Mortgage Holidays & Repayment Pauses — How They Work

A mortgage holiday (also called a repayment pause or repayment deferral) is a temporary arrangement where your lender allows you to stop or reduce your repayments for a defined period. They can provide critical breathing room during financial hardship — but they are not free, and the long-term cost is real.

How Repayment Pauses Work

During a repayment pause, your minimum repayment is reduced to zero (or to a partial amount). However, interest continues to accrue on your outstanding loan balance. That accrued interest is capitalised — added to your loan balance at the end of the pause period.

Example: $550,000 loan at 6.5%. Monthly interest = approximately $2,979. After a 3-month pause with full capitalisation, your loan balance has increased by approximately $8,937. Your subsequent repayments are now calculated on the higher balance, costing you more in interest for the remaining loan life.

The Real Cost of a Repayment Pause

A 3-month pause on a $550,000 loan at 6.5% costs approximately:

• $8,937 added to your loan balance
• Additional interest on that $8,937 over the remaining loan life: approximately $14,000–$20,000 depending on remaining term
• Total effective cost of the 3-month pause: approximately $22,000–$29,000 in extra interest over the full loan life

This is not a reason not to use a repayment pause if you genuinely need one — $22,000 spread over 27 years is approximately $67/month in additional cost, which is manageable. The pause provides real value in a genuine hardship situation. But you should understand the real cost, not assume it is "free."

Eligibility for a Repayment Pause

Lenders assess hardship applications on a case-by-case basis. They generally require:

• A genuine and documented hardship event (job loss, illness, natural disaster, relationship breakdown)
• Evidence of the hardship (termination notice, medical certificate, separation documentation)
• Reasonable expectation that your financial situation will improve within the pause period

Under the NCCP, lenders must consider all genuine hardship applications. They are not required to approve them — but if they decline, they must explain why, and you can complain to the Australian Financial Complaints Authority (AFCA) if you believe the decision was unreasonable.

Types of Repayment Hardship Arrangements

A full pause is not the only option. Lenders may also offer:

• Partial payment reduction: Pay a reduced amount (e.g. interest-only) instead of full P&I repayments
• Interest-only switch: Temporarily convert to IO repayments, reducing the minimum repayment without a full pause
• Loan term extension: Extend the remaining loan term, which lowers the minimum repayment going forward
• Repayment restructure: Redesign the loan product (split, restructure) to reduce repayments within the existing loan balance

Better Alternatives If You Have an Offset or Redraw

If you have a redraw facility or offset account with funds available, consider using those funds to cover repayments before requesting a formal hardship pause. Using your own offset or redraw avoids capitalised interest — the balance comes from your existing funds rather than being added to your loan. This is financially superior to a formal pause and does not require lender approval.

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