If you follow my commentary on property, you’ll know that I’m a passionate advocate of the virtues of home ownership. Indeed, I’m of the view that anyone who wants to buy a home should be able to do so and that making this happen should be a cornerstone policy of our society. It’s for this reason that I’ve been a tireless campaigner for the removal of the Reserve Bank's loan-to-value-ratio restrictions (because they create a barrier to home ownership for young people) and why I’ve repeatedly expressed the view that increasing the percentage of Kiwis who own their own home should be a priority for any New Zealand Government.
The strength of my conviction is driven by the fact that owning your own home - mortgage-free or with only a small mortgage - should be the starting point for your retirement planning and I’d go as far as to say that home ownership is a minimum prerequisite for anyone who wants to be comfortable in their golden years. But this isn’t the only reason that home-ownership is so important. Over time, due to the amazing power of capital growth, the gap between what your home is worth and what you owe to the bank will widen – with the difference representing your equity in the home - literally, the portion of it that you own. This equity is one of the major drivers of wealth among New Zealanders and, over the years, it will be available to you for a range of possible purposes, including improving your home and lifestyle, traveling, helping your kids, investing in shares, buying a business or providing you with a buffer during times when things get tough.
It’s this last purpose, using equity to help you through rough patches, which I want to focus on in this article.
Over the past few weeks the major trading banks have all offered Kiwi home-owners the opportunity to reduce, or even defer, mortgage payments while the country faces the challenges presented by Covid-19. Each bank's criteria differs, but in broad strokes, qualifying applicants can reduce their payments to "interest only" or even defer mortgage payments for a period of up to six months.
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It’s important to understand that this is not a "holiday" or a subsidy and that, at some stage, the payments will still need to be made along with some additional interest – but in this respect, it is no different to borrowing money against your home for any other purpose. So it’s with some bemusement that I’ve read the proliferation of articles, from so-called experts, warning people of the dire consequences of deferring mortgage payments and the apparently unreasonable imposition of having to pay a bit more interest on your mortgage as a result.
What nonsense!
Here’s the reality. Having the ability to defer payments at a time when you’re stretched financially is simply a form of loan and is exactly the sort of purpose to which your equity should be put from time to time. Having the freedom to make such choices is one of the reasons we buy our own homes and if you’re smart enough to be a home owner you’re to be congratulated for giving yourself this flexibility. Better still – if you still have more than ten years to run on your mortgage, there’s a reasonable likelihood that your home will more than double in value over that time (Covid-19 notwithstanding) and that the cost of the deferral, relative to what your house will be worth when you retire, will be relatively small.
Having said all of that, I’d still encourage you to exercise the same caution that you would if you were considering any loan against the equity in your home. Use the same judgement that you would if you were looking to buy a car or go on an overseas holiday. Ask yourself whether you should borrow the entire amount or try and fund some (or all) of it from other savings?
I’d also encourage you to take into account the length of time during which your income might be reduced. If it’s going to be for more than three or four months, then perhaps consider reducing your household costs, overall, rather than funding your lifestyle with increased debt.
Your bank will be able to help you with this so don’t be scared to ask for their advice, but if the circumstances merit it and you have the equity to do so, deferring mortgage payments for a time isn’t just a smart choice, it’s a logical use of the value you’ve accumulated in your home.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
