Taking a mortgage holiday

By the resi financial blog team, 03 October 2014

Taking a mortgage holiday

Life doesn’t always go according to plan so there may come a time where you’re unable to make your mortgage repayments. If this happens, ask your lender about taking a mortgage holiday.

Some typical situations where you might require a temporary suspension from making payments include maternity leave, an illness - where high medical bills need to be paid, or the loss of a job.

A mortgage holiday is simply that – a break from making your loan repayments – with of course, permission from your lender.  The concept of mortgage holidays has been around for some time and while they sound like an answer to a cash-strapped homeowner’s prayer – they will cost you more money in the long run.

Generally you can have your repayments suspended for between two to six months. The idea is to give you some breathing space to get your finances back on track.

A mortgage holiday works by capitalising the missed payments onto the balance of the loan. A very simple example would be say you have $250,000 outstanding on your loan and your monthly repayments are $1500 a month.

You ask for a three-month mortgage holiday, which your lender agrees to. The $4500 in repayments you haven’t paid ($1500 x 3) is added to the outstanding loan amount of $250,000 bringing the total outstanding amount to $254,500. The interest payable is now calculated on the higher amount of $254,500 rather than $250,000. You can also request a mortgage holiday where you still make repayments but they are reduced. 

In reality the loan balance is likely to be higher because of the compound interest effect, that is, the interest that was added to your home loan balance in the first month will also have interest charged on it during the second month and then the third month.

And this means that you will be paying more interest over the life of the loan and it may take you longer to pay it off in full.

Lenders generally expect you to be up to date with your payments if you want a mortgage holiday, otherwise you are likely to be refused. However, it is always at the discretion of the lender as to whether you will be granted one.

So while mortgage holidays can be a lifesaver during temporary periods of financial stress, they can be costly. Before you ask your lender for one, check to see if there may be another solution.

 

Categories: Loan terms, Mortgage holiday