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Top-up loans and other ways to survive the financial fallout

The coronavirus crisis has affected every part of our lives – health, social interaction and personal freedom, travel and recreation, jobs and finances. Although New Zealand may now be on top of the health aspect, the other effects will go on for some time. Job losses, widespread unemployment, business closures – the crisis and ensuing recession will have an impact on many Kiwis.

It sounds scary, but if your finances have been affected by the crisis, there are options. If you’ve lost your job, had your hours cut, or your business has lost income, you could take out a top-up loan to keep your cash flow moving, take a break from mortgage repayments, or find other ways to cut down on your outgoings.

The key is to seek help and find solutions before you’re in dire straits.

Free up funds

Before you apply for a loan or a mortgage holiday, look for other ways to cut expenses and free-up some much-needed cash. Personal expenses are the obvious first step – thanks to the lockdown, many of us have been forced to cut spending on unnecessary extras anyway.

From there, think about putting your KiwiSaver contributions on hold for a while – depending on your income, that 2-4% could make a big difference. You can also talk to your bank about going interest-only on your mortgage payments for a set period. Paying just the interest owed stops your mortgage from growing, and cuts your repayments down to a manageable level while you’re struggling. Many banks will let you switch to interest-only payments for a while – you just need to ask.

Refix – and grab a lower rate

With interest rates set to fall thanks to a historically low OCR, refixing your mortgage is another way to cut down on costs. If you have a fixed-rate term ending shortly, it’s easy – simply negotiate with your bank for the best rate and re-fix for another 12-month or two-year period.

If your fixed rate isn’t set to expire any time soon, you could think about breaking the term and going elsewhere. Most of the time this will cost you break fees, which means it may not be worth the reduced cost of repayments, but it’s worth looking into.

Take a mortgage holiday

As part of the first COVID-19 relief package, the government announced that banks would be offering mortgage holidays of up to six months for people affected by the crisis. A mortgage holiday sounds like a pleasant break from responsibility – although it’s not quite that simple, it can be a good option if you’re struggling to meet mortgage payments.

During a mortgage holiday, you’re not required to make payments toward either the principal or interest of your loan. However, this doesn’t mean those payments don’t exist – you’re simply putting them off for the mortgage holiday period. Because your loan will still be accruing interest, you’ll actually pay more for your property in the long term.

Despite the downside, a mortgage holiday could be a viable option if you have been laid off or had your income reduced as a result of COVID-19. A break from mortgage repayments could help you hang onto your house while things are tough, as long as you’re confident that you can get another job or increase your income before too long.

Take a top-up loan

Adding to your mortgage while you’re struggling doesn’t sound smart at first, but if it helps you avoid losing your house or struggling to support your family, it could be the best option for your situation.

Top-up loans are basically additions to your regular mortgage. They’re often used to fund renovations or other purchases, but they can also be used to get you through a rough financial period. Top-up loans are usually based on the equity you’ve built up in your property – that is, the difference between what you owe and what your home is worth. The assumption is that you’ll be able to pay back both the mortgage and the extra loan if and when you sell the property. In a way, you’re just accessing money that is already yours. Because the loan will be set at a similar rate to your mortgage, it’s often a better option than spending on a credit card or taking out a high-interest personal loan.

Taking out a top-up loan means talking to your lender, and giving details of your financial situation. You may need to provide a valuation of your home or proof of income.

Talk to the experts

As always, if you’re not sure about the best way to structure your finances and free up cash, talk to the experts.

The team at Global Finance can offer advice and negotiate with lenders on your behalf, whether you need a mortgage holiday, a top-up loan, or a complete financial restructure. It’s about finding the best way to get you and your family through.
Get in touch to book a consultation now.

**These are general guidelines and are by no means a reflection of bank or lending policies