Dec 24, 2010

Should you take a mortgage break at Christmas?

Should you take a mortgage break at Christmas?

With Christmas on our doorstep, the extra costs of presents, catering and holidays can stretch the family budget. It would be great to not have to worry about paying your mortgage off during this period to help? Or would it?

There are many lenders who permit a mortgage break, where the homeowner takes a “break” from paying the mortgage for a short period of time – allowing them to use the normal mortgage payment to cover other expenses.

A word of caution though – it will come at a cost unless you plan ahead and save in advance.

Aussie founder and executive chairman John Symond says the best (and most economical) way to accommodate a break from making payments is to make excess payments onto the mortgage in advance, building up a buffer on the home loan.

“Making extra repayments is always a sensible option, and this way you’re using your own money to give yourself a break from the mortgage,” he said.

This type of payment break is dependent on the terms and conditions of the particular mortgage product, but they can last between two months to 12 months.

Another option is to switch to an interest-only loan for a period of time. This strategy doesn’t absolve the borrower of all payments, but it certainly brings down the amount required to pay each month.

“This may cost you to switch products, and should only be used as a short-term fix,” Mr Symond said. “It should be mentioned that anyone wanting to pay off a property eventually should be looking at principal and interest (P&I) loan.”

The third option, and one which should be the last resort according to Mr Symond, is to take what is called a “repayment holiday”.

“If you really are facing a challenge in making the loan payments, there are lenders who allow a repayment holiday,” he said. “But there are strict conditions such as length of time with the lender, have always made payments on time and the loan will need to be a P&I loan.”

Mr Symond said these repayment holidays will normally only be allowed for three months, and the loan will continue to accrue interest, which will add more to the outstanding balance.

“And the banks will probably charge a fee for this service,” he said. “I would strongly caution anyone from taking this path if they can avoid it.”

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