Following widespread economic breakdown due to the coronavirus (COVID-19) pandemic, the government has undertaken a raft of measures to safeguard Kiwis. Among the actions was a deal with retail banks to extend to homeowners a 6-month mortgage holiday.

What is a mortgage holiday?

A mortgage holiday happens when you take a break from making your regular mortgage payments. In most cases, lenders extend such flexibility when the homeowner encounters financial hardships and reaches out for assistance. In this case, homeowners whose sources of income have been adversely hit by the coronavirus (COVID-19) pandemic have access to a 6-month holiday.

You can take a “full holiday” and freeze the entire payments for the duration. Or you can possibly lower payments.

Who is eligible?

Ordinarily, lenders extend mortgage holidays to homeowners facing financial hardships. The lender would request for evidence to support this, and a statement of status to back up the request. However, homeowners whose income sources have been affected by the pandemic are now potentially eligible. It may even be potentially eligible if you have concerns but may not have experienced a drop yet.

The government has agreed with retail banks to make special concessions for this group. This is in line with the standard eligibility criterion – and the aspect is the homeowner may be experiencing financial hardships.

However, banks will still uphold the responsible lending code and assess your financial status. They will also review your previous payment behavior and the type of contract. Some of the concessions the banks could make under the COVID-19 crisis include:

• Disregard how long you have had the mortgage
• Set aside time limit between two successive mortgage holiday applications.

Ordinarily, dark spots on your payment history would make it harder to qualify for a mortgage holiday. However, we are facing an unprecedented crisis. Banks could give homeowners with bad credit history some leeway. So don’t be shy, reach out to your lender and make the request.

Pros and cons of a mortgage holiday

Like any vacation, there are good sides and bad sides to a mortgage holiday. Some of the pros are:

• It relieves some of the financial pressure for a while.
• If the loss, or dip, in income is temporary, it’s a sensible move to maintain cash flow.

The cons of a mortgage holiday are:

• The mortgage still accrues interest.
• When the holiday period ends you will be facing a larger mortgage balance and interest to pay.
• It’s not a long-term solution, especially if the income loss is permanent.

If the loss in income is permanent, consider an alternative long-term solution. Reach out to a mortgage broker for help.

Applying for a mortgage holiday

You can reach out to your lender and request the mortgage holiday. But keep in mind, the lender has to assess each case on its merit and uphold the responsible lending code. However the understanding is that it is reasonably flexible to get one.

The thought of being hit by a major economic crunch that jeopardizes your financial well-being can cause sleepless nights. Especially when it’s inevitable, like the current COVID-19 crisis.

But you can take measures to mitigate the effects. The government, along with banks have taken a step to relieve the impact. There’s  support for businesses  and banks are ready to extend a 6-month mortgage holiday to those whose incomes are at risk.

But you can do so much more. You could come out of this crisis better. Here’s how.

Take Advantage of Government Relief

A few weeks ago, the  government made public its response package  to counter the economic impact of the COVID-19 crisis. The initial package was costed at about NZ$12.1 billion. However, new figures indicate that it will cost about NZ$17-18 billion.

In the package, there are measures to support small businesses and the self-employed. Some of the approaches include wage subsidies and credit guarantees. Apart from this, the  government announced  a mortgage holiday deal with retail banks. The banks will extend a 6-month mortgage holiday for homeowners and business owners whose incomes have taken a hit from the COVID-19 crisis.

These are great measures. However, taking a mortgage holiday might not work out very well for your long-term financial wellness. After all, during the holiday the mortgage will still accrue interest. You will have an inflated mortgage bill after the holiday is over.

Consider switching to an interest-only mortgage payment plan.

Review Your Expenditure and Reconsider the Mortgage Holiday

If you are wondering how you will keep up, even with interest-only mortgage payments, we say look within. Have a second, third and even fourth look at your expenses. A mortgage holiday may give a false impression of lower expenses. But as sure as this crisis will be over, your mortgage payment will resume. But it will be bigger.

Try and cut down on all that is not necessary and channel the funds to more important payments. Like interest-only mortgage payments.

You can begin by looking into your financial contracts. For instance, you can cut down high-interest debt like your credit card bills. You can also review your insurance commitments.

Don’t seek to scale down the insurance. We all know how handy an insurance cover can be. Instead, look for ways to enhance it. Scope the market. Check if you can find the same kind of insurance plan, but at a lower rate. But remember, a good insurance cover prevents a crisis from piling to another.

You can do the same for your home loan. Rather than scrambling for a mortgage holiday, ask yourself, do you have the best deal? A mortgage broker can help you find a better deal and lower your mortgage payments.

Seek Opportunities to Enhance Your Productivity and Earn an Extra Dollar.

If you have a hard time getting sufficient sleep, exercise or opportunities to read, take advantage of less commute and do more of these activities.

On the other hand, explore your abilities to earn some extra cash. Whether it’s selling stuff online, or even freelancing. The extra cash may seem insignificant, but even small amounts can go a long way to help assure your financial recovery and prospects. Don’t forget,

By the time this crisis is over, you should be: more productive, better equipped to make more money, sharpened in your budgeting skills and with a lower mortgage bill.

The impact of the Covid-19  crisis is gradually taking shape in New Zealand. As Kiwis get-into-terms with the COVID-19 crisis, one can’t help but wonder how it will affect daily living. It’s impossible to ignore the concerns about the financial impact. The  government sanctioned  mortgage holidays as a way out. But is a mortgage holiday really worthwhile?

What other options do homeowners have?

Here’s a look at what you can do to take charge of your mortgage through the Covid-19 crisis.

Taking the Mortgage Holiday

Taking a mortgage holiday means that you take a break from regular payments on your home loan for a predetermined time. However, the interest continues to mount.

In a bid to mitigate the effects of job losses by New Zealand homeowners,  the government moved to secure  a 6-month mortgage holiday scheme with banks. Although not all the details about the scheme are out, one thing is sure, interest will continue to pile.

We recommend that you consider a mortgage holiday as a last resort.

Although the ‘holiday’, will give you reprieve for a short while, interest will continue to pile. After the six-months break, you’ll have to settle a bigger mortgage bill over the long-term. So, try to make the holiday the last resort.

Here’s what else you can do.

Change Your Payment Frequency

How often do you make mortgage payments? Weekly? Fortnightly? Or do you make payments monthly?

If you make payments every week or fortnight, you can relieve the pressure. Reach out to the bank and request to switch to a monthly payment plan. The impact will be mainly on the principle reduction, not the interest. So the bank shouldn’t have much trouble making the change. Plus, the switch will give you a couple of days to get that extra buck.

This may work well especially if you are in business and looking forward to some Accounts Receivables to be settled. However, if you are on a payroll, and facing a salary cut, consider a less speculative option.

Convert Payments to Interest-Only for a Period

Instead of suspending the entire home loan payments under the guise of a ‘mortgage holiday’, suspend the principal payments only. This works best for mortgages that are not structured as table loans.

This way, you continue to pay interests during the crisis period. But the principle stays put.

It may seem similar to a mortgage holiday. However, when you switch to interest-only payments, there’s no accumulation of interest. The mortgage period may stretch but at no extra cost.

Stretch the Mortgage Term

The instalments could also be too big due to a short mortgage term. If that’s the case, you can speak to your bank and request for a longer repayment period. This will stretch out the payments over a longer-term making them smaller. However, this has a somewhat similar impact on your loan as a mortgage holiday. You’ll pay more interest in the long-term.

Refinance to a Cheaper Option

If you are looking at a long term solution, consider refinancing to a cheaper option. With mortgage rates hitting record lows, the thought of refinancing to a cheaper option shouldn’t be far-off.

But don’t work alone. Consult with an experienced mortgage broker. They will help you to evaluate the market and the pros and cons of each option objectively.

Lastly, Withdraw Funds from Your Kiwi Saver

This is like the mortgage holiday move. It should only happen when you are facing financial hardships and should be a last resort.

The government scheme with lenders shortens the mortgage holiday process. However, it doesn’t make it any less expensive. On the other hand, withdrawing from the Kiwi Saver maybe longer, but it comes at no extra cost. Just remember, to make it a last resort.

On 24th March 2020, Finance Minister, Grant Robertson, announced that the government had struck a deal with major retail banks. They settled that banks would give a mortgage holiday of up to  six months for Kiwis whose incomes have been disrupted by the COVID-19 pandemic. But the deal only touched on the protocols of application.

The banks’ committed to evaluate requests on a case by case basis and expedite qualified applications. However, other conditions for the mortgage holiday would hold constant. It’s only the mortgagee who could give waivers on requests that don’t meet their threshold.

A 6-month mortgage holiday when the country is  facing a certain economic downturn  is welcome. But, will six months give you sufficient break? Will you be back on your financial track by then?

Here’s a brief assessment of how realistic the 6-month mortgage break is and what you can do.

Businesses were Hit Way Before the Government’s Announcement

Long before Robertson’s announcement, COVID-19 was already affecting New Zealand’s economy.

One may say that the government was still assessing the situation and policymakers were busy cracking their heads. However, the virus was making a real impact on the earnings of several Kiwis. By late February of this year, operators in the hospitality industry were facing  revenue losses exceeding $180 million. Chances are high that there were several late mortgage payments, as well as missed payments as a result of the early effects of the COVID-19 virus.

Whereas there’s a 6-months mortgage holiday sanctioned by the government, lenders still have the responsibility to evaluate the eligibility of requests. Most lenders approve mortgage holidays only for applicants with a clean mortgage bill. Would they approve requests from those hit by the early impacts of the virus?

As they say, it’s a case by case basis. One thing is certain, the process wouldn’t be as fast if you are in that group.

It’s Probably More Severe than Predicted

Everyone expected that  New Zealand’s economy would take a big hit, and the government responded with  a massive response package. But, the support (a six-month mortgage holiday) seems short-lived. On the other hand, the impact could be more severe than anticipated.

Some  economists described the risk profile of the COVID-19  crisis as uncharted waters. We have adapted  severe social distancing; it is the only known effective control. But this approach has serious negative ramifications on the real economy.

Unless there’s extraordinary innovation, the impact on the economy is likely to be more severe.

The Virus Will Be Around for Longer

For those who thought that the virus would be around for only a few weeks and things would get back to normal, you could be clinging on to false hope. Adam Kucharski, author of the book  Rules of Contagion  sets  a conservative estimate of one to two years. This may seem contrary to what  David Skegg told parliament. However, Skegg admitted that they do not know the extent of community spread. The number was likely to be far higher than the confirmed cases. Although there was an impressive dip in new infections after the level-4 lockdown, the risk of new infections is still high. Second wave infections were reported in  Singapore  and  Hong Kong  where there was successful strong measures to contain infections.

So the virus could be around for longer. Thus, the economic slowdown will probably last more than a few weeks. A 6-month mortgage holiday may not be sufficient time for homeowners to weather the storm. You will probably need more time which means a bigger balance after the mortgage holiday.

A Mortgage Holiday is not Your Only Option

Although the situation seems grim, there are a few things you could smile about.

For starters, you don’t have to take the mortgage holiday. With interest rates at historic lows, you can opt for the following:

• Stretch the mortgage term.
• Apply for interest-only mortgage payments.
• Consider refinancing to a cheaper deal.

This way, you will avoid accumulating loads of interest as it is the case in a mortgage holiday.

To conclude, it’s probable that the economic slowdown could last longer than many people anticipate. Science shows that the virus would be around for longer. With no remedy in sight, apart from severe social restrictions, a mortgage holiday may not be your best option. Reach out to a mortgage broker to explore the other options.