What is a repayment holiday and can I take one?
Whether your income has been affected by COVID-19 or you’re taking an extended leave from work, a repayment holiday can alleviate some financial strain when it comes to making home loan repayments.
Repayment holidays provide you with some much-needed financial flexibility in the short-term by reducing your repayments for a certain period of time.
In this post, we break down:
- What is a repayment holiday, how it works, and the different types available
- How to apply for a repayment holiday
- Key considerations to keep in mind
- Repayment holidays during the COVID-19 pandemic
Given the unprecedented nature of the coronavirus pandemic, repayment holidays taken during this time are treated differently.
Many banks have announced specific repayment holiday packages for COVID-19. Read more in our section below.
What is a repayment holiday?
A repayment holiday, or a repayment pause, is exactly as it sounds: a break from your scheduled mortgage repayments.
There are a number of reasons why people take a repayment holiday, including:
- If you experience changes to your employment, such as reduced hours, or if you are made redundant
- If you are between jobs
- If unexpected costs arise that significantly affect your financial situation
- If you are taking paternity or maternity leave
- If you are travelling for an extended period of time
How does a repayment holiday work?
A repayment holiday works by pausing your mortgage repayments for a duration of time. During this time, you temporarily stop or reduce the amount of repayments you make. Repayment holidays can last anywhere between three months to 12 months, depending on the bank or lender you are with.
Repayment holidays can last anywhere between three months to 12 months, depending on the bank or lender you are with.
What are the different types of repayment holidays?
There are a few different types of mortgage repayment holidays that most banks offer:
- A full repayment pause, where you stop making any repayments for a certain period of time
- A partial repayment pause, where you only make part of your usual repayment amount
- Interest-only repayments, where you only pay the accumulated interest.
In most cases, you shouldn’t take a repayment holiday if you’re experiencing financial hardship. Instead, apply for a hardship variation from your bank or lender.
How to apply for a repayment holiday
1. Check that your lender and/or mortgage product offers repayment holidays
Not all lenders offer a repayment holiday. On top of that, not all mortgage products are eligible for repayment holidays. To figure out whether you can apply for a repayment holiday, it’s best to check the terms and conditions on your loan offer documents – or get in touch with your broker.
2. Check to see if you meet the general eligibility criteria
While every lender has their own criteria, these questions will help you understand whether you’re in a position to apply for a repayment holiday.
- Have I had my home loan for at least 12 months? If not, you may not be eligible to apply.
- Am I ahead on my repayments? Repayment holidays are typically only available if you’re ahead on your scheduled repayments.
- Is my loan-to-value (LVR) ratio over 80%? If it is, it’s subject to the Lender’s Mortgage Insurance (LMI) policy.
- Have I had any missed repayments over the past 6 months? If so, you may not be approved.
- Has the home loan been in arrears over the past 6 months? Similar as missed repayments, you may not be approved if you have been behind on your repayments.
- Am I an owner-occupier? Most banks only allow you to apply for a repayment holiday if you bought the property and are currently living in it. However, some banks offer repayment holidays on loans for investment properties.
3. Make a request directly to your bank or lender
If you have reviewed these questions and still want to take a mortgage repayment holiday, it’s time to apply with your bank or lender. Call them or head into your nearest branch to find out which paperwork you need to fill out, and the specific process for your lender. Your mortgage broker should be able to help you out with the process.
Be sure to specify the length of the period that you’d like to pause repayments for, and the type of repayment you’d like (full, partial or interest-only).
Key questions to keep in mind before applying
Does a loan repayment holiday affect credit rating?
If you take a repayment holiday, it appears on your credit history file. Your repayment history information is reflected in your credit report, and taking a repayment holiday is classified by banks and lenders as a ‘mortgage in arrears’.
If in future you choose to refinance your home loan, you need to provide proof to your lender that you were granted a repayment holiday.
Are you willing to pay more over the duration of your loan?
Although you have paused repayments, you will still accrue interest which is added to your home loan principal. This is also known as ‘interest capitalisation’. While you won’t be making repayments in the short term, you’ll end up paying more over your full loan term.
Is there a fee associated with loan repayment holidays?
It depends on your bank or lender. Many may require you to pay a fee between $0 to 500 every time you request a repayment holiday.
Breaking down the cost of a loan repayment holiday
It may be a bit difficult to grasp the long-term impact of taking a loan repayment holiday on your total mortgage. To make it easier, we break down the effect a loan repayment holiday has on your home loan principal.
Example: let’s say you have a mortgage of $600,000 with a fixed interest rate of 3.59% p.a. and a 25-year term. Your monthly principal and interest repayments are $3,033 per month. After five years, your remaining balance is $517,302.
|Accrued interest added to home loan principal with repayment holiday||Accrued interest added to home loan principal without repayment holiday|
|After 1 month||$1,547.60||$1,538.52|
|After 2 months||$1,552.23||$1,529.45|
|After 3 months||$1,556.87||$1,520.38|
|New mortgage balance after 3 months||$521,958||$512,791|
|Extra amount owing||+$9,167||-$4,511|
By taking a repayment holiday, you’ll accrue an extra $9,167 in interest, which is added to your total home loan principal. This means you will end up paying more over the same loan term.
Now to pay off your home loan over the remaining 20 years, you will have to make monthly repayments of $3,052 instead of $3,033.
Repayment holidays during the COVID-19 pandemic
Most banks and lenders have announced a string of new measures to help clients that have been affected.
These include passing the full interest rate cut from the RBA, updated lending policies, mortgage relief options and more. Many, including the big 4, are also offering a coronavirus repayment holiday package, which allows clients to pause their repayments for anywhere between three to six months.
Will taking a coronavirus repayment holiday affect my credit rating?
Unlike a standard loan repayment holiday, the ARPA has confirmed that repayment holidays for coronavirus won’t be treated by banks as ‘a period of arrears’. This means if you need to take a repayment holiday due to COVID-19, it won’t appear on your credit history information.
Will I still accrue interest during this coronavirus period?
Yes. Unfortunately, this isn’t a hibernation on your loan. Even if you pause your repayments during this time, you’ll accrue interest which will be added to your home loan principal. This means that you will end up paying more over the term of your loan.
For more on how banks are helping clients affected by COVID-19, read our post here.
** General Advice Warning
The information provided on this website is general in nature only and it does not take into account your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice in relation to legal, financial, taxation, mortgage or other advice.