For most people there are good alternatives to taking a mortgage holiday.
A mortgage holiday eases the immediate financial burden of having a mortgage … that’s it.
It is not a “gift” from the Government or from your bank. It’s costing the Government nothing and your bank will end up making more money from you if you take the option iof a mortgage holiday.
Media giant Stuff has said “take care. It could lead to more pain in future” and the fear is many people are looking at mortgage holidays as a way to make things easier now without considering the future..
The problem with mortgage holidays are that at the end of the “holiday” you will have a larger debt that requires larger repayments or an extended loan term.
Do You Really Need A Mortgage Holiday?
The main purpose of a mortgage holiday is to remove the mortgage repayments from your household expenses in times of dire financial stress.
Banks have been able to offer mortgage holidays previously and generally offered them for up to 3-months which gave people time to reorganise things, find a replacement job or to get the house on the market and sold.
The reason that the Government has announced that the banks will offer a 6-month mortgage holiday is to (a) help those that really have the financial stress and (b) to give people more money in their pockets so they continue to spend and therefore help keep the economy ticking along.
The reality is that most Kiwis are still being paid something close to what they were being paid prior to the lock-down, and most have also probably noticed that they are spending less.
Before committing to a mortgage holiday (which ultimately commits you to larger payments in 6-months) you should consider if you really do need one, and consider the other alternatives to taking a mortgage holiday.
What Are The Alternatives To Taking A Mortgage Holiday?
As mortgage advisers we believe that there are three alternatives that you should consider before opting to take a mortgage holiday.
- Restructure your lending
- Switch to interest only
- Refinance to take advantage of lower rates
Let’s look at these in a bit more detail.
Restructure your lending = there are many ways that you can structure your mortgage and often this can reduce the repayments too.
If you have some other loans or credit card debt it would be a good idea to consolidate that into your mortgage too as those types of debts usually are more expensive and have larger payments too because of the short-term nature of that kind of lending.
To reduce the repayments you can generally extend the loan term out to a term of up to 30-years, but it’s good to ensure that you have the option to increase the repayments again when things improve so you can reduce the loan term again and pay the mortgage off faster.
Switch to interest only – this is a very good option of reducing your repayments.
The real advantage of changing to interest only is you are not increasing your debt – instead you are maintaining the same debt level.
The banks are generally offering this option for 12-months which gives you greater certainty and you should also ensure that you can increase your repayments again when things improve.
Refinance to take advantage of lower rates – you may think that your bank is looking after you but they are looking after the bank.
If your bank were really looking after you then they may offer to lower your interest rates which helps you financially both immediately and into the future.
How much would you benefit if you could refinance your mortgage and be paying under 3%?
We have one bank that is open for business and currently offering a 1-year fixed rate of 2.89% and a 2-year rate of 2.99%
It may be a great time to refinance your mortgage which also gives you the chance to restructure your lending and switch to interest only if necessary too.