Are you due for a repayment holiday?

Your mortgage payment is likely to be the biggest bill you pay each month, with an average mortgage of $300,000 chewing through monthly repayments of roughly $2,100*. So would it help to know that you if you’re under financial stress, you may be able to take a “holiday” from your home loan, allowing you to divert those funds elsewhere?

 

It sounds like wishful thinking, but mortgage repayment holidays have been available for some time. They by no means offer an “easy out” to a sticky financial situation, as loan repayment holidays will almost always cost you more money in the long run.

 

A mortgage payment holiday is exactly what it sounds like – it’s a break from making mortgage payments.

 

It means that your lender will let you temporarily suspend your mortgage repayments – generally, for a period of two to six months – allowing you to reduce your monthly outgoings and give you some valuable financial breathing space.

 

Situations where you might ask for a mortgage holiday could be when you go on maternity leave, change jobs, or face unexpected financial expenses such as medical bills.

 

Essentially, mortgage holiday’s work by capitalising your missed payments onto the outstanding balance of the loan.

 

For instance, Ginny and Paul have a mortgage of $300,000 on a variable rate of 7%, with a term of 25 years. The monthly repayment on their loan is $2,120 per month.

 

After 12 months they’re made repayments totalling $25,440, with around $21,000 covering the interest, and $4,440 going towards the principal. Therefore, after one year, the total outstanding loan balance (principal) is $295,660.

 

Another twelve months pass, and Ginny and Paul continue to make their repayments on time each month. Because the principal loan amount has been reduced in year one, less interest is payable in year two. They make the same monthly repayments of $2,120, totalling $25,440, but in year two $20,700 goes towards interest and $4,740 goes towards the principal.

 

Therefore, after two years, the total outstanding loan balance (principal) is $290,920.

 

Ginny is expecting her first baby so, in an effort to temporarily reduce their expenses while she’s not working for, she asks for a three-month payment holiday. Their lender agrees.

For a three-month period, capital payments are suspended and Ginny and Paul are not required to make regular payments of $2,120. Instead, those funds – totalling $6,360 over three months – can be used to cover other expenses, such as nappies, food and utilities.

 

However, during that period interest continues to be payable, and is added to the outstanding loan amount. On Ginny and Paul’s loan balance of $290,920, the interest component is around $1,697 per month, or $5,091 in total.

 

Therefore, when their repayment holiday ends, their new principal loan amount will be $290,920 + $5,091 = $296,011.

 

All mortgage payments made from this point on will be calculated with interest payable on the higher principal amount. Effectively, this means that Ginny and Paul will pay more interest over the life of the loan, and it may take them longer to pay their mortgage in full.

 

Most lenders will insist that you are up-to-date with your repayments when you ask for a holiday, so if you are already in arrears – or you have been in recent months – it may be too late to access this feature. It is completely at the discretion of your lender as to whether they offer you a repayment holiday or not.

 

Keep in mind that mortgage repayment holidays can be a costly interim measure and they will not always provide the best solution for your situation, so make sure you speak to your lender or mortgage broker about all of the options available to you.