Even though it may sound like wishful thinking initially, mortgage repayment holiday options are available from time to time. They by no means offer an “easy out” to a sticky financial situation, as loan repayment holidays will almost always cost you more money in the long run.
A mortgage payment holiday is exactly what it sounds like – it’s a break from making mortgage payments.
It means that your lender will let you temporarily suspend your mortgage repayments – generally, for a period of two to six months – allowing you to reduce your monthly outgoings and give you some valuable financial breathing space.
If you are taking maternity leave, switching jobs or have unanticipated financial expenses, such as medical bills, you might be eligible to receive a vacation mortgage.
How it works
Essentially, mortgage holiday’s work by capitalising your missed payments onto the outstanding balance of the loan.
Ginny (and Paul) have a mortgage amounting to $300,000. The rate is 7% and the term is 25 years. The monthly payment for the loan is $2120.
After 12 months they’re made repayments totalling $25,440, with around $21,000 covering the interest, and $4,440 going towards the principal. Their principal balance is now $295,000.
Ginny, Paul, and their twelve-month old sons continue to pay their monthly installments on time. The principal loan amount was reduced by one-year, meaning that less interest is due for year 2. They will continue to make the same monthly payments of $2120. This totals $25,440. In the second year, $20,000.00 will go towards interest and $4.740 toward principal.
So, after two years, $290,000.920 principal remains on the loan.
Ginny is expecting her first baby so, in an effort to temporarily reduce their expenses while she’s not working for, she asks for a three-month payment holiday. Their lender agrees.
The catch
Capital payments are temporarily suspended for three months. Paul and Ginny are not required to make regular payments of $2,120. Instead, those funds – totalling $6,360 over three months – can be used to cover other expenses, such as nappies, food and utilities.
However, interest will still be due and will be added onto the outstanding amount. On Ginny and Paul’s loan balance of $290,920, the interest component is around $1,697 per month, or $5,091 in total.
The principal amount of their new loan will be $290,920 + 5091 = $296,000.
All mortgage payments made from now on will include interest on the principal amount. Paul and Ginny may have to pay more interest during their loan term, and may be required to repay their mortgage longer.
Most lenders will insist that you are up-to-date with your repayments when you ask for a holiday, so if you are already in arrears – or you have been in recent months – it may be too late to access this feature. Your lender will decide whether you get a repayment vacation.
Mortgage repayment holidays can be a temporary solution that is not cost-effective and may not work well for everyone. Talk to your mortgage broker about your options.