When you have debt you need to repay it, to defend your cashflow during recessionary times or when you are forced not to work, or at risk of losing your job, you should look at reducing all costs – including debt costs. Typically there are two ways to reduce repayments.
1. Mortgage Restructure.
Increase Loan Terms
Let’s simplify the concept by ignoring interest from the equation and look at two different loan terms. When you borrow $100,000 you have to repay it.
- If your repayment term is 5 years that will cost $385 per week.
- If your repayment term is 30 years that will cost $64 per week.
Decrease Interest Rates
Again let’s simplify the concept by ignoring principal repayments for a moment. When you borrow $100,000 you need to pay interest on the loan.
- If your interest rate is 19% (personal debt) your interest cost will be $365 per week.
- If your interest rate is 4.5% (bad mortgage rate) your interest cost will be $87 per week.
- If your interest rate is 3% (great mortgage rate) your interest cost will be $58 per week.
Stop Repaying The Mortgage Principal
If you are paying interest and principal that is two payments. If you can stop paying the principal for a temporary time by switching to an interest-only loan that will save you one whole payment.
High-interest personal debt is not good to carry into a recessionary period, we strongly encourage you to look at consolidating it onto your mortgage. This works both strategies: decreasing interest rates often from 22% down to 3.5% and by increasing the term from 2-5 years to 10-30 years.
Here is a quick case study:
David Chamberlain mortgage adviser explains: I met someone who was stuck, their short term debt had grown to the point he was struggling with life and debt repayments, he came to us with eight short term loans totalling $52,900, with minimum monthly repayments of $1,894.
- BNZ credit card $21,500, $581 per month
- ANZ personal loan $12,000, $400 per month
- Gem Visa $8,000 $216, per month
- Hire Purchase $4,000, $108 per month
- Overdraft ASB $1,000, $55 per month
- Hire Purchase $1,900, $325 per month
- ASB Credit Card $2,000, $55 per month
- ANZ Credit Card $2,500, $154 per month
- TOTAL $52,900, $1,894 per month
For this scenario there was no way the bank would consider taking the consolidation on so we left his mortgage at BNZ and used a second mortgage at Avanti Finance to consolidate all of the short term debt on a 14.95% interest rate over a 7-year term.
A lot of his short term debts were on interest rates above 20%, with the combination of better interest rates and a longer-term his monthly payments plunged from $1,894 to a $907 per month.
This solution was focused on quickly fixing his cash flow. The repayments for his new situation were $907 per month. When you need a non-bank lender like Avanti Finance there is an establishment fee payable which gets rolled into your consolidated debt – the monthly $907 included paying all his short term debts and the fee.
2. Mortgage Holidays
Banks have hardship teams that work directly with mortgage holders who come into very tough times – typically this is not the first option you want to take.
During normal times there is a full application process you need to go through, the banks are working to make it as easy as possible during these times for people who are struggling.
Note if you meet the criteria for specific covid-19 mortgage holiday announced by the government – check below.
Please understand a mortgage holiday is actually a deferral. Essentially it looks like a pause on all payments with interest still accumulating. This means after the “holiday” your total mortgage will have grown due to interest payments being capitalised instead of paid. You will then have to extend the mortgage term or increase repayments from their current levels. Alternative options to discuss with your adviser:
- switch to interest-only (saves cashflow whilst ensuring your mortgage doesn’t grow)
- consolidating high-interest debt (should be done anyway)
- restructuring now to a longer-term (continue paying down your mortgage but with permanent lower payments)
3. Emergency Cash (mortgage top-ups)
For those of you who are not affected through income loss or jobless as of now, we are seeing banks willing to top-up mortgages for around $25,000 – $50,000 with the reason being ‘emergency money for Covid-19’. If you are wanting to secure some lending for security and have an existing mortgage – we can help.
During normal times there is a full application process you need to go through, the banks are working to make it as easy as possible during these times for people who are struggling. Note if you meet the criteria for specific covid-19 mortgage holiday announced by the government – check below.
Temporary Covid-19 options.
Most banks are offering interest-only loan restructuring options to clients. We are finding you are more likely to be approved now than you were previously and banks are moving to do these applications with little to no paperwork.
Government has announced a covid-19 specific mortgage holiday scheme.
Extremely dynamic situation – we are working hard to keep this up to date.
Watch the live announcement.
“Retail banks have agreed to provide a mortgage repayment holiday scheme for people whose incomes are affected by Covid-19,” Grant Robertson said today.
“A six-month mortgage holiday for people whose incomes have been affected by Covid-19 will mean people won’t lose their homes as a result of the economic disruption caused by this virus,” he said today.
Mortgage holiday scheme by retail banks.
- 6-month mortgage repayment holiday to homeowners whose incomes have been affected (specifics to be finalised by each bank and published in the next 1 or 2 days).
- RBNZ reduced banks core funding ratio from 75% to 50%
- $6.5 billion dollars, government-guaranteed loans from the bank to small business (turnovers between $200,000 and $18mn), the lending decision to be made by banks. The government carries 80% of the risk.
Bank Specific Help
- Information available at https://www.asb.co.nz/page/covid-19.html
- Waiver of home-loan application, top-up, and re-documentation fees (Early Repayment Adjustment fees still apply).
- A 90-day temporary overdraft facility at a concessional interest rate is available. (Subject to the salary being credited to an ASB account before 1 March 2020).
- Interest-only repayments on home loans for up to 3 months.
- Home loan holiday for up to 3 months (interest will still be added to the loan).
- Ability to extend the home loan term for up to 3 months.
- Information available at https://www.bnz.co.nz/contact/covid-19-update
- Normal hardship options are available.
- covid-19 mortgage holiday applications are open for switching to interest-only and repayment holidays.
- will launch on Monday 30th March.