What is a repayment holiday?
A repayment holiday is exactly as the name suggests, a break from your usual debt repayments for a set period of time.
Also referred to as a ‘repayment pause’, you can reduce or avoid making your home loan repayments for up to six months, but this can go up to 12 months with some lenders.
Generally, the most common reasons for taking a repayment holiday are:
- Period of leave from the workforce/ changing jobs
- Parental/ maternity leave
- Installing water/energy saving devices (eco-pause).
- Short-term injury.
- Extraordinary circumstance such as the coronavirus (COVID-19) pandemic.
A mortgage repayment holiday is typically only available for borrowers who are ahead of their scheduled repayments and is meant to help them manage their cashflows. However, due to COVID-19, they’re now available to all homeowners financially affected by the pandemic.
In fact, an astounding 11% of total housing loans worth $195 billion were deferred according to data from APRA till June this year.
Although the number of customers exiting repayment holidays has outpaced those requesting them, almost one in ten (9%) housing loans are still on a mortgage deferral as of 30 September 2020 due to COVID-19.
Coronavirus (COVID-19) mortgage repayment holiday
The Big Four Banks (ANZ, CBA, Westpac, NAB), as well as many smaller banks and lenders, have announced that customers affected by the coronavirus pandemic can pause their repayments (repayment holiday) for three to six months.
During the repayment holiday, the interest continues to accrue, and its added on to your home loan balance. This is also known as interest capitalisation. At the end of this period, your home loan balance would have increased.
“Not all banks and lenders have announced a coronavirus specific repayment holiday package, but all lenders have financial hardship arrangements for customers facing financial difficulties for any reason. So, please get in touch with your lender if you need assistance.”
For additional information on what other mortgage relief options are available, lending policy changes, and updates due to the coronavirus (COVID-19) pandemic, please refer to our guide on coronavirus.
4-month extension to the repayment holiday
The initial wave of loan deferrals will end around 30 September 2020.
The Australian Banking Association has announced that as customers approach the end of their six-month repayment holiday, banks will contact customers to ensure that wherever possible they can return to repayments through a restructure or variation to their loan.
If these arrangements are not in place at the end of a six-month deferral, customers will be eligible for an extension of their deferral for up to four months. Customers will be expected to work with their bank, during this extra time, to find the best solution for them.
This 4-month extension to the repayment holiday is not automatic and will only be provided to those genuinely affected by COVID-19.
Banks will work with customers to find the best options to restructure or vary their loan. These include:
- Extending the length of the loan
- Converting to interest-only payments for a period of time
- Consolidating debt
- A combination of these and other measures.
Does a repayment holiday during COVID-19 affect credit rating?
No, the Australian Prudential Regulation Authority (APRA) has said that mortgage repayment holidays would not count as ‘mortgage in arrears’ as they such won’t affect your credit rating/file.
So, if a home loan customer chooses to take up the offer not to make repayments as part of their lender’s COVID-19 support package, the bank will not treat the period of the repayment holiday as a period of arrears.
Also, if you’re granted the 4-month extension on the repayment holiday, it will not affect your credit file.
What happens after the repayment holiday ends?
Customers coming to the end of their mortgage deferral period in September have several options which include extending the deferral, resuming repayments, switching to interest-only and other options.
We weigh the pros and cons of each option on our page, ‘After The Mortgage Payment Deferral Ends’.
Lenders may call you during the repayment holiday, this is nothing to be alarmed about as they’re doing this to check-in to see how you are going, and discuss extending or ending the repayment deferral depending on your situation.
What are the types of mortgage repayment holiday?
Originally, repayment holidays were particularly useful for borrowers who did not have a redraw feature on their home loan.
However, please note that not all lenders have this repayment feature and are only available on a case by case basis.
It is not meant for customers who are experiencing financial hardship.
If you’re experiencing financial hardship, you can apply for a hardship variation with your lender.
The types of mortgage repayment holiday available are:
- A full repayment pause wherein you stop making any repayments for an agreed-upon period of time.
- Partial repayment pause wherein you reduce your repayment amount to the requested amount, i.e. you make 50% of your usual repayment.
- Interest-only repayments for the period.
During the repayment holiday, the accrued interest is added (capitalised) on top of your home loan balance.
How do I take a mortgage repayment holiday?
All repayment holidays are subject to bank approval.
A request must be made directly to your bank requesting a break in your repayment specifying the length of the holiday period required.
You can do this by calling their customer care hotline or visiting their nearest branch.
The lender may charge a fee between $0 to $500 per request.
Please note that insured loans, i.e. loans over 80% LVR are subject to the mortgage insurer’s policy.
Am I eligible for a home loan repayment holiday?
The factors that determine whether or not you’re eligible for a repayment holiday are:
- Your bank/ lender: Not all lenders offer this service. To find out if it is available to you, please read the terms and conditions on your loan offer documents.
- Your mortgage product: Mostly available for owner-occupiers on basic and standard variable rate loans and fixed-rate loans.
- Your financial circumstances: You shouldn’t be experiencing financial hardship or have been in mortgage arrears.
But, generally to qualify:
- The home loan should have been with the bank for at least 12 months prior to applying.
- The home loan should not have been in arrears or had any missed repayments for up to six months prior to applying.
- The loan to value ratio should not exceed 80%, in which case, they fall under their mortgage insurance provider‘s policy.
- Generally, only owner-occupiers are eligible. A few banks allow this facility on portfolio loans.
- You must sign any documents the banks require when making a request to suspend your repayments.
Lenders also refer to this repayment feature as a ‘mortgage safety net’ or a ‘repayment pause’.
What are the disadvantages of a repayment holiday?
- Your repayments will likely increase once the repayment pause period ends.
- You pay more in interest over the life of the loan.
- It appears on your credit file under the repayment history information (RHI).
- When refinancing, you would require proof from the banks for the break on your home loan repayments.
What’s the true cost of a repayment holiday?
Let’ say you have a $400,000 mortgage with an interest rate of 3.5% p.a. where you’re making a principal and interest monthly repayment of $1,796.
After the first 12 months, your mortgage balance is now $392,323.49.
Now if you were to take a three month repayment holiday, the interest rate during that period gets added (capitalised) to your home loan principal.
At the end of the:
- First month: Accrued interest of $1,144.28 is added to your home loan balance.
- Second month: $1,147.61 is added.
- Third month: $1,150.96 is added
By the end of the three month period, your new mortgage balance will be $395,766.
You owe an extra $3,443, and because your loan balance is now higher, but your loan term remains the same (29 years), your repayments will increase from $1,796 to $1,812.
You would have paid $646,624 in total if you had stuck to your original repayments. Instead, you’ll now pay $652,190.
That’s an additional $5,566 over the life of the loan.
Why do repayment holidays affect your credit score?
Under the comprehensive credit reporting system, your repayment history also shows up on your credit file.
So when you take a repayment holiday, it is reflected on your credit report as it’ll show that you haven’t been making your repayments under the section repayment history information (RHI).
If you were refinancing, you would need proof from your lender that a repayment holiday was granted for the period.
What are some other options?
Instead of a repayment holiday:
- Borrowers who have made extra repayments towards their home loan with a redraw facility can set up an automatic debit towards their mortgage repayments using the surplus funds.
- You may be able to switch from principal and interest repayment to an interest-only period with some lenders up to a maximum period of 12 months.
- Another way to reduce your mortgage repayments is to refinance your mortgage either with a better interest rate or extending your loan term. Please be aware that you’ll be paying more in interest over the life of the loan if you extend your loan term.
Can I refinance my home loan after the repayment holiday?
Yes. Many customers will get jobs again late this year and will want to refinance to clean up debts / get back on their feet.
Only a handful of lenders have confirmed their policy, but generally to refinance after a repayment holiday:
- Major lenders will want at least 3 to 6 months of perfect repayments on your home loan to consider your application.
- Specialist lenders will consider your home loan refinance application at a higher rate as long as you’re able to make repayments now.
- A refinance is not possible if your income has not returned and you cannot afford the loan. Because under responsible lending guidelines (NCCP Act), it’s illegal to give customers a loan that they cannot afford.
The key to approval will be applying with the right lender based on your individual circumstances.
Is a repayment holiday the right option for you?
For expert advice on your home loans, please call us on 1300 889 743 or fill in our free online assessment form.