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Easing financial pressures: loan deferrals, refinancing and more

Wednesday, October 14, 2020

When COVID-19 struck, banks gave eligible customers an option to pause their repayments for six months from March, due to the volatile economic climate. Hundreds of thousands of Aussies took up the offer.

Home loan deferrals were due to end in September, but banks announced borrowers who are still experiencing difficulties could apply for further deferrals of up to four months. For those still considering this option, it’s important to understand the financial implications – you may end up paying more in interest over the course of your loan.

And once the deferral period ends, what next? Before making any financial decision, it’s best to seek professional advice about what’s right for you. Here are some of the options you may like to consider in consultation with your mortgage broker or lender.

Increase your repayments

If finances permit, you could increase your repayments when they resume so that you can pay off your mortgage in the same loan term and “catch up”.

Pros:
– You won’t have to extend your loan term to cover the repayments.

Cons:
– You’ll need to budget for the larger repayment, which may create additional financial stress.

Extend your loan term

You may consider extending your loan term from say 25 years to 30. By stretching the mortgage over a longer period of time, your repayments may decrease and remain as close to pre-deferral levels as possible.

Pros:
– If you’re struggling financially, your repayments will be more manageable.

Cons:
– You’ll be paying your home loan off longer and may pay more interest over the life of the loan.

Negotiate a lower rate or switch to a fixed rate

If you’re struggling with your mortgage repayments, you could ask your lender for a lower interest rate or move to a fixed rate loan. These are typically lower than variable rate home loans.

You may even wish to split your home loan – fix a portion, whilst leaving the rest variable.

Pros:
– Fixing your home loan for a set period means you’ll know exactly how much your mortgage repayments are and you can budget accordingly.
– Locking in a lower rate could save you considerable money over the long run.
– Any savings can go back into your home loan or other debts.

Cons:
– If interest rates come down further, your repayments won’t decrease.
– There may be costs to break the fixed rate period if you decide to sell or refinance.
– There may be restrictions on making additional repayments.

Switch to interest-only repayments or make reduced payments

Instead of paying principal and interest, you could talk to your lender about switching to interest-only until you get on top of things financially.

You could also ask about making reduced repayments over the coming months. If you’ve been paying more than the minimum repayment amount, this could be an option.

Pros:
– Fixing your home loan for a set period means you’ll know exactly how much your mortgage repayments are and you can budget accordingly.
– Locking in a lower rate could save you considerable money over the long run.
– Any savings can go back into your home loan or other debts.

Cons:
– Interest-only loans generally charge a higher rate of interest.
– You won’t be making a dent in your home loan balance if you pay interest-only.
– If you reduce your repayments, it may take you longer to pay off your loan.

Ask your bank to waive your fees

There’s no harm in asking, right? If your bank or lender does waive your fees, it may be the difference that allows you to continue to cover your mortgage repayments.

Pros:
– You can free up money to put towards your mortgage.

Cons:
– Some people might feel awkward asking. If this is the case, your mortgage broker can reach out on your behalf.

Consolidate your debt

If you’re paying off several debts and you have sufficient equity, you may be able to roll your debts into your home loan.

Pros:
– You may decrease your interest payable and your monthly repayment (for example if you’re paying off multiple credit cards at higher interest rates).
– One repayment rather than multiple may make your life easier.

Cons:
– You may be subject to Lender’s Mortgage Insurance (LMI).
– In some instances, you may pay more interest over the course of the loan.

Access your redraw or offset facility

If you have a redraw facility and you’ve made extra loan repayments, you may be able to use these funds to cover your loan repayments while you’re going through a tough time financially. Same goes if you have savings sitting in an offset account.

Pros:
– You’ll avoid getting into home loan arrears.

Cons:
– Any money taken out of your redraw or offset account will no longer be reducing your interest.

Let us help you explore your options

As your mortgage broker, there are all sorts of ways we can help you navigate these challenging times. There may be other options we haven’t covered here, so please reach out and we’ll help you put a plan in place.