Here’s what you need to know before you consider a mortgage holiday –

123RF.COMMortgage repayment holidays can end up more expensive than you expect.

The country’s banks have agreed to a mortgage holiday scheme, in which customers who have experienced an income drop due to Covid-19 can stop paying their home loans for six months.

That gives some cash flow relief in the short-term.

But borrowers’ mortgages will be bigger at the end of the holiday than they were when it began because interest still accrues.

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Some details of the scheme are yet to be determined.

Repayment holidays are available in normal circumstances but mortgage broker Bruce Patten said the scheme allowed banks to fast-track the application process.

They did not have to go through their normal requirements under responsible lending rules to understand why someone was experiencing hardship.

“They need to relax the rules because they are not going to have time to assess all the applications individually.”

Patten said he had been inundated with requests for information about taking advantage of a holiday. But he said it should be a last resort. People who could afford to just pay the interest owing on their mortgage should do that instead, he said.

A six-month repayment holiday would add about $15,000 to the cost of a loan for someone with a $500,000 mortgage at 4 per cent, or about an extra $72 a month once payments began again, according to financial research site MoneyHub.

“I see it exactly like taking an equity loan of $15,000, spending it on a car, and repaying it over the next year. However, no one in this economy will be doing that,” said MoneyHub spokesman Chris Walsh.

Tom Hartmann, managing editor of Sorted, said a mortgage holiday would be appealing in the short-term but less welcome over the long term. “It’s about cash flow right now. If they don’t have cash right now it’s a way of stopping money going out that they don’t have. That is a very good thing.”

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But he said there were consequences, which people needed to understand. “Banks are not losing money, just short-term revenue. You could make the case that they are making money on this deal.”

Financial adviser Liz Koh agreed care was needed. “At times like these, good budgeting is essential. People who receive financial relief will need to be very disciplined to ensure their financial commitments are met first, before increasing spending on other things.

“A mortgage holiday is just a break from payments; the amount owed will not change and will continue to accrue interest. This means that it will take longer to repay the mortgage, and over the life of the mortgage, more interest will be paid. It’s always a good idea to get rid of debt as quickly as possible and this should be a key goal when budgeting.”

A spokesman for the New Zealand Bankers’ Association said it could not comment at this stage because details were still be worked through.

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