Mortgage Holidays: Here’s What You Need to Know Before Hitting Time-Out on Your Payments.

The number of New Zealanders transitioning from low fixed rates over the next few months is expected to create more financial pressure on households.

While seeking ways to offset this impact, taking a "mortgage holiday" may seem tempting, but in reality it should be seen as a last resort if you’re facing financial hardship.

For borrowers considering a mortgage holiday, it’s important to understand the terms of the agreement as well as the potential long-term consequences.

It is also important to remember that a mortgage holiday is not a long-term solution, but rather a short-term relief for borrowers who are struggling to make payments due to unexpected financial pressures.?

Hitting time-out on your mortgage repayments can definitely provide some much needed breathing space, but the missed payments will need to be repaid at a later time. This means that the overall loan amount will increase, and interest charges will continue to accumulate during the break, which will add to the overall cost of the loan.

When the mortgage holiday period ends, it is essential to keep in mind that resuming your mortgage payments may result in an increased repayment amount.

As a result, opting for this temporary relief option may ultimately result in costing you more in the long run, so let's take a look at some other options to consider:

1. Consolidate High Interest Loans Into One Loan at a Lower Interest Rate

If your costs are mounting up due to multiple high-interest loans, you could consider consolidating these into your mortgage. This can be an effective strategy to reduce your overall financial burden. Here's a more detailed look at this option:

How it works: You combine multiple debts (credit cards, personal loans, car loans) into your mortgage. This is often done through a mortgage refinance or by accessing your home's equity.

Benefits

Lower interest rate: Mortgage rates are typically much lower than rates on credit cards or personal loans.

Single payment: Instead of juggling multiple payments, you'll have one consolidated payment.

Reduced monthly outgoings: By spreading the debt over a longer term and at a lower interest rate, your monthly payments could decrease significantly.?

Improved cash flow: The money saved on monthly payments can be used for other expenses or to build an emergency fund.

Faster debt repayment: More of your payment goes towards principal rather than interest, potentially helping you become debt-free sooner.

Simplified financial management: Having one loan instead of multiple debts can make budgeting and financial planning easier.

However, it's important to consider:

• You're securing previously ‘unsecured debt’ against your home.
• The debt will be spread over a longer term, which could mean paying more interest overall.
• There may be fees associated with refinancing or accessing equity.

Before proceeding, work with a Mortgage Adviser to explain the pro’s and con’s. We can also help you calculate the total cost over the life of the loan to ensure it's truly beneficial in the long run.

1. Extend Your Loan Term to Minimise Repayments?

Extending your loan term can provide immediate relief by reducing your monthly mortgage payments enabling you to free up funds for other expenses or debt repayment. Here's a more comprehensive look at this option:

How it works: We negotiate with your lender to extend the duration of your loan, for example, from 25 to 30 years.

Benefits

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Flexibility: This option can be temporary. You can often revert to a shorter term when your financial situation improves.

Easier budgeting: Lower repayments can make it easier to manage your monthly budget, reducing financial stress.

Avoid missed payments: By making payments more manageable, you're less likely to default on your loan.

Potential to overpay: If your situation improves, you can make additional payments to shorten the loan term again.

However, it's crucial to understand the long-term implications:

• Increased total interest: Extending the loan term means you'll pay more in interest over the life of the loan.
• Slower equity build-up: A smaller portion of each payment will go towards the principal in the early years.
• Longer debt period: You'll be in debt for a longer time, which could impact future financial plans.

To make the most of this option:

• Consider it as a temporary measure and plan to increase payments when possible.
• Look into making extra repayments when you can to reduce the principal faster.
• Regularly review your loan with your Mortgage Adviser to ensure it still meets your needs.

Remember, while extending your loan term can provide short-term relief, it's important to have a strategy to manage the long-term implications. Always consult with your Mortgage Adviser to understand how this option fits into your overall financial plan.

1. Go Interest Only on Your Loan

It is usually better to pay at least the interest portion of your mortgage, rather than opting for a full mortgage holiday. Interest-only loans can provide significant relief for homeowners struggling with their mortgage payments. By temporarily paying only the interest portion of your loan, you can reduce your monthly payments substantially. Let’s take a look:

Lowers monthly payments: Your payments will be significantly reduced as you're not paying down the principal.

Provides breathing room: This can free up funds for other essential expenses or to build an emergency fund.

Maintains your credit score: Unlike a full mortgage holiday, you're still making payments, which helps protect your credit rating.

Offers flexibility: Most lenders allow you to switch back to principal and interest payments when your financial situation improves.

However, it's important to remember:

• The principal amount of your loan won't decrease during this period.
• You'll pay more interest over the life of the loan if you don't make up for the reduced payments later.
• This should be viewed as a temporary measure, typically lasting 6-12 months.

Switching to an interest only loan will require a full mortgage application and is subject to approval by your lender. Always discuss with a Mortgage Adviser to understand how this might impact your long-term financial goals.

1. Refinance to a Different Lender

Refinancing your mortgage with a different lender can offer several benefits, including potentially lower interest rates and the opportunity for cashback. This strategy can be particularly beneficial in the current market for several reasons:

Lower interest rates: You might find a lender offering a more competitive interest rate, which could significantly reduce your monthly payments.

Cashback incentives: Many lenders offer cashback deals to attract new customers. These can range from $1,000 to $10,000 or even more, depending on your loan size.

Immediate financial relief: The cashback you receive can be used to:

• Cover refinancing costs
• Pay down other high-interest debts
• Create an emergency fund
• Subsidise your mortgage payments for a few months

Better loan features: A new lender might offer features better suited to your current situation, such as offset accounts or redraw facilities.

Debt consolidation: You might be able to roll other debts into your mortgage, potentially reducing your overall interest payments.

Opportunity to reset: Refinancing can be a chance to reassess your financial goals with your Mortgage Adviser and structure your loan accordingly.

However, be aware of potential fees like exit fees from your current lender, application fees, and valuation fees. Remember, while the cashback and potentially lower interest rates can provide immediate relief, the goal should be to find a sustainable long-term solution that improves your overall financial position.

Conclusion

Taking a break from your mortgage repayments could provide some much-needed respite, but the key here is not to wait until you’ve missed a payment to ask for help. If you think you might miss or have already missed a home loan repayment the best thing you can do is act now by getting in touch with us. It's important that you reach out early enough so we can find a suitable solution to help get you back on track.

You don't have to try and manage it all on your own. By exploring these options thoroughly, you can make an informed decision potentially avoiding the need for a full mortgage holiday. Feel free to get in touch for a no obligation chat, we are here to help.