Effect Of Payment Holidays On Mortgage

The coronavirus pandemic has left the entire world, along with Australia, in a financial turmoil. Every individual, no matter what their financial status, has felt the monetary pangs that come with such a pandemic. As a result, many Australians are looking at the possibility of failing to pay their mortgages.

Keeping the current situation in mind, Australian banks have taken the initiative to offer a payment holiday. This comes as a part of their Covid-19 relief packages and is meant to ease the burden of those mortgage holders who’ve been hit the hardest by the pandemic.

While the prospect of hitting a temporary pause on mortgage payments does seem to be an enticing proposition, it’s nonetheless a complicated one. There are certain corners of the industry that have been expounding that payment holidays may actually do mortgage holders more harm than good.

The following seeks to explain the effect of payment holidays on the mortgage in detail. And to make sure we cover all points, we’ll begin at the beginning by defining what a payment holiday is.

What Is A Payment Holiday?

Put simply, a payment holiday, also known as a mortgage holiday or a mortgage freeze, is a temporary pause on your mortgage payments. This is mostly applicable for a limited time period, such as three to six months. In select cases, mortgage holidays can extend up to a year.

Banks usually offer payment holidays as an alternative to borrowers who have suddenly fallen upon hard times. A sudden job loss, parental leaves, or recuperation from a medical emergency are situations that make one eligible for a payment holiday.

How Does The Process Work?

First, you need to apply for the mortgage holiday; this often involves the payment of a fee. If you’re eligible and your request is granted, you may be allowed to completely halt your mortgage payments for a time. There’s also the option of switching to interest-only repayments.

In case you completely stop mortgage payments, most banks will continue to charge interest during this period. Most often the interest is capitalised, which is to say that the additional charges are added to the total loan amount. This essentially means that you’ll have to pay interest on the interest as well.

At the end of the day, this translates to the fact that you’ll emerge from the payment holiday with more money owed than when the holiday began. That means, after you emerge from the holiday, you’ll have to make repayments at a higher rate. Only then will you be able to pay off the extra interest amount, along with the principal.

In case you find it tough to make pay higher instalments, your lender may offer to extend the loan term for a longer period. Though you’ll still have to increase your loan instalments, this time the increase might not be substantial enough to hurt you in the long run.

Will A Payment Holiday Save Me Any Money?

This is where the answer gets really complicated. In case you’re in tremendous financial distress, pausing on mortgage payments can bring great relief to your household expenses in the short run. This will give you the time to get your affairs in order and face the situation with a clear mind. Plus, the extra cash in hand is always welcome in times of need.

However, seen from the long term perspective, taking a mortgage holiday actually makes your loan more expensive. Since the interest is being capitalised, you have to pay more than you originally needed to. This leads to higher instalments, which ultimately puts the burden back on your shoulders.

While you do have the option of bringing down monthly payments by extending your loan term, this also leads to more expenditure. Since you have to pay for longer, you’ll have to bear extra instalments, which ultimately translates to the same thing.

Also, there’s the fact that the repayment holiday will be mentioned in your repayment history, which can affect your credit scores. This is something you may not want to put up with, though it varies from case to case.

Without going into complicated calculations, it suffices to say that entering a payment holiday will undoubtedly increase the total amount you’ll have to pay back. And this is excluding any fees and additional charges, and not counting the increases in interest rates.

Final Words on Payment Holidays

The choice of whether to go in for a payment holiday ultimately depends on your current financial situation. It should also take into account how much you’re ready to pay on a monthly basis once the holiday period is over.

It’s best to employ professional help to ensure you get the better end of the deal. In order to understand the intricacies of the payment holiday process, please contact us

Please note this content is not considered personal advice and it is general in nature. The individual will need to seek their own advice that is suitable for their personal circumstances.

Leave a Reply

13 − 1 =