Taking a repayment holiday
One of the best parts about going on vacation is being able to get away from it all. Sometimes it's nice just to be able to take a much needed break and escape from the usual obligations and commitments of life.
Did you know that some home loans offer you the option of taking a holiday from your mortgage repayments as well? Allow us to introduce you to the concept of the 'repayment holiday'.
A repayment holiday involves coming to an arrangement with your lender, in which both parties agree that home loan payments will be put on temporary hold for a limited period of time.
There are advantages to taking a repayment holiday, but there are also some disadvantages as well. It's important to weigh up both sides of the equation carefully so that you make an informed and sensible decision.
Why you might want to take a repayment holiday
If you are struggling to pay your home loan, then a repayment holiday can be a real lifesaver in allowing you to get your finances back under control.
There are several different life events that might make you consider taking a repayment holiday. For example, a divorce, the birth of a child, a death in the family or a change in employment. Serious injuries or illnesses that prevent you from making your usual income might also be factors.
Most lenders will allow you to take a repayment holiday of up to 12 months, however the exact details will depend on your mortgage and your financial situation.
If you ever think that you will not be able to make your loan repayments for a significant period of time, you will want to talk to your lender about the possibility of taking a repayment holiday.
Why a repayment holiday might not be a great idea
The downside of taking a repayment holiday is that you will continue to incur interest on your loan over the holiday period. Obviously, this means that it will cost you more in the long run.
Furthermore, because you are both incurring interest and putting your repayments on hold, odds are that it will take you considerably longer to pay off your loan and become debt free.
Another thing to consider is that some lenders will charge you a fee for going on a repayment holiday, which further adds to the cost of your loan.
Of course, if you are really struggling to make your repayments, then these downsides may be worth enduring. You do, however, have a few other options to consider.
What are the alternatives to a repayment holiday?
One of the alternatives to taking a full repayment holiday is to opt to temporarily reduce your mortgage repayment amount. This means you will have more income to play with, but will still continue to pay off your loan.
Some lenders will allow you to combine these two options by temporarily suspending your home loan payments, and then reducing your mortgage repayments once they start back up again.
Another possibility is that your lender will allow you to revert to only paying the interest in your home loan. It all comes down to the individual nature of your lender and your arrangement with them.
If you foresee that you might struggle to make your mortgage repayments in future, make a point to get in touch with your mortgage broker ASAP. They will be able to help you put a strategy in place that takes all of your unique circumstances into account.