The Pitfalls And Pluses Of Pausing Your Mortgage
Pausing your mortgage, also known as a home loan deferral or a mortgage holiday, is a way a lender can suspend the borrower’s mortgage payments for a set period of time. However, is that something you should really be considering?
During COVID, the number of borrowers requesting mortgage holidays from their lenders surged. Now with rapidly rising interest rates and the escalating cost of living, borrowers are once again looking at a loan deferral as a way to get back on track.
While pausing your mortgage can provide temporary relief for struggling borrowers, it is important to consider the advantages and disadvantages before deciding if it is the right choice for you.
Financial Relief: One of the main advantages of a mortgage holiday is the temporary financial relief it can provide. If a borrower is facing unexpected expenses or a reduction in income, deferring mortgage payments can alleviate some financial stress.
Avoiding Default: A mortgage holiday can help borrowers avoid defaulting on their mortgage, which can lead to negative consequences, like damaged credit scores or even the loss of their home.
Opportunity to Reorganise Finances: With a temporary break from mortgage payments, borrowers have time to reorganise their finances and get back on track with their mortgage payments. Sometimes a bit of breathing room can make a big difference.
Increased Interest: While a borrower’s mortgage payments are suspended during a mortgage holiday, interest will continue to accrue. That means the total amount owed on the mortgage increases, and the longer it is left, the larger it will become. This can also lead to higher payments in the future or an extended loan repayment term, which might just put borrowers back in the same position that they started, before deferring the loan.
Financial Implications: A mortgage holiday can lead to long-term financial implications, including increased interest payments, missed opportunities to pay down the principal balance, and a longer loan term. The other major issue for borrowers is that it could impact their credit score, making it harder or more costly to obtain finance in the future.
Not a Permanent Solution: A mortgage holiday provides temporary relief, but it is not a permanent solution. Eventually, borrowers will have to resume making payments on their mortgage and will owe more money due to the interest accrued during the deferral period. It might be better off taking control of your finances now and only taking a deferral in the event of an emergency.
If a mortgage holiday is not the right choice for you, there are alternative options that may be more beneficial.
First, borrowers can potentially negotiate with the lender to see if they could receive a lower interest rate.
It’s also possible to refinance a mortgage at lower interest rates, or open up other home loan options and features including offset accounts and redraw facilities. Borrowers can access any extra repayments they have made on their mortgage to help with financial difficulties by using a redraw facility if they already have that option in place.
Another option worth considering, is switching to interest-only payments, which can reduce monthly payments for a set period of time. This could help buy some time to get finances under control.