Important considerations about the mortgage deferral extension
As of 18th of August, the decision to extend the mortgaged deferral scheme is being made by the gatekeepers of New Zealand banking, the Reserve Bank. A waiting game ensues as we assume the reactions of the retail banks.
It now lies with each bank to put in place their own take on the policies nuances specific to them. Here at Loan Market (and an opinion shared with many other professionals), we are expecting that they will generally follow suit to what was done prior to the COVID-19 lockdown in March this year.
The good news
There was concern about mortgage deferral schemes eroding equity and property, particularly if the COVID-19 environment were to decline property values. However, conflicting what many experts predicted, we have seen property prices generally holding well, and in some areas, increasing!
“I think that'll take away some of the concerns of the banks supporting the mortgage deferral scheme through to March 2021, given the property market has been holding up very well”, says Loan Market’s Mortgage Adviser, Simon Maule.
But although mortgage deferrals are back on the radar, homeowners really need to consider what other options there are before taking one on. The interest alone can be damaging to those not keen to increase their overall loan balance. Increasing in size, timescales, and more pressure can outweigh the benefits of a deferral.
“From a financial advice point of view, I wouldn’t recommend this is something you look at as your first option”, Simon concludes.
When is a mortgage deferral positive?
For many Kiwis across the country, this scheme could be the best thing for them.
Professionals like airline pilots who have had to drastically pivot their career, or those who have been made redundant and seen a significant decrease in income, now have a lifeline available to them for this (hopefully) short economic downturn.
The mortgage deferral has its place, and that is important to discuss. It is valuable to many people; however, it should be treated as the last resort.
What other options do you have?
Extending the loan
You may wish to consider extending the period of the loan back out to a longer schedule.
This is something we have advised for a few months now as a reminder during this economic uncertainty. Perhaps extending your loan out to 25 or 30 years may give some relief, but it will not be noticeable if you are in a challenging, financial situation.
Another option is looking at interest only. The balance of your loan remains the same here and will not increase. But you will be servicing and paying the interest cost until such time as you can navigate the financial difficulties.
Finally, and in line with the media hype, you can look at a mortgage deferral.
For many people, this is the only palatable option, but we always make sure that our clients really understand its implications before taking it. You need to be confident that this is something you must take as your only option.
What Loan Market can do
At Loan Market, we review options for every single client. We look at their financial situation and provide relevant, in depth information around the three options.
In Christchurch – and arguably most parts of New Zealand – we have not been greatly impacted in this current COVID-19 outbreak as we did in March. But we watch the trends thoroughly, every day.
Mortgage deferrals, interest only, and term extinctions all provide something to help us deal with this situation over the next few years. Given the lack of vaccines, the ability to effectively control the virus on a global scale, and uncertainty fueled by media, these sorts of schemes might just be what keeps homeowners on the property ladder.
The banks appetite needs to remain optimistic though. They need to continue to provide options and be evolving to their client’s needs. It is something we need to keep an eye as we continue to crawl through 2020.