What Is The ‘Mortgage Holiday’ And Can I Apply?
As with much of the information passed on during Government Press Conferences and media coverage, simple buzz words are thrown around to ensure that viewers can understand quickly what speakers are referring to.
However, when it comes to Mortgage Holidays, it may have given some the wrong impression of what they’re eligible for. This term can be misleading to what the offer really is.
A typical holiday implies time off from something as a result of planning and saving. A trip to the Pacific Islands doesn’t usually come with further payments once you are home, but with a Mortgage Holiday, it does.
The technical term for this situation is loan repayment deferral.
Banks are offering a six-month term maximum to the loan repayment deferral. This isn’t restricted to six months if you believe that you only need it for two or three months. Loan Market can help you calculate and set that time period that makes sense for you as well as helping to set a structure that matches your financial situation. So, there is flexibility.
This product has been delivered by the banks to help anyone that's been financially impacted by COVID-19 and is concerned about their ability to meet their obligations.
During the loan repayment deferral, you are not required to make any loan repayments.
The point to remember during all of this is that you will still be charged interest.
Your lenders are still going to keep those interest charges active during your off period. This means the balance will increase and at the end of the loan repayment deferral, you will likely need to increase your loan repayments to clear the additional money owing.
Alternatively, you can extend the term of the loan and return to payments generally at the same level you were in prior to COVID-19.
By making the decision to extend the term of the loan, you’re going to pay more interest in the long run by allowing interest to accumulate during the deferral and by virtue of having a bigger balance on the loan at the end of deferral. If you don’t increase your repayments at the end of the term, additional interest will be accumulated as the loan will run for longer.
Loan Market's Recommendations
If your income has only been affected slightly and you’ve taken the time to review your budget, (particularly considering that most of us won't be out buying coffees, takeaways and shopping), that reduction in spending can possibly offset the reduction in income.
Some households in Christchurch are saving up to $300 per month with no need to pay for petrol given the work from home policy.
If this is you, then putting your home loan on interest only, which means payments will be cheaper than the current payments, would be the best option when comparing interest only to a loan repayment deferral.
With interest only, the balance stays static on your loan, and you’ll only pay the interest component, it doesn't increase the balance as it does for the home loan repayment deferral.
For some people, the loan repayment deferral will be the only option though. We’ve already dealt with clients this week who have lost their jobs and it is the only option until things get back to normal.
The other option you have is to extend the term of your loan. That's a little bit more complicated.
In essence, if a client has been paying their loan at a faster rate than they needed to, then they have the ability to extend the loan term back out to a maximum of 30 years (less the amount of time they've already had the loan for).
For example, if I took out a loan five years ago, I could extend my loan term back to 25 years. If I'm on track to pay it off in 12 years, (because I've been paying quite aggressively) then extending it back out to twenty-five years from 12 would reduce my repayments and I would still be paying principal and interest payments.
So, my balance is still reducing slightly during the term of the loan. It's better than interest only and it's better than a loan repayment deferral as well.
If those three options seem a little confusing, you can reach out to me to breakdown further.
Regardless of what option you take, we’re here to discuss at the end of the loan repayment deferral what you’d like to do about either increasing your payments or extending your term.
You won’t need to make that decision on your own.
Your Next Steps For The COVID-19 Mortgage Holiday
Ideally, you must not be in arrears at the time you approach Loan Market Metro for assistance, regardless of whether you’re going with a deferral, interest only or term extension.
If a Mortgage Holiday sounds too good to be true, that’s because it probably is for some. This idea that clients may ‘take a break and not have an obligation during these difficult times’ is one of luxury.
If your income is significantly reduced, then this is likely the only solution for you and we are here to help with that.
In most cases though, it will be the interest-only option as your alternative. If you can tighten your budget and spend less during this time, then meeting your interest only payments should be achievable.
If loan repayment deferrals are your only option, you need to do what you need to do to get through this process, but advice and support is out there. Make informed choices and speak to us before jumping into this decision.
COVID-19 is challenging, but for now, you’ll need to meet your obligations in the meantime, as we work through this process. So, get in touch early with me and the team to avoid any delays.
I’ll be releasing relevant content like this every week to support those affected by COVID-19. From a resource point of view, I’m keen to ensure the facts are broken down and simplified. You can register for this list below.