Time to read : 4 Minutes
Is A Repayment Holiday On Your Mortgage Worth It?
Taking out a loan, especially a mortgage, is a big commitment. For most, it may even be the biggest financial decision of their lives. So it’s no surprise that a lot rides on it going well.
Life, however, every so often, has different ideas. So what can you do when you suddenly can’t meet your repayments for the foreseeable future?
What is a repayment holiday?
A repayment holiday, or repayment pause, is a temporary break from monthly loan payments, like your mortgage. In most cases, you can apply for a six-month break. Some lenders may even offer a 12-month term under extenuating circumstances. For example, many lenders approved repayment holidays at the height of the pandemic in 2020 and 2021, but other reasons can qualify as well. For instance:
Temporary financial hardship.
Changing jobs, e.g. due to job loss or redundancy.
Change of life circumstance (e.g. parental leave, separation, divorce etc.).
A short-term health crisis.
Travel.
Installing eco-friendly devices at your property.
💰Good to know: whether it’s your mortgage, credit card repayments or a business loan, you can hit pause on almost any of them. If your lender approves, that is.
And since Covid-19 hit in 2020, banks have become a little more lenient, too.
Before the pandemic for example, you might only get approved to freeze your mortgage if you were already ahead in your repayments.
The pros and cons of repayment holidays
The benefits of such a break are evident. After all, it allows you to put a big financial commitment on hold for six months, so you can focus on getting back on your feet.
When the pause lifts, you resume your repayments. However, there are a few stumbling blocks you should be aware of before applying for a repayment holiday:
Interest: when freezing your home loan, your monthly repayments come to a halt. But, your interest continues to accrue during this time.
This means at the end of the repayment holiday, your total balance will have increased. The amount of additional debt depends on your loan terms and your current interest rates.
Loan terms: the additional interest will affect your repayments. So once your repayment holiday ends, your lender will likely give you two options.
You can either increase your monthly repayments to compensate for the additional interest, or you can extend your loan term.
Credit score: until mid-2022, taking a repayment break could impact your credit score negatively.
That’s because lenders were not able to report these arrangements to credit agencies. As a result, these gaps were noted as missed payments.
Since July, however, new regulations have come into effect. Now, repayment holidays can be noted on credit reports, meaning they won’t affect your overall score. So long as you keep up with your loan terms once repayments resume.
Be aware: it’s important to keep in mind that this extra time will also accumulate interest. So unless you plan on paying off your loan early, you may end up paying even more over a longer loan period.
Alternative solutions to repayment holidays
If the benefits don’t outweigh the drawbacks, or you don’t qualify for a loan pause, there are still a few things you can do to alleviate some of the financial pressure you may be feeling.
Instead of taking a complete repayment holiday, you may be able to switch to an
interest-only period for up to 12 months. During this time, you’ll only pay your monthly interest instead of the full amount.
Shop around for lower interest rates. See if a different lender may be able to offer you better terms. Even your current lender may have better deals going at the moment. Our Compare Club experts can help you compare loans in a matter of clicks.
If you have a mortgage and happen to be ahead on your repayments, you can
withdraw those funds again. Just contact the respective redraw facility to access the money.
Depending on your loan, you may be able to negotiate to lower your monthly repayments.
For credit card repayments, you may be able to transfer your balance to a new credit card. Many providers offer sign-up deals that include free balance transfers and interest-free periods. Some for up to 24 months.
The bottom line
Injury, illness, redundancy or the loss of a loved one – life can throw a lot of things at you when you least expect it.
So it’s good to know you have options to help stay financially afloat as you get back on your feet. But be sure to weigh them up carefully – and always:
Read the fine print.
Know your loan terms.
Put measures in place to help you pick up where you left off after your break.
