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Last Article Uploaded: Friday, December 3rd, 9:22PM

Mortgages

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The dangers of home loan holidays

Financial Services Complaints Ltd (FSCL) has issued a warning that loan payment holidays can have long-term costs that people don't always appreciate.

Wednesday, October 27th 2021, 6:00AM 1 Comment

by Eric Frykberg

FSCL says it is not just the unpaid interest that gets added to the principal.

The term of the loan is extended as well and that incurs still more interest costs for every month of additional time, thus total payments end up higher.  

“We are seeing cases where borrowers don’t understand that deferring payments extends the term of loan, meaning that they will end up paying more interest over the life of the loan,” explains FSCL chief executive Susan Taylor.

She adds it is important for borrowers to speak to their lender early if they are experiencing hardship and to make sure they understand the implications of changing the terms of a loan.

Taylor cites a case which was taken to the FSCL from a woman named only as Wendy.

When Wendy took out a loan in 2019, she had every intention of paying it off within three years, but incurred a 50% salary loss due to the nationwide Covid-19 lockdown in 2020.

She then applied for a deferral, and was granted and agreed to an extension. It was later that year when Wendy realised her loan repayment deferral had led to her loan term being extended and extra interest being added to her loan balance.

Unhappy about the additional interest, Wendy asked the lender to let her go back to her original loan balance and term. The lender refused, saying the new terms were legally binding. 

So Wendy complained to FSCL. 

It found that although the repayment holiday meant Wendy’s loan term was extended and that Wendy would pay more interest on the loan in total, it was clear that she had agreed to the new terms of the contract. 

FSCL said it could not see any grounds for asking the lender to reinstate the loan to how it had been before the repayment holiday.

Taylor says interest will continue to be added to a loan during the period of a loan repayment deferral.

“The loan does not stop during the deferral period,” she said.

“The loan term will be extended because of the loan repayment deferral and will mean the borrower will be paying the loan back for longer than they had originally planned.”

Tags: FSCL

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Comments from our readers

On 27 October 2021 at 2:01 pm Murray Weatherston said:
Covid lockdown must have finally got me.

After reading a lot of such reports worried about the aggregate amount of repayments and aggregate interest paid, and biting my tongue, I've decided to put fingers to the keyboard.

Why is there never any awareness and discussion of the time value of money?

A question for everyone - what is the net present value of the stream of loan payments made on a mortgage over time if the payments are discounted at the interest rate?

If you know the answer to that you will understand why I get mad.

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Lender Flt 1yr 2yr 3yr
AIA ▲4.60 3.65 4.35 4.69
ANZ 4.79 4.25 4.95 5.35
ANZ Blueprint to Build 2.03 - - -
ANZ Special - 3.65 4.35 4.75
ASB Back My Build ▲2.29 - - -
ASB Bank ▲4.60 3.65 4.35 4.69
Avanti Finance 4.55 - - -
Basecorp Finance 5.49 - - -
Bluestone 3.74 3.54 3.89 4.09
BNZ - Classic - 3.65 4.35 4.69
BNZ - Mortgage One 5.15 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Rapid Repay ▲4.95 - - -
BNZ - Std, FlyBuys ▲4.95 4.25 4.95 5.29
BNZ - TotalMoney ▲4.95 - - -
CFML Loans ▲5.35 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.95 - - -
First Credit Union Special 5.85 3.59 4.09 -
Heartland Bank - Online 2.25 1.85 2.35 2.65
Heretaunga Building Society 5.25 4.00 4.60 -
HSBC Premier 4.49 2.19 2.45 2.69
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - 2.25 - -
ICBC 4.15 3.29 3.85 4.19
Kainga Ora 4.43 2.88 3.28 3.59
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank ▲4.25 ▲4.54 ▲5.20 ▲5.54
Kiwibank - Offset ▲4.25 - - -
Kiwibank Special ▲4.25 ▲3.69 ▲4.35 ▲4.69
Liberty 4.84 - - -
Nelson Building Society 4.95 ▲4.29 ▲4.85 -
Pepper Essential 4.79 - - -
Lender Flt 1yr 2yr 3yr
Resimac 3.39 3.54 3.89 4.09
SBS Bank 4.79 3.65 4.19 4.25
SBS Bank Special - 3.15 3.69 3.75
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - ▲3.45 - -
The Co-operative Bank - Owner Occ ▲4.75 ▲3.65 ▲4.35 ▲4.69
The Co-operative Bank - Standard ▲4.75 ▲4.15 ▲4.85 ▲5.19
TSB Bank 5.34 4.09 4.74 4.99
TSB Special 4.54 3.29 3.94 4.19
Unity 5.65 4.15 4.60 -
Wairarapa Building Society 4.99 ▲3.65 ▲4.05 -
Lender Flt 1yr 2yr 3yr
Westpac 5.09 ▲4.29 4.95 5.29
Westpac - Offset 5.09 - - -
Westpac Special - ▲3.69 4.35 4.69
Median 4.77 3.65 4.35 4.69

Last updated: 3 December 2021 8:16am

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