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Warning: Think Twice About Taking Mortgage Hardship

A lot of mortgage holders are hurting badly. According to the Australian Banking Association the depth of financial trouble that many are in is reflected in the alarming data that as of April 9 there had been 409,305 inquiries for deferrals for both business and mortgage loans.

As the big banks allow homeowners to put the brakes on mortgage repayments, borrowers are being advised to consider the long-term ramifications. Last month, all the Big Four banks announced they would provide a six-month loan deferral – with a review after three months – as part of their coronavirus hardship measures. Applications are open to customers who lost their job or had their income slashed by 20%.

However, a six-month moratorium results in higher repayments over the life of the loan as interest accumulates throughout the holiday.

Our calculations reveal exactly how much more borrowers will pay if they take the banks up on their offer. Customers who are 10 years into paying off a $400,000 mortgage, and on an average variable rate of 3.90 per cent, would pay an additional $8902 over the remaining 20 years of their loan. That’s equivalent to $37 extra per month!

For those with a $500,000 mortgage using those same variables, that extra amount balloons to $11,127 over the life of the mortgage, or another $46 every week.

Alternatives to taking out a mortgage ‘holiday’

We say borrowers should only enter an arrangement if they have done their homework. The only reason you would want to pause your repayments is if you are facing significant financial hardship. Households affected by the coronavirus pandemic – but not at their wit’s end – have other options available, including:

  • Refinancing and asking their lender for a lower interest rate, or switching to a more competitive rival

  • Organising a temporary mortgage repayment reduction if income has been reduced temporarily (i.e. reduced working hours)

  • Temporarily switching to an interest-only (IO) loan for 12 months to reduce monthly repayments.

The only downside for homeowners in entering an IO loan is they won’t build equity in their home. Considering the current downward projections for property prices, it’s definitely a risk. Repayments will jump up when a loan reverts to principal and interest, as they usually entail high-interest rates. But if you’re really well informed and a savvy borrower, an interest-only loan can work well.

Could mortgage ‘holidays’ alter credit scores?

There are also concerns that taking out a mortgage holiday could affect a borrower’s credit history. Falling behind on mortgage repayments would normally erode credit scores and hinder someone’s ability to acquire new loans for a minimum of five years. But APRA last month said banks should not be treating repayment holidays as a “period of arrears” while the pandemic unfolds.

Seek Expert Advice

All in all, the best possible course of action is to seek to consult with us to get expert advice on the best solution to your situation. Simply call us on 1300 861 143. We are available 7 days a week from 9am to 9pm.

Your Choice Mortgage Brokers Pty Ltd ATF Halo Innovation Trust trading as Heart Mortgage Services - Australian Credit Licence 38643

The information contained herein is of a general nature only and does not constitute advice. You should not act on any information without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances. The views expressed here are not ours. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date.  To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties who are not related to us. These links are provided for convenience only and do not represent any endorsement or approval by us.

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