Homeowners affected by COVID-19 and want to take a six-month mortgage holiday are warned that interest is still charged and added to their loan, making it bigger when the holiday ends.
The six-month mortgage holiday announced by Finance Minister Grant Robertson on Tuesday is available to homeowners whose incomes have been affected by COVID-19.
Discussing the offer on Newstalk ZB on Wednesday, Finance Minister Grant Robertson said that under the offer, payments are put on hold and added to the total loan.
"This defers the payments, they'll end up being added on to the mortgage at the end.
"It is principal and interest so that also will mean a significant bill, but I'm very pleased the banks have stepped up for this and taken that pressure off homeowners who are worried about losing their homes for the next few months."
Campbell Hastie at Hastie Mortgages said that although the offer feels like free money, it's not.
"Think of it like going to Fiji and putting everything on the credit card: you pay nothing while you’re on holiday but you’ll pay for it when you get back," Hastie said.
But for people in a bind, 'parking the problem' could give them valuable breathing space.
"A mortgage holiday does nothing to the loan term - interest is still charged and added to the loan [meaning that] payments will be slightly higher at the end of the holiday.
"People need to consider what they'll do when the holiday is over," Hastie added.
Enable Me managing director Hannan McQueen said that before taking a 6-month break on mortgage payments, homeowners should check if they're in survival mode and need the cash.
"If you're in a state of survival [with] no income or cash reserves, the mortgage holiday is for you.
People in this situation may be supported with a wage subsidy or Government assistance and are encouraged to cut back all costs - including the mortgage - while they re-stabilise.
"The reason [people would] ignore the higher cost overall is because it gives a cash flow reprieve and when in survival mode, cash is king," McQueen said.
People who are struggling but still have income could look at changing their payments to interest-only, or breaking their fixed-term interest rate and moving to a lower one.
"If you need to get your costs down to allow your reserves to last for longer, then going interest-only might be a more suitable suggestion, as it means you're not delaying a cost," McQueen said.
Hastie said that in his view, interest-only payments could be a better alternative to a mortgage holiday.
"You just pay the interest which means your loan won't go down over time, but it won’t go up either.
As a recent example, a family with a $640,000 mortgage over 30 years paying 3.55 percent interest found that moving to interest-only payments freed up around $1000 per month.
"Their household will carry on even though their income might take a hit: it was really comforting for [them] to know that," Hastie said.
With fixed interest rates down to just over 3 percent, moving to a lower rate is another option to save cash.
"Most people will wait until their current fixed interest rate expires but others might want to ask about the cost of breaking their current rate and getting into the 3 percent range immediately.
"Breaking will come at a cost, but if you get a decent cash flow improvement you might decide it’s worth doing," Hastie added.
McQueen said that due to the break fee, moving to a fixed rate is unlikely to provide much of a benefit overall, but it could help remove immediate pressure.
"Restructuring the mortgage lowers immediate outgoings, helpful if you need to get [costs] down," McQueen said.
A Westpac New Zealand spokesperson said that following the release of the COVID-19 economic support package and six-month mortgage holiday, the bank had received "hundreds" of hardship requests from self-employed people and those in travel, hospitality and logging.
"Customers are calling proactively to discuss options if their financial situation worsens.
"We have a range of options available, including temporary overdraft facilities, mortgage holidays and temporary interest-only mortgage payments, the spokesperson said.
Banks are expected to provide further details about the mortgage holiday and hardship packages in the coming days.
