Putting in lump sum into loan, but not making monthly repayments

[swanqueen]

Hi all, tried doing a search on this but couldn't find any answers...

The other half has a IO IP loan since 2009, min monthly repayments around the 1700 p/month mark. He's made regular full payment of the interest charged every month, until...

Early last year he dumped 40k into the loan and stopped making the minimum monthly payment, reasoning that the regular $1700 interest being charged would come out of the 40k. He said that he'd start making the 1700 p/month payments once the 40k has been deducted completely.

I found out about this just now, which made me wonder... Don't we usually HAVE to make a regular monthly payment, even though we are ahead of our repayments by 40k (or whatever the amount is now that more than a year has passed) ? I'm not sure if this can be considered a 'repayment holiday', don't think the product we have offers it.

Would appreciate your thoughts. Thanks.

 

[Kristine..]

Hello swanqueen

Welcome to the Forum!

It depends on the type of loan product:

To have a 'Repayment Holiday' is a bit more complex than simply putting some money into the loan. For starters, the lenders has to agree to allow a repayment holiday, and this is usually for a specific amount of time

BUT

If the product is a Line of Credit and if the terms of this particular product allow that no 'payments' are required, that is, that the interest can be capitalised to the loan up to the approved credit limit, then that is inherent in the loan product / loan agreement and specific permission to do this does not have to be arranged

Not all Lines of Credit allow for capitalisation of the interest, but many do allow this, and the Loan Documents and product information provided by the lender will detail what the particular product can and cannot do

Hope this helps. If you are still unsure what your particular loan allows, check with your broker or ring the lender's customer service line

regards
Kristine

 

[BV]

swanqueen

Like Christine said it depends on the loan type you have and who your lender is.
Making a lump sum payment can be seen as a loan reduction so the lender will still expect you to make a monthly interest payment for the remaining loan amount.

If you don't meet your monthly obligation they could be charging you the default interest rate which is considerably higher than normal.
I suggest you ring and talk to your lender right now.

 

[swanqueen]

Thanks all for the reply, I'll get the hubby to check with the bank.