Who doesn’t want a holiday? A holiday is a getaway. A break. An escape. Holidays are usually great things. But what is the one thing holidays have in common? They cost money.
Recently, the banks have announced a mortgage holiday offering that will provide 6 months of mortgage relief for people experiencing financial hardship during these times. Unbeknown to many people, this has actually always been an offering. It just hasn’t been as publicized as it is now.
And now there is high demand. 4,000 requests to Kiwibank, 7,000 to BNZ, 9,500 to ANZ, and 8,500 to BNZ. These are huge numbers in such a short space of time.
The problem with the mortgage holiday, where you make no payments for 6 months, is that you don’t pay for it now. You pay for it later. 6 months of no mortgage payments sounds incredible and then you can just continue with your repayments after 6 months.
I wish they didn’t use the term holiday. Kiwisaver used to use the same term – a contribution holiday. Makes it sound like it is a good thing when it isn’t. Thankfully, the Kiwisaver terminology has been changed and it is now a savings suspension. Just the terminology makes it sound like you are giving something up, not gaining something. And that is how it should be. Mortgage suspension would be much more accurate terminology.
With the mortgage holiday, borrowers are giving up many thousands of dollars. Of course they are gaining 6 months of no payments which will be a real life raft for many people and for those that really need that to stay afloat then this is a great thing. It allows you to keep your house for that much longer until you can figure out a plan.
It is the people that may not necessarily need a mortgage break but are on the fence. I really hope the banks are strict with their acceptance of who the suspension is applied to. If not, many mortgage holders will unnecessarily be adding to the costs of their mortgage.
How much will a mortgage holiday cost me?
Let’s assume you are 5 years into a 30-year mortgage of $500,000 (5% interest) and decide to take a 6-month break.
Instead of paying $466,279 in interest, you will be paying $507,860 in interest. A 6-month cost of over $40,000! Not only that though, but the mortgage will now take an extra 21 months to repay. At $2,684 per month that is $56,364 that could have been used elsewhere. Including interest, the 6-month holiday in this example is a cost of close to $100,000.
As I said, if you have no other choice than you have no other choice. To keep your house, you will need to take up the option. But if there is any other way that this can be avoided, then please try to do so. I’m not sure the banks will be very strict in who they turn down. After all, it will mean more money for them. They also don’t have the time to analyse each application too deeply, given the number of applications coming in. This will result in a lot of people that don’t actually need a mortgage holiday getting a mortgage holiday.
Alternatives to a mortgage holiday
1/. Instead of going on a full mortgage holiday for 6 months, you could ask to only pay the interest each month. That would see an increased mortgage cost of $11,000. Much better than $40,000 in the first example. The mortgage term would only be extended by 6 months too.
2/. Once the mortgage holiday ends, hopefully your situation has improved, and you may be able to increase your monthly repayments so that the mortgage term remains at 30 years. On resumption of repayments, your monthly repayments would be $100 per month more than before the holiday, but at least the mortgage would still be paid in 30 years. You will need to consider how the lower monthly cashflow will impact you though.
In this scenario you would pay $475,480 in interest. About $9,000 more but much better than a full mortgage holiday or mortgage principal holiday with no change to the mortgage term.
3/. Some people are paying extra on the mortgage. Make sure this is not the case. If you are paying more than the minimum currently, you may be able to get away with reducing your repayments to the minimum.
4/. Do you have any investments that could be sold to cover things until you get on your feet? You would need to ensure that the cost of doing this does not exceed the cost of the holiday. Weigh up the pros and cons.
5/. Use your emergency fund. This is exactly the type of situation that an emergency fund is for. A rainy day. If you have saved 6 months of expenses into an emergency fund, and your mortgage makes up half of your total expenses, then you will still be left with 3 months of emergency fund savings at the end of 6 months. This is where prudence has really paid off. No need to take a holiday that will cost you many thousands of dollars, and this cash will buy you time to come up with a new plan for earning income.
6/. Take a smaller holiday. You don’t have to take 6 months just because it is available. Take 3 months (or less) and then reassess things. The less of a holiday the lower the mortgage costs will be.
Costs of a mortgage holiday
Cost of different mortgage holiday options on a $500K 30 year mortgage at 5% interest
This is only one example. If your mortgage is more or less, or you are deeper into your mortgage term, then the results will vary. The higher the mortgage and the closer you are to the beginning of the loan, the higher the holiday penalty will be.
Final thoughts
If you absolutely have to take a mortgage holiday, then do so. It may be the only thing keeping your head above water. But at least consider the alternatives and the cost of doing so. This is not a holiday, so much as it is a deferred payment. This will add thousands of dollars to the cost of your mortgage so just be aware.
If you do take this up, then please also use the holiday period wisely. Look for employment if needed. Look at areas you can reduce spending. If you are on a mortgage holiday, your expenses should be at bare bones minimum, otherwise you don’t need a holiday.
And if you are in trouble with your ability to make mortgage payments let your bank know as soon as possible. Please don’t bury your head in the sand. If you can get on the front foot with your bank they will be much more willing to work with you.
If you’re unsure get independent advice. Unfortunately, banks are far from independent and I would hate for people to be encouraged to take these holidays without a full analysis of their situation.
If you need help analysing any financial decisions, then get in touch and we may be able to help.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here