The newly announced option for people to take mortgage holidays will be an important safety net for many.
But it’s also crucial to remember that’s what they are; a safety net. And you don’t throw yourself off the tightrope and into the safety net unless you really have to.
Here’s how they work. It’s not a “holiday” as such, it’s a deferral. AKA, you don’t have to pay it today, but you will at some point.
Listen to Frances Cook talk to mortgage expert Rupert Gough below
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Whatever your current mortgage payments are, each one you miss will be added back on to your total mortgage. You’ll also keep being charged interest on that money, even while you’re not paying it.
The deferral is being offered for up to six months, but remember, you don’t have to take the full six months. You could ask for three months, and then extend it further if you haven’t managed to get back on your feet in that time.
If you’ve lost your job, it’s welcome breathing space so you can save that money and keep food on the table. But if you haven’t suffered a loss of income, you’re just watching your mortgage get bigger for no particular reason.
It’s a sign of the times that in the first few days after the mortgage holiday option was announced, over 10,000 New Zealanders applied for one. After only a week, that number soared to 30,000.
The good thing is that a payment “holiday” isn’t your only option here. It’s just the most extreme one.
If you’re worried that your job is precarious, and cutting costs to save money, you can reduce your payments before stopping them entirely.
First, you could extend your mortgage term. If you have twenty years left to pay it off, you could talk to your bank about spreading it over 30 years instead.
That means the payments today are cheaper, and you can stack the saved money in your emergency savings account.
You could also pay interest only. That will at least stop your mortgage growing by too much, while still getting you reduced payments to ease your financial situation.
The silver lining in this whole situation is that most of the country is in it together. Many people have lost jobs already, while others are feeling increasingly worried and precarious.
That means this isn’t your fault, and you can hold your head high while asking for help.
It also means that banks are friendlier than ever – they want these alternative options to work, because if half the country defaults on their loans at the same time, that’s a terrible situation for the banks as well.
Many banks have streamlined the process for applying for a mortgage holiday, or alternative payment plan. It varies how each is handling it, but you may only need a letter from your employer confirming you’ve had a pay cut, been asked to take unpaid time off, or been made redundant.
The important thing is to start the conversation with your bank early, so that you can make whatever changes you need to before you’re already on the edge of disaster.
- Frances Cook is the host of the personal finance podcast Cooking the Books. She is not a financial adviser, and all information is general in nature. For individual advice, see a financial adviser.
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