UPDATED For Covid-19
With mortgages most often being people's largest household expense, a mortgage repayment holiday sounds great doesn't it? Not needing to pay your mortgage for an extended period of time. Dreams do come true, even during a pandemic.
Or do they...?
As with many things in life, when things sound too good to be true, most often they are. There are definitely pros and cons with mortgage repayment holidays so let's have a look at them and some other options you could consider if times are a bit tough or there are good reasons to have a break from full mortgage repayments.
When are they able to be taken?
Due to Covid-19, banks are offering these for people effected by the lockdown period and although these haven't been advertised too heavily recently, they have always been available for other reasons as well. All banks have different criteria for this and they expect you to be fully up to date with your repayments currently and in the recent pas. The key reasons why you might be eligible for a mortgage repayment holiday other than COVID-19 (or other options) are:
- losing your job
- a medical condition
- a relationship break-up
- a death in the family
- a natural disaster
- planning a family
- going on an extended overseas holiday
What are the advantages of a mortgage repayment holiday?
If for any of the reasons above you are not going to be able to meet your mortgage repayments then a repayment holiday could help you get through that time period. Life is unpredictable and if you haven’t got mortgage or income protection insurance and you get an unexpected injury or illnesses that means you can't go to work, a mortgage repayment holiday may be an appropriate option. The repayment holiday can be for any length of time from three and 12 months depending on the lender and the reason for the holiday. Also they will assess it based on your individual home loan and the financial situation you are in.
The disadvantage of a mortgage repayment holiday
The main disadvantage of a mortgage repayment holiday is that interest is still being charged on the loan for the entire period that you are not making payments. This means that you loan will be higher when you do start making repayments again. Essentially it will cost you more throughout the life of your loan as you need to pay the additional interest as well. Some lenders may also charge fees on repayment holidays which again adds to the overall amount of your loan.
Sometimes the added cost of a mortgage repayment holiday outweighs the benefits of a repayment holiday and so there are some alternative options you can consider.
- Instead of pausing your complete repayments, another option is to consider reducing your repayments down to the minimum you're allowed to pay (i.e. extending your loan term). You bank will be able to tell you what the minimum repayment will be (or if we've put your loan in place we'll have that information on hand).
- You could also request to pay interest only for a period of time. This means you aren't paying any principal off your loan but you are not adding any additional costs to your loan either.
These options allow you to not go backwards on your home loan and also free up some cashflow for the other parts of your life. Bank policies and your circumstances will determine what option is best for you so speak to us at My Mortgage and we can let you know what option suits you.
When and How to look at these options?
For special support due to COVID-19, go here and we can give you the best advice for your situation.
If you’re thinking that you might need to look at these options either down the track, speak to the My Mortgage team early, before you are behind in repayments as the banks are much more receptive to looking at these options if we are able to front foot them.
We can then help you set out a plan that takes into account your personal situation and ensures the right result for you!