The economic pain inflicted by the spread of the coronavirus has left many Kiwis struggling financially. The Government has responded to the job losses and deep cuts to Kiwi incomes with aid packages. The big banks have joined efforts to lessen the pandemic's blow and offered relief to homeowners.
On the table are various payment deferrals and interest-only options.
The advice on which is best can be confusing. Some commentators OneRoof has spoken to over the past weeks have urged caution on taking up mortgage holidays, saying the word “holiday” is misleading as the money still has to be paid back.
And new research shows just how much extra the different relief measures could be adding to Kiwi home loans.
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Canstar, a company which researches and analyses data and rates products, crunched the numbers for OneRoof and found that going interest-free for a time could lead to bigger savings compared to mortgage holidays.
In some cases the difference between the two is as much as $35,000.
Jose George, Canstar NZ’s general manager, says Kiwis need to figure out which option suits their needs best. “Kiwis are facing extraordinary pressures as a result of Covid-19 and everyone’s needs are different," George says.
Taking a mortgage holiday could be the right decision for one household, while going interest-only could be better for another.
It’s important, George says, for Kiwis to understand the long- and short-term impacts of their decision, and make sure they are comfortable with the ultimate costs.
To illustrate, Canstar looked at different scenarios across two mortgages, of $500,000 and $1 million.
One example is for a relatively new mortgage holder. Canstar took a 25-year, $500,000 mortgage on a 3.5 percent fixed interest rate and looked at the impact of taking a six-month mortgage holiday within the first year, without later increasing repayments.
The interest ultimately paid increased by 8.3 percent, or nearly $21,000, on the original interest amount of $250,935.
If the mortgage holder did increase payments to meet the same term - an extra $78 per month - the interest paid was 2.9 percent more than the original cost, or $7364.
However, if the mortgage holder went into an interest-only structure for the same period of time and adjusted the repayments to meet the same term, the total interest cost was just 1.2 percent, or $3128, more than the original interest payable.
Under this scenario, the adjusted repayments are $33 a month more.
The same scenario but being closer to the end of the term makes a significant difference.
As mortgage terms near their end, principal payments make up a larger percentage of the full cost (assuming a table loan with equal monthly repayments, which is most common in New Zealand).
As such, Canstar considered the same size mortgage and interest rate, but with only five years left on the term.
Assuming the mortgage repayments were not increased, the increase was just 1.3 percent if the mortgage holder took a holiday, or even less, at 0.5 percent, or if the mortgage holder went interest only and adjusted their repayment afterwards.
Canstar also considered a much larger home loan of $1 million.
In this case, with the same term and interest rate, taking a six-month holiday within the first year without later increasing repayments added 8.3 percent to the overall interest repayments, or $41,537.
If the mortgage holder went interest-free for six months then later adjusted the repayment, the additional cost dropped to just 1.2% and $6,256.
George says the dramatic difference in figures shows how careful mortgage holders need to be when making changes.
