If your Covid mortgage repayments deferral is ending this week and you have any spare cash, run to your bank and increase your repayments - it could save you tens of thousands of dollars
On March 27 2020, almost exactly one year ago, and two days after New Zealand went into level 4 lockdown, our banks introduced six-month mortgage “holidays” for customers. Anyone worried about their job or their business because of the Covid-19 crisis could put their mortgage payments on hold for a while.
Over the following five weeks, Reserve Bank figures show 70,000 New Zealand households with mortgages worth around $20 billion took up the offer. Another 55,000 people with home loans worth $15 billion restructured their payments to ‘interest only’.
In September, the mortgage deferral scheme was extended a further six months and by the end of last year, 90,000 borrowers had taken holidays - around 6.5 percent of all mortgage accounts.
Around the same number had gone interest-free.
Unless these customers increase their mortgage payments now, those people who took the “holiday” could end up paying their bank thousands - even tens of thousands - of dollars more in interest payments than they would if they had left their mortgage settings alone.
That’s according to numbers crunched for Newsroom by bank research and ratings company Canstar.
Basically the top part of the table imagines someone with a six-month-old, $750,000 mortgage, and monthly mortgage repayments of $3464. If they took the 12-month holiday, and then went back to making the same repayments they did before, they will end up paying an extra $41,220 over the life of their mortgage.
Meanwhile, their 25-year loan becomes a 27-year loan.
A very expensive “holiday”.
That’s because banking “holidays” aren’t holidays at all. Banks aren’t letting you off the money you would have been paying; they are just saving it up for later - with interest.
In the scenario above, instead of paying $330,322 in interest over the life of the loan, the homeowner will pay $371,542 - an extra $41,220, or 14 percent.
As the bottom section of the table shows, even someone 15 years into their loan, when much of the interest has already been paid off, will be $13,437, or 4.6 percent, worse off from taking the holiday.
That’s the money for a reasonable-sized real holiday once the borders open.
Put another way, it’s hundreds of millions of dollars in total handed over to the banks.
There is another option
The way to avoid the extra payments, according to Canstar and shown in the table, is to compensate for the holiday by upping your monthly mortgage payments. In that way, you pay off your mortgage a tad quicker than you were due to post-holiday, and therefore cancel out some or all of the extra interest penalty.
By upping monthly payments to $3667, or an additional $203 a month, the new home owner in the example above will pay only $15,693 in extra interest over the term of the mortgage, saving themselves more than $25,500 overall.
If they were able to increase payments by $348 a month, they won’t pay any extra at all, and the mortgage will be paid off a year early.
Of course many people won’t be able to afford to increase their mortgage repayments, says Canstar New Zealand general manager Jose George.
But if the economic forecasts are correct, a section of the population are in a better post-lockdown financial position than they were expecting.
Maybe they have had a pay rise, or falling interest rates mean their loan repayments are actually smaller than they used to be, George says. In which case, get in contact with your bank as soon as possible.
“If you are coming out of a mortgage holiday, you have an option to be able to talk to your bank about possibly restructuring your loan. Have that conversation, and explore options for what you can pay.”
Not too much financial stress – so far
Credit reporting and data analytics company Equifax New Zealand managing director Angus Luffman has also been looking at the mortgage holiday scheme - concentrating particularly on what the numbers tell us about whether borrowers are in trouble or not.
And the picture is mostly a positive one, he says.
For a start, the number of people who took up the mortgage “holiday” is small in the scheme of things - 90,000 people out of approximately 1.4 million open mortgage accounts at any one time. Even adding in the 90,000 people who went interest-only, that’s only 13 percent.
And Luffman says most borrowers didn’t stay in mortgage deferral for the whole 12 months - people started exiting off the scheme three months into the programme and as of the end of the scheme at the end of the month, only around 4000 accounts are still in deferral. That’s less than 0.3 percent.
Arrears are low too. Only 0.4 percent of people with mortgages are two or more payments behind.
Still, people who take a mortgage holiday are up to three times more likely to into financial stress than people who don’t - statistically-speaking, Luffman told Newsroom.
In fact, a borrower who takes a mortgage holiday is up to 20 percent more likely to close their account in the future - a sign they are having to re-finance, re-structure, or even sell up.
And the longer the holiday lasts, the higher the chance of future problems.
“An analysis of deferrals over time shows the longer an account is in deferral, the more likely they are to have lower financial resilience when they exit the deferral programme. That is, they are more likely to get into arrears on their payments.”
Banks will need to work closely with the final group exiting deferral this month, Luffman says.
“They are likely to need the most support from their lender.”
Meanwhile he warns the “credit delinquency cycle” (the number of people missing two or more mortgage payments) runs behind the economic cycle.
People can often continue, though with difficulty, meeting their monthly mortgage payments for one or even two years after losing their job, their business, or getting sick, before getting into arrears.
This means it might be further down the track before people impacted by the Covid-induced downturn in, say, hospitality or tourism, start turning up in the credit delinquency figures.
Still, it could have been much worse, Luffman says.
“There are definitely pockets of stress, but in the context of low numbers.”
