Homeowners should think carefully before taking or extending a holiday on their mortgage, an expert warns.
It comes as the 6-month mortgage holiday, announced by Finance Minister Grant Robertson in March - and the wage subsidy extension - are coming to an end, putting increased pressure on homeowners.
In July, in an interview with Stuff, Finance Minister Grant Robertson said the Reserve Bank was considering extending the mortgage holiday scheme, however nothing has been formally announced.
Kiwibank spokesperson Kara Tait said a home loan deferral gave customers flexibility and helped them get back on their feet. The bank would continue to work with customers to understand their financial situation, offering support on a case-by-case basis.
"If customers require further support, we'll work with them to identify the best option for their circumstances at that time…options could include further extensions to interest-only or deferred payment terms," she said.
David Green, lending specialist at adviceHQ, said although mortgage holidays reduce financial stress on homeowners, they aren't free. Homeowners should understand the price-tag of taking - or extending - one.
"If you can afford it, don't delay - repay," Green said.
Also called a 'home loan deferral', it means that mortgage payments (loan principal and interest), stop. The interest that would normally be paid is added to the loan. As it is charged on a higher loan balance, next month's interest is higher.
"The process repeats itself over the six months resulting in a higher balance to repay when your mortgage holiday ends," Green explained.
For a typical Auckland mortgage of $600,000, paying a 5-year fixed interest rate of 2.99 percent over a 25-year term, taking a 6-month mortgage holiday would add $2905 to the loan.
"If [at the end of the holiday] you repay your mortgage as normal (i.e. it takes you six months' longer: 25 years plus 6 months), the amount of interest would accumulate to $5591 over the life of the loan," he said.
For those who could afford to increase their repayments at the end of the holiday, it would cost less.
Dual-income households that had gone down to one income could look at converting to an interest-only loan instead. Single-income households could refinance to another lender, sell big-ticket items such as caravan or motorbike, or rent out their home and move in with family or friends.
"Everyone's individual situation is different, cliché as it is, there is not a one-size-fits-all solution. The most important thing is to ask for help before it's too late," Green said.
In a May Financial Stability Report, the Reserve Bank confirmed that banks had granted payment reductions or deferrals on 13 percent of total household lending. Although mortgage deferrals helped homeowners adjust to "temporary income shocks" without going into arrears, this increased their debt servicing burden.
"If current pay reductions and elevated unemployment persist for a longer period than expected, households and banks may find that more substantial loan restructuring or remediation is necessary when deferral periods end," it said.
