Now is the time to take that mortgage bull by the horns. I've written about the Government's mortgage "holiday" aka deferral scheme previously. This article is for the people who are managing to make payments, but are staring down the barrel of an uncertain future.
Maybe your pay is coming via a wage subsidy and you don't know what will happen at the end. Or you have a job on full pay or 80 per cent but there could be redundancy just beyond the horizon. Covid-19 has shown us how a certain future can become uncertain overnight. It's time to make contingency plans.
Instead of building up "spare equity" on your mortgage for your next holiday or renovation, start overpaying a little each fortnight or month to build up a buffer.
In the absence of mortgage/income-protection insurance that covers redundancy (which is rare in New Zealand) or an emergency fund you can get a month or two or even more worth of payments into your mortgage you will have some breathing space if financial disaster hits.
You can then arrange with the bank to take a break from paying for that period of time if you lose your income. It's not rocket science to get this done and you don't need a magic wand, says mortgage broker Geoff Bawden, of Bawden Consulting.
Mortgage arrears were down 43 per cent at the end of July compared to February, in part because people are saving more and utilising their credit cards 10 to 15 per cent less, says Angus Luffman, managing director of Equifax New Zealand, the country's largest credit reporter. Some, of course, have lost incomes but plenty of people are being circumspect about their spending.
The great thing about paying money into your mortgage is it's effectively a tax-free investment. At the ASB, for example, if you stash your spare cash into an online savings account you'd get a 0.5 per cent on anything less than $5000 and 1.30 per cent in a six-month term deposit if you have more than that minimum. You still have to pay tax on those measly returns.
On the other hand the same money paid down on your ASB variable floating rate mortgage saves you 4.45 per cent and there's no tax to pay on that return. You can still withdraw that overpayment if needed, providing you choose the right mortgage product.
Paying off a little extra regularly reduces the capital owing and therefore the interest element of your mortgage payments become smaller.
The easiest way to start paying more, says Bawden, is to keep your payments the same, whenever mortgage interest rates go down. That way you're paying a little extra off your mortgage each pay.
If you have all your mortgage in fixed rates there are most likely limits to how much extra you can pay down. You've signed a contract with the bank, adds Bawden.
You may be allowed to make small additional payments until the fixed term is over and then remortgage to something more appropriate for your situation. That might be a portion of the mortgage on the floating rate and the rest on one or more different fixed terms.
Revolving credit is another option. It's like a big overdraft reduced on payday when your salary goes in. The rates and fees for revolving credit can vary hugely. This week, for example, Kiwibank was offering 3.45 per cent on revolving credit with zero monthly fees compared to Westpac that was charging 4.69 per cent and a monthly fee of $9.95. Rates and fees change regularly.
If you do survive the Covid financial guillotine and end up with a buffer on your mortgage, think long and hard about that money. You can choose to use it for the post-Covid holiday, or to build your dream kitchen, bathroom, or extension. Or you could keep it in the mortgage as an insurance policy against future black swan events.