What will it really cost YOU?
By Sue Howe, Mortgage Supply Co Ltd
What is a mortgage holiday?
Homeowners struggling financially as a result of the Covid-19 lockdown can now apply to their bank for a six-month mortgage holiday. This means you can put your mortgage payments on hold for 6 months.
While you are taking advantage of this “So Called Mortgage Holiday” your bank will still be charging you interest daily and adding interest to your mortgage account. This is known as compounding interest.
Check the table below which gives you a snapshot of the costs to you.
| Loan Details | Paying Principle & Interest | Paying Interest Only for 6 months | 6 months Repayment HolidayDon’t change payments | 6 months Repayment HolidayIncrease payments by $45.00 |
| Mortgage | $500,000 | $500,000 | $500,000 | $500,000 |
| Term years | 25 | 25 | 25 | 25 |
| Adjusted Term | 25 | 25 | 26.1 | 25 |
| Interest Rate | 3.50% | 3.50% | 3.50% | 3.50% |
| Monthly Payments 1st 6 Months | $2,503 | $1,458 | $0 | $0 |
| Monthly PaymentsOngoing | $2,503 | $2,535 | $2,503 | $2,580 |
| Total Interest life of loan | $250,935 | $255,538 | $266,386 | $258,468 |
| Total Interest differenceP&I v Interest Only | $0 | $4,603 | $15,451 | $7,533 |
| Total repayments (term of loan) | $750,935 | $255,538 | $781,794 | $758,468 |
| Difference in Total Payments P&I v Interest Only | $0 | $4,603 | $30,859 | $7,533 |
Albert Einstein quoted:
“Compound interest on debt was the banker’s greatest invention, to capture, and enslave, a productive society”
What should you consider before applying for a mortgage holiday?
If you are concerned about keeping up your regular payments. There are several options available to you other than a mortgage holiday.
Interest Only Payments
This is an excellent alternative to mortgage holidays; you will continue to pay the interest on your mortgage which will keep the costs down until you are able to resume paying the principle as well. Your principle loan will not reduce during in this time.
Reduce Repayments
If you are not able to make the full repayment’s, then look at options of reducing your repayments. For example, you continue to pay the interest and a nominal sum off your principle.
Extend Your Home Loan
This is an option to help you with your cash flow, though again it will cost you more over the term of your mortgage.
If you’re reducing your payments, you’re not paying off your mortgage as quickly as possible, with the power of compounding interest you are doing yourself a disservice. For many people, it’s advisable to chat with your mortgage broker or adviser on your personal situation.
During this current financial turmoil, the government and banks are all working together to help you.
However, remember whatever option to take in these times it will add costs to your mortgage. These costs can be both financial and increase the term of your mortgage. The “Mortgage Holiday” being offered is not FREE.
Sue has been in the financial services industry for over 20 years. She has worked with investors, first home buyers, parents who are assisting their children into their first home, in fact anyone who has financial dreams.
For an obligation-free chat about your personal situation please call Sue Howe on 021 173 6611 or email she will be able to help you crunch your numbers.
