Mortgage Payment Holiday - Pros, Cons and Considerations
Mortgage Repayment Holidays
For many the biggest financial outgoing will be your monthly mortgage payments. If you’re struggling financially due to coronavirus crisis you may have welcomed the recent promise by the Finance Minister with cooperation from the RBNZ and NZ Main Banks to implement payment holidays of up to six months for those who are struggling to pay their mortgage.
The mortgage payment holiday will provide flexibility in repaying your mortgage by allowing you to stop or reduce your monthly payments for up to six months. This won’t be suitable for everyone but could provide much needed help if you need it, but this won’t be free money.
It's important to understand that, when taking a Mortgage Payment Holiday, any unpaid interest will probably still need to be paid back (To be confirmed).
It’s likely the lender will follow one of the following approaches/options:
Spread your outstanding payments over the outstanding term of your mortgage, so you will see an increase in your monthly mortgage payments - so, the shorter the term left on your mortgage, the larger the increase in your payments, once the mortgage payment holiday is over. You should consider the impact this will have on your future financial commitments.
Your lender may also offer other options if they are more appropriate for your circumstances. It’s possible some lenders will consider increasing the length of your mortgage term. For some making interest or capital only payments may be an option. In any case you should speak to your lender and ask them to provide an explanation of what this will mean for you and understand any other options which may be available to you.
If you have a mortgage with non-bank lender and would not normally fall under the RBNZ governed rules, your provider may choose to offer a Mortgage Holiday Option on a voluntary basis.
What is a mortgage repayment holiday?
A mortgage payment holiday is an agreement you might be able to make with your lender allowing you temporarily to stop or reduce your monthly mortgage repayments.
Benefits of a mortgage holiday
The biggest positive about a payment holiday is that it relieves some pressure for a while.
For a period of time, you have one less thing to worry about when considering your outgoings.
If you are only facing a temporary drop in income, i.e. reduced hours due to Coronavirus shutdown, and the mortgage holiday is to cover this period, this can be a sensible move.
Downsides of a mortgage holiday
While a mortgage holiday can be a useful short-term solution, it may not be suitable if you can’t afford your mortgage payments because your household income has reduced permanently.
There are several important things to bear in mind:
While you are not making mortgage payments, you’re still racking up interest on your remaining mortgage balance. (i.e. the balance and need to pay that doesn't go away and unless banks announce that they are foregoing interest being added to the outstanding loan (unlikely), then its important to understand this.
When the payment holiday comes to an end, your outstanding mortgage balance and mortgage payments will be higher than they were before the holiday
Summary and Conclusion
Right now, most, if not all of us are like the proverbial "Deer in the Headlights" with what is happening in our world - it's nothing you can prepare for (despite all those "told you so"" @#$@ heads out there telling us we should have prepared for this!).
The current announcement by the Government and Main Banks is fantastic news and I commend them for this. However, it's important to understand what considerations you need to make when looking at the option of a Mortgage Payment Holiday.
Although we don't know the full detail of the terms and conditions of the NZ Main Bank Lenders Mortgage Holiday options, I hope you are a little more equipped to objectively review any offer and options when the detail comes out in the coming hours/days ahead.
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