The Hidden Cost of Payment Holidays

Why Payment Holidays Aren’t Really a Holiday - And How They Cost You More

For many New Zealanders, the idea of a payment holiday sounds like a welcome break – a way to ease financial pressure in tough times.

But while it might offer short-term relief, the long-term consequences can be costly.

The term ‘holiday’ is misleading. Whilst you might not pay the repayment immediately, you still have to pay it at some point- a bit like Buy Now Pay Later. This often result in more debt and higher repayments over time.

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What is a Payment Holiday?

A payment holiday is a period during which a borrower can temporarily stop or reduce loan repayments. This option is often presented by banks and lenders as a way to manage financial hardship, particularly during unexpected events such as job loss, illness, or economic downturns like the COVID-19 pandemic.

While it sounds appealing, there’s a catch: interest continues to be charged on the outstanding balance. Because you’re not making payments the balance is higher. And that means that when payments resume, borrowers face higher overall debt and increased repayment amounts to get back up to date (or a longer time in debt!).

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The Hidden Cost of a Payment Holiday

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1. Compounding Interest Adds Up

When you take a break from repaying your loan, interest doesn’t stop - it keeps adding up. If the unpaid interest is added to the loan balance, meaning you end up paying interest on interest. This is particularly concerning for long-term loans such as mortgages, where even a short break can add thousands of dollars to the total cost of the loan.
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2. Extended Loan Term or Higher Repayments

Lenders typically adjust loan repayments after a payment holiday in one of two ways:

• Extending the loan term - This means you keep paying your loan for longer, delaying financial freedom and increasing the total cost of your debt.
• Increasing your repayments - This can make budgeting harder once payments resume, especially for households already facing financial strain.
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3. Potential Credit Score Impact

While lenders often market payment holidays as a form of assistance, some may still report them to credit agencies, affecting your credit score. This could make it harder to borrow in the future or impact the interest rates you’re offered.

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Who Really Benefits?

While payment holidays may help in genuine short-term hardship, they ultimately benefit lenders more than borrowers. By allowing interest to compound, banks and financial institutions ensure they recover even more from borrowers over the long term.

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What Are the Alternatives?

Before considering a payment holiday, borrowers should explore other options:

• Restructuring the loan - Talk to your lender about switching to an interest-only repayment plan or extending the term in a way that doesn’t increase the overall cost as much.
• Financial hardship support - Some lenders offer hardship assistance that doesn’t automatically increase long-term costs.
• Debt consolidation - If you have multiple debts, consolidating them into a lower-interest loan may be a smarter way to reduce pressure without letting interest snowball.
• Budgeting assistance - Working with a financial mentor or advisor can help you restructure your finances without needing to pause payments.

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Final Thoughts

In New Zealand, where many families are already feeling the financial squeeze, a payment holiday might seem like a solution - but it’s more of a short-term plaster than a fix. If you’re considering taking one, make sure you understand the full cost before signing up. Often, working out an alternative repayment plan will leave you in a better financial position in the long run.

A ‘holiday’ should leave you feeling refreshed and better off - not deeper in debt.

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