3 crucial things to know before you defer your loan payments

By Gerv Tacadena

For many home-loan borrowers who are struggling with their finances, a repayment holiday buys them time to sort their budgets out. Think of it as pressing a pause on your mortgage repayments.

The impacts of the COVID-19 outbreak on different sectors of the economy have left a lot of Australians either without a job or with reduced salaries. To support their affected clients, banks have opened their lines for customers who want to avail of a deferment for up to six months.

If you are considering to take a break from your repayments, here are three things you need to know before dialling your lender’s numbers:

1. When you defer, interest will continue to accrue

While a repayment holiday allows you to skip paying for a certain period on time, you will still be charged interest. These accumulated interest charges will be spread out on the remaining life of the loan.

Take note that your unpaid repayments will also be added to your loan balance. This means that after your deferral period, you might find yourself owing a higher monthly payment.

This is one of the downsides of deferrals, as interest could accumulate and you end up paying more than what you would have if you did not defer.

2. The typical repayment holiday is three months

Lenders typically provide struggling borrowers with a three-month deferral period. However, this may change depending on the assessment of your lender and your eventual agreement.

After your initial deferral period, you can request an extension, especially if your financial conditions have yet to recover. It is up to the bank whether they will grant this privilege of not.

When applying for a mortgage deferral, it is crucial for borrowers to show sincerity. You should also assure your lender that you will try your best to get back on your feet.

3. A deferral will not hurt your credit score

When you skip repayments without approval from your lender, you will most likely be tagged, hurting your credit score. This mark on your credit report could stay for up to two years. This will hurt your chances of getting another loan in the future and diminish your negotiating power when you refinance.

When you apply for a repayment holiday, your lender formally gives you approval to skip payments. They key here is communication with your lender. You have to be honest to your lender about your current financial standing to be able to avail whatever support is available.

Should you defer your mortgage repayments?

Mortgage repayment deferral will give you the buffer you need to get your finances up and going again. However, there are other options available for struggling borrowers, particularly those who are paying at an uncompetitive interest rate.

To get a clearer picture of your finances, consider reaching out to a mortgage broker. A broker will be able to help you determine if you really need to defer your mortgage payments. Given their knowledge of the market and their connections with banks, mortgage brokers will be equipped to help you navigate the market and find the right solutions for your needs.

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