Podcast: Mortgage Holiday Scheme – What Property Owners Need to Know | Ep. 204

Posted by Ed McKnight on 20/04/20
Mortgage Holiday Scheme What You Need to Know 001
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Show Notes

What's Covered in the Show?

In this episode, we are joined by Peter Norris from Lateral Partners to discuss the Mortgage Holiday Scheme that is currently available as part of the economic response to the Coronavirus.

Property owners need to remember that the mortgage holiday is not really a holiday at all, but rather a deferral. The payments will still need to be made, but you make them at a later date. Remember too that any delayed interest payments will incur additional interest. i.e. you will be paying interest on top of the interest.

If you are to take a mortgage holiday, there are two primary ways you can pay it off.

First, you could keep your loan term the same, and increase your payments. Or, you could keep your repayments the same and extend your loan term.

On a 6-month deferral of a $500,000 loan at 4% interest, the additional repayments required would be $52 a month. Or if you were to keep your repayments the same and extend your alone term, you would need to keep up repayments for an additional 11 months.

Transcript

Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight and I'm Andrew Nicol, and today on the show we are joined by Peter Norris from Lateral Partners. Now, Peter is a mortgage broker advisor, and he's joining us today to speak about the mortgage holiday program that is currently being put in place.

Now, this is a topic we talked about only a couple of days ago, but we wanted to come out with an update around this because we know that so many people have questions about the mortgage holiday program, what it means, how it's implemented, and what we've found is there are often some misconceptions that we just want to iron out, I guess, within this episode.

But just before we do jump into that, Peter, why don't you just introduce yourself, Lateral Partners, how long have you been a mortgage broker, that kind of thing.

Peter Norris: Yeah. Thanks guys. Thanks Ed. So lateral partners, is a business that's been set up for five weeks now and six weeks now, great timing to set up a new new mortgage broking business, um, but myself and Ben are running that we're, we're focusing on the residential commercial side of lending.

Ben more so on the commercial and me residential. Together we've got over 20 years of lending experience. I've done BNZ, I've run a business, sold into another brokerage and just left that recently to, um, to start Lateral. So, yeah.

Ed McKnight: So although Lateral is only five weeks old, it doesn't have five weeks of experience behind it, which is good for anybody listening to the show.

Now, Peter, we've been talking about these mortgage holidays and the, and the biggest misconception, it seems is that it's a holiday as opposed to a deferral.

Peter Norris: Yeah, correct. Yeah. There's, I'll say early on that, that the government and the banks are doing a tremendous job around, around this mortgage holiday and around the, what they, the packages they're putting out.

The banks are working hard to get that across the line and clients are probably able to access these holidays or holidays a lot easier than they ever have done in the past. But, uh, it's really the way I described it recently in a blog was it, it's the holiday you maybe should think twice about taking, because it's not actually a holiday it is more of a deferral.

Ed McKnight: Exactly. And hey, we've just got an example here in front of us, thinking about the two different ways that you pay this down, if I've understood this right, Peter, because once you make the deferral, you put off any mortgage payments, and of course, all of the interest that you would've been paying over that time is just added on top of the mortgage.

And eventually that's got to be paid down. And there are two ways to do this, right? We can either keep the same repayment we were always having and pay it down over a longer period, or we could make a higher repayment and pay it off in the same term that we were, that we were originally paying the loan off, is that right?

Peter Norris: Yeah, correct. So the misconception that's, that's kind of been put out there and then it's a interest free holiday, uh, that the banks are sort of letting that interest slide. But that's not the case. And, I think in fairness, the banks were never going to do that, so, the interest does accrue.

It doesn't, it doesn't disappear that it continues to accrue on top of the loan. And at the end of that six month period, you either extend the term of your loan or you increase your repayments to make the term of the loan remain the same.

Ed McKnight: Exactly. Let's just run through an example as well. So I've got a calculator in front of me. We're looking at a $500,000 loan. Uh, it's, it's over a 26 year period at 4%. Now, based on those figures, the monthly repayment would be $2,580.

Now, if you were to take a six month deferral, you have two options. Now, if you were to go down the first path, which is where you keep the same term, but increase your payments, what would, what difference would that make? Well, in essence over the life of the loan, you would make an extra $16,235 worth of repayments, total repayments, and your monthly repayment would be $52 higher.

Now, if you were to keep the same repayment, but extend out your loan, it would be a difference of about an extra nine months or so, uh, or sorry about 11 months, I should say. And the difference there would be an extra $30,963 total difference of almost 31 K, uh, if you were to keep the same repayment, but pay it over a longer period.

So these are some pretty, pretty large, uh, differences because it's going to be some way between 16 and 31 K, uh, based on these figures, in order to, to take this, this deferral.

Andrew Nicol: And Peter, what are the, what are the other options that clients can then investigate if they don't want to take a mortgage holiday? What other, what other options are there to kind of soften the blow of maybe a reduced income at the moment?

Peter Norris: So, the big part of that is, because it's so easy to access these these things that the banks are doing, I'll talk a little bit more about that in a minute, but because it's so easy to access, you basically fill in a form and say that you'd been affected by Covid19, whether it be by health or by income, now you don't have to prove that.

You just have to say that it's affected you and you get the mortgage holiday, and because of that, there's been close to 70,000 people that have applied for that, and I wouldn't say that there's been 70,000 people who have been drastically affected or, or in hardship. So that's, that's a concern for me.

The other options that you've got is you've got to move your lending on to interest only so you can, um, put your lending, on interest only for 12 months. And that's going to mean obviously that you just pay interest rather than principal as well. So your loan remains the same, but you continue to make the interest payments.

The benefit to that is that cashflow wise, you paying less, uh, so you got more in your pocket. Um, but also that compared to the mortgage holiday is that you're not paying interest on interest. Um. Which is the big numbers that you're talking about Ed.

Andrew Nicol: Because if you're capitalising your principal and your interest payments then your mortgage value is going up every month, right?

Peter Norris: Yep. Correct. And you end up paying interest on interest which...

Andrew Nicol: And so have you seen any of these be approved yet or is it, is the bank, are the banks inundated with requests?

Peter Norris: So like I've mentioned there's been I mean, how long's this been around now a week, and there's been close to 70,000 people applied for it. So they're inundated, and I'm getting three to four calls a day. It is being approved, they're doing a really good job and they've set up a really good process.

The banks have basically said, their focus is on looking after existing customers, experiencing distress. So new to bank customers, that's lot harder, turn around time, they're a lot further out, but they've set up really simple processes to apply for these, these mortgage holidays or interest repayment. So it is getting approved quite quickly.

Andrew Nicol: Okay. That's really good. And tell me what investors, sorry, if you've got an investment property and you're interest only already, obviously you can't, you know, that you're already on the minimum payment, uh, which you're able to make, uh, can you capitalise those interest payments approving investors to have a mortgage holiday?

Peter Norris: Yes, absolutely. So, if you're, the criteria is basically, if you're affected by Covid19, then you can take one of those options. Now, the thing with that though is, and this might change in the, at some point, but at the moment, um, if you're on interest only, uh, you can't then switch to, so if you, if you, if you take advantage of the Covid19 package and move to interest only, you cant' then move to the mortgage holiday.

So that's really important that you get advice around what option is the right one for you at that time. Um, if you're an investor and you're on interest only, you can take, you can take advantage of it because the reality is that investors are going to, are going to struggle in this time.

Andrew Nicol: And so some of our long term listeners and also Peter who's looked after a lot of our investor clients will know that we always recommend taking out a revolving credit in case of emergencies.

So maybe an option for some investors, if you, maybe your tenants are not able to make the full rent payment and can make, you know, um, 90% or 80% of the rent payments, maybe what you can do is use your revolving credit, to cover the extra 20%, so that you're still making the bulk of the payment and in your, your revolving credit is just going overdrawn by the amount that actually there is a shortfall of, um, would you think that might be a better idea for some investors.

Peter Norris: Yes, absolutely. I think that if you can exhaust all your options first before resorting to a mortgage holiday, that would be my suggested way of doing it. If you've got access to revolving credit, if you've got access to to savings, that sort of thing, then I'd be, I'd be suggesting that you maybe don't, don't use all of it, but certainly look at that first.

Andrew Nicol: And so another thing that came up today in a conversation I was having with a mortgage broker, Peter, maybe you've heard a little bit about this. Westpac, for example, if you, I'm pretty sure it was Westpac, if you take the mortgage holiday, they put a note on your file, of financial hardship.

Now that note of financial hardship is there to stay. And so whilst not all banks have this, um, that could negatively impact on your ability to borrow a future, would that be fair?

Peter Norris: I'm going to say that I hope that's not the case. I, it's certainly something that I've, that I've, that I've thought about and, I think what hopefully banks recognises that this situation, uh, happened quickly and it wasn't of the doing, it wasn't because someone made mistakes. It wasn't the error of the investor or the person borrowing this, the loan or the business owner, it's genuine mistake and people who've been put in the position where they've opted for this mortgage holiday.

It's not the typical hardship that we've experienced in the past where you have to be in a pretty dire straits to get this holiday, so yes it will absolutely be loaded on the file. But will it impact your future ability to borrow? I don't know.

Andrew Nicol: And this is where we always harp on about using a mortgage broker, obviously. So you're getting the best advice. You're not just necessarily going to the bank because you're, you're a bit concerned at the moment.

So a broker can help you discuss obviously other options before you go down this path, but if you do, and then you need future lending and if this as an issue, then a broker who can paint a story about the situation to make sure that it doesn't necessarily impact your future ability to borrow.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the show. It really does help us get the message out to more people and hey, if you're wondering how Covid19 is going to impact the property market, then why not check out the webinar that we are hosting this coming Tuesday, the 7th of April.

We we're going to dig into 165,000 different data points of suburb valuation data all around the country. So we can show which areas are going to be hardest hit by any downturn we might experience, and the ones that are going to have the most speediest recovery. So if you want to check that out, you can either go to our website, Opespartners.co.nz. Otherwise, I'm going to link it in the show notes as well. So tap or swipe over the cover art. It'll take you right there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.