We are a nation now facing financial hardship with three million Australians predicted to lose their jobs during the coronavirus outbreak and unemployment rates soar to the highest since 1932. If you are one of these three million, it could have you questioning how you’re going to get by and what options are available to you to save on your mortgage debt.
One option to consider is pressing pause on your home as some lenders are offering deferral on payments for up to 6 months, but what are the pros and cons of this option and what should be considered before taking up this offer? What else might be available?
Deferring your loan means you are not required to pay interest or the principal amount of your loan during the agreed period. It is important to note the interest and principal you would have paid during this period will, in most cases, be added to the loan total. Additionally, generally, the term of the loan is not altered. This means that your payments will increase after the freeze period to ensure your full loan is paid off in the original set timeframe e.g. 25 years. Bankwest, CBA & Macquarie are extending the loan term out by 6 months, so the repayments are not increased when they come off the pause.
The main cons here would be the possibility of payments being even higher if the banks opt to increase payments after the break to keep the term as-is. The other option of extending the term also means the client will be paying the loan off for longer”. Says Carol O’Shea, Credit Adviser at Invest Blue.
“Each lender or bank will have different terms and options available during this period, you can find information on your lender’s website to find out what applies to you. Approval will be on a case by case basis but in most cases, lenders are not asking for any evidence at this initial stage.”
Your credit rating will not be affected by deferring your loan during this period, lenders have advised they will not be reporting payment pauses as arrears.
Deferring your home loan isn’t the only option available to you when it comes to your home loan payments, here are some other options to consider:
Repricing your loan
This is an option most will be able to utilise. Repricing your loan means changing your loan with the same lender, unlike refinancing which is switching banks. This means you may be able to take advantage of new offers such as a lower interest rate, given that the RBA cut rates by another 0.25% recently, most lenders are also decreasing rates for their customers. Depending on your loan agreement, you may be entitled to reprice your loan at no cost. The value of your total loan will also be reassessed, as a result, you may find you can reduce payments by lowering the total loan amount on your loan if you’ve already paid a significant amount off. Invest Blue’s Credit Advisers have already assisted a few clients to reprice their loan since the outbreak.
Equity is the difference between the full value of your home and the amount you have owing on it. Accessing your equity in most cases requires you to refinance your mortgage. For example, your house value is $800k and you only have $370k left on your mortgage, you to have $430k in equity. Banks usually lend at least up to 80% of the value of the home. In this example, there is potentially a $210k of equity available.
When facing unemployment this option is more difficult as you may not have the required income to service an extra funds as you did previously,” Says Geoff Murray, Lending Manager and Credit Adviser with Invest Blue.
Debt consolidation is combining two separate loans, for example, your car loan and mortgage, together into one loan which may assist in reducing repayments. This option, similar to leveraging equity, is also difficult for those going through financial hardship as without an income you will not be approved for additional funds.
Utilising offsets and redraws
If your loan has an offset account attached to it, there may be an option to utilise these funds instead of pausing your mortgage repayments. You could also use your redraw amounts during this time which are additional repayments you have made on top of your scheduled repayments.
How to proceed
When deciding what option is right for you, it is best to take into consideration your situation and loan type.
Our team of credit advisers can assist you with providing the information related to your specific lender and discussing what options are available to you during this time and what exactly each of those options means for you.
We encourage you all to read our article on financial benefits available to you during covid-19 outbreak and regularly checking our market updates for relevant information. If you find yourself unsure of what to do with your finances during this time, or simply want to discuss your options, don’t hesitate to contact us.
Speak to us today to learn more about this.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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