A guide to mortgage repayment holidays
7 Apr 2020
Many Aussie banks and credit unions are offering ‘mortgage payment holidays’ for those who have been financially affected by COVID-19. Find out how mortgage payment holidays work, how to apply for one, plus the pros and cons of getting one.
So firstly, what is a mortgage payment holiday?
Also known as a repayment holiday or a mortgage freeze, a mortgage payment holiday is an agreement you make with your lender allowing you to temporarily stop your monthly mortgage repayments.
How long you can have a mortgage payment holiday for depends on what you and your lender agree, but they often have maximum terms of 3 to 6 months, although it may be possible to arrange a holiday for as long as 12 months depending on your circumstances.
The most common reasons for borrowers taking a mortgage payment holiday outside of COVID-19 related issues include unexpected unemployment, marital break ups, parental leave, short term illness or injury.
Pros of a mortgage holiday
The biggest positive about a payment holiday is that it relieves some pressure for a while. You will have one less expense to worry about, which will hopefully help you get back on your feet.
Cons of a mortgage holiday
There are several important things to bear in mind when applying for a mortgage payment holiday. While you won’t be making mortgage payments, you will probably still be racking up interest on your mortgage balance.
When the payment holiday comes to an end, your outstanding mortgage balance is likely to be higher than it was before the holiday (unless you somehow found a way to make some payments). However, this could vary depending on what agreement you come to with your lender. So, it’s important to have a detailed discussion with your lender to work out whether a mortgage holiday is the best option for you.
Once a mortgage holiday is over, your lender will either recalculate your repayments or extend the term of your loan. Either way, another con of a mortgage holiday is that you will pay more interest on your loan over the loan term.
Will a mortgage payment holiday affect your credit score?
The Australian Prudential Regulation Authority (APRA) confirmed that mortgage holidays taken due to COVID-19 will not count as a period of arrears. So therefore, they shouldn’t affect your credit score.
However, if you are applying for a mortgage payment holiday for any other reason it might impact your credit score. This in turn could affect your ability to get credit in the future. So, it might be a good idea to speak with a trusted financial advisor before applying for a mortgage payment holiday to understand all the possible implications.
What are some other options?
Instead of a repayment holiday:
- If you’re paying more than the minimum repayment your lender might consider reducing your repayments and that might be enough.
- Has the term of your home loan shortened over the years? If so, your lender might be able to extend your term, which will reduce your payments
- Do you have money in redraw? If so, your lender might agree to use this up instead of you having to make mortgage payments for a period of time.
- Do you have money in an offset account or in any other accounts? If so, you could potentially add this to your home loan and then you wouldn’t need to worry about payments for a period of time.
- You may be able to switch your loan from principal and interest to interest-only for a period, which would reduce your repayments. But again, this will increase the life of your loan and the total interest you’ll pay.
How to apply for a mortgage holiday
The best thing to do is talk with your lender or jump online to see if you’re eligible for a mortgage payment holiday. The criteria will vary from lender to lender.
The length of your payment holiday will depend on your lender. Some will allow you to take up to 12 consecutive months off from paying the mortgage, while others may only allow up to six months.
Are you a member and believe a mortgage payment holiday is the right option for you?
Our Lending Specialists are on hand to give you advice and talk you through the process. Please get in touch using the form below so we can discuss your individual situation and figure out how to best support you.