Repayment holiday pros and cons

These are holidays of a different sort – necessary, but best kept as short as possible. When your income has been interrupted as it has for so many, you try to keep things running as they were – keeping things normal – for as long as you possibly can. But there are times when you really can’t.

Take your loans, for instance, whether they’re for a mortgage, a car or on a credit card. They were taken out when the world was different, before COVID-19. The repayments may not be sustainable now.  

You could try to keep up as best you can, but there may be better alternatives for you right now. It’s important to weigh all your options.

Talk to your lender first

If you are struggling, contact your lender and talk through it with them. The earlier you do this, the better. You might be surprised how willing they are to make things work for you and your loan.

The sooner you get in touch, the better placed they are to help you cope with financial stress. After all, they deal with this sort of thing all the time. 

Depending on what you’re experiencing, your lender could:

• Temporarily suspend loan repayments through a holiday
• Move you to interest-only payments
• Restructure small business loans
• Consolidate loans to make repayments more manageable
• Provide short-term funding for a business

Mortgage and loan holidays

One option these days is to take a repayment holiday on your mortgage or loan. This means you press pause and take a break from making any repayments, both on the principal (the part you borrowed) and the interest (the part your lender charges you for using that borrowed money). Mortgage holidays, for instance, can be up to six months.

Here’s the thing: these holidays are perfect if you cannot make your repayments right now because your income has been interrupted. They allow you to keep the cash you have on hand for your immediate needs.

But they are a type of ‘holiday’ that you never want to go on longer than absolutely necessary.

Here’s why: all the time you’re not making payments, the interest charges will continue to add up behind the scenes. You will eventually have to repay more interest overall.

Since repayment holidays make every debt more expensive, it’s important to understand what’s involved before you choose this option.

How much more expensive?

To see how much interest a "holiday" adds to a mortgage, for example, use Sorted's savings calculator.

Step 1. Set the amount that you plan to save to $0.

Step 2. Set the time period to 6 months (or less if your "holiday" will be shorter).

Step 3. Enter in your interest rate.

Step 4. Enter in your present loan amount in the "I've already saved" field. 

Important: the inflation button beneath the graph must be turned off. 

The calculator will immediately show you how much more interest you are tacking on during your holiday, which of course will need repaying afterwards, when you start everything up once again. (And that will cost even more interest.)

Do loan holidays affect my credit history?

Stopping repayments on any loan typically has consequences, and they’re generally not good. Happily, the type of repayment holiday we’re looking at here will not affect you negatively in this regard.

Obviously your credit score may be the least of your worries at the moment, but someday you may need a clear history if you want to borrow more. It’s good to know that there is broad agreement across the industry and consensus on how your lender can record your repayment holiday without marring your credit record.

Rest assured – you can take a repayment holiday and not tank your future credit score as a result.

Those are the pros and cons of a repayment holiday – you can turn to it to ease the short-term pressure, but thinking long term, it’s probably not something to apply for until you truly need it.

MoneyTalks

A good way to learn about your options is to get personalised help. Reach out to the great team at MoneyTalks (even anonymously) by ringing  0800 345 123, texting 4029 or email:

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