Taking a payment holiday should only be done if you really have no way to meet your monthly debt payment. It adds to the cost of your loan and can add significantly to the period of your home loan, especially if you recently bought your property. For example, if you are only one year into a 20-year mortgage, that three-month payment holiday will extend your repayment period by eight months due to compounding interest.
If you do need to take a debt holiday, the approach by FNB to provide a cashflow relief loan rather than a term extension is a clever way of ring-fencing that debt and making sure you pay it off quickly rather than adding it to the term of your loan.
FNB effectively issues a new loan to cover your debt instalments and the repayment only starts after the three-month relief period. The loan is issued at the prime interest rate of 7.75% and carries no fees.
So, for personal loans, car finance and overdrafts that have interest rates above prime, this would save a customer money. For a home loan issued at the prime interest rate, the cashflow relief loan would at least ensure that the term of the home loan is not extended. The repayment period is flexible, and you can settle the relief loan sooner with no penalties.
Doret Jooste, CEO of FNB Retail Money Management says, “The solution is designed to be less expensive compared to the traditional payment break with a term extension, where a customer could potentially be paying ‘interest upon interest’, fees are still levied during the break and their repayments on the longer term will be based on the conditions of the existing agreement, for example interest rate and fees. In the long-term, the total cost of credit for a payment holiday with a term extension is significantly higher than a cashflow relief plan.”
What the example below shows is that the customer could be paying more than 3 months’ worth of instalments due to a term extension. By taking a separate loan, you pay off that debt sooner and save a significant amount of money.
For customers who do not bank with FNB or elect not to take the cashflow relief loan, at least make sure that you increase your repayments as soon as possible so that you still repay your home or car over the same original period.