What You Need To Know About Mortgage 'Holidays'
There is no doubt that the outbreak of COVID-19 was something that nobody planned for, and the subsequent actions of the Government and health authorities to keep New Zealand safe will impact in different ways for many people. Some significant contributors to New Zealand’s economic performance will suffer for some considerable time to come, particularly those involved in tourism and hospitality, but also many small businesses undertaking a wide range of activity in various alert levels.
The Reserve Bank of New Zealand have asked the banking sector to provide assistance, in conjunction with the available Government assistance packages and subsidies. Many New Zealanders own property, either for their own occupation, or for tenancy, occupation by others, and many of these will be subject to borrowing from lenders, commonly referred to as mortgages. The banking sector have stepped up and put together relief packages for borrowers, and as a result have been receiving thousands of enquiries as people seek assistance to help them through this challenging period, particularly from those whose incomes have been affected, or those who have lost their jobs.
It is important to seek advice early, from a specialist financial, or mortgage adviser, or directly from the bank, and be prepared to make changes as required.
Everyone will have their own different circumstances, loan amounts, financial situations, family needs and so on, and relief needs to be tailored to best match the needs and longer-term objectives of each borrower. The packages offered by the banks are aimed at helping to free up cash flow from available disposable incomes, and it is important to select the right package for individual circumstances, and ensure that any decision is made with good advice. The bank packages can be summarised as follows:
The loan is restructured to have the cost of interest paid each month, with no principle being paid to reduce the loan balance, for an agreed period of time, such as three to twelve months.
Interest Rate Adjustment
It is possible that the bank may offer a lower interest rate than is currently applying to the loan, which may enable the repayment to be reduced, or the interest only amount to be reduced. There is likely a cost involved to break out of an existing fixed rate contract, and it will be appropriate to calculate the cost benefit of making this change.
It may be possible for the bank to consider offering a temporary overdraft facility, a top-up to the existing loan, or a flexible type facility to provide assistance when needed. This will need to be repaid in time and can be consolidated with existing lending when circumstances allow.
Mortgage Repayment Deferment (Holiday)
This option has received considerable media attention and requires careful consideration. A deferment can be for a period of between three and six months, where the bank will suspend loan repayments but will continue calculating interest which will be added back to the loan balance monthly. At the end of the agreed period, the loan balance will be higher. New loan repayments will then need to be calculated and are likely to be higher to maintain the existing overall loan term.
Extend Loan Term
Banks may be able to consider extending the existing loan term out to the maximum available loan term of 30 years, depending on meeting other terms and conditions to enable this. This option can also have the effect of reducing regular loan repayments.
It is important to have a robust discussion with your adviser and the bank, to ensure that the right decisions are made to ensure that any assistance is appropriately matched to circumstances. Consideration must be given to the longer-term implications given the challenges of this unprecedented event.
Please note that there are many other ways to improve your cashflow at this difficult time such as with your KiwiSaver and insurances. Again, speaking to a financial adviser should be your first port of call. To understand your options, check out this helpful page we have created for our clients, and if we can be of assistance, please make contact. We are passionate about helping Kiwi’s to give them financial certainty.
Clive Martin is a financial adviser with the Lifetime Group. He has 32 years of experience in the banking industry, and has spent over 20 of those years as a bank manager.
Recently, one of America’s largest life insurers (New York Life) did a survey of over 2,000 people to find out what they considered to be their largest financial mistakes, and how long it took to recover from them.