What is a Mortgage Repayment Holiday?

Find out what a mortgage repayment holiday is and if it could help you out with Savvy.

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, updated on August 8th, 2023       

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You may not have heard of a mortgage repayment holiday, but it’s one option that may be available to people who are experiencing mortgage stress. Read more about what a home loan repayment holiday is, and if there may be other options available to you, right here with Savvy. You can also compare your options to find the right lender for you.

What is a mortgage repayment holiday?

A mortgage repayment holiday is an arrangement whereby a lender allows a borrower relief from paying their mortgage repayments for a set period of time (usually between one and six months).  This ‘mortgage holiday’ is usually granted to customers who are experiencing mortgage stress or who have just suffered a financial setback such as a loss of income due to illness or redundancy.  It’s designed to allow the borrower some respite from having to find mortgage repayments and hopefully provide the customer time to get back on their feet, find another job or recover from the financial setback they’ve suffered.

However, a mortgage repayment break doesn’t mean you won’t have to repay the money you owe or the amount you would’ve paid during the mortgage ‘holiday.’  Once your home loan repayments restart, you’ll have to pay extra for the next few months to make up for the repayments you missed during the holiday.  This will mean the term of your loan remains the same, so you will end up paying off your mortgage in the same time period as your original loan agreement.

For example, let’s say you usually pay $400 a month on your home loan repayments.  Your lender allows you a two-month mortgage holiday because you injured your back and were unable to work for that time.  This will mean you don’t have to make any mortgage repayments for two months, but will still owe the $800 you would’ve repaid in that time.

When you return to work, your repayments may be increased from $400 a month to $600 a month (an extra $200 a month) for the next four months so that you repay the $800 you missed paying during the mortgage holiday.  After this period of higher repayments, you will be back on track to pay off your loan in the same period of time as originally agreed and your repayments will resume to their normal $400 a month.

As an alternative to making additional payment to catch up on your loan, you could agree with your lender to extend the term of your loan, leaving your repayments the same but giving you more time to pay off the loan. This will usually involve refinancing your mortgage.

Will I be eligible for a mortgage repayment holiday?

That will depend on your lender.  Not all lenders offer the option of taking a mortgage repayment break per se, so it will depend on what hardship provisions your particular lender has in place.  Under the National Consumer Credit Code all lenders are obliged to consider hardship repayment variation if you have a reasonable cause, such as sudden illness or unemployment.

What is mortgage stress and how do I know I have it?

The definition of mortgage stress varies slightly between lenders, but it is generally agreed that if you are paying more than one third (or 33%) of your take-home pay on your home loan repayments, you may be experiencing mortgage stress.

If you’re suffering from mortgage stress, it’s very important to contact your lender as soon as you realise that you may not be able to make a home loan repayment. It’s far better to contact your lender and let them know you’re struggling rather than fall behind with your mortgage repayments, which could trigger mortgage default legal action.

What are my alternatives if I'm struggling to make home loan repayments?

If you’re struggling to meet your home loan repayments, you do have several options available to you, depending on the cause of your mortgage stress.  You could:

  • refinance your home loan to one with a lower interest rate, which will reduce your repayments and the interest you’ll pay overall
  • refinance to a loan which has a longer repayment term – for example, increase your loan term from 25 years to 30 years, which will also reduce your loan repayments – but mean you’ll pay more interest in the long run
  • switch to an interest-only loan for a set period of time until you are able to pay principal and interest payments again. Switching to a fixed rate interest-only loan may offer you a lower interest rate and certainty from interest rate increases for the duration of the fixed term period, but, again, you’ll pay more for your loan in the long run
  • refinance to consolidate other debts, freeing up more money to pay your home loan at a lower interest rate. For example, you could use your home loan equity to get a loan of an additional $20,000 with a 2.5% interest rate and use this money to pay off your car and personal loan (on which you were paying a higher interest rate). Refinancing to consolidate other debts can be a clever way of reducing interest payments and getting back on your financial feet
  • use any additional funds you may have in your loan account and redraw them to meet repayment obligations
  • take money out of a savings account or offset account to help you meet your mortgage repayments

Savvy can assist with many of these options, comparing loans and presenting you with clear, accurate and up-to-date loan comparison information side-by-side, which can help you make the best financial decision to assist you during a difficult period in your life.

More questions about home loan or mortgage repayment holidays

Will taking a mortgage repayment holiday affect my credit score?

If your financial hardship is as a result of COVID-19, your credit score will not be affected, according to the Australian Prudential Regulation Authority (APRA) in an announcement made in August 2021.  However, if your request for deferred loan payments is not COVID-19-related, a deferral agreement may affect your credit score, depending on the nature of the agreement you come to with your lender.

Can I extend my mortgage repayment holiday after the first six months?

Probably not – if you’re still unable to meet your loan repayments after an initial six-month mortgage holiday period, you may need to talk to your lender and find another financial solution to your mortgage stress.

If I'm struggling to pay my mortgage, should I take out a personal loan?

No – this would not be a good idea.  With personal loan interest rates far higher than home loan interest rates, it would not be a good idea to take out another loan with a higher interest rate to repay one with a lower rate.

What happens if I still can't pay my mortgage after my home loan repayment holiday is over?

If you are still unable to meet your loan repayments after your mortgage repayment holiday is over, it’s vital that you speak to a financial counsellor or advisor as soon as possible.  There is a great deal of assistance available for borrowers in this situation, so contact the National Debt Helpline on 1800 007 007 to talk to a free financial counsellor before your debt issues escalate.

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