Mortgage Holiday – the term has a nice ring to it. But that was in the good old days, before the planet became infected by a rampant flu virus and, overnight, holidays acquired negative connotations, such as getting stuck overseas with no way of getting home.
For the time being, at least, the word holiday instils a sense of caution – and it’s how homeowners seeking to defer their loan payments should also approach the idea of a mortgage holiday.
Of course, for many people seeking assistance from banks, it’s for an essential lifeline, to help keep afloat during the current financial turmoil. And, thankfully, lenders are coming to the party, offering a range of different payment options.
As we covered in our story COVID-19 Mortgage Holidays: What Banks are Doing to Help Customers, the main options include:
- Interest only repayments on home loans for up to six months
- Mortgage repayment deferral for up to 6 months
- Extending home loans over a longer period.
But, of course, if you’re reducing your payments, you’re not paying off your loan as quickly, and with compound interest, in the long run, you could end up paying more for your mortgage, even if you increase your monthly repayments.
To work out exactly how much extra, Canstar’s research team crunched the numbers on a few scenarios, assuming an interest rate at the current two-year fixed average of 3.5% and a loan of $500,000 over 25 years:
Base Case: ($500,00 at 3.5%)
Monthly Repayment: $2,503
Total Interest over Loan Term: $237,253
Length of Mortgage: 25 years
Senario 1 (with 24 years left on the loan)
If you take a six-month holiday, then adjust your monthly payment so your loan term remains the same:
New Monthly Repayment: $2,581 (an extra $78 per month)
Total Interest over Loan Term: $244,192
Extra cost of Mortgage holiday: $6,939 (2.9% extra interest compared to Base Case)
Length of Mortgage: Remains the same, 25 years.
Senario 2: (with 24 years left on the loan)
If you take a six-month holiday of interest only payments, then adjust your monthly payment so your loan term remains the same:
New Monthly Repayment: $2,536 (an extra $33 per month)
Total Interest over Loan Term: $240,200
Extra cost of Mortgage holiday: $2,947 (1.2% extra interest compared to Base Case)
Length of Mortgage: Remains the same, 25 years.
Senario 3: (with 24 years left on the loan)
If you take a six-month holiday, then but leave your monthly repayments the same after the holiday:
Monthly Repayment: $2,503 (same as before)
Total Interest over Loan Term: $263,918
Extra cost of Mortgage holiday: $26,665 (11.2% extra interest compared to Base Case)
New length of Mortgage: 26 Years 3 Months
The Conclusion:
If you have any type of loan, it’s always better to pay it off as quickly as possible, that way you’ll save money on interest repayments. But if you are facing difficulty making full payments, it’s still a good idea to pay off as much as possible. This is borne out by the first two scenarios, which add little to the overall total you’ll pay over the term of your loan: an extra 2.9% and 1.2% respectively.
The most expensive option is to pay nothing during your holiday, and then carry on as before, making your same monthly payments (Scenario 3). But even though this looks like a huge sum on paper – $26,665 (11.2% extra interest compared to Base Case) – it must be taken in perspective. Over the long life of your loan, it amounts to around just $90 extra per month – a sum that if it means the difference between having to sell up and move, or remain in your own home, could well be a small price to pay.
Here at Canstar, as well as running the ruler over mortgage holiday figures, we also provide comparisons of the best home loans in the market. For information on the latest low market rates, click on the button below.
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