Financial hardship can feel overwhelming, especially when dealing with debts like home or car loans. If you’ve lost your job or had your income reduced, it’s crucial to speak with your lender as soon as possible.
Repayment Pauses and What They Mean
Many Australian lenders offer repayment pauses for up to six months. These breaks can provide temporary relief, but they don’t eliminate your financial obligations. During the pause, interest continues to accrue. Once the break ends, that interest is added to your loan balance—a process called interest capitalisation.
This means your total loan amount increases, and so do your future repayments.
What Is Interest Capitalisation?
Interest capitalisation occurs when unpaid interest is added to your loan’s principal. Instead of paying interest monthly, it accumulates and becomes part of the loan balance. This results in a larger debt over time.
For example, a six-month pause on a $350,000 home loan could add $9,800 in interest. To repay the loan within the original 30-year term, your monthly repayments would need to increase by $60.56—from $1,709.22 to $1,769.78.
When Is Interest Capitalisation Used?
Lenders may offer interest capitalisation to help borrowers manage financial stress. Some investment loans include this feature from the start. The Australian Taxation Office also recognises its use in complex investment loan structures.
How It Works in Practice
Let’s say you pause your $350,000 home loan for six months. During that time, interest builds up. At the end of the pause, the lender adds that interest to your principal. From then on, you pay interest on the new, higher balance. This is similar to compound interest—except you’re being charged, not earning.
Key Takeaways
-
Interest capitalisation lets you pause repayments temporarily.
-
It increases your total loan balance and future repayments.
-
While it offers short-term relief, it can cost more in the long run.
-
Always talk to your lender if you’re struggling. They may offer hardship variations or other support options.
