Look before you book a mortgage holiday
Right now, it feels a lot like the only holiday on the itinerary in Aotearoa is a mortgage holiday.
However, before you book into hotel deferred payment, such a lovely place you may never leave – is there an alternative destination that could be more rewarding in the long-term.?
The first principle of dealing with debt is to pay it off as quickly as possible, while still achieving a lifestyle that works for you and your family. How you react to the challenges can be empowering or discouraging, and now is the time to put on your wet weather gear in preparation to totally blitz the financial foul weather.
What is the problem with deferred payments?
When New Zealand changes its response to Covid-19 there are Government policy changes and recommendations that also change. At Unite Against Covid-19 you will find current financial information and updates about the banks’ extended offer to defer payments for residential mortgages for up to six months for customers affected by the pandemic.
It may seem like a good option to put principal and interest payments on hold for six months or more, but deferring payments increases the total cost of the mortgage debt.
Debtfix has crunched some numbers using the Sorted mortgage calculator and the following table indicates the true cost of deferring total mortgage payments for one year.
We used a four per cent interest rate, rather than some of the very low interest rates available at August 2020, because we have assumed the interest on the remaining part of of any mortgage will eventually rise.
Stopping payments for a year on a $100,000 mortgage could cost you an extra $860 when there is 10 years left on the mortgage, or up to $2,334 over a 25-year mortgage period.
This may not seem like much but if your residential mortgage is nearer to $400,000 – the extra interest is could be from about $3,400 to $9,300.
That could be the cost of a real holiday somewhere sunny and warm.
The cost of deferring mortgage payments based on a 4% interest rate
Get independent financial advice
During such a period of uncertainty and frequent changes, now is the time to ask for independent information from others before acting.
f you can’t meet your current mortgage commitments it may be better for you to:
reduce payments rather than deferring them,
review your total household budget,
pay the interest only on your mortgage,
work with your other creditors first,
investigate trading down to a more affordable home.
None of these options maybe ideal, but it is important to act sooner rather than later if you are struggling with debt.
When you are in control of the solution, you have ownership of the outcome and tough choices are made more bearable.
If financial changes caused by Covid-19 have made it hard for you to make ends meet – you are not alone, and the economic situation is not of your doing.
Talk to Debtfix, a budgeting service, a mortgage broker, the bank or your mate.