Author: Matthew Baker, Personal Mortgage Adviser, Apt Wealth Partners
As a result of the COVID-19 pandemic, so many Australians are dealing with an uncertain financial position, with at least one million people facing unemployment. This means the topic of mortgage repayments is at the forefront of many conversations.
When the Ďbig fourí banks announced the news that Australians can pause their mortgage repayments, many Apt Wealth Home Loan clients asked the question: is this is a good idea?
It is important to note that there is no ideal approach, and depends largely on your personal circumstances and goals, plus your current financial situation.
I strongly encourage you to speak to your financial adviser or mortgage broker before making any decision that could impact your future.
If you're one of the millions of Australians wondering if pausing your repayments is the right move, you should seek expert advice. However, there are a few things you can think about before taking your next step.
Is the extra cash needed for your basic needs?
Do you actually need this extra cash? This is the first, and most important question to ask yourself. Remember - this isnít free money. A repayment holiday may sound like a good thing, but it will impact your repayments in the future - potentially extending the life of your loan.
The likely scenario is that the lender will continue charging you interest, capitalising this into the loan amount. The compounding interest is likely to result in higher repayments once the repayment pause ends.
Do you need the cashflow immediately?
Lenders refuse extension of your hold period. While they may agree to an initial three or six month pause, they donít have to continue this for any longer. This means it could be a mistake to exhaust this term earlier than required.
Ask yourself: what will you do with the extra cash? If you can meet the basic costs of living, food and utilities in the immediate future, you may have few other options. As an alternative first step, instead explore whether or not your utility, phone and internet suppliers are willing to defer bill payments under hardship clauses. This shouldnít cost you extra in the long run so may be a more feasible option.
If having extra cash means avoiding dipping into your savings, you need to decide whether this actually makes sense to your finances. Is extending your mortgage and increasing your repayments to keep cash in the bank worth it? It all depends on your circumstances, plus your current and future costs, so talking things through with your broker or planner can help you clearly understand the true financial impact and make an informed decision.
Do you have other options?
Instead of pausing your repayments, another option is to talk to your lender about going on to a fixed rate loan for a period of time. This is helpful if you are looking to stabilise your costs to provide some financial certainty, as opposed to needing to cut costs immediately. This option depends on your lender and the terms of your loan, although many are open to this to provide more financial certainty for all involved.
Customers with a redraw facility may consider letting this decrease to cover loan repayments. This will have an impact on interest, but will free up some much needed cash in the short term.
Some lenders may extend interest-only loan periods to provide short-term relieve for borrowers, however, this will also have a long-term impact.
You may be able to shop around for a better home loan deal
Looking into getting a better deal with another lender is also an option - lending criteria hasnít tightened as a result of COVID-19. Lenders may, however, exercise a more stringent process, and want to see recent employment and income verification. The process could take longer if you are employed in an Ďat-riskí industry, such as tourism or hospitality, and you may be asked for more details and supporting documents to prove your income.
Now is a good time to speak to your broker to discuss your situation with your current lender or the possibilities of finding a new one. Itís a phone call that wonít cost you anything, and could save you money, so is well worth your time.
Whether you should take any relief options your lender is offering really does depend on two key things Ė what you will do with the extra cash on hand and whether it makes sense for your financial situation and goals.
The best thing to do is to speak to your broker or financial adviser. They will help you evaluate the benefits and impacts, so you can continue living for today while planning for tomorrow.
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.
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