What is a Repayment Holiday?
A repayment holiday is where you take a holiday/deferral/pause from making loan repayments (3-12 months).
- It can only be done with agreement from your lender
- Different lenders apply different criteria
- Not ALL borrowers will get the same result from a given lender – it is on a case by case basis
- You will NOT be entering a new loan agreement with your lender, it will be an addendum or new schedule which will complement your existing agreement.
How do Repayment Holidays work?
On the agreed date you can stop making repayments for the agreed period. You will continue to be charged interest on the amount owing, so your loan balance will increase during the holiday period. In the past, the interest would be charged on the increasing loan balance, however, with Covid-19 there is pressure on lenders NOT to do this. Each lender will have a different policy on this.
At the end of the holiday, you start making repayments again.
- The pre-holiday interest rate on your loan will continue to apply (if it is a variable rate, it is subject to normal variable rate movements)
- If your loan is due to come off Interest Only, or a fixed rate during the holiday, that will STILL occur
Will a Repayment Holiday affect my credit rating or future borrowing capacity?
This is our most common question and it is important.
Vision’s short answer is a NO to the credit rating question. But the borrowing capacity question cannot be answered YES or NO at this early stage and will be UNCLEAR for up to 2 years (in our opinion).
To answer it properly, we need to understand that there are plenty of things that DO NOT impact your credit rating but DO impact your borrowing capacity.
We need to explain the difference between credit RATING and credit SCORE.
- Your credit RATING is sourced by your lender from an external credit agency (such as Equifax)
- Most lenders are announcing, or are under pressure to announce, that taking a repayment holiday WILL NOT be reported to a credit rating agency. So, it is likely your credit RATING will be unaffected.
- Your credit SCORE is something that lenders come up with to determine if and how much they will lend. They use a range of factors in determining the credit score (including credit rating)
- Different lenders have different methods of coming up with a credit score.
- It is too early to know and understand if lenders (12-18 months down the track) will use the fact that people had a repayment holiday to impact their Credit Score.
- Will there be a question on future application form asking if you have taken a repayment holiday in the past 2 years? We cannot answer this. Lenders will be under pressure not to use this against borrowers, but Vision is cautious about this.
Will I be eligible for a Repayment Holiday?
All lenders have their own criteria to determine who is eligible for corona-virus support or not. You may have to show support that you have lost your income or had it reduced. Any documentation you have will help you. Also, as lenders are fielding so many enquiries, it could take some time.
What should I do?
Please talk to Vision and let us help you with your numbers. There are options we can explore with you, which we are already. For many clients we have been able to
- Obtain lower rates
- Extend Interest Only
- Extending loan periods
- Obtain buffer funds
We will explore every avenue that could be better for you long term. If these do not work, then we can help with your next steps.
The property experts at Vision Property & Finance can guide you in maximising the return on your property and securing a quick sale, positioning you for success in 2020 and beyond. Contact our Sydney office on 02 8354 3000, talk to our Newcastle office on 02 4014 1999 or get in touch with us here.