Should I get a Mortgage Holiday?
The Implications of Pausing your Mortgage during an Economic Downturn
There has been a lot of media coverage during Covid-19 about banks offering mortgage holidays to their customers as a way of giving them a break from repayments during a time where finances can be tight, and in worst-case scenarios like where people have lost their jobs and are unable to meet their mortgage payments. The last time we saw this so widespread was after the Christchurch earthquakes where many homeowners paused their mortgages as a way of dealing with the financial aftermath of the quakes.
In situations where your income has been directly affected such as if you (and, or) your partner have lost your jobs, it is a more desperate time so you should consider pausing your mortgage until such time as you can afford to start making repayments again. This will ease your financial burden in the meantime so you have enough money for everyday living costs without having to worry about your mortgage whilst your income is down. Banks have been fairly flexible with applying for mortgage holidays and will let you choose how long you want to take a break for (for example, 3 or 6 months is most common).
While getting a mortgage holiday can be tempting to many, there are some key considerations to make sure you are making the right choice. Before you get a mortgage holiday, it’s worth weighing up the following:
- Have you explored getting help from the government in terms of increased benefits, wage subsidies and other finance you may be eligible for? There is a lot on offer in NZ at the moment that may help before you decide to pause your mortgage.
- Getting a mortgage holiday effectively just ‘pauses’ your mortgage for a set period of time, however this means your payments at the other end will be higher. Talk to your lender about sums covered by your payment holiday and increases in monthly repayments or the total amount payable under your mortgage contract once the holiday has ended.
- Extending the length of your mortgage (‘pushing it out’ via a holiday), means you will be paying your mortgage over a longer period of time, so you will pay more interest over the term of your mortgage. Ask your lender about the exact figures and how this could affect you long-term. In particular, if you are renting your home you may want to consider this in terms of what rent you need to charge once the holiday has ended.
An Effective Short-Term Measure: Pay Interest-Only on your Mortgage
Another short-term measure to ease financial burden during the coronavirus outbreak is to look at paying interest only on your mortgage, instead of taking a mortgage holiday. For some people, this may reduce your mortgage repayments by about half the amount which is significant to your cash flow. Paying interest only could be a good option to consider for the meanwhile until your income is stable again and you can resume your normal mortgage repayments. For example, on a $400,000 mortgage your interest-only payments could be around $400 a week versus around $800/week when paying both the interest and principal. This effectively puts your mortgage into a holding pattern so it doesn’t accumulate into a bigger amount and get any worse in the meantime.
If you are having trouble with finances during the coronavirus outbreak, get in touch with us to see how we can help. We offer practical advice and solutions to help you manage your money effectively.
by Ash Horton
June 25, 2020