Beware the mortgage holiday

Stuff reports:

The Government has announced a mortgage holiday for those affected by coronavirus.

At a press conference on Tuesday Finance Minister Grant Robertson said the major retail banks had agreed to a six-month mortgage holiday for people who had their income affected due to Covid-19. 

The exact criteria was yet to be finalised, but it would cover both principal and interest payments.

A lot of people don’t realise that a mortgage holiday is a mere delay in payments, not a waiving of payments. If you take advantage of the mortgage holiday, you will end up owing more to your bank and paying them more over time.

I’ll give an example. Let’s say you live in Auckland and have just brought a house at the median price of $875,000.

You have the 20% deposit so take out a mortgage for 80% or $700,000. Assume a 25 year term and you get monthly repayments of $3,891 and total interest paid of $467.248.

Now let’s say you take the six month holiday. Your $700,000 owing grows at 0.375% a month so at the end of that six month holiday you owe $715,898.

You continue paying $3,891 a month but it now takes 27 years to pay off your mortgage, not 25 and the total interest paid is 501,450.

So you end up paying $34,202 more in interest.

So people should only take up the mortgage holiday if they absolutely need it. It is a holiday on payments, not a holiday on interest accruing (based on info known to date).

Also worth noting the reality is that almost all banks would give mortgage holders a payments holiday if needed, rather than foreclose. It is much more profitable for a bank to have you keep paying interest than selling your home and just getting back their original loan.

If your mortgage was so large that a payments holiday means the mortgage might be greater than the value of the section, then banks might be reluctant.

So in reality the Government guarantee won’t actually change bank decisions significantly, and people should only take up the holiday if they really need to (ie have lost their income and have no savings they can use).