How much does a mortgage holiday cost?

Life is stressful, especially for Australians with a home loan. The number of mortgage holders struggling to pay off their loans reached a record 42% in August.

With economists on Finder's RBA Cash Rate panel not expecting a rate cut until late 2024 at the earliest, repaying a mortgage is unlikely to become easier any time soon.

In response, some homeowners are turning to mortgage holidays to ease their stress – 5% say they have asked for a repayment holiday or applied for hardship relief in the last 6 months. That's equivalent to 165,000 Australians who have asked their lender for help.

What is a mortgage holiday

A mortgage holiday does exactly what it says on the tin. Much like a normal holiday which gives you a break from everyday life, you get to take a break from paying your mortgage repayments.

Pausing mortgage repayments can be a lifeline for borrowers who have a sudden reduction or loss in income, for example if a spouse is made redundant or if you need to take unpaid carer's leave to look after a loved one.

Lenders generally don't let you pause repayments for more than 6 months. Mortgage holidays are designed to give you enough time to get back on your feet after running into unexpected financial trouble.

Your lender also doesn't simply forget about the repayments you paused during your holiday. Instead, the interest you would've paid over this time gets added to the remaining balance of your loan. Your repayments will be higher once the holiday period ends as a result.

How much extra will you pay for taking out a mortgage holiday

How much extra interest you pay over the course of your loan will depend on the following:

• When you take the holiday – taking a holiday at the end of your loan will be cheaper than right at the start.
• How long you pause your repayments for – the shorter the better.
• The size of your loan – below I will show how buying a house in a more expensive state, can lead to a much higher interest bill if you have to take a holiday.

The table underneath gives you an idea of how the two largest contributors - length of your holiday and the size of your loan - can significantly affect the cost of your holiday.

In Sydney, the capital of Australia's most expensive state, pausing repayments for 3 months could add an extra $19,205 in interest charges. Extending this to a 6-month repayment holiday would more than double these charges to $52,103.

For the median Australian house, mortgage holders can expect to pay an extra $13,238 for taking a 3-month break and $35,915 after 6 months off.

Although a repayment holiday may cost more in the long run, if you're about to or already defaulting on payments, the extra interest can be well worth it to avoid potentially losing your home. If you're considering a mortgage holiday or are already on one, here are some tips to help you minimise costs.

Tips to avoid taking a holiday or if you have to, how to structure it

1. Refinance first: make sure you are at the lowest rate possible. Explore the market and speak to your lender to see what they can offer. Currently, the average variable-rate mortgage holder is paying 6.36%, which is 0.38% higher than the lowest variable rate of 5.99% available on Finder. Switching to the lowest rate could save you $2,374 in interest over the first year, based on the average loan size of $641,143 in July 2024.
2. Keep your holiday as short as possible: Each additional month of paused repayments means more interest added to your balance. As we saw in the examples above, doubling the length from 3 to 6 months will actually more than double the additional interest you end up paying.
3. Extend your loan term. Some lenders offer the option to either increase your repayments or extend your loan term to cover the extra interest accrued during a mortgage holiday. If you can't afford higher repayments, extending your loan term can help manage the financial burden.

Finder's Insights Column examines issues affecting the Australian consumer. It appears weekly on finder.com.au.