UPDATE: It’s been almost half a year since New Zealand had its first confirmed case of Covid-19. On February 28 the Ministry of Health announced that a person in their 60s who had recently returned from overseas had tested positive for the virus. Less than a month later the country was in lockdown and banks were very quickly trying to figure out how to stop a potential flood of mortgagee sales from hitting the market as the economy stopped in it’s tracks.
Now Auckland is back in an alert level three lockdown and the rest of the country is on alert level two after the Prime Minister announced that there had been cases of community transmission in Auckland. The shift to new restrictions will have an impact on the economy and have more people reassessing their finances.
Banking is not an industry that traditionally moves quickly. The legal ramifications for changing a major policy - like easily allowing a mortgage deferral or “holiday” - has to be examined from many different angles: Will it cause some people to use it that don’t need it? Is it the most financially responsible thing to do? Should people be allowed to fall behind on their mortgage?
Financial planning is always about hoping for the best and planning for the worst, and the re-emergence of Covid-19 in countries like Australia has highlighted that we are not out of the woods yet, even though New Zealand is currently in a good place for mortgage-holders.
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If you have lost your job as a result of Covid-19, my heart goes out to you. It's with that in mind that some of the following strategies may not be for everyone. But if you still have a large percentage of your normal income, the first thing you need to address is how your mortgage is structured.
Interest rates have never been so low and they appear to be continually dropping. Generally, it's a sound strategy for mortgage-holders moving to a lower fixed-term rate to leave their payments the same. This is because there’s no extra financial pain and you are paying down your mortgage faster. Imagine if you’d continued paying the 10 percent interest rate you were paying in 2008!
But the problem with over-paying the fixed term of your mortgage is that means money won’t be readily available if the country goes into another lockdown. You have to apply for this money back and the next time around, the banks may not be as lenient on mortgage-holders who haven’t slammed ahead.
Paying the minimum required payments onto your fixed term and putting the extra payments into a Revolving Credit or Offset account means you can easily access the funds in an emergency but are still paying down your mortgage in the meantime. Be careful using floating accounts for this. Some banks require you to apply to redraw the money from these types of accounts.
The benefit of this strategy is that the money is easy to access. But this is also a risk, if you suddenly see a new TV you like, or maybe want to splash out on a nicer car. To minimise this risk, some people do their day-to-day banking at a completely different bank. They simply never look at their mortgage accounts until it’s time to refix a term or need their emergency fund.
To be financially secure in the future, assume another lockdown will occur and set up your mortgage to have a buffer as soon as you can. A good buffer needs three to six months or more covering all your expenses and mortgage payments.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
