Mortgage Holiday vs Interest-Only- What’s Best in NZ?

With increased financial pressures in 2025, more homeowners are exploring temporary mortgage relief options. Both a mortgage holiday and an interest- only loan provide financial relief by “stopping” or “reducing” mortgage repayments. We compare both options which can offer temporary relief, but they work differently and have different pros and cons. This article discusses and compares both to help you decide which is best for you.

Life happens – changing jobs, parental leave, health events and other events, such as COVID-19, which make it harder to meet regular mortgage repayments. During these times, either strategy offers temporary financial relief but ultimately have different impacts. If you have a major life event and not sure which option is better for you, contact us to work with you to help you find a tailored solution that will work for you.

What Is a Mortgage Repayment Holiday?

In short, you hit “pause” on all repayments for a fixed period, (which is usually 3 to 6 months). Also known as “repayment deferrals”.

• Pros: No repayments during the mortgage holiday period
• Cons: Interest still accrues which increases your total loan balance
• Best for: Sudden loss of income or genuine hardship

How Does Interest-Only Differ?

You only pay the interest portion of your mortgage for a set time.

• Pros: Lower repayments
• Cons: Principal is not reduced which will result in a higher payment later when principal and interest is paid
• Best for: Lifestyle breaks, self-employment variability or events such as parental leave

Can You Get Interest-Only for Lifestyle Reasons? (2025 update)

Some mainstream banks now allow up to 24 months of interest-only for lifestyle reasons. You do not need to state the reason however you need to meet eligibility criteria. which include:

• No prior hardship
• Good account conduct
• Under 80% LVR
• Ability to resume full repayment at end of interest-only period

Decision Tree: Which is Right for You?

• Are you currently facing genuine financial hardship (sudden loss of job or income)?
• If yes:  consider a mortgage holiday
• If no:  Are you needing to lower your repayments for flexibility?
• If yes: – consider interest-only
• If no: stay with your current repayment structure or explore refinancing and other options

Comparing scenarios:

Mortgage Holiday scenario:

Jane lost her job and needed time to find new work. She applied for a 3- month mortgage holiday which was approved. This gave her space to breathe and secure a new role. Her loan balance increased slightly due to accrued interest.

Financial Implications example of mortgage holiday

• The original amount of the loan was $500,000
• Interest Rate: 4% per year
• The loan is for 30 years, and the regular monthly principal and interest mortgage payment is $2,387

Let’s say for example, that you qualify for a 6-month mortgage holiday. So for 6 months you don’t have to pay anything on the loan. Therefore, you get immediate relief of $2,387 per month. However, interest keeps adding to the amount that is still owed.

Calculation:

Interest over 6 months: Original loan amount / monthly interest rate x period of mortgage holiday period in months. The interest rate each month (4% divided by 12 months) = 0.33%

So, $500,000 x 0.33% x 6 months = $9,900 in interest over a 6 month period. This amount will then get added to the loan (as a minimum) and your repayments will be recalculated at the end of the mortgage holiday term.

Possible Savings: Relief of $2,387 per month for 6 months because you are not making payments.  The interest however gets added to the loan amount, resulting in a higher overall loan amount, compared to when you originally started, plus additional costs to cover the interest of the loan. However, Jane enjoyed the temporary mortgage relief when she really needed it to find that new role.

Interest-Only Scenario:

James took a year off for parental leave. Instead of applying for hardship, he changed to a 24-month interest only plan. This gave him some financial breathing space without needing to hit “pause” on the loan repayments. James preferred this interest-only mortgage strategy since he still earned an income due to other income streams.

You only need to pay the interest on the loan for a certain amount of time. This means that the amount of the loan’s principal doesn’t change during this time, so the monthly payments are smaller, which helps with repayments.

Financial Implications example Interest Only

• The original amount of the loan was $500,000
• Interest Rate: 4% per year
• The loan is for 30 years, and the monthly principal and interest mortgage payment is $2,387

Let’s assume you switch for a period of 2 years. During this time, you only need to make interest payments, and the principal balance remains unchanged.

Calculation:

Monthly Interest Payment: $500,000 x 4% / 12 months = $1,667 in interest payments

Potential Savings: You can reduce your monthly mortgage payment from $2,387 (principal and interest) to $1,667 (interest only). This results in a monthly savings of $720 per month for the 2-year period.

These calculations provide a simplified example to illustrate the potential savings from a mortgage repayment holiday and changing the mortgage structure temporarily to interest only. Actual savings will vary based on individual mortgage terms, interest rates, and specific circumstances. It’s important to consult with a Mortgage Broker or Financial Adviser, to obtain accurate calculations, specific to your situation.

Comparison Summary of Mortgage Holiday vs Interest-Only

Get help from our mortgage experts who help you through these tough times. We carefully look at your finances and long-term goals. Understanding the pros and cons of each choice is very important if you want to make a good financial decision.

These methods can help in the short term, but it is important to think about how they might affect the loan term as a whole.

Advantages & Disadvantages

Advantages:

• Help for your cash flow right away: Free up money with lower or no repayments.
• Flexibility: Gives you the freedom to manage your money and meet instant needs.
• Avoid Default or Foreclosure: Helps you avoid going into default on your loans or face foreclosure.

Disadvantages:

• Interest gets added: During the mortgage holiday, interest continues to be added to the amount. This can make the loan last longer and cost more in interest generally.
• Lengthened Loan Term: To make up for the delayed payments, lenders may lengthen the loan term, which makes the time it takes to pay back the loan, even longer.
• Possible financial stress in the future: Once the break is over, you’ll have to go back to making your regular mortgage payments, which may be higher because interest has built up or the loan term has been extended to compensate for the temporary break.
• The principal amount of the loan doesn’t go down at all during this period.
• Since the principal amount stays the same, the total interest paid over the life of the loan can be higher than with a traditional repayment plan.
• Future Payment Adjustments – may result in higher payments in the future.

Key Takeaways

• A mortgage holiday is suitable only for temporary hardship, with long-term cost consequences, and therefore a “last-resort” option.
• An interest only is more suitable for a more sustainable short-term strategy to manage cashflow.
• Interest-Only is usually a better option if affordability is tight, but you’re not in hardship.
• Always consult with your mortgage adviser before choosing either option.

Conclusion

So in summary, these examples show that even though these options can help in the short term, they can hurt in the long run, because the loan term may be longer and interest keeps adding up in the background.

Before making a choice, you should think carefully about these factors and weigh the short-term benefits against the long-term financial effects. 

It’s important to note that the terms of the loan, the interest rate, and how long a period the mortgage holiday or interest only lasts all affect the calculations.

Talk to your Mortgage Broker first, as they can give you more accurate calculations and will provide advice that best fits your unique situation.

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