During the Covid-19 pandemic, the current lockdown no doubt has an effect on many people's incomes and financial obligations, which includes monthly payments on a home loan.  You may have heard about payment holidays and may be considering to apply for it. It is however important to fully understand how such a payment holiday works and whether it will change your interest rate, the term of your loan or the monthly instalments.

The mortgage payment holiday will provide flexibility in repaying your mortgage by allowing you to stop or reduce your monthly payments for up to three months. This could provide much needed help if you need it, but it won’t be suitable for everyone. A number of banks have announced plans to assist their customers during the difficult time ahead. This debt relief is limited to customers in good standing only. This means banks will only consider granting a payment holiday to you if you are not among the 10 million consumers that are currently in arrears. 

You should be aware that there will be an increase in your monthly repayment as well as the total amount payable once the payment holiday has ended. Should you decide to apply for the payment holiday it would be wise to discuss the following with your banker:

Spreading your deferred payments over the outstanding term of your home loan. This means you will see an increase in your monthly repayments once your payment holiday period is over. The shorter the term left on your home loan, the larger the increase in your monthly payments. You should consider the impact the higher repayments will have on your future monthly financial commitments.

Increasing the length of the term on your home loan. Extending the length of your home loan means you might see a smaller increase in your monthly repayments, but you will be paying your home loan back over a longer period which means you will be paying more on interest over the term. 

The biggest positive about a payment holiday is that it relieves some pressure for a while, but there are several important things to bear in mind. While you are not making payments towards your home loan, the interest is still accumulating on your remaining balance. When the payment holiday comes to an end, your outstanding balance and payments will be higher than they were before the holiday.

From the above it is clear that while a payment holiday might relieve the pressure for a short while, it will be more beneficial to rather cut unnecessary or luxurious expenses and make the necessary payment towards your home loan.