Rapidly rising home loan instalments have become a problem for many borrowers. It is proving to be quite a challenge to manage a private budget when loan interest rates have often risen by more than a thousand zloty a month. The government has responded to these difficulties by introducing mortgage payment holidays. Thanks to them, the borrower will be able to postpone the repayment of eight instalments until the end of the coming year.
How mortgage payment holidays work
Mortgage payment holidays will allow borrowers to defer payment of selected instalments. These instalments will be deferred to the end of the loan term. In simplest terms, this can be put as moving the repayment of selected instalments to a period after the scheduled last instalment. This applies to both the interest portion and the principal portion. This solution will not generate additional loan costs. Borrowers will be able to select two months each in the third and fourth quarters of 2022 and one month each quarter of 2023.
To illustrate the mechanism of a credit holiday, let us look at a mortgage contracted for a period of 10 years, or 120 months. Let us assume that the borrower paid the first instalment in January 2022.
Under the law, a borrower will be able to choose two months in the third and fourth quarters of the current year in which he will miss payments, as well as one month in each quarter of the coming year. For example, he can choose to miss payments in August, September, October and November in 2022 and in January, April, July and October 2023. Thus, he will defer the payment of eight selected loan instalments. He will have to pay these obligations after the end of the original loan period, i.e. after December 2031.
The graphic below shows an example of the transfer of instalments from August and September (successively the 8th and 9th instalments in the example loan). These instalments should be paid in the 121st and 122nd month of the loan period. If originally the last instalment was to be paid in December 2031, after moving these two instalments, the need to pay the loan instalments in January and February 2032 will arise. In summary, the borrower will not pay instalments in August and September 2022 and the obligation will shift to January and February 2032.
Is it worth applying for a mortgage payment holidays and is it worth it at all
The idea behind the government’s introduction of the Mortgage Payments Holidays Act was to support people whose soaring mortgage instalments had significantly reduced their financial resources. However, the solution has become an attractive mechanism for all borrowers. When considering applying for a credit holiday, it is worth looking at two factors that affect the attractiveness of this solution – inflation and the possibility of making an overpayment on the loan.
- Inflation means a general increase in prices. Money loses its value with the passing of time. To put it simply, what we buy now for PLN 100 would have cost us, say, only PLN 90 a year ago. Therefore, the amount of money spent today will have a greater significance for us than the same amount spent in one, five or ten years. Simply put, we can buy more today with that amount than we will be able to buy in the future. Therefore, a loan instalment paid in a few years’ time will ‘hurt’ us less than the same instalment paid today, because it will simply be worth less.
- Overpayment – many banks offer the opportunity to overpay your mortgage for free. You will read about why you should consider overpayment in a separate article soon, but here we briefly point out the basic benefits. A loan instalment consists of a capital part, which reduces our debt with a particular bank, and an interest part, which is the bank’s income for making the money available. The amount of the latter depends on the amount outstanding. So the faster we repay the loan, the lower the costs we will incur. Depending on the situation we are in and the ratio of the amount remaining to be repaid, it may turn out that even an overpayment equivalent to a few months’ instalment will result in the shortening of the term of the loan by several dozen months.
So how can this relationship be used in the context of a mortgage payment holidays? Deferring eight instalments will indeed mean extending the term of the loan by eight months, but ultimately the funds from these ‘unpaid instalments’ can be paid as an overpayment. Unlike a regular instalment, which also includes an interest instalment, an overpayment will only result in a reduction of the remaining amount to be repaid. As a result, it may turn out that the extended mortgage term of eight months may ultimately be even shorter than the original term stipulated in the loan agreement. In summary, this mechanism makes it possible to shorten the term of the loan and to reduce the cost of the loan, which is the bank’s fee for granting the loan to us.
Going back to the earlier example, by applying an overpayment of the value of the shifted two instalments, the borrower can shorten the term of the loan by several months. By using such a mechanism, it will be possible to shorten the mortgage term and reduce the cost of the loan.
Do mortgage payment holidays have disadvantages? At the stage of the bill, many doubts were raised about entries in the Credit Information Bureau. With the experience of 2020 and the beginning of the pandemic in mind, questions have become legitimate as to whether our creditworthiness will decrease through mortgage payment holidays. According to the BIK’s position, taking mortgage payment holidays will not affect our credit score (assessment of reliability in repayment).
On the other hand, banks will have access to information that the borrower has used a credit holiday. This may therefore impair the possibility of obtaining a loan, since – from the bank’s perspective – the use of credit holidays means liquidity problems (this is the idea behind the law). In view of this, with a plan to take out another loan in the coming months (including, for example, hire purchase), it is worth weighing up the potential benefits of taking mortgage payment holidays against the potential difficulties in obtaining a new loan.
Who can benefit
Mortgage payment holidays will be available to those whose loan agreements were concluded before 1 July 2022 and whose loan termination date does not fall within the coming months. In addition, this solution only applies to loans taken out in Polish currency for own housing needs.
When will the mortgage payment holidays come into effect
The law comes into force 14 days after being signed. This means that applications for mortgage payment holidays can be made from 29 July 2022. Will this translate into just one day to be able to avoid the August instalment? Most banks have confirmed that it is sufficient for the application to be submitted before the payment of the August instalment. Information about this deadline can be checked in the loan agreement. If the borrower has the maturity (obligation to pay) of the instalment on the 10th of the month, there will be more than 10 days left to submit the application.
How to apply for mortgage payment holidays
Applying for mortgage payment holidays can be done in traditional paper form or electronically. Some banks provide this option via their electronic banking systems. However, care should be taken to use a statutory mortgage payment holidays and not the bank’s fixed offer, which may incur a fee for using such a service.
The application should include information on the period of suspension of the mortgage repayment, an indication of the data related to the contract (borrower’s data, number of the loan agreement), as well as a statement that it concerns a property intended to meet own housing needs. It is necessary to include the clause: “I am aware of the criminal liability for making a false statement”. It is advisable to ask for details and a specimen of such an application, e.g. at the helpline of the bank where you obtained the loan.
It is worth noting that requests for mortgage payment holidays relate to individual quarters. Thus, it is not possible to request a credit holiday for a period of eight months in 2023. If a borrower misses the deadline for requesting a deferred instalment in a particular quarter, he or she will lose the opportunity to postpone during that period.
