At the height of the 2008-2009 financial crisis, former Prime Minister John Key rooted for banks to give homeowners up to 12 months of mortgage holidays. It seemed like a great idea. But Martin Hawes’s rebuttal described mortgage holidays as “holidays from hell.”

The current coronavirus outbreak is expected to create economic shocks that will impact many companies. Tour operators are looking at an income loss of $180 million per month which comes from Chinese tourists. This is bound to have a ripple effect on businesses and employees.

If you don’t have some savings stashed up somewhere, you may need financial assistance or consider a mortgage holiday.

Are you planning to take a mortgage holiday?

Here’s a deeper look at whether it’s a break worth taking.

What is a Mortgage Holiday and Who Needs It?

Just as the term implies, a mortgage holiday is a break from making your regular home loan payments. Most lenders set the break between three to 12 months. It’s a temporary ‘suspension’ of your mortgage payments but hardly ‘a get out of jail free card.’

Mortgage holidays are often included as part of ‘bailout’ plans by lenders to homeowners facing temporary financial hardships. The Banking Ombudsman Scheme also recognizes them as such. But it adds a note of caution to whoever is enticed by such an option, that it may not be a great form of financial assistance.

Mortgage holidays can serve as a temporary relief for but they don’t just serve your interests.

Here’s how.

You’ll Pay the Mortgage for Longer

A Mortgage holiday, just like any other holiday, is not permanent. When you resume making mortgage payments, the loan term will be longer. Worse still, interest continues to accrue even when you are on “holiday.”

So you’ll not just get back to a stretched mortgage term but also a bigger loan!

You’ll Pay More Interest

Back in 2009, the Herald calculated the extra interest payments on an NZ$250,000 home loan due to a mortgage holiday (the rate used was 8%) and came up with a jaw drop figure of NZ$28,000. You may be thinking that the rates were off the roof at that time. But the basics do not change.

When you take a mortgage holiday, the bank suspends the mortgage payments but the interest still accumulates! But that’s not all. Since the loan term is longer, the mortgage also accrues more interest over the elongated term.

So you’ll be paying more for longer.

If you’ve been having a hard time trying to save for a rainy day, chances are it’ll even be harder making bigger mortgage payments.

How to Use the Holiday Wisely

Mortgage holidays are not fancied even by the banks. For instance, Kiwi Bank says that it should be the last resort. ANZ Bank, which commands nearly 30% of the market, scrapped standard mortgage payment holidays. The Bank now only considers applications from those who are:

• Unable to make mortgage payments for a short period.
• Need temporary assistance with repayments.
• Are certain about regaining their financial footing.

Mortgage holidays are reserved only for brief financial hardships. More importantly, you should have a concrete plan to resume payments. But that’s easier said than done.

If you foresee financial headwinds, perhaps alternative financial assistance for home loans could work for you. Talk with an experienced mortgage broker first. You’ll get invaluable guidance on options perhaps you’re yet to explore.