Mortgage Holiday: What Every Home Owner Must Know Before Applying

To cushion homeowners in New Zealand, the government agreed with lenders on a mortgage holiday scheme. The  lenders will offer a 6-month  mortgage holiday to Kiwis whose incomes have been affected by the COVID-19 pandemic.

Contents hide
1 How a Mortgage Holiday Works?
2 How Much Will a Mortgage Holiday Cost You
3 What’s the Alternative?

Not all the details are out. However, before you sing Hallelujah, think twice. Back in 2009 when Prime Minister John Key floated the same idea, Rachel Grunwell and Nicola Shepheard  termed it as a “holiday from hell.”

A mortgage holiday means a bigger bill in the future and you shouldn’t buy in unadvisedly.

Here’s why

How a Mortgage Holiday Works?

A lender could extend a mortgage holiday as one way to help a homeowner who is facing financial difficulty and unable to make mortgage payments.

The intervention entails the bank “freezing” mortgage payments for a predetermined time. This enables the troubled homeowner to reorganize their financial position or wait out the storm.

During the holiday, mortgage payments are suspended and the bank does not report the loan as defaulted. Therefore, your credit score remains intact. The bank also does not charge penalties for missed payments. However, interest still accrues.

At the end of the mortgage holiday period, your credit record will be clean but with a bigger mortgage bill.

 

How Much Will a Mortgage Holiday Cost You

Although the bank freezes payments to the mortgage account, ordinarily it would not stop interest from accruing.

Suppose you took a mortgage of NZ$ 450,000 for a 30-year term, and you’ve been paying for the last five years. If the home loan is on a reducing balance structure, interest accrual over the 6-months mortgage holiday will amount to about NZ$10,000. If you stretch the holiday to a year, you will accrue slightly about NZ$19,000 in interest. You can call it a bonus for the bank for giving you a break.

The extra amount will be spread over your remaining payments after the holiday is over.

A mortgage holiday is like taking a loan, secured by your home, of NZ$19,000 and splashing the cash on frivolous expenditure. No one is doing that now.

 

What’s the Alternative?

The COVID-19 situation presents unprecedented challenges to everyone. If you’ve lost a significant chunk of your income, a mortgage holiday may seem appealing. But it is a short-term solution that leaves you with a bigger mortgage bill.

Rather than opting to “freeze” some payments, including the mortgage, consider adjusting to minimal payments.

Concerning the mortgage, consider switching to interest-only payments during the crisis season. Then focus on trimming your expenditures and mopping up as much cash as possible from the non-essential expenditure. Look to slash your credit card payments, fuel, entertainment, and travel spending. The  recent containment measures  will help you keep such expenses in check. Then channel the savings to vital expenses such as mortgage payments.

 

You can also consider refinancing the mortgage to a cheaper option. However, you need expert help, such as an experienced mortgage broker, to evaluate the market and the effect of switching lenders.

 

To conclude, during this time of crisis, you should be looking to make progress in one of the most important personal finance objectives, lowering your debt level. Unfortunately, a mortgage holiday does not help you achieve this goal.

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