With close to 800,000 mortgage holders in Australia opting for a COVID mortgage holiday followed by a second outbreak in Victoria, many lenders have now offered a second 4-month mortgage holiday extension. Borrowers can therefore now effectively choose to defer payments right up to January 2021. A lot of experts opine that a mortgage holiday should, however, be used as a last resort. Here’s what you need to keep in mind before opting for another extension.
A mortgage holiday will increase the cost of your loan:
Interest will capitalise during your mortgage holiday and you will need to make up for this with an increase in repayment amounts, an increase in loan tenure or a combination of both based on what your lender allows. In all three cases the cost of your loan will go up.
Increased Lender Scrutiny
The first time lenders offered a COVID mortgage holiday a lot of borrowers felt that in case they experienced COVID caused financial hardship they would not receive timely relief on account of the rush most lenders were witnessing. As a result of this, a lot of borrowers applied and got approved for relief despite seeing no decline in income or change in employment status. This time around, lenders have significantly stepped up the level of scrutiny to ensure that relief is passed on to only those who are in genuine need of it. So, if you are considering a mortgage holdiay extension apply at the earliest and factor in a longer approval time.
Flexibility to restart making repayments
While lenders are offering an extension, they very much want borrowers to view this as a last resort. In addition to checking with borrowers every three months, they are allowing them to explore a range of flexible ways to restart making repayments. For instance, you could consider switching to an Interest-only repayment option. This could help you reduce repayment amounts without increasing the cost of your loan as much as a mortgage holiday. Alternatively, you could also consider refinancing. Given the current rock bottom interest rates, if your home loan is older than two years, there’s a good chance that your rate isn’t competitive. Even a half per cent dip can significantly trim your repayment amount and add cash to your monthly budget.
When the mortgage holiday isn’t a good idea even if you are in a bad financial situation
If you do not expect to see any improvement in your financial situation, it’s best to bite the bullet and see if selling your property is a good idea instead of continuing to dilute your equity through deferment. For instance, if you happen to be an industry like international travel, tourism or a space that is unlikely to rebound anytime soon, consider an honest conversation with your lender. Lenders are supporting and guiding borrowers in the best possible manner to make the most of a property sale.
Whether it is to begin making repayments or opting for a deferment, it’s best to act fast. If you are looking at remaking payments, the sooner you start, the lesser the cost of your loan will go up. On the other hand, if you are considering a moratorium, do so at the earliest as lenders will take longer to issue an extension due to stricter processes and missing a repayment will hit your credit score hard.
It can get overwhelming to make the right choice under pressure. It’s best to reach out to us for the best way forward as per your specific circumstances.