Counting the cost of mortgage holidays

Sunday Apr 12, 2009
Rachel Grunwell and Nicola Shepheard

A 12-month mortgage holiday – or a brand-spanking new kitchen and bathroom? As Prime Minister John Key persuades the nation’s banks to offer struggling homeowners one-year breaks on paying off their mortgages, figures reveal the enormous cost in taking the “holiday from hell”.

According to bank calculations, a family paying 8 per cent interest on a $250,000 mortgage will pay an extra $28,000 in interest – the long-term cost of some short-term relief. That is because the interest keeps compounding, and is added to the end of the loan.

To put that in context, $28,000 would pay for a new kitchen and bathroom in most houses – with a little left over for a real holiday at the beach.

Indeed, Patrick Goodin of Good Kitchens Ltd said it would not only buy you a nice new kitchen – it would even pay for top-notch finishing, such as stone bench-tops.

Amid accusations that banks are profiting from homeowners’ vulnerability, Finance Minister Bill English said yesterday that banks needed to “play their part” by accepting lower profits.”They need to recognise that because taxpayers are picking up some of the risk by underwriting the wholesale funding guarantee for banks, banks can’t necessarily expect the same level of profit,” the minister’s spokesman said.

English welcomed the 12-month holidays, but said they would not be appropriate for everybody: each borrower should work out, with their bank, what was appropriate for them.

Financial author Martin Hawes warns today, in his Herald on Sunday column, that

“A mortgage holiday is to be avoided… It really is the holiday from hell”.

Westpac announced its 12-month mortgage holiday scheme yesterday,

but the bank was quick to warn there was a “real risk” involved for bank and customers.

The ASB indicated it would join Westpac in considering mortgage holidays, but said this was generally not in the best interests of most customers.

Financial adviser Liz Koh of Moneymax said mortgage holidays should be the “absolute last resort”.

“The banks do make money out of it,” she said. “It’s good news for the banks if they encourage you to clock up a bit more interest and keep the loan going. It’s akin to that trick they’ve got of extending your limit on your credit card, which encourages you to spend more and that clocks up more interest.”

She encouraged people to try hard to save money elsewhere in their budget to meet regular loan repayments, before accepting a bank’s offer of a mortgage holiday.

Mortgage adviser Bart Utley of the Loan Market said borrowers needed to budget better and get income protection insurance, rather than taking a break from mortgage payments.

“Clients don’t initially realise that all of that interest is added on to their loan,” he said. “Ultimately, at the end of the mortgage holiday period payments will increase if they want the term to remain the same. And if their situation hasn’t changed, things are going to get a whole lot harder.”

John Bolton, from Squirrel mortgage advisers, welcomed Westpac’s announcement as a last-resort option for people who otherwise faced losing their home in a mortgagee sale – but said anyone who was in such dire financial straits would probably have to sell their home regardless.

“It takes a lot of pressure off, but, at the end of the day, people still need to confront the issues they’re facing,” he said.

Most New Zealand banks said they would deal with customers on a case-by-case basis, but would usually only offer short-term mortgage holidays of up to three months.

Even a three-month break from a $250,000 mortgage will add an extra $6870 to the loan. That equates to repaying another $46 every month for the life of the mortgage.ANZ and National spokeswoman Virginia Stracey-Clitherow said borrowers should contact their bank if they were in any difficulty. Loan repayment holidays were one of a number of options available for customers, usually for three months.

Other options include restructuring loans – paying them off over a longer period, or having an interest-only period.