As the effects of the economic downturn take hold, many people will be struggling to make their mortgage repayments. Most banks are offering a six-month mortgage repayment holiday, but is this a good solution?

The aim of a repayment holiday is to reduce financial pressure and give breathing space to people who are struggling in times of crisis. As with any other financial matter, the decision about whether to opt for a repayment holiday has to be looked at in terms of its long-term consequences.

For a typical household, mortgage payments are the biggest regular expense, followed closely by spending on groceries. Having a holiday from mortgage payments can significantly increase the amount of money available to cover a reduction in income or an increase in other expenses. We know that financial stress leads to anxiety and depression and has a negative impact on family relationships. There is often a link between conflict or even violence in a relationship and financial stress.

However, a repayment holiday does not reduce the amount of money you owe the bank. In fact, the interest will keep compounding over the period of the holiday, so that you end up owing more. There are other ways to reduce financial stress. It may be possible to lower your mortgage repayments by stretching the loan out over a longer period of time – for example thirty years rather than twenty. You may also be able to convert your mortgage to an interest-only loan, so that although you are not paying back the principal, you are at least not allowing the interest to compound.

Repayment holidays are only a short-term fix. It can be difficult to resume repayments after a break. Talk to your lender to get the best solution for you and treat repayment holidays as a last resort.