The adage 'cash is king' is never truer than in a crisis. Cash gives you the flexibility and freedom to respond to changes.
Now is a good time to have a small cash buffer in your mortgage. The thing to remember is banks don’t want you to default on your mortgage, and they have temporary options in place which are designed to support those who find themselves in financial hardship.
Below are some ways to free up your cash flow and ease the pain of mortgage repayments at an uncertain time like this.
You might already have a buffer which is the difference between your loan limit and your current balance. If you are with Westpac, you can redraw this difference if you need to, and we can show you how to restructure your lending to do that.
No matter which lender you are with, it might be a good time to consider a small top-up using a revolving credit or an offset account. It’s usually easier to do this as part of refinancing from one lender to another, and you get the benefit of a cash back and competitive rates.
Contemplate moving your mortgage(s) on to interest-only. On a $500,000 mortgage this would free up $1,000 of cash flow per month. This is a good option for business owners who are facing uncertain cash flows. It gives them more flexibility.
Note: if you don’t have any obvious reason to go to interest-only and if you haven’t been impacted by COV-19 with a salary reduction or loss of job, then the bank is unlikely to support this.
I recently had an example of a client who was going back to work after maternity leave, and now they can’t. They had used up their savings, so reducing their payments to interest-only has freed up enough cash to keep them above water.
It’s not really a holiday. In essence the bank allows you to not make any repayments on your mortgage for a period – usually 3 months but it can be extended. Interest will still accumulate on the mortgage.
Given how low mortgage rates are, the cost isn’t high and you shouldn’t feel guilty asking for a repayment holiday. If your property is worth $800,000 with a mortgage of $500,000 then you would only eat up $8,750 of your capital over six months.
That way you get to stay in your home and not have to pay the mortgage for up to six months. This option will work well if you do lose your income. Due to COVID-19 the Government has no stand-down on work and income benefits, so you can receive a benefit and not service the mortgage in the short-term.
If you have any high paying debts like credit cards, personal loans, or car loans, now is the time to consolidate them into the mortgage. It reduces the interest but also allows you to reduce the repayments and free up your cash flow.
Another sneaky option is to consolidate your student loan into the mortgage. Student loans consume roughly 12% of your gross income deducted from your net pay. For someone on $100,000 that is close to $1,000 per month. Consolidating a $40,000 student loan on to your mortgage would free up roughly $800 per month.
Obviously putting debts onto the mortgage over a long term is not a smart idea in the long run. The goal should be to pay debt off. However, in the short term it can provide much needed breathing space.
If you are going to be hit by coronavirus then there are some additional things you can do to make life easier.
You can stop your Kiwisaver contributions for up to a year. For someone on $100,000 that is $250 per month and can make a bit of a difference. To suspend your KiwiSaver you will need to apply here.
Think about all of your other monthly expenses. Netflix, Lightbox, Neon, Apple TV subscriptions. Do you need them all?
If you lease a car park at your work but find that you are going to be working from home for an extended period, consider whether or not you can afford to pay for an empty space.
During this time, Many New Zealanders may become eligible for Working for Families if their salaries get reduced from above the threshold. Working for Families Tax Credits are payments for families with dependent children aged 18 or under. While everyone's situation is different, if you have a child (or children) under the age of 18 at home, then it could be worth a quick look. The IRD has plenty of information on how it works. Here are some more useful links:
It won’t cost you anything to have a chat to one of our team to assess your options and make sure you have your mortgage structured the best way. You can complete a short online form to get started and one of the team will be in touch.