Mortgage deferral deadline — what to do next?

By Gerv Tacadena

Check out the options available for you if you are still unable to resume regular repayments when deferral ends

The COVID-19 outbreak has taken its toll on the finances of many Australian homeowners, affecting their ability to repay their mortgages. Given this situation, financial institutions in Australia provided borrowers with repayment holidays, which will allow them to skip paying for mortgage for at least three to six months.

There remains uncertainty as to whether the impacts of the COVID-19 outbreak on the economy have already been contained. This puts many homeowners in a vulnerable position — after their mortgage deferral ends, what options do they have?

If you find yourself not in a good financial position to resume your regular mortgage repayments, here are some of the things you can work on with your bank:

1. Extend repayment holiday

One of the options you may have is to apply for an extension of your repayment holiday. Your lender will assess your current financial condition and determine how long you can put your repayments on hold.

However, there are several things you should take note of when you defer your loans. The most crucial consideration is the accrual of interest. When you skip paying your monthly dues, you will still be charged interest, which can build up until you start regularly paying again.

Furthermore, the repayments that you have skipped will be added to your loan balance. You will not be required to pay your balance up front when you resume your payments — instead, your unpaid balance will be spread out on the remaining life of the loan. The interest on these outstanding repayments will accumulate, which means that your monthly repayments at the end of your deferral period will be higher.

Some borrowers are afraid that repayment holidays will hurt their credit score — this, however, is only the case if you skip payments without getting approval from your lender.

2. Switch to interest-only payments

Another option that you can consider after your repayment holiday expires is switching to an interest-only arrangement for your mortgage. Only paying the interest portion of your repayment over a certain period will allow you to adjust your finances until such time that you are able to pay your loans.

Switching to interest-only payments is perfect for borrowers who are in a challenging financial position. Going this route will help reduce your monthly outgoings. The typical length of an interest-only period is five years. This can be extended depending on your agreement with your lender.

However, a disadvantage of switching to interest-only is that you will end up paying more interest over the life of your loan. When your interest-only period expires, you might get overwhelmed with the higher dues you have to pay monthly. Also, you should take note that during the interest-only period, your equity in your home will not increase.

3. Refinance to a fixed-rate loan

If you want certainty in your repayments once your deferral period ends, you can ask your lender if you can switch to a fixed-rate loan. Getting a fixed-rate mortgage allows you to take advantage of the low-rate environment.

Having a fixed-rate loan enables you to manage your budget more efficiently, as your repayments stay the same for a certain period. You will be protected from sudden rate hikes.

Reaching out to a professional

Mortgage brokers can help determine the solution that is the best fit for your needs. They can assess your financial health and suggest options that you can undertake as you transition from your repayment holiday. They can also work things out with your lender on your behalf. Reach out to a professional by visiting Your Mortgage Broker.

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