Mortgage Holidays: When You Might Need One

When financial pressure hits, whether from job loss, illness, relationship breakdown, or simply a period where expenses have overwhelmed income, keeping up with mortgage repayments can feel impossible. This is where a mortgage holiday comes into play, offering temporary relief when you need it most.

A mortgage holiday, sometimes called a payment deferral or repayment holiday, is an arrangement with your lender to temporarily stop or reduce your mortgage payments. It is not forgiveness; your debt remains, and interest continues to accumulate. But it can provide crucial breathing room while you get back on your feet.

How Mortgage Holidays Work in New Zealand

When you take a mortgage holiday, you are essentially agreeing with your bank to defer your scheduled repayments for a set period, typically ranging from a few weeks to several months. During this time, you make no payments, or reduced payments, but your loan does not sit frozen.

Interest continues to accrue on your outstanding balance every single day. This interest gets added to your principal, a process called capitalisation. When your holiday ends, you owe more than you did before, and your future repayments will be higher to account for this.

When to Consider a Mortgage Holiday

Mortgage holidays are designed for genuine hardship situations where you temporarily cannot meet your obligations but expect your circumstances to improve. Common scenarios include:

• Job loss or redundancy: When you need time to find new employment without the pressure of immediate mortgage arrears.
• Serious illness or injury: Medical situations that reduce your income or create unexpected expenses.
• Relationship breakdown: The transitional period during separation when finances are being restructured.
• Natural disasters: Events like floods or earthquakes that disrupt your income or create urgent costs.
• Business difficulties: For self-employed homeowners experiencing a temporary downturn.

A mortgage holiday is not intended as a long-term solution or a way to free up cash for discretionary spending. Banks will want to understand your situation and see a realistic path back to normal repayments.

The Application Process

New Zealand banks have hardship teams specifically trained to help customers facing financial difficulty. Under the Credit Contracts and Consumer Finance Act 2003, lenders are required to consider hardship applications and cannot simply refuse without proper assessment.

To apply, contact your bank as early as possible; ideally before you miss any payments. You will typically need to explain your situation, provide evidence of your circumstances (such as medical certificates or redundancy letters), and outline your expected recovery timeline.

Alternatives to Consider

Before committing to a full mortgage holiday, explore alternatives that might cost you less in the long run:

Interest-only payments: Switching to interest-only for a period means you are not paying down principal, but you are covering the interest as it accrues. This prevents your loan balance from growing.

Extending your loan term: Lengthening your mortgage term reduces each payment, making them more manageable. You will pay more interest over the life of the loan, but less than capitalising several months of missed payments.

Partial payment reduction: Some banks will agree to reduced payments that cover at least part of the interest, limiting how much gets added to your balance.

Accessing your revolving credit: If you have a revolving credit facility with available capacity, using this to cover payments temporarily might be cheaper than a formal mortgage holiday.

The Long-Term Impact

Beyond the immediate financial cost, a mortgage holiday can have other implications worth considering. Your credit score may be affected, particularly if the hardship arrangement is recorded on your credit file. This could impact future borrowing applications for several years.

Your relationship with your lender may also be affected. While banks understand that life happens, a history of hardship arrangements could influence future lending decisions or the terms you are offered when refinancing.

Perhaps most importantly, resuming payments after a holiday can feel like a shock. Your repayments will typically be higher than before, either to cover the added debt within your original loan term or through extended payments. Make sure you are genuinely ready before ending the holiday period.

Getting Help

If you are struggling with mortgage stress, you do not have to navigate this alone. Free financial mentoring services like MoneyTalks (0800 345 123) can help you assess your situation and communicate with your lender. A mortgage adviser can also help you understand your options and potentially negotiate with your bank on your behalf.

The key is to act early. Banks are far more willing to help borrowers who come to them proactively than those who have already fallen into arrears. A mortgage holiday might not be the right answer, but having the conversation opens up possibilities you might not have realised were available.