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Mortgage Holiday - How much will this holiday really cost you

April 16, 2020

The Government announced that banks will be able to provide a mortgage holiday of ‘principal and interest’ for the next 6 months to alleviate the consequences of COVID-19 on homeowners. However, there has been confusion amongst homeowners, landlords and tenants and the purpose of this article is to clarify what this means.

Firstly, I commend the government for offering additional collateral to the banks to help them support their customers during this time. Mortgage holidays can be an incredibly powerful tool when used correctly, and we will explore the math behind this. It’s particularly stressful to the business owners and employees who are suffering a substantial drop in income and that is what this is for. The purpose of the government offering this extra collateral is to avoid mortgage holders being in a position where they can no longer make their payments. This way homeowners can still keep their homes.

Mortgage Holidays are often a ‘last resort’ solution whereby a borrower would agree to not making any payments (interest and principal) for a period between 3-12 months. Banks must abide by the responsible lending code and discuss the negative implications of taking out a Mortgage Holiday. Our expectation is that banks will be releasing options to make this easier than under normal circumstances to apply for this and may even make exceptions to stretch the holiday over the remaining loan term. There are massive financial implications to taking out a Mortgage Holiday, so let’s look at the example below and 4 different scenarios.

We’ll use the NZ average house price of $640,000 as per February 2020 report from REINZ as an example with an 80% loan ($512,000) over a standard 30 years and an average 4% rate for the life of the loan for the sake of simplicity.

Scenario 1: Do not take out a mortgage holiday

Total Repayments = $879,372
Total Interest = $367,405
Repayment = $563.70/w

Scenario 2: Take 6 months Mortgage Holiday and repayments return to $563.70/w after the holiday

Total Repayments = $916,001
Total Interest = $403,668
Net Difference to Scenario 1 = $36,629
Extra time to repay your loan = 1 YR, 3M

Scenario 3: Take 6 months Mortgage Holiday and repay it over the remaining term of 29 years and 6 months

Total Repayments = $890,530
Total Interest = $377,941
Net Difference to Scenario 1 = $11,158
Repayments increase to $580.15/w post-holiday

Scenario 4: Take a 6 months Mortgage Holiday, repay within 2 years and finish the loan on the remaining 27 years 6 months

Total Repayments = $880,565
Total Interest = $368,048
Net Difference to scenario 1 = $629
Repayments increase to $712/w for a period of 2 years after the holiday and return to $563/w

Before considering a Mortgage Holiday consider using other alternatives first such as:

  • Mortgage Repayment Reduction – Many of our clients are paying more than minimum of their loan payments. Contact your bank directly to reduce these payments if you are paying above minimum and need the relief.
  • Redraw Lines – Westpac and BNZ mortgage holders who have repaid more than minimum may be able to access their redraw facility. Note, you’ll need to break your loan to access this or wait until your fixed rate is up for renewal. This will help re-instate your cash funds when the times comes.
  • Contingency Funds – Instead of accessing redraw lines or applying for mortgage holidays consider using your contingency funds (if available) in the interim.
  • Interest-Only – If neither of the options above help, we recommend contacting your bank to set up your loans on interest-only for a short term (6 months). This will alleviate some of the principal payments, however once the I/O period expires your loan will have a slightly higher minimum payment as your balances wouldn’t have dropped, yet your loan term has shrunk.
  • Mortgage Holiday – This is a last resort and is essentially a form of arranged arrears. It will provide massive immediate relief, however your interest will still accrue and your repayments would have a substantial increase immediately after the ‘holiday’. If you need this, please apply directly with your respective bank.

If you absolutely need to take out a Mortgage Holiday, consider agreeing to the bank to be able to repay the arrears within a short time frame. This substantially reduces the overall cost of the exercise but comes with a cashflow risk once the holiday ends.

Under normal circumstances, Mortgage holidays have an impact on your credit score and future borrowing. Our expectation is that banks and credit agencies will be working closely with the government to ensure this won’t be the case to support their customers.

Seek financial advice at a time like this – I know for sure I’ve already helped many of our clients understand the implications of this and find alternate solutions thereby reducing a substantial cost over that period of time.

I encourage all landlords to be kind to their tenants and have empathy for those who may have substantial drops in income. Work with them to find a solution because unlike a bank, no landlord has a government guarantee standing behind them to offer rent holidays!

Likewise for the tenants out there, please be understanding to your landlords as they too are likely topping up the repayments and may be out of work too. The equivalent for a tenant with let’s say a $500/w rent would be to receive a rent holiday of 3 months for example, and then for the remaining 9 months you’ll need to pay $670/w.

25/03/2020 Blog Post