During these unprecedented times with COVID-19, the term mortgage free holiday has been heard more now than ever. As many New Zealanders’ incomes have been negatively affected, which can make it difficult to meet mortgage payments (amongst other payments), a mortgage free holiday may be an option worth considering.
The mortgage free holiday has always been an option for mortgagors even before COVID-19. Its purpose is to offer some reprieve during unexpected events that come up through life such as a change in income, death of a loved one, an injury etc. In the normal course, each bank has their own application process and criteria that is required to be met to be eligible for a mortgage free holiday. If you are approved in the normal course, a mortgage free holiday is usually for 90 days in length. During COVID-19 the banks have worked with the government to create a mortgage free holiday that is for a length of 6 months, with the only criteria required to be met is that you have been affected financially by COVID-19.
It is important to keep in mind when considering a mortgage free holiday that the interest payable will still accrue on the loan amount. This simply means that the principal payments are deferred for the length of the holiday, but since interest is still accruing, your loan amount will increase through the mortgage free holiday, which means that it will take longer to pay back your loan.
There are potential alternatives to a mortgage free holiday such as:
- Make interest only payments. This would mean that the principal amount of your loan would remain the same but the interest would not accrue as you would be making this payment.
- Extend the term of your loan. This would likely make the loan payments less than what you have been previously paying, but again this will potentially mean that you will be paying the loan back over a longer amount of time.
- Discuss lowering payments with your bank. Many banks will consider the possibility of lowering your payments for a period of time.
It is worth remembering that banks must act in a responsible manner and treat mortgagors fair and reasonably, which includes when mortgagors are experiencing financial hardship. With that said, if you are experiencing financial difficulty and making your mortgage payments has/will become difficult, the first action you should take is to contact your bank and discuss all your options in full.
In these times of hardship and uncertainty that have come with COVID-19, a mortgage free holiday is a way to relieve some of the financial stress from life at the moment. However, as illustrated in this article, it is important to understand the repercussions of a mortgage free holiday in the long term.
