What if you can’t pay your mortgage during lockdown?

COMMENT: In New Zealand's first Covid lockdown, the Reserve Bank and mortgage lenders were quick to respond with mortgage repayment deferral packages that allowed clients to either easily extend the term of their mortgage, shift to interest-only payments or capitalise (add) their mortgage payments to the outstanding amount.

So far, the banks haven’t released any special solution for homeowners facing hardship. But with Auckland staying in a level 4 lockdown until at least September 13, there is an increased likelihood of homeowners finding themselves with reduced income or potentially unemployed if their employers can’t survive a month of little to no income. If you find yourself in this position, then you still have options but you need to weigh up your decision carefully.

Anyone with a mortgage can make a hardship claim and it’s important to realise that a Covid-related hardship is taken seriously at the bank. As discussed above, there are typically three types of relief that the bank can provide: you can extend the term of your mortgage (for example from a 15-year mortgage to a 30-year term), meaning your payments will slightly reduce; you can change your mortgage payments to interest-only; or the bank can add the interest to the outstanding amount of loan (capitalise the mortgage payments).

Before contacting the bank, however, it’s important to take some time to go through your expenses and reduce any unnecessary expenses. Any luxury expenses or subscriptions that you are no longer using should be cancelled if that is possible without incurring large fees. A hardship claim progresses much more smoothly if you can show the bank from the very beginning you have reduced discretionary expenses – i.e. costs you can survive without - as much as possible. The best way to do this is to download the most recent 31 days of bank statements and highlight every expense you can cancel or reduce. Make a note next to that expense and send that page to the hardship team with all other details they require.

Deciding which relief option to take will largely come down to how much you need your mortgage payments to reduce by.

Extending the term of your mortgage will reduce the regular payments a little and could be good for employees on slightly reduced hours.

Interest-only payments may provide relief for scenarios where one person in a couple has been made unemployed or employees are on reduced hours. This is the option to choose if your cash flow has been affected but not entirely turned off.

If all parties on the mortgage have lost their job due to Covid, no amount of belt-tightening or reduced payments will help. This is the time to look at temporarily capitalising your mortgage payments. The long-term costs of this are significant, often adding tens of thousands of dollars to the lifetime cost of your mortgage so choose this option only if the other two options won’t get you out of trouble.

For Covid-related hardships, you should think of the relief as a short-term solution. Often a bank will allow, for example, interest-only terms of up to five years on your own home. However, asking for a five-year interest-only term for relief due to lockdown points to a problem that may not be Covid-related. It’s more likely a Covid-related hardship will be put in place for approximately three months although this may be extended if, for example, your job is particularly niche and hard to find roles for.

A lot of people will be wanting to know why the banks haven’t responded with a specific Covid relief package yet. The banks have always allowed legitimate hardship claims and are monitoring the length of this lockdown but currently, this lockdown is looking to be shorter than the early 2020 one. Homeowners have had almost 18 months to prepare their finances for this scenario and a lot of homeowners and business owners have taken steps to build up a buffer just for this type of scenario.

Financial hardships caused by Covid are outside of your control and not your fault. If Auckland needs to remain in lockdown after September 13, expect the Reserve Bank and lending institutions to reassess the Covid hardship packages they offer. In the meantime, however, if you have had a significant change to your financial circumstances, assess what expenses you can cut back on and contact your bank or broker immediately.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.