Are you eligible for a mortgage vacation?
A mortgage payment holiday (or mortgage vacation) is a temporary hold on your mortgage payments. For a specified period of time, your lender
will not require you to make your regular payment, enabling you to use those funds for other purposes.
How does it work?
The option for a mortgage payment holiday must be a feature of your loan. Not all lenders will provide this option, so think ahead when choosing your home loan, and consider whether you think it will be a useful option.
To be eligible for a mortgage vacation, you need to have made significant additional repayments on your loan, so that you are “ahead” of your mortgage.
If you are approved for a mortgage vacation, your lender will suspend your mortgage repayments for the agreed length of time – usually for a period of between two and six months.
When to take a break
When you experience a change of circumstances – such as losing your job – a break from mortgage payments may help you manage daily life until you are back on your feet again. Your first priority in this situation is to talk to your lender immediately. It is better to take an official mortgage holiday than to fall into a situation where you can’t make payments at all.
If you receive a payout from your previous job, you could put a portion of that into your mortgage and then take a mortgage vacation, reducing your debt, so you don’t accrue too much interest during the “holiday.”
The Interest Factor
Before considering a mortgage vacation, it’s important to calculate the potential cost of additional interest payments. If you are in financial difficulties, a mortgage holiday may just delay your problems rather than solve them. Even during your holiday, your interest continues to accrue, increasing the size of your overall debt. The interest accrued during a mortgage vacation could potentially extend the term of your loan by several months or even years, so it is not a decision
to make lightly.
Alternatives to a mortgage holiday
Your lender will discuss a number of options to ease your financial pressure, such as switching your payments to interest-only or extending your loan term to reduce your regular payments. Alternately, you could look into a redraw
feature on your loan, giving you access to withdraw additional payments in a time of emergency.
Before taking out a home loan, plan ahead to figure out how you will handle a financial crisis or any changes in circumstances. Your best option is always to stay a little ahead of your mortgage repayments so you can maintain a more comfortable position during a crisis. Talk to your mortgage broker or lender to discuss how you can protect your investment and work out the best strategy for handling a financial crisis.