When is a repayment holiday NOT a repayment holiday?
When the interest is capitalising!
There has been much fuss made over the covid19 relief packages and the relief they offer home and property owners.
It is important to note that this is not really a holiday. The missed repayments will be added to the loan balance and interest charged on the original balance, as well as on the missed repayments. That’s interest charged on interest. It can become costly and difficult to recover from.
After the repayment deferment period, some lenders will extend the loan term so that you can pick up where you left off in 6 moths (albeit with larger debt, and longer contract, at least the repayments will not increase) and some will increase the repayments to make up for the ones you missed. Some will offer a choice.
All lenders will require you to use your savings or redraw first, so if you are ahead on your repayments or have savings, you will not be eligible until those savings have depleted.
If you really need relief, but can still afford the interest repayments, then consider making those interest payments voluntarily to reduce the cost. Just be mindful of extra repayments into fixed rates.
Most importantly, check with your broker before proceeding. Taking a repayment deferment for covid19 won’t adversely affect your credit rating, but it will prevent you from refinancing either to a cheaper rate or an interest only loan until you are caught up, so it is important to make sure you have explored all your options first and use this only as a last resort.