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.