Page 72 - Q&A

What are the consequences of a payment
holiday on my home loan?

April 2020
“Many people are saying that you can get a payment holiday on your home
loan to help you during these difficult economic times. I’m just worried there’s a
catch and I end up with a different interest rate or longer loan period or maybe
even more instalments in the end. Is there a catch?”

Requesting a payment holiday on your mortgage loan can assist your current
cash flow position by allowing you to stop or reduce your monthly payments in
most instances, for up to three months and providing a much-needed help to
your cash flow if such is under pressure at present. This is not to say you should
or must apply, but the option could be considered if needed. There are also
options such as credit insurance which could be considered.

Property But let’s assume, that you do feel the payment holiday is the option for you.
Firstly, it is worth noting that although most banks are assisting their customers
with the payment holiday option, this form of relief is generally limited to
customers that are in good standing with their bank and are not in arrears on
their home loan instalments.
So, what happens if you are granted a payment holiday? For the period of the
payment holiday you will not have to pay or pay a smaller amount on your
home loan. Once the payment holiday is over there could be an increase in
your monthly repayment if you prefer to defer payments over the current term of
your home loan, or, the total amount payable may increase due to additional
interest should you rather opt to rather increase the length of your home loan
term. Let’s break this down a bit more.
Spreading deferred payments over the outstanding term of your home loan
will mean that you will see an increase in your monthly repayments once your
payment holiday period is over. The shorter the term left on your home loan,
the larger the increase will be in your monthly payments. The impact of this
option should therefore be carefully considered and whether you will be able to
manage such higher repayments in the future.
On the other hand, increasing the length of the term on your home loan for
example by extending the term with an extra three months, may result in a
smaller increase in your monthly repayments after the payment holiday, but you
will be paying your home loan back over a longer period and resultantly pay
more interest because the term is longer.

A payment holiday can help immediately to relieve cash flow pressure, but
while you are not making payments, interest continues to accumulate on your
remaining balance and when the payment holiday is over, your outstanding
balance and payments will be higher than what they were before the holiday.

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