Pain in the pocket: The cost of deferring your mortgage for a year

The cost of deferring your mortgage for up to a year depends on the size of your mortgage. Photo / 123RF

An extension to the mortgage deferral scheme means some borrowers could soon be able to put payments on their mortgage on hold for up to a year.

On Monday the Government announced the current mortgage deferral scheme would be extended until March 31 next year.

The current scheme was due to expire on September 27. The bulk of those who initially applied for mortgage deferral did so in April, during the level 4 lockdown, meaning their six months will be due to end in October.

The extension period allows for new people to apply for the scheme and for those already on it to reapply. But the Government and the Reserve Bank has told banks it will not be a rollover process and each applicant will have to be assessed on their own situation.

How much will it cost?

The cost of deferring your mortgage for up to a year depends on the size of your mortgage.

Bruce Patten, a mortgage broker with Loan Market in Auckland, said the average size of the loans he dealt with was $600k.

Deferring a mortgage of around $600k with an interest rate of 3 per cent on a term of 30 years for a year would add around $18k to the debt and then you will have to pay interest on that extra debt.

For a $400k mortgage it would be around $12k.

Patten said less than 10 per cent of his clients were currently on a deferral or interest only arrangement and he estimated even smaller numbers would choose to extend it.

"Of those a lot of them have gone back to work, albeit on a reduced salary with most people on 80 per cent of their salary."

But he said many were reluctant to come off the current deferral scheme early because they were using it as a way to build up savings.

Patten said so far he had only had one approach asking to extend it.

"I would suggest only half or maybe only 25 per cent of those would want to extend it."

Jeff Royle, a mortgage broker at iLender said deferring a mortgage was not a cheap option and should only be used as a last resort.

"My view is that it is one tool in the toolbox."

Royle said borrowers should also consider if they can afford to go interest only or if they have had a mortgage for a number of years whether an extension to the term might be possible instead.

"If you have to use the deferment my advice would be as soon as you can come off it, do so."

The average new Auckland mortgage is around $600k, says one broker. Photo / File

Royle said in some cases people will be just staving off the inevitable and a managed sale of the property would be a better choice.

"If it looks like things are not going to come good then people have to talk about things like, we need to get the house on market."

Mortgagee sales remain low so far in New Zealand but have begun to creep up. Royle noted there were around 23 mortgage sales on Trade Me at the moment, up from around 10 in May.

The red flags for needing to sell up

Royle said it was not just the mortgage that usually signalled the need to sell up a property.

"It is your lifestyle and other debt. The boat is on finance and the car is on finance. It was tight anyway and now it is not sustainable."

Royle said people needed to ask themselves if they could realistically afford to maintain the house paying the mortgage, rates, insurance and maintenance costs.

"If the answer is no then what is going to change? Is it likely you will get another job paying the same money to retain that lifestyle? These are pretty hard questions. If the answer is no, it is much better all round to draw a line under it yourself and make the move rather than have some faceless banker, send a nasty letter."

Royle said in some cases people would be able to sell up and downsize their home.

Banks have told brokers that if they get approached about a deferral extension to ask people to be patient as they are still working through the details of it.

ANZ has said on its Facebook page that it is working through changes to the eligibility criteria.

Tighter process to apply

Patten said he expected banks would want to see a full financial statement about a client before they could approve an extension.

"What do you own, what do you owe?"

He said banks did not want to put people in a situation where they would be in the same position in six months time and end up having to sell their home quickly.

"It is not going to be as simple as what we had to do the first time."

That involved simply contacting the bank via email to let them know a borrower had had their income affected by Covid-19 through a job loss or a reduction in income.

"This will be more like what banks use in their asset management area. They will be ramping that area of the bank up now."

He said each application would be assessed individually.

"It is not just going to roll over."

Patten said some borrowers would have tourism businesses that simply would not recover in another six months.

"So what is the point of deferring the inevitable?"

Others who were faced with going into negative equity would likely have no choice but to sell, he said.

Patten urged those wanting to extend to contact their broker or bank a few weeks ahead of their deferral ending.