Homeowners have been given breathing room, following the decision to extend the mortgage deferral scheme for six months to help the country through a resurgence of Covid-19.
Those with mortgages need to understand the pros and cons of taking a deferral or extending an existing one, particularly with Covid-19 dragging on.
- Scroll the end of the article to listen to Frances Cook’s podcast, Cooking the Books
First, the good news. People now have the option of hitting pause on their mortgage payments until the end of March. This means we’re much less likely to see forced sales, with those unlucky enough to lose their jobs can keep a roof over their heads while they scramble to find new employment.
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But now the warning. The resurgence of Covid-19 in the community and the second lockdown for Auckland highlighted just how uncertain the future looks. It’s unclear how long the economic pressure will last. All we’ve learned in recent months is how little we can predict the future.
A mortgage deferral is something you only want to use when you absolutely have to, and for as short a time as possible. It’s not a case of you stopping payments, and the mortgage waiting for you at the same number. It continues to grow. The interest on that debt keeps building up.
Just like an extra $20 a week can knock years off your mortgage, deferring payments for too long could seriously add to the length of time you pay it off for.
In the first lockdown, nearly 60,000 borrowers asked for a deferral on payments for about $20 billion of debt. More than 30,000 have since resumed normal repayments.
Some will have needed the deferral to take the pressure off. Others will have used it out of fear they would lose their jobs.
Fear-based thinking is understandable in the current climate, but you need to fight it, particularly when it comes to handling your money. Fear can cloud your judgement, and push you into making decisions that come back to bite you.
If you think you might need the deferral, start the conversation with your bank.
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There are other options you can consider, which are particularly helpful if you’re on reduced pay rather than having lost your job entirely. You could extend the term of your mortgage, pushing out the end date by a couple of years. This has the effect of reducing how much you pay each week, without letting the debt monster build up to an unmanageable level.
You can pay interest only. This small weekly payment does at least stop your loan increasing in size.
Or if you’re worried that you’re in line to lose your job, but it hasn’t happened yet, you can just have an honest conversation with the bank about that. Talk to them about how the process works, when any deadlines might be, and how long it would take to organise it.
Don’t be scared of that conversation. It works for two reasons.
One, the bank will actually see you as more responsible now, and treat you better than if they had to come to you questioning missed payments. Two, knowledge is power, and understanding what you would need to do is often a stress-buster. This way, you don’t feel cornered into taking a deferral that doesn’t work for you, “just in case”.
Until you have to take these options, the average person will be better off sitting tight and trying to build up cash savings, rather than getting deeper into debt.
A mortgage deferral is certainly much better than losing your house to the bank. But that’s about it.
Take this as a sign to get your finances stable, so that you’re as secure as you can be for whatever new curveball Covid-19 throws at us. If nothing else, you now know you have options when or if things go wrong.
- 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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