortgage and use the cash to settle high-interest debts. It will immediately take the pressure off from your cash flow and enable you to focus on the more important debt – the mortgage. Plus, if there’s leftover cash, after settling high-interest debts, you can use it to make advance mortgage payments.

You will have to pay more interest on the mortgage. But, you’ll have peace of mind, and focus on the one important thing.

Finally, Refinance to a Cheaper Option

The Covid-19 crisis has rattled the economy. But at least homeowners have one thing going their way  – record-low mortgage rates.

Use this opportunity to scope the market for opportunities to save. But don’t work alone. Get help from an experienced mortgage broker. They will advise you on the above instalment-reduction options, give market insights, and help you assess the implications of refinancing.

You don’t have to take a mortgage holiday. Refinancing to a cheaper option will not only help you to make the instalments more affordable; you will make long-term savings on mortgage payments.