Mortgage Holiday During the COVID-19 Crisis: To Take or Not to Take 

As news of  Grant Robertson’s announcement on the 24th of March went round, many homeowners were left wondering whether to take or not to take the mortgage holiday.  

A mortgage holiday amidst the coronavirus crisis is a welcome break from all the anxiety and cash flow stresses.  

But on the other hand, financial advisors often counsel against taking mortgage holidays. Even banks don’t encourage clients to take holidays. Most lenders reserve it for clients experiencing financial difficulties.  

If you are wondering whether a mortgage holiday would be beneficial or not read on and find out.  

What’s a Mortgage Holiday 

When a bank grants a homeowner a mortgage holiday, it gives you a break from making regular mortgage payments. The break is only temporary and excludes any penalties, unlike a missed payment. The mortgage will also not be reported as a defaulted loan to the credit reference agencies. However, interest still accrues. 

The length of the break is usually predetermined.  

In this case, the  government and retail banks agreed on a 6-month scheme to cushion clients affected by the COVID-19 pandemic. 

Why take the Holiday 

Mortgage payments constitute one of the biggest regular expenses by homeowners. A drop in one’s income will result in missed payments and anxiety over continued ownership.  

When facing an unprecedented financial strain, it makes sense to freeze such payments. It will give you peace of mind until you can sort out the cash strain, or at least until the storm clears.  

What Happens to the Mortgage While You are on Holiday? 

While you are on holiday, you’ll get a chance to work out your finances. But the bank doesn’t stop earning from the loan. The mortgage will continue to accrue interest during the holiday. 

It’s like taking a break from work due to work-related stress. But you leave no one to handle the work. When you get back, you’ll find piles of work which could cause more stress. If you have an outstanding mortgage balance of about NZ$400,000 at 4.5%, and about 20 years to go, you’ll accrue about NZ$10,000 during a 6-month mortgage holiday.  

You’ll still owe the bank. But now, the outstanding amount will have increased.  

Who Should Take the Holiday 

Anyone experiencing financial difficulties can consider a mortgage holiday as a possible solution. But keep in mind that it’s only a brief reprieve. Therefore, the financial challenges you are experiencing should also be temporary. If you are not sure when the storm will clear, a mortgage holiday could be a recipe for deeper woes in the future. 

But you shouldn’t stop at that. Expect to make bigger mortgage payments.  

If you are not sure about either of these outcomes, don’t stress. There are alternatives to mortgage holidays.  

What are the Alternatives? 

When facing financial difficulties, such as the COVID-19 pandemic, you need cash in your pocket more than ever before. If you are not ready to take the financial hit that comes with the holiday, consider these options: 

• Convert the mortgage payments to interest-only during the crisis period. 

• Stretch the mortgage term to reduce the monthly payment amount.  
• Refinance to a different or cheaper home loan option.  

These options could reduce the payment amount considerably leaving you with more cash.   Eligibility depends on criteria, circumstances and other factors. 

Are you wondering whether to take or not to take a mortgage holiday? Check how much it will cost you. Are you ready to pay the extra interest? If yes, are you certain that you’ll bounce back and when the storm will clear? 

Talk with a mortgage broker and learn more about the mortgage holiday and your options.