It is a very uncertain time for a large number of Australians and many lenders have come out with packages to support borrowers who are affected by coronavirus.
One of the measures has been the introduction of a repayment holiday for up to 6 months to home loan borrowers who won’t be able to make their repayments. For some, this may be suitable but there are some downsides which are worth understanding.
How does a repayment holiday of my home loan work?
For home loan customers impacted by COVID-19 and the current economic uncertainty, some lenders have introduced a repayment pause for home loan customers who have a reduced ability to service their loan. Customers will not need to make repayments for up to six months, with most lenders implementing a review at three months. Interest and charges will continue to accrue during the repayment pause.
Do I qualify for a repayment holiday?
A person qualifies for a repayment holiday if as a result of the Coronavirus pandemic they have a reduced capacity to repay their home loan. The banks will expect that you have considered other options available to you under the government’s stimulus package. Please see the government’s website for more information.
Will I accrue interest during the pause?
Yes, interest and charges are accrued during the repayment holiday period. Accrued interest will be capitalised and added to your home loan balance at the end of the pause and your repayments will be adjusted. These future payments will be higher.
How will my loan term be affected?
Generally, your lender will require you to repay your home loan in the same amount of time. Therefore, if you have 29 years remaining on your loan, you will have 28.5 years to repay your home loan once the repayment holiday period expires. Some lenders (such as CBA) will allow you to extend your loan term after the repayment holiday in order to ensure that your repayments remain the same.
What do I need to do to start a repayment holiday?
You need to get in touch with your lender directly. We’ve compiled a handy list to help you contact your lender. We’ve also put together a list of the major banks’ policies here.
Does a repayment holiday affect my credit rating?
This is not entirely clear at the moment. The early information is that it won’t affect your credit score, however your month-by-month repayment history is listed in your credit report, so opting in to a repayment holiday will likely be visible on your credit file.
Does it matter what type of home loan I have?
This depends on the lender, but it looks like all types of loans are eligible, including owner occupied, investment, construction and all repayment types such as interest-only.
What’s the true cost of a repayment holiday?
Let’s say you have a $1,000,000 mortgage with an interest rate of 3.50%, your principal and interest monthly repayments are $4,490 per month.
After the first 12 months your mortgage balance is now $980,808.72
If you were to take a six month repayment holiday, the interest during that period gets added (capitalised) to your home loan balance.
At the end of the:
- First month: Accrued interest of $2,860.69 is added to your home loan balance.
- Second month: $2,868.88 is added.
- Third month: $2,877.08 is added
- Fourth month $2,885.31 is added
- Fifth month $2,893.57 is added
- Sixth month $2,901.84 is added
At the end of six months, your new mortgage balance would be $998,096.09.
You owe an extra $17,287.37 and because your balance is higher and your loan term remains the same (28.5 years), your repayments will increase from $4,490 to $4,616.
If your lender allows you to extend your loan term in order to retain your current repayment amount, you will be paying off your loan for an extra 11 months and your interest expense will be $31,176 larger over the life of the loan.
What are the disadvantages of a repayment holiday?
- Your repayments may increase once the repayment holiday period ends.
- You pay more in interest over the life of the loan.
- It will likely appear on your credit file (but probably not affect your credit score)
- You will need to demonstrate a period of regular conduct (likely 6 months) once the repayment holiday period ends to any new lender if you choose to refinance
What are some other options?
Instead of a repayment holiday:
- Most of us chose to maintain our monthly repayments while rates were coming down, meaning that you may be ahead of your repayment schedule. You can ask your lender to reduce your monthly repayment to the minimum required and use the surplus funds to reduce your subsequent repayments
- You may be able to switch from principal and interest repayment to an interest-only period. Lenders are offering very competitive rates on interest-only at the moment, particularly for investors.
- Another way to reduce your mortgage repayments is to refinance your mortgage with a better interest rate.
Please contact us if you have any questions or need further information. This is a fast moving situation and we are doing our best to stay on top of all the new information across all the lenders.