Mortgage holidays: Can I take one and what will it cost me?

A mortgage holiday is a break from making mortgage repayments, usually for a maximum of six months. During this period you won’t be required to make any repayments at all. 

If you're experiencing temporary financial hardship, a mortgage holiday can be a great way to make it through without selling your home. 

1. Make an online application

Most lenders have an online application for mortgage holidays on their website. Fill this out to start the process. If yours doesn’t, it’s best to contact them directly, let them know you’re having difficulty affording mortgage repayments and ask about a mortgage holiday. 

1. Sort out your mortgage

Once you’ve filled out an application or contacted your lender they’ll get back to you to discuss your options. Your lender is required to ensure that you understand the financial consequences of your choice by making you aware of any extra costs and answering all your questions. 

Mortgage holidays can be a lifesaver in some limited circumstances, but they should only be used as a last resort by borrowers. That’s because taking just one mortgage holiday can greatly increase the amount of interest you pay on your loan. Here’s why:

• During your mortgage holiday you’ll still be charged interest. 

• That means, because you’re not making any interest or principal repayments, during this time your loan balance will increase (as interest is added to your balance). 

• As a result you’ll pay more interest on your loan. 

• If you don’t extend your loan term your repayments will also increase once your mortgage holiday ends. 

Because of this, holiday is not really the right word. It’s more accurate to call a mortgage holiday a repayment deferral - you’ll still be making the same amount of repayments (or more), they’ll just be delayed. 

The amount that a mortgage holiday could cost depends on the length of the holiday, the size of your mortgage, your interest rate and your loan’s structure. To give you an idea of the costs let’s look at a borrower with the average mortgage in New Zealand of $369,435. 

In this example taking just one mortgage holiday increases the total cost of the loan by $27,819. If your mortgage was larger, your interest rate higher or your term was longer, a holiday could cost you even more (and vice versa). 

A mortgage holiday should be your last resort when experiencing financial difficulties. Before you decide to take one, you should consider all your options including:

This will still increase the total cost of your mortgage but by less than not making mortgage repayments at all. 

This will decrease your monthly mortgage payments, as you won’t be paying any principal. If you can manage this, your mortgage balance won’t increase. You’ll still pay mortgage interest over the life of your loan, but not as much as if you’d completely stopped making repayments. Your mortgage repayments will increase in size once your interest only period ends so make sure you’re ready for this. 

This will help reduce your monthly repayments. It could also increase the total amount of interest you pay so do your sums and make sure this is a better option than a mortgage holiday. 

If high interest loans like credit cards and payday loans are making it hard to afford mortgage repayments, consolidating them into your mortgage could make life easier (and reduce the total amount of interest you pay).

Many lenders offer cash back for new loans. In other words, if you refinance your loan to them they’ll give you a certain amount of cash to use as you see fit. This is usually around 1% of the total mortgage amount. You may then be able to use this to offset your mortgage repayments. 

Keep in mind that refinancing can cost you money and cash back often comes with conditions. Most lenders require you to keep your loan with them for three years or you’ll need to repay the cashback. Talk to your mortgage broker for more detail. 

Your mortgage holiday will eventually end and when it does your repayments may be higher than they were before. During this time it’s a great idea to make a plan to ensure that you’re able to cope financially.. 

You could create a detailed budget, or put aside some money during your mortgage repayment to make sure you can handle the higher repayments. You could also pay down other higher interest debt, reduce your living expenses or increase your income. If you’re not sure what to do, it’s a great idea to ask for help.