Mortgage holidays: The ultimate 2024 guide

A mortgage holiday is a temporary break when you stop paying your mortgage. And the bank is OK with it: they don’t force you to pay your mortgage for 3-6 months.

But while it can be a lifeline, it comes with financial downsides.

Your loan doesn’t “pause” … they keep charging you interest. They just add it on to your loan. So you pay the interest later on although, in the meantime, the interest costs compound.

Your mortgage repayment will also probably increase once the holiday ends.

This makes mortgage holidays an expensive option, so you should only get one in serious circumstances.

Just so you know, some people also call these mortgage deferrals. They’re generally reserved for people in financial hardship, but the exact criteria changes based on which bank you’re with.

How do mortgage holidays work?

A mortgage holiday is simply a pause in payments. You stop paying your mortgage for a few months (and the bank is OK with it).

You stop paying down debt … but the bank keeps charging you interest. This gets added on to your loan.

Now, not everyone can get a mortgage holiday. You need to meet your bank’s lending criteria to get one.

Most banks will explore alternative options before “green lighting” a mortgage holiday. I like to call it the “three tiers of help”:

Step 1: Extend your loan term. If you have 23 years left on your loan, increasing it to 30 years will reduce your monthly repayments. This might be enough to get you through a tough time.

Step 2: Switch to an interest-only loan. Here you stop paying the principal for a set period. This reduces your repayments, but you still cover the interest. So your mortgage balance stays the same (rather than going up like with a mortgage holiday).

Step 3: Take a mortgage holiday. This is the last resort, where both principal and interest repayments are paused for a time. In this scenario your mortgage (debt) starts going up.

What are the pros and cons of a mortgage holiday?

For people experiencing financial hardship, a mortgage holiday can offer space to breathe.

For example, what happens if you lose your job? Your income goes down and you might stress about paying the mortgage.

In this situation, a mortgage holiday could give you temporary relief while you look for a new job.

But I’ve also had clients come to me with serious illnesses. They can’t work, so they need to reduce their expenses for a short time. I’ve even had instances where a client had an abusive spouse. A mortgage holiday gave them the ability to get out of a bad situation.

But it comes at a cost.

Mortgage holidays make your mortgage more expensive over time.

This is because the banks still charge you interest, and that interest compounds in the months that you’re not paying your mortgage.

Compounding interest is when you get charged interest, on interest. (It’s great in a savings account, but not when you borrow money).

The other thing is, your repayments are usually higher once the holiday ends. (More on these costs below).

There can also be ongoing implications for you. For example, if you came off a mortgage holiday and then wanted to refinance to another bank.

This can impact your new application because it’s often an indication of financial hardship. That can make any new bank nervous. They might not want to give you a mortgage if you’re struggling to pay your current bank.

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Can mortgage holidays make your mortgage more expensive over the long term?

Yes, a mortgage holiday makes your repayments more expensive in two ways.

#1 - Higher monthly repayments

After the mortgage holiday ends, the repayments will likely be higher. This is because you are paying the same loan amount off, but over a shorter period of time.

The only way to lower the repayments is to extend the loan term, but this is something you will need to discuss with your bank.

#2 – Higher interest

On top of that, interest is still charged (and added to your loan) during your holiday. So your balance will increase, and you’ll pay more interest overall.

Let’s say John had a 6-month mortgage repayment holiday. At the time, he had 25 years left on his mortgage of $350k.

Once the holiday ends, the same repayments are now squeezed into 24.5 years because he’s just had six months off and didn’t make payments.

After his holiday, his payments increase $97.84 a month, but the balance increases $11,530.

How do I apply for a mortgage holiday?

Most banks have an online application for mortgage holidays on their website.

So, somewhat unusually, you won’t need to use your mortgage broker.

People needing a mortgage holiday are deemed “vulnerable” by the bank.

For this reason, banks don’t like mortgage brokers getting involved.

Instead, they would rather work with the person directly. This way the bank can support you as much as possible. Banks have specialised teams well-versed in working with people in this situation.

The team will discuss strategies to help overcome the immediate situation. They’ll also look at improving cashflow in the future or discuss selling as an option.

This is why there are so few mortgagee sales. The bank team acts like a coaching service, to get you back on your feet as soon as you can.

Are mortgage holidays a good idea?

Mortgage repayment holidays tend to be considered a last-ditch resort. This is because it does cost more for people in the long run.

But they do have their place.

Lots of my clients have needed that short break to get their lives back on track.

And usually, once that hardship has passed (you’ve got a new job, you’ve recovered from illness) then you can pick up where you left off.

If you think this is an option you’d like to consider, get in touch with your bank directly for more information.