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Seven Ways To Relieve Mortgage Pressure

Friday, 14 June 2024, 5:14 pm
Press Release: RNZ

Susan Edmunds, Money Correspondent

A combination of higher interest rates and a sharp economic downturn are putting pressure on some homeowners' budgets.

While overall home loan stress appears to still be low, it is increasing.

Reserve Bank data shows there was $1.901 billion of "non-performing" home loans in April, up 7.8 percent on the year before. That includes loans that are at least 90 days past due, and those that have been deemed impaired.

The non-performing loan ratio has increased from 0.3 percent in April 2023 to 0.5 percent.

Here are seven options to consider if you're worried about servicing your home loan.

Interest-only

Switching to an interest-only structure can make payments cheaper.

How much cheaper depends on how long you've been paying off your loan, because at the start most of the payment is interest, anyway.

If you were starting out on a $500,000 home loan with a 7 percent interest rate, you might pay $770 a week for a principal-and-interest loan. Cutting it back to interest-only could reduce payments to $673.

During this period, the amount you owe will not fall.

While it is down from the Covid peaks, the amount of existing lending on interest-only terms has increased in recent quarters, to $59.19b.

Corelogic chief property economist Kelvin Davidson said that probably reflected people switching to alleviate payment stress. The removal of interest deductibility for investors in recent years had meant there was little incentive for investors to choose interest-only loans.

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Banks typically restrict how long you can make interest-only payments for, and typically do not extend your loan term to allow for them. So if you had a 25-year loan term and paid interest-only repayments for five years of it, you could find you had to pay off the principal in the remaining 20 years at a higher rate.

This is something to work through with the bank or a mortgage adviser.

Restructure

Another option could be to restructure your loan on to a longer term.

Maybe you have a 25-year mortgage and have been paying it for 10 years - taking out the loan as new borrowing over a new 20-year term would reduce your payments. Alternatively, if you have a newer loan set to be paid over 25 years, you could ask to restructure it over a 30-year term.

A $600,000 mortgage paid over 30 years costs about $921 a week, compared to $1073 over 20 years.

But note, this can be a costly option.

The amount of interest you have to pay in this scenario can be substantial - with that $600,000 loan you would pay about $515,000 in interest over the course of 20 years but more than $830,000 in interest over 30, according to Sorted's mortgage calculator.

Glen McLeod, of Edge Mortgages, said this was an option he talked about with clients, provided they could service the new payments. "This may include debt consolidation."

Repayment holiday

You can sometimes apply for a repayment holiday, which means you make no repayments for a period of time. But it can be an expensive holiday because interest will still accrue. You will have to either pay back the loan for longer once payments start again, or make higher payments.

If you aren't sure that you'll be able to resume payments on the other side of a mortgage holiday, it could be better to look at other options. Otherwise you might end up owing more, but still in the same squeezed position.

Selling and renting

Getting out of the housing market entirely can be an option, but it could prove an expensive one.

If your property has dropped in value since you bought it, selling might not give you as much money as you expect, which might make it harder to get together a deposit for a future purchase.

You will probably also have to pay things like real estate agent commissions and legal fees.

People often imagine they will sit on the sidelines for a while, save up to buy again and grab a bargain while prices are softer - but It's really hard to pick the market in this way.

Most of the time, we don't know that prices are really picking up until they have done so in earnest - and at that point you might have missed your opportunity.

"The risk is that you can't get back into the market because in the meantime prices go back up and you get shut out," Davidson said.

He said credit conditions could also change and make it harder for people to get a mortgage again.

But he said people would often save because rent payments were usually cheaper than mortgage payments. "House prices could fall and you haven't done too badly. Ultimately it's down to the individuals But it's a big call if you have already been in the market to go renting. For some people it might not be a choice."

He said people could consider downsizing to a cheaper property or area. "At least you've still got equity and you're still in the game."

Move out and rent your house out

Another option is to shift out of the house for a while and rent it out.

With the return of interest deductibility, the interest repayments on your home loan will offset the income you earn from rent, reducing your tax bill.

But there are not many cases where this would save you money unless you had somewhere very cheap or free to rent instead.

If you have a $600,000 home loan on a house in Glenfield, Auckland, for example, you might be paying $921 a week with a 7 percent interest rate. Median market rent according to Tenancy Services is $675. There are also other fixed costs such as rates that have to be paid.

Another option could be to get a boarder in or rent out just part of your house.

Reverse mortgage

This is an option for older homeowners.

Depending on your situation, it may be possible to consider switching your home loan for a reverse mortgage.

A reverse mortgage (or home equity release) is borrowed against the equity in your home.

You receive a payout, either as a lump sum or ongoing stream of payments, but don't pay anything back until the house sells.

Usually, this is for people who are freehold but if you have a small mortgage, it may be possible to take out a reverse mortgage and clear it.

Because you are not making payments, what you owe will increase as interest accrues.

There is usually a no negative equity guarantee that means you won't end up owing more than the property is worth when it is time to sell.

You usually also have the right to stay as long as you want to.

You could also look into the option of equity protection, which allows you to ringfence a portion of the value of the home that will not be eroded by the reverse mortgage.

It is important to get independent advice on this.

Making an application on hardship basis

Banks are required to consider applications for assistance when borrowers have had an unexpected change in circumstances that means they can't keep up with their loans.

If you are seriously worried about being able to meet your obligations, a good first step is to contact the bank's financial hardship team.

They will probably want evidence of your financial position, evidence of employment and income and any change in circumstances.

The solutions they might be able to offer can vary but are often things like consolidating loans, deferring payments or providing alternative loan arrangements.

Davidson said so far the level of housing stress appeared to be low. "It could be coming but we're not necessarily seeing it happen right now."

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