With at least one million Australians currently facing unemployment and many more of us in an uncertain financial position as a result of the COVID-19 pandemic, mortgage repayments are a hot topic.
Recently, the big four banks announced that they will allow Australians to pause their repayments, and many Apt Wealth Home Loan clients are asking if this is a good idea. The reality is that there is no one-size-fits-all approach here. It largely depends on your individual circumstances, goals and current financial situation, and I strongly encourage you to speak to your financial adviser or mortgage broker before making any moves that could impact your future.
If you’re one of the millions of Australians wondering if it is the right move, you should seek expert advice, however, there are a few things you can weigh up before deciding on your next step.
Do you need the cashflow for basic living costs?
The first and most important question is, do you actually need this extra cash? While a repayment holiday sounds like a good thing, it’s important to remember this isn’t free money, and it will impact your repayments in the future and potentially the life of your loan.
Essentially, your lender will likely continue charging you interest and capitalise this into the loan amount. This compounding interest will most likely result in higher repayments once the term of the repayment pause is up.
Do you need it immediately?
Lenders have the option to refuse extension of your hold period. They may initially agree to a three or six month pause, but they don’t have to continue this for any longer, so exhausting this term earlier than needed could be a mistake.
A good question to ask yourself is what will you do with the extra cashflow? If the answer is that you will meet the basic costs of living, food, utilities etc., in the immediate future, it may be that there is little option. If you are in this situation, it may also be worth exploring whether your suppliers, such as utility, internet and phone, can defer bill payments under hardship clauses as a first step. Typically, this shouldn’t cost you extra in the long run so may be a better first option.
If the extra cash simply means you won’t delve into your savings, you need to decide whether this actually makes financial sense. Is it worth extending your mortgage and increasing your repayments to keep cash in the bank? This really does depend on your individual circumstances and your current and future costs, so talking to your broker or planner can help you understand the true financial impact to make an informed decision.
Do you have other options you can make use of?
If you are looking to stabilise your costs to provide some certainty rather than needing to cut costs immediately, one option may be to talk to your lender about going on to a fixed rate loan for a period of time. Whether you can do this will depend on your lender and the terms of your loan, but many are open to this option as a way to provide more certainty for all parties.
If you have a redraw facility in place, you may also consider letting this decrease to cover loan repayments. Of course, this will also have an impact on interest, but it will free up cash that may be needed in the short term.
Some lenders are open to extending interest-only loan periods, and again, this will have a long-term impact, but may provide some short-term relief for borrowers.
Can I still switch lenders to get a better deal?
Exploring whether you can get a better deal with another lender is still a viable option. Lending criteria hasn’t yet tightened in response to COVID-19; however, lenders may want to see more recent employment and income verification and the process may be more stringent. If you are employed in an at-risk industry, like hospitality or tourism, it is still possible, but it could be a slightly longer process as you may be asked to provide more details and supporting documents to prove ongoing income.
If you haven’t spoken to your broker already, it’s a good time to pick up the phone and discuss your options with your current lender or a new one. It won’t cost you anything and it might save you money, so it’s well worth the investment of your time.
At the end of the day, whether you should use any relief options your lender is putting out there really depends on two key things – what you will do with the extra cash and whether it makes sense for your financial situation and goals. Speaking to your broker or financial adviser is the best step to evaluate the benefits and impacts, so you can continue to live for today while planning for tomorrow.
For the latest COVID-19 financial updates visit: Apt Wealth COVID-19 Hub
General Advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.