Home loan holidays: Brokers back extension despite falling application numbers

An extension of the mortgage deferral scheme is just one of the options the Reserve Bank is considering. Photo / File

Mortgage brokers say the home loan holiday scheme should be extended despite demand for the scheme falling.

Reserve Bank of New Zealand figures show just there were just 391 requests for mortgage deferrals through the banks in the week to July 24.

Weekly application numbers have fallen steadily since the peak of 28,455 in the week ending 10 April when New Zealand was under its level 4 Covid-19 lockdown and have been around 500 a week or less since mid-June.

Finance Minister Grant Robertson announced the scheme on March 24 after an agreement was reached between banks and the banking regulator.

The Government-approved scheme enables banks to allow customers to reduce or suspend mortgage repayments for up to six months, without the Reserve Bank considering those loans to be non-performing when assessing bank solvency.

The interest on the loans continues to accrue.

Banks have always had loan deferral and interest-only options but applicants typically needed to go through a rigorous hardship application process.

The scheme arrangement essentially made it so anyone affected by Covid-19 could apply and be accepted allowing the banks to handle high volumes of applications.

Nearly 60,000 borrowers (59,885) had agreed to a deferral of payments on $20.2 billion of home loans, personal lending, credit card or overdraft debt as of June 30, figures from the NZBA show.

A further 79,166 customers had agreed to reduce loan payments to either interest-only or a reduction in principal and/or interest repayments on $24b of debt that was either home loans, personal lending, credit card or overdraft debt.

Although banks and brokers both indicate some borrowers have already come off the deferral.

Reserve Bank governor Adrian Orr reached an agreement with the banks to allow the six month mortgage deferral scheme. Photo / Mark Mitchell

John Bolton, managing director of Squirrel Mortgages, said the scheme should be extended.

"I think it's a good idea for those suffering a loss of income due to Covid."

Loan Market mortgage broker Bruce Patten believed an extension was inevitable.

"A lot of businesses haven't decided on who and how many people they will lay off after the wage subsidy finishes at the end of September. So a lot of people are on 80 per cent of their wage and may end up staying on that or taking a reduced number of days/hours or lose their job altogether."

In Australia a similar scheme has been extended for four months stretching it until the end of the year.

Patten predicted New Zealand could follow suit with another four months taking it out until the end of the year.

But Bolton said if New Zealand was to extend its scheme it would be better to do so for up to another six months.

"Four months lands at Christmas so I'd prefer six months to get them through to March."

Patten said the criteria for who qualified for the deferral was likely to be tightened by the banks.

"I expect the banks won't make it as easy as the first round, where anyone that applied basically got given it.

"They will want to understand the client's circumstances and what's happening, so people can expect to have to provide a lot more info than my income has been reduced unless, of course, they were made redundant and don't currently have a job but are still looking."

Mark Collins, chief executive of Mike Pero Mortgages, said it should be extended but only to those who really needed it.

"I'm a bit concerned about a blanket approach."

Collins said continuing to allow people to defer payments had potential downside risks, particularly for first home buyers who had bought a house in the last year or so, and could be faced with negative equity if house prices fell.

"For first home buyers at 90 per cent [loan to value ratio], who've bought in the last year it doesn't take much if they have had some job challenges ... extending that holiday gets close to the red line."

Collins said, for first home buyers, the level of financial knowledge was low and many believed if the bank allowed them to do something it was okay.

He said borrowers needed to understand the full consequences of extending the deferral which could mean they have to make higher payments or extend the amount of time it took to pay off their mortgage.

But Bolton said the scheme should not be too restrictive.

"People are generally sensible and know they are adding cost to their debt. We don't need to be a nanny state.

"If homeowners have enough equity then why get too worried about this? Effectively a mortgage deferral is like using built up savings but it's in the form of equity in their home.

"If they don't own they have to rent so, either way, there is a cost that will eat up savings."

Home loan borrowers in financial difficulty have been allow to go on a mortgage holiday. Photo / Dean Purcell

Tony Alexander, an independent economist, said he believed the underlying need for mortgage deferrals was relatively low but extending the scheme would be a low risk and low cost option for the Reserve Bank.

"The Reserve Bank's underlying drive for its monetary policy is to provide as much support as possible and confidence as possible."

"To provide an extension is consistent with its underlying policy drive."

The Reserve Bank has indicated an extension is only one of the options it is considering but it has declined to say what the others are.

Alexander said even if the RBNZ decided to include the loans as non-performing on bank balance sheets, which would require the banks to hold more capital against them, then he believed banks would continue to offer mortgage relief for borrowers.

"Banks have no interest in forcing mortgagee sales."

A RBNZ spokesman said a decision on the scheme would be made by the end of next week.