Since the Covid-19 Level 4 lock down restrictions came into place, the world has become a much more uncertain place, and, as many people’s incomes evaporated overnight, financial stress has become the norm. Within days of the Government’s announcement that banks would be offering six-month mortgage holidays, thousands have applied for one. But what are the pros and cons of taking one?
It’s important to note the term mortgage ‘holiday’ is a bit of a misnomer, and enableMe’s Hannah McQueen says, “It would be more accurate to call it ‘Mortgage Repayment Deferral’ – terminology which some banks are now adopting”. As Hannah explains, the interest you don’t pay during the mortgage holiday will be added to your mortgage, so you’ll end up paying interest on that interest, and your repayments afterwards will rise if the term of the loan remains unchanged.
She recommends people first establish that they actually need the repayment holiday right now, by accurately diagnosing their situation, and this is where enableMe’s financial advisors can help. They advise that if you are now in survival mode, reducing your outgoings is of top priority. However, if you’re panicking but can actually pay the bills for now, they suggest not using the ‘holiday’ yet.
They also say that the other thing you could consider is applying for an interest-only period. This means is you continue to pay the interest bill on your mortgage, so what you owe doesn’t get any larger. However, you’re also not reducing the principal. Finally, one more option is to lengthen the term out to 30 years, so you continue to pay a small bit of principal and continue to make some progress, just at a slower pace.
Hannah McQueen is an Authorised Financial Advisor, Chartered Accountant, Personal Finance Author and the founder of enableMe – Financial Personal Trainers, so for more information on mortgage advisors, financial advisors Wellington and certified financial planners please go to http://enableme.co.nz .