Payment Holidays

Payment holidays allow banks to offer their customers a temporary break from payments, while interest still continues to accrue on the outstanding mortgage balance during this period. This means that, even if the term doesn't extend, the total amount the borrower owes will increase, leading to higher future payments.

Lenders can choose whether a Dynamic Mortgage or Interest-Only loan can extend or keep its original term during the product configuration process in the Repayment Schedule Editing section of Repayment Scheduling.

Here's how payment holidays without extending the term work for dynamic mortgages and interest-only loans:

Dynamic mortgages

Dynamic mortgages are often designed with built in flexibility, making them well-suited for payment holidays that don't extend the original loan term.

Core functionality

• Zeroing of installment details: For the payment holiday installments, the total expected will be set to 0.
• Principal recalculation: Missed principal payments are implicitly deferred. The system ensures the schedule maintains the same number of instalments.
• PMT recalculation: The payment (PMT) of the upcoming installments is recalculated to account for the deferral of principal and the eventual application of payment holiday interest. This new PMT maintains the original number of installments. The calculation uses the following parameters:
  • Interest rate (IR)
  • Number of remaining installments
  • Principal balance
• PMT formula: PMT(Interest rate/12, remaining number of installments, −principal balance of payment holiday installment)
  • Accrual of PH interest: Interest for the payment holiday period continues to accrue. This accrued PH interest is logged in a dedicated Payment Holidays Interest Accrued balance.
  • Manual application of payment holiday interest: Unlike regular interest, interest from payment holiday installments is not applied automatically by a cron job. Instead, this interest must be manually applied by the lender after the payment holiday period has concluded.
  • This application can be done either in bulk on the first installment after the payment holiday period, or in smaller portions across multiple/all remaining installments of the schedule.
• Allocation of applied payment holiday interest: Once the payment holiday interest is manually applied by the lender, it will be allocated to the interest balance, consistent with regular interest.

How do payment holidays work in dynamic mortgages

1. The borrower applies for a payment holiday for a specified period (e.g., 1-3 months, varying by lender and product).
2. During the holiday, the borrower makes no payments.
   a. The affected installments are marked as Grace, and their expected principal, interest, and total due amounts are set to zero.
3. The system immediately recalculates the PMT for the remaining original number of installments, adjusting them to account for the deferred principal and the upcoming application of payment holiday interest. Lenders can view these new monthly payments right after the payment holiday installments are set up.
4. Interest continues to accrue on the principal balance in the background and is logged in the Payment Holidays Interest Accrued Balance.
5. After the payment holiday, the lender must manually apply the accrued payment holiday interest. This applied interest then increases the total due of subsequent instalments.

Interest-only loans

For interest-only loans, payment holidays without term extension also result in increased future payments due to continued interest accrual on the outstanding balance.

Core functionality

• Automatic interest accrual: The interest that accrues during the payment holiday (PH interest) is automatically calculated and applied on the due date(s) of the payment holiday installment(s). This process is typically handled by a scheduled system job (cron job).
• Balance allocation: The accrued payment holiday interest is initially recorded in a dedicated Payment Holidays Interest Accrued Balance. Once applied, this accrued payment holiday interest is also moved to the interest balance, similar to regular interest.
• Capitalization of missed interest: The interest that accrues during the payment holiday is added to the outstanding loan balance.
• No direct principal impact on schedule: Since interest-only loans primarily involve paying interest, the direct capital repayment portion isn't 'missed' in the same way as a capital repayment loan. However, the capitalized interest from the holiday increases the overall amount the borrower needs to repay at the end of the term.
• Schedule recalculation: When the payment holiday installments are added, the loan schedule is recalculated. To maintain the original loan term, the future monthly interest-only payments will increase to cover the capitalized interest from the holiday.
• Payment (PMT) recalculation formula: PMT=PMT(IR/12, Number of remaining installments, closing balance after payment holiday, initial PB, 0)
• The Payment (PMT) of the upcoming installments is recalculated using these parameters:
  • Interest rate (IR)
  • Number of remaining installments
  • Closing balance of the payment holiday installment. This reflects the balance including capitalised interest.
  • Initial principal balance (PB). This parameter is specifically used for interest-only loans.

How do payment holidays work in interest-only loans

1. The borrower applies for a payment holiday for a specified period (e.g., 1-3 months, varying by lender and product).
2. During the holiday, no payments are made. Interest continues to accrue on the closing balance of each installment.
3. Interest accrues and is applied on each installment due date, and then capitalized (becoming part of the loan’s closing balance).
4. Lenders can view the new monthly payments immediately after the payment holiday installments are set up.