The idea of a mortgage holiday might sound attractive – who wouldn’t like a break from paying off their home loan?
But this could turn into a sticky situation.
Taking a coronavirus mortgage holiday from your home loan repayments could add to the size of your mortgage, so it is possible that you end up having more to repay when the holiday ends.
For every payment you are not making because of your mortgage holiday, the interest you didn’t pay will be added to the loan balance.
Imagine that someone has just started paying off a $500,000 loan with a 3% interest rate and a 30-year term. If they took a six-month mortgage holiday, that would add an extra $7,547 to the total loan balance.
After the six-months the homeowner will have to either keep paying back the loan for a few months past the 30-year term or bump up their repayments from $2,108 per month to $2,139.84.
Of course, some people have no option. If it’s a choice between not being able to pay your mortgage or a mortgage holiday, then the holiday might be the best option.
But Denham says before you take that step you should contact your mortgage broker to explore other strategies.
It could be that you maybe have made extra repayments in the lead up to the crisis and your home loan might have a redraw facility which you can use to meet your mortgage payments.
Going back to your existing lender and trying to negotiate a cheaper rate is another good idea and Denham says even a small reduction can make a big difference for some people.
There is also the option of refinancing your home loan with another lender offering a cheaper rate. Several are currently offering rebates for refinancing, which will be more than enough to cover the fees.
Mortgage holidays are more readily available to borrowers who have a good repayment history with their lenders.
Lenders assess on a case-by-case basis, but in general they will want to know that your financial hardship is the result of a short-term change of circumstances, not something that is likely to be ongoing for several years.
Different banks have different policies on mortgage holidays, with three or six month holidays on offer, and they vary in how they assess customers’ eligibility.
For that reason, it’s a good idea to consult your mortgage broker, who can help you gather the necessary documentation and guide you through the application process, says Denham.
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