A mortgage repayment holiday is a temporary period when your lender pauses your monthly loan repayments. Many people accessed mortgage repayment holidays during the pandemic. This is helpful for borrowers who are struggling to make repayments for reasons like:
It's usually only an option for a few months, 6 months at the most. Also, the payments you miss aren't "forgiven" – you still have to repay the full loan amount after the repayments holiday ends. So either your loan period will be extended by the same amount of time as the repayment holiday, or your mortgage repayments will increase slightly for the rest of your loan.
It's also important to know that your lender will continue charging interest even when you're not making repayments.
There are a few options for pausing your home loan repayments.
A repayment holiday is an option for borrowers in temporary financial difficulty. But if you're on top of your loan repayments you can still cut down your repayments by getting a lower interest rate.
You can do this by refinancing to a lower home loan rate or by asking your current lender for a better deal.
Most lenders consider your individual circumstances when setting up a repayment holiday. For many lenders, the upper limit on a mortgage repayment holiday is from 3 to 6 months.
Be aware that while your repayments are reduced or paused, 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 for the difference.
If you negotiate a repayment pause with your lender, then missing repayments during that period of 3 to 6 months shouldn't affect your credit rating.
The Australian Banking Association (ABA) confirmed during the pandemic that repayment holidays taken out during that period, would have no late payment recorded against the borrower's credit file.
But if you're unable to make your loan repayments after the mortgage holiday ends, then it could impact your credit score.
What to do if you missed a mortgage repayment
Let's assume your mortgage balance is $300,000 with an interest rate of 6.2%. Your monthly repayments are $1,838 per month, which you pay comfortably for the first 12 months. After this time, you've managed to get your home loan balance down to $296,451.40.
But then you lose your job and you need to take a 3-month mortgage holiday. During your repayment holiday, your lender adds the monthly interest charges onto your loan balance.
The interest that was added to your home loan balance during that first month will also have interest charged on it during the second month. And then both amounts will have interest charged on them during the third month.
By the end of your 3-month holiday, you will owe an extra $4,617.83 on top of your previous loan balance of $296,451.40. That means you now owe $301,069.32.
And because your loan balance is now higher but your loan term remains the same (you have 29 years left) your repayments will increase from $1,838 to $1,865 per month. This is only $27 per month. But over the life of a home loan that's almost $10,000 extra in interest costs.
Every bank and lender has its own hardship assistance schemes, each with different requirements. You'll generally need to apply for assistance either online or via phone.
Then the lender will assess your position and, if successful, help you set up a suitable repayment holiday. Your lender may suggest other alternatives too.
The Big 4 banks have programs in place to help home loan customers facing financial hardship.
Remember that there is always help available for financial and emotional distress.
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