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.