A mortgage holiday might sound intriguing. But firstly, it's for those experiencing temporary financial difficulty. We investigate some reasons you may need one. Plus, essential factors you need to consider.
What is a repayment holiday?
It's a temporary period while your lender pauses your monthly loan repayments. It's only an option for a few months. You will still repay the full loan amount after the repayment holiday ends. Interest will accrue against the total amount owed still.
How long can my repayment holiday be?
Your circumstances are considered, but for many lenders, the limit on a mortgage repayment holiday is three to six months.
Will a mortgage holiday affect my credit score?
If you negotiated with your lender, missing repayments shouldn't affect your credit rating. But it's worth checking with your lender when you apply for a pause just to make sure. If you cannot make your loan repayments after the mortgage holiday ends, it could quickly be impacted.
Is there a cost to a mortgage holiday?
Interest is still accruing on the principal of your home loan. This means you'll eventually need to either increase your repayments, or the length of your loan term to make up the difference. For every month you pause payments, the interest will continue to grow. Making your total loan higher.
How to apply for a mortgage holiday?
Every bank and lender have their own hardship assistance schemes. Each has different requirements. You'll need to apply for assistance either online or via phone. The lender will assess your position and, if successful, help you set up a suitable repayment holiday. Your lender may suggest other alternatives.
There are several options. Here are four ways to pause or reduce your home loan repayments:
- Temporary mortgage payment suspension through a hardship variation. If you cannot keep up with your regular repayments because of temporary financial stress. If your lender agrees, they will pause your repayments and add all interest charges on your home loan. This can extend your loan term and add thousands to your original loan amount. But could keep you from losing your home.
- Temporary mortgage payment reduction. If your income has been affected temporarily, you may be able to apply for a temporary reduction. Such as a spouse losing a job and leaving you with only one income. This means you will make partial repayments for a set period. After that, your repayments will go back to normal. But you'll also have to make up the money you've missed.
- Temporary mortgage payment suspension using your redraw facility. If you have been making extra payments off your mortgage balance, you may have funds available. This is known as a redraw facility. Rather than withdraw these, you may be able to use them to substitute making repayments. Note that not all mortgages have a redraw facility.
- Switch to interest-only repayments. If your mortgage has principal-and-interest repayments, you might be able to switch to interest-only repayments temporarily. Reducing your monthly repayments in the short term because you will only pay interest. However, this will cost you more over time because you will eventually need to repay the whole mortgage.
A repayment holiday is an option for borrowers in temporary financial difficulty. But remember, you may also be able to reduce your repayments by getting a lower interest rate. You can do this by refinancing to a lower home loan rate – contact us for advice.
We’d love to hear from you if you have considered a mortgage holiday and need advice.
SPEAK TO AN ADVISER
Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. You may be charged a fee for mortgage advice.