David Chaston explains what's at stake when you consider taking up the mortgage payment deferral schemes now offered by banks. There is a lot to think about

David Chaston explains what's at stake when you consider taking up the mortgage payment deferral schemes now offered by banks. There is a lot to think about

By David Chaston

On March 25, the Government announced banks will provide a six month mortgage holiday for homeowners with mortgages (and small business owners who have mortgaged their house as part of funding their business).

But is that a good idea?

What's not to like, you ask? Six months payment free, and at a time when things could be really stressed.

For some people, it will be a life-saver. But before you decide whether it is for you, you should work through the details. It is not obvious, especially if your income is still mainly in place (but perhaps not at the previous level).

Everyone will have a specific situation, which is why you need to do your own work. It will be worth doing.

But here is a foil, one way to look at it. We will use a specific set of assumptions, and our mortgage calculator.

Firstly, lets assume you purchased a median priced house at the start of 2015. That would have cost you $425,000. And lets assume you had a deposit of just under 20% back then, say $75,000. (You may have been trading up from a lower quartile house you bought a few years earlier, in our example, so you would have had a capital gain to help with a 2015 deposit that large).

Borrowing $350,000 at the start of 2015 would have been quite different to now; the average bank interest rate back then for a two year fixed mortgage was 6.00%. That means on a 30 year mortgage you were obligated to make monthly payments of $2098.43. Over the full 30 year loan you were committing to pay total interest of $460,160 plus the principal of $350,000.

But of course, interest rates fell subsequently and assuming you rolled over the loan interest rate each two years in January at the new average rate, you would have expected to pay a lot less in interest, especially if we make another assumption that you kept the original monthly repayments unchanged. Interest rates dropped to 4.75% in January 2017, and to 4.25% in January 2019.

Now in April 2020 you owe the bank $308,100. Yes, it's a table mortgage where the payments are even every month, so in the first few years you are repaying mostly interest with relatively small principal repayments. You owe $308,100. But in February 2020 the median 'value' of your house is $640,000 (nationally, per the Real Estate Institute of New Zealand - they haven't released the March data yet). That means your loan-to-value ratio (LVR) is a respectable 48%. You won't be underwater unless you can't find a buyer for your home for at least $310,000.

Because you have done the sensible thing and kept the original monthly repayment amount, you are on track to pay off your loan in 248 months (20 years and nine months) rather than the original 360 months (30 years). You are on track to save a massive $291,094 because you are going to pay only $169,066 in interest. We assumed that when you renew on January 2021 your interest rate would be 3.00% and it would stay like that till the end, a reasonable assumption these days.

But a pandemic calamity has hit. Should you approach your banker for a six month payment holiday? A number of large banks are making it easy to apply and tens of thousands have. However, before you do, know this: it is a payment deferral only. It just pushes things back by six months. While you are not paying, interest will be accruing on the $308,100 and by making zero payments, this will add $6660 to your loan balance taking it up to $314,760. If you restart payments normally then, the loan will then go on for another 256 month (21 years, 4 months) and you will pay a total of $176,690 in interest. That is a $1000 penalty for the delay.

Restarting loan payments at a lesser monthly repayment amount will balloon that penalty out significantly. For example, let's say you agree with your banker to adjust the loan repayment down to paying it off over the original 30 year term (ie to January 2045), your new repayments will reduce to just $1,525 per month (a considerably lighter monthly load), but you will end up paying $225,425 in total interest (an expensive extra total commitment).

There is a lot to think about.

Only your specific circumstances can help you make the right decision for you. But from the above you can see you are deciding on implications that can cost you $10,000s. More than just a six month payment holiday is at stake here.

Talk your circumstances over with a professional - your mortgage broker, a registered financial adviser, or even your banker. Get as much information as you can from credible sources.

But in the end, the decision is yours.

I think it is worth pointing out that no bank will want to sell you up in a mortgagee sale. Firstly, the market is dead, so such sales will be very hard to pull off. In very stressed circumstances they may write-off some of the loan owed so that it can match what you can pay, even if you are on a benefit. But these will be rare situations and depend on many factors. They will want to work with you if you are prepared to work with them - that is my guess anyway. Selling you up is an expensive proposition for them which they would rather avoid.

But don't expect bankers to be a social agency. They aren't; they are a lending business and will make their own decisions on that basis. Even the Reserve Bank Governor and the Minister of Finance know there will be borrower casualties in this crisis, so there won't be any free passes from anyone. If you are in a tough situation, negotiate realistically.

And finally, know that mortgages are a personal debt based on your income. Your house is security, but it is you and your income that backs up your obligation legally. Walking away from your house and handing the keys to the bank won't change what you owe. If they have to sell and can't recover what they are owed (and this will include their costs), you will still owe the balance. At least until you declare bankruptcy. (And the No Asset Procedure is unlikely to let you off in this case because the amounts involved will be greater than that NAP process cap.) Bankruptcy is not an easy way out as it will severely limit your options when life finally returns to a new normal. (It won't be the old normal).

Because serious money is involved, think carefully about whether it is right for you to take that six month mortgage payment deferral. It's just a guess, but I suspect that for most people it could be a costly mistake, to be regretted later. But for a few, it will be a lifeline, even if it does come with long-term costs.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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55 Comments

I assume Credit Reporting Agencies will have information on Mortgage Holidayers and credit scores may be impacted?

That was what I was thinking.
Would always look good to say in a years time that you didn’t need to take a mortgage payment holiday. Even though our income stops, we are fiscally prudent enough to carry on payments for 6-12 months.
Looks a lot better than jumping on holiday

Unfortunately I suspect there won't be any kudos from banks/reporting agencies for being prudent during hard times.

what about the future value of the dollar?
Keeping 6 months of $2000 a month cash in hand and making good use of that money over time may well be a very good outcome for some people,especially since it is very unlikely they will keep that house to the end of the mortgage, more likely to upgrade within 10 years to match changes in lifestyle.

Nzdan, good question, the RBNZ expressly ruled that the banks will NOT classify the "mortgages on holiday" as non-performing loans (which incur stricter lending criteria) but as standard, performing loans.

For capital purposes only, for reporting purposes these remain NPLs and should be reported as such.

Are you sure about that? DC, can we please have clarification? Thanks

On Credit Simple you can look at the "repayments" tab and it shows the repayment history for 24 months. Current = Green. 1 - 29 Days = Yellow. Then each subsequent 30 day period goes from orange to dark red. 180+ days past due date will show as a brown circle with an 'x'.
I don't think banks will report to the Credit Agency that balances are paid each month if on mortgage holiday. So either they'll report Non-Payment, Mortgage Holiday or they might not report which may default to "Non-Payment" on the credit file.

I don't think that is right. Technically, the loans are being paid. They are being paid by capitalising the payment - essentially a little top up each time. Not especially different from someone paying their mortgage from a revolving line of credit. I can't see how these would turn up as non payment.

T

If you mean a "credit report" like Veda then nothing will be recorded. However for the last couple of years banks have shared information on credit card and loan payments among one another. So if Bank A sees you have a loan at Bank B but are not making repayments they will know you are using a mortgage holiday arrangement or defaulting.

that's only if it shows as a missed payment. But it is not missed - it is capitalised. That's not the same. These loans are NOT in arrears.

So the banks will report a "payment" and then capitalize it into the principal? How does that work?
$500,000 mortgage, $2500 per month payment, with an increasing outstanding balance? Or do they not report the balance?

My original comment was whether the reporting agencies will be aware of who has taken a mortgage holiday, and may score accordingly.

The way mortgage repayment deferments work, I believe it would have an increasing balance.

Month 1, $500,000; Month 2 loan is $502,500; Month 3 is $505,000. Loan remains performing because payments have been made (via top up)

People taking the holiday now will be getting a good going over by the banks while in holiday mode and may be getting a little nudge to sell before prices slump further.
It will be interesting to see how many listings flood the market in a few weeks once agents can work again.
It may cause an instant slump as buyers will be sitting tight and waiting for bargains from longterm house owners who can meet market versus recent buyers holding out for the so called 9 percent increase this year???.
I hope agents stop the game of neg over or auctions and just put prices again as when I see a listing neg over etc it just says to me it is over priced versus a solid price point.
Imagine you go to supermarket that nice piece if steak has a sticker neg over $35 would you buy it.

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Let's not forget all those apartment holders, who will have Body Corporate Fees to pay, month in months out.
That's where the crack may appear first ( if they haven't, physically, already!)

So.
We are assuming ( hoping!) that property prices don't retreat down to what they were just 5 years ago ie; Purchase for $425k, Deposit $75K - Owner's equity $350k.

"You won't be underwater unless you can't find a buyer for your home for at least $310,000."

That $40k isn't much margin to play with after costs etc. And that's just a 5 year retreat! What if it's, say. 8 years? Back to the market apres the GFC? That's no long ago either.
But past comparisons aren't all that important really.
All that matters is having one's nose above $310k; having/keeping a job and other property owners not sinking the market around you.
Easy!

That's right bw, DC tries to keep his assumptions to a minimum and uses the latest data available with is the correct thing to do. So the house in the example is worth $640k and the debt is $310k, therefore the owner has a buffer of $340k (not $40k) against any potential future value drop

Wonderful stuff, imaginary equity isn't it! Such a comfort.
All that matters is 'whatever any buyer CAN pay'.
As long as it's above $310k in this case, then the vendors have options. Below that - they are limited to 'topping up' the lender's equity before any sale goes through, or just putting the keys in the proverbial mail to them.
After all, property prices aren't going to fall 50%! Are they?

It's equity from the latest set of actual data, cold, hard numbers from throughout the country, so no, it's not imaginary equity. Where prices go from here, on the other hand, is speculation

Equity...is ALWAYS imaginary ( a matter of interpretation; where the current stats and market are etc.) until such time as it's realised. (ie: Imagine if I sold my house for current market. Look how much I'd make!)
Even that 20% deposit is 'up for grabs' in any ultimate sale price.
And the biggest trap in believing that "equity is real!" - borrowing against it.
Debt is real and fixed; even Sale Price is real - but Equity is Imaginary.

I don't think they teach these concepts in the landlord 101 seminars. Its more about prices doubling every 10 years, then using equity on one property after 3 years as a deposit for the next property....repeat...repeat..

So are you saying buying houses is price speculation? Interesting...

I thought there was no speculation involved in house prices as they always went up and/or doubled every 10 years. A safe haven for capital gains.

Excellent article DC, one that hopefully will help some readers think their situation through more thoroughly and make the right decision.

Talk your circumstances over with a professional - your mortgage broker, a registered financial adviser, or even your banker. Get as much information as you can from credible sources.

That's an oxymoron. David.

Those folk all assume there is a tomorrow and it will be like today. As Mary Holm said (RNZ Afternoons) in reply to my text about the Limits to Growth: "not in my skill-set". At least she was being honest, but I doubt she's added to that skill-set since the wake-up question (I stand to withdraw and apologise on that).

The reality is that banks loan keystroke-conjured numbers, and tap into the real planet when you 'pay' them for doing so. What gave them the right? When was the last time a journo challenged that right? When was the last time a journo peered ahead and warned that the gathering snowball was headed for a cliff?

Mary Holm's answer was a form of denial PDK. Just like so many others.

Haha and most of those who could be in trouble have probably been listening to Ashley Church and Bindi - so guess who they will turn to for 'professional advice'?

Well, Bindi might tell them its a good time to sell, after all, that is what generates a commission for her employers.. if they can talk the seller into taking what someone is willing to pay.

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'Firstly, the market is dead, so such sales will be very hard to pull off......'

So now is foregone conclusion that market is not slow but dead.

All FHB should be aware of RE agents calling to create FOMO to buy house asap during the lock down, if have visited the open home before the lock down or to move with speed as soon as the lock down is over BUT FHB BE AWARE of such calls and remember that they are just interested in selling to you (doing their job, understand but at your cost - intent is not your well being so should be aware of such RE agents) knowing very well what future holds and you will lose money / your deposit in value.

No doubt anytime is good time for FHB to buy but not now as can get more out of their deposit/ dollars by beine patience.

World has stopped for the first time in living memory and eveyrthing is falling apart and not to be fooled by.......

I welcome the agents to call me up along with a hefty discount to asking otherwise bugger off.
Agents will be working on plans as we speak to keep manipulating the market.
All they want is commission at the end of the day.

Anyone foolish enough to sign up to a contract to buy a house at a time when settlement is physically impossible for an unknown future period of time deserves little sympathy in my opinion.

Around 67 Billion of New Zealand's outstanding mortgage debt is interest only. In essence they already have ( if they wish) a principal repayment holiday. Over the past three years , 21 Billion of new mortgage lending was above 80 percent LVR. You can take numbers from everywhere, and keep assumptions to a minimum and come to many different endings , but any prolonged fall in house prices will commence a cascade effect , where the banks must adjust underlying asset quality and pricing as will every other individual. . Many recent home owners may quickly find themselves in negative equity. For those that have mortgage debt on more than one home , multiply the problem.

Reset process is on and however hard one may try by throwing money, incentives ( required and needed) but reset of all picies, way of doing business, way of governining, house price, etc etc... Will reset.

Just hope that many will come out of it and will survive as no one will be immune/ untoched by the calamity.

And 40% of NZ's mortgages are held by only 8% of people (majority investors) and these are also the same people with most of the interest only mortgages.

Do you have a link?

as per RBNZ info, a total of $75b mortgage is owed by investors. Please see below.

https://www.rbnz.govt.nz/statistics/s33-banks-assets-loans-fully-secured...

That is about 26.5% of all lending secured against residential properties ($75b/$282b). Your statement just sounds like "alternative facts".

Not alternative facts, but perhaps out of date? I was just remembering the headline which was quoting RBNZ (below). I bet there is still a heccuva venn diagram between interest only/investors and overall outstanding mortgage debt, although maybe many investors cashed out since 2018.

https://www.stuff.co.nz/business/money/104323467/reserve-bank-says-8-per...

You could be right. But I suspect that the $67 bln are largely floating rate "revolving credit" mortgage facilities that are really SME working capital funding that banks will only do when secured by the owners house. I don't know this however, just a suspcion. These borrowers are probably doubly risky given that their underlying businesses are probably currently in a precarious position now.

Included will be some/many residential investors running small portfolios.

You could always take the mortgage holiday, build it up in a separate bank account for 6 months and then when the mortgage is due for renewal and if everything goes back to semi normal and incomes stabilise
You could then make a lump sum payment during the renewal process so net impact will likely be very small

What is important now is safety cushion, or more precisely - buying time... so you do not default and lose all equity

I thought mortgage holidays were being extended to distressed borrowers, so technically commit fraud? I suppose just like Interest Only mortgages were once upon a time extended to distressed borrowers, mortgage holidays can be another tool for Investors to maximize free cash flow?

What fraud are you talking about??, And we don't live in a table-loan only age anymore...

If you lose a significant amount of household income i.e. 20-40% then by definition you are a 'distressed borrower', if you adjust your spending and try to put your mortgage payment aside and try to save it in case things get even worse then that is not fraud, that is trying to be prudent by keeping the mortgage payment habit, but also matching spending with means

No one wants defaults... lender or borrower, this supposed 'fraud' you refer to is a fallacy...

Fair call, my comment wasn't well thought through. But again, if you lose 20% to 40% of your household income, can still afford to put away your mortgage payments and survive (albeit by being prudent) then why would one need to take a mortgage holiday? You could be prudent and keep "the mortgage payment habit" by paying your mortgage?

Don't worry! The property market will be back on its feet when the vaccine for Covid19 arrives. That's just months away! Just hunker down and ride it out.
Really?

A vaccine for the common cold, the holy grail of the global pharmaceutical industry – promising wealth beyond the dreams of avarice for anyone who cracks it – has yet to be found. The same goes for HIV, despite more than 30 years of trying. A malaria vaccine took many years to develop and is only 30pc effective. Most flu vaccines are similarly hit and miss. A shingles vaccine was 15 years in the making.

Always looking for an angle, If one was on a fixed interest period to a given date, lets say April 2021 and opted to take the deferred mortgage option for six months would the fixed interest period also be pushed out six months or would the fixed interest end date remain the same? Given interest rates will be lower than when the fixed interest period agreement was entered into.

For most people, selling their house or houses will not even be a thought!
Why would you when interest rates are the lowest they have been and they still need a roof over their heads?
Most people will be more concerned with just having a job going forward!

It's not "most people" that will crash the housing market though, it never is.

What about all of the AirBnb's and empty houses around the country? (10's of thousands...) They aren't providing a roof over anyone's head - and if there is still a mortgage to the title, and you're running low on cash, how long can you hold on?

Why did people sell there houses in the US during the GFC? Or Ireland, or any other property bubble. I think you underestimate the behavioural finance/psychology elements to this - if the herd gets panicked and the narrative that 'house prices are falling' catches on, watch out. The mania you witnessed of toilet paper buying, will be property investors running to their agents to sell their properties.

And we are part of the herd. How many readers does Interest have? How many are reading this comment and shifting there views even if only just slightly. I think the herd has lifted its head and is collectively looking around. Moving restlessly on their feet. Glancing at one another.

I'm part of the herd. I was going to buy a rental in January. Decided to put it off until this thing blows over when I saw it becoming major in china. Will I offer the same - very unlikely. I'll be dropping my offer, risk has increased... my part of the herd is moving - not bolting yet but moving...

RBNZ set to save housing market
RBNZ Chief Economist says not preparing banks for negative cash rate at the moment
But says that banks would need to be ready if the OCR was taken lower

Yuong Ha preparing New Zealand mortgage holders for monthly cash payment for maintaining mortgage.

At that stage surely everyone deserves a house on the government. Investors would have no basis to rant against KiwiBuild being expanded.

Interesting Scenario.

Must see as possibility - fearsome but possible

https://m.youtube.com/watch?v=E7r7nTVmdLc

Love the animation - who knows, he might be right! I've always had suspicions about what boomers will do when they retire and start selling assets to fund their retirements and what the flow on effects will be to the economy. This gives you one extreme example of what could happen. Interesting thing is that I know many boomers who have got a fright the last month or so and removed tens or hundreds of thousands of dollars from their banks and are hiding it around their properties - just like this video!

Another part of the herd moving ....

Excellent article, David, and with a nicely worked example. It's the sort of thing I would always put through a quick-and-dirty Excel model first, to make sure I hadn't omitted something or make a calculation howler somewhere in the works. Could save a very red face when fronting those 'advisers'....and also could serve to check the quality of that 'advice'.

Interesting thoughts so far. Will property values drop? In America during the gfc, the banks were quick to realise that if they continued to foreclose on mortgages, they would be contributing to collapsing the house values that they were taking possession of. The solution they found, was to keep the mortgages on the books, reporting them as delinquent only when forced to. By taking control of the payments, they could extend credit to the mortgage holder, with certain condition, like not putting the house on the market. In this way, the banks managed to restrict supply to the market, in a direct effort to maintain sale values. The key to this, and why they eagerly followed the prescribed solution, was simple. If the banks clocked up too many delinquent loans, their own credit rating was in danger of being dropped. This gave them long enough to bundle loans that were in reality delinquent, and sell them on. The same thing is clearly happening. It prevents a panic, and the banks buy themselves sometime to clear/clean their books. In a similar way, the lvr, requiring 20% deposits, appears to be a solution to the big problem of the gfc, being bad loans to people who couldn't afford them. In this instance, this is a concept easily sold to the public, who are suffering fomo. No one stops to think that the banks are giving themselves a 20% buffer from a falling market. Bankers are branksters. They help inflate a market, then blame the people they marketed to as the reason for it going wrong.
So many people constantly refinanced, using flexi facilities, meaning that people were/are constantly borrowing against the "imaginary " increase in equity. It's an extended version of the 1920's all over again, and the longer the situation is maintained, the more money can be printed and thrown into the system in the form of yet more debt. The system is ensuring it's own end. The only ultimate outcome is that fiat money becomes absolutely worthless.
People will be left in debt for their entire lives, and incredibly, it would seem that they are going to be at least mildly, happy about it.

I agree , only take the holiday if your really need it right now , for very good reason , quite apart from those enunciated .

Rather keep your ammo dry , you may need it in a year from now if things go very pear -shaped .

In any even the Banks are themselves facing a tsunami of defaulting loans on their unsecured lending , store cards (which they often under-write ), as well as vehicle and asset finance, which is going to be unpleasant for them .

This will put them under pressure in terms of capital, write-offs , and reduced profitability , not to mention shareholders expecting return on their investments.

An lets not forget Aussies have likely got a few Billion $ in Bank shares in their Compulsory Super , on which the have to receive a dividend .

This conundrum could explain why ANZ has lost over 50% of its value in the share price since 25 February , and the markets, which are amorphous, not well understood and have a nous we often overlook, have seen something not immediately evident to most of us.

In summary , once you have taken a " holiday "once dont think its going to be an extended rolling one on a lengthy cruise at the Banks risk or philanthropy '.