It’s time for us to hear from our resident Financial Health Coach, Chris Folland. He’s offering an interesting perspective on a concept currently being offered by several kiwi banks. It turns out it may not be quite what it seems.
Over to Chris…
First things first – I trust you’re keeping well during this pandemic lockdown.
Next, up – it’s time for this week’s question. Does it make sense to take a ‘mortgage holiday’?
It’s come up quite a bit recently because people both here in New Zealand and in other countries around the world are being offered what’s being called a ‘mortgage holiday’.
What this means is that the banks are offering a 6-month break during which you don’t have to make your mortgage payments. At first glance, it sounds like a good idea, although when we think this through, it may not be quite what it seems.
And that’s because a mortgage holiday sounds helpful on the surface but will cost you more in the long run.
Consider a typical house worth $600k or $650k. Pop the figures into a mortgage calculator, on a 30-year term loan at 4% interest, and you’re looking at paying about $550 a week.
If you take a mortgage holiday, you don’t have to pay that amount. However, the payment you missed is added onto the end, and you are still charged interest during the six months.
When you look at the real numbers, a mortgage holiday in the above example is actually costing you an extra $36,000.
This is because there’s the interest now, plus extra interest at the end. 1
From the $14,000 temporarily saved, the banks are adding $11,000 on top. So the total you pay in reality is 76% interest on your ‘holiday’.
So, if you’re struggling to pay your mortgage during this crisis, what could be some viable options?
- If you can, pay from savings.
- If you’re currently paying over the required amount, see if you can pay at your minimum rate.
- Pay the interest only.
- Or even, draw down on the property equity to pay the mortgage.
- Seriously considering your other options is better than taking a mortgage holiday.
And incidentally – don’t feel bad for the banks. Here in New Zealand, they just did over 4 billion in sales and made 1.8 billion, which is 40% profit. They’ll most likely make it through this. Do what you can, so you can too.
1When you ask the experts, most agree that nearly any option is preferable to taking a mortgage holiday, due to the long-term financial burden: “The chief executive of one mortgage lender said the Financial Conduct Authority’s existing advice [to take a mortgage holiday] ‘flies in the face of every bit of regulatory guidance ever . . . [customers] are just piling up more debt for later. We’re trying to tell people if you can make a payment, even half, that’s better for you.’” It seems that a mortgage holiday is effectively a last-ditch option to be avoided if possible.
“Lenders Sound Warning on Mortgage Holidays”
- Megaw and M. Vincent, (2020)
Fi Jamieson-Folland D.O., I.N.H.C., is The LifeStyle Aligner, with over 27 years experience in Europe, Asia and New Zealand as a qualified Osteopath, Integrative Nutrition Health Coach, educator, writer, certified raw vegan gluten-free chef, speaker, health mentor and Health Brand Ambassador.