Payment holidays – a wolf in sheep's clothing

We are living in unprecedented times and there’s no doubt many people are struggling to keep up with their debts, a situation that is likely to continue for some time.

While the banks and other lenders have been quick to promote themselves as the white knight and offer payment holidays to their struggling clients, it is important not to confuse a payment holiday with a payment gift.

Before I continue, I want to stress that I’m not criticising lenders with how they are responding to the current situation, in most cases they are at least doing something to help their troubled clients, however when it comes to payment holidays there can be a sting in the tail for the borrower.

You may think that you will save money by entering a payment holiday arrangement, but unfortunately this is almost never the case. While the borrower will receive some short term cashflow relief, the debt itself will likely grow during this period leaving the borrower with an even bigger debt to contend with at the end.

Allow me to explain how a payment holiday typically works. To keep the math simple let’s suppose a borrower has a loan of $300,000 and the monthly payments are $1,500.  If the lender granted a six-month payment holiday, while the borrower would not need to make the monthly payments over this period, the lender will add the missed payments to the loan amount. Using this example, the debt would increase from $300,000 to $309,000.

After the six-month payment holiday, the lender may ask for monthly payments to be increased for a period of time to make up for the missed instalments or perhaps increase the term of the loan, so while the borrower would have had some short term reprieve, the lender will want all the money paid back.  If the lender insists that payments are increased to make up for the missed payments this can place further cashflow strain on the borrower.

For this reason, borrowers need to be aware of the long-term effect of putting accounts under a payment holiday arrangement. While there are definitely people who will have no option but to put a hold on their payments, there are others who could keep up with their debts but are applying for payment holidays thinking that it will somehow benefit them financially, when in reality they will have to deal with a higher debt when the party ends.

If you genuinely need a break from your payments due to a short term cashflow issue, then of course contact your lender and talk with them about a payment holiday. However don’t make the mistake of thinking that this will somehow save you money or that the lender is in anyway forgiving payments.

Due to some lenders advertising this option recently because of the impact of Covid-19, many mistake this as a new initiative by the banks, but in reality offering financial assistance to their struggling clients has been a legislative requirement for some time. The cynical side of me thinks that this recent media push by lenders offering financial assistance is more to do with appeasing government than anything else. Sadly, even in these times I see some lenders putting profits ahead of people and not doing all they should to assist their clients.

I understand it can be hard to think past next week at the moment let alone several months down the track, however let’s not forget that government help in the form of job keeper may only be here until September. While I fully support the government with this initiative, they are misguided if they think businesses will be back to normal and everyone will have their jobs back by then. Many businesses have been severely impacted or stopped altogether and the fact is it will take some time for them to return to normal trading when the dust settles, that is if they make it at all.

I do feel many of us are in a false sense of economic security at the moment due to government stimulus but the real test could come when these taps are turned off and businesses are far from fully recovered.

I think it’s fair to say that our new normal will be very different from the past and the banks and other lenders had better be ready and willing to effectively help their clients well into the future, not just over the next few months.

John Dickinson
DebtX – Debt Mediation Services
www.debtx.com.au