During the lockdown, many New Zealanders financially affected by Covid-19 have been taking up the banks' offers of going on a mortgage holiday (also referred to as a repayment deferral). However, some are starting to question whether this will have an impact on their credit score and therefore, their ability to borrow in the future.
Having a poor credit score in a restricted borrowing market can create more issues. If you're not able to borrow against your home for things like renovation, asset purchases or even upgrading, then are you really better off?
Banks have addressed this concern, stating that the mortgage deferral during Covid-19 will not have an impact on credit scores. While most banks are doing so, Westpac is the only bank to have stated that they are putting a "payment no required" flag on their clients' credit report when taking on mortgage deferral. This doesn’t negativlely impact the borrower’s credit record.
It is also interesting that the banks are now more commonly calling this a deferral rather the original term, holiday. This is because it's important to remember that during a deferral period, interest is still charged on the home loan. The loan balance is increasing, which will mean higher regular repayments after the deferral period has ended.
It’s important to budget and possibly consider other options such as an interest-only period, which doesn’t significantly increase repayments when switching back to the regular principal and interest repayments.
As an example, a $500,000 mortgage at 3.05% for 1 year, on a 25-year term will have a $550 weekly repayment. However, on interest only the repayment would be reduced down to $293 per week which helps ease the pinch during a tough time.