Is it for You?
Given the current situation with COVID-19 I have received a number of enquiries about a loan repayment holiday. Particularly how it works and whether it is a good idea or not.
Most banks and lenders are offering a loan repayment holiday to clients who they deem are in need.
How does a loan repayment holiday work?
Calling it a holiday is probably the wrong term, it’s more like a home loan repayment pause or deferrment. For three months or up to six months borrowers can request their lender halt their loan repayments.
The obvious advantage for a borrower is an easing of their household cashflow demands. Home loan repayments are normally the largest expense in most budgets.
That’s the good part. The downside is while you’re not making repayments, your bank or lender is still charging you interest. This is added to your loan each month.
What happens after your loan repayment holiday?
When your loan repayment holiday is over, you will owe more on your loan than at the start. Your repayments will increase, as you have a larger loan and shorter time period to pay it back.
Some banks and lenders have the capability to extend your loan term by six months to help reduce your new repayments, but not all. As you can see, it’s no holiday
Before you take this step, consider other ways of managing your loan repayments, such as;
- Reduce your loan repayments to the minimum required
- If you are ahead on your repayments, redraw the extra funds and use towards your loan repayments
- Use your offset account balance towards your repayments
If a home loan repayment holiday is the only option, try and reduce your interest rate as much as possible with your lender first. This will reduce the amount of interest added to your loan while you’re not making repayments.
Many banks and lenders are offering low fixed rates. It could be worth switching to this type of loan before putting the loan repayment holiday in place.
Call Paul at Halogn Home Loans on 0410 520 398 or email firstname.lastname@example.org