What are the consequences of a payment holiday on my home loan?
"Many people are saying that you can get a payment holiday on your home loan to help you during these difficult economic times. I'm just worried there's a catch and I end up with a different interest rate or longer loan period or maybe even more instalments in the end. Is there a catch?"
Requesting a payment holiday on your mortgage loan can assist your current cash flow position by allowing you to stop or reduce your monthly payments in most instances, for up to three months and providing a much-needed help to your cash flow if such is under pressure at present. This is not to say you should or must apply, but the option could be considered if needed. There are also options such as credit insurance which could be considered.
But let's assume, that you do feel the payment holiday is the option for you. Firstly, it is worth noting that although most banks are assisting their customers with the payment holiday option, this form of relief is generally limited to customers that are in good standing with their bank and are not in arrears on their home loan instalments.
So what happens if you are granted a payment holiday? For the period of the payment holiday you will not have to pay or pay a smaller amount on your home loan. Once the payment holiday is over there could be an increase in your monthly repayment if you prefer to defer payments over the current term of your home loan, or, the total amount payable may increase due to additional interest should you rather opt to rather increase the length of your home loan term. Let's break this down a bit more.
Spreading deferred payments over the outstanding term of your home loan will mean that you will see an increase in your monthly repayments once your payment holiday period is over. The shorter the term left on your home loan, the larger the increase will be in your monthly payments. The impact of this option should therefore be carefully considered and whether you will be able to manage such higher repayments in the future.
On the other hand, increasing the length of the term on your home loan for example by extending the term with an extra three months, may result in a smaller increase in your monthly repayments after the payment holiday, but you will be paying your home loan back over a longer period and as a result pay more interest because the term is longer.
A payment holiday can help immediately to relieve cash flow pressure, but while you are not making payments, interest continues to accumulate on your remaining balance and when the payment holiday is over, your outstanding balance and payments will be higher than what they were before the holiday.
