Affected by COVID-19? There might be a better way to ease financial pressure than taking a mortgage holiday.
As of mid-May nearly 3 million Australians are asking for a rent reduction or mortgage repayment pause as the coronavirus pandemic wreaks havoc on Aussies’ ability to pay bills.
Of those 2.9 million Australians, 1.2 million are homeowners who have already contacted or plan to contact their lender for a deferral in their mortgage repayments, recently released Australian Banker Association’s (ABA) statistics reveal.
Many major lenders have offered to put borrowers’ home loan repayments on hold for six months.
However, LJ Hooker Home Loans franchise owner and lending specialist for Melbourne East, Rav Maggo, warned Australians to be cautious in taking up the offer.
“Whether you own your own home or are renting, it’s time to re-evaluate your expenses and see where you can cut down,” she said.
“If you have a home loan, a pause in your mortgage payments should be your last resort.”
That’s because even though homeowners can pause their repayments, the interest will still accrue. So over time the extra interest costs to you could be substantial.
In fact, homeowners with a $500,000 loan who had spent 10 years paying it off with an average variable rate of 3.90% would be slugged an extra $11,127 over the remaining 20 years of the loan if they took up the six month pause.
And homeowners who take up the pause with a $400,000 loan would still need to pay an extra $8,902 over the remaining 20 years.
But that could blow out to an extra $17,000! Borrowers need to be aware that it’s a repayment holiday, not an interest holiday. In fact your lender may well make extra money from your repayment holiday.
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Rav Maggo advises “There are better ways. If you can get a lower rate on your home loan, that’s going to save you potentially hundreds of dollars a month right there if you are struggling.”
And, she continued, borrowers who decide to extend their loan by six months, rather than increasing their repayment sizes at the end of the six month period, may well be worse off.
“You will ultimately pay interest on interest,” she said, flagging that borrowers with $400,000 loans are looking at as much as $17,000 added to their loan if they choose to extend the repayment period.
So what can you possibly do instead?
Rav Maggo said borrowers should consider looking for a better home loan deal. And the best part is that a lending specialist will do all the hard work for you, and help you compare variable and fixed rate options.
A better option for you may be to look into getting a lower rate on your home loan first if you are struggling to make your repayments.
While a mortgage deferral or holiday sounds appealing in the short term, you need to seriously consider whether you’ll be able to afford this ‘holiday’ in the long run.
A home loan refinance may save you enough to avoid having to pause repayments.
COVID-19 has hit the economy hard but the silver lining is that home loan interest rates have never been lower.” Rav Maggo says.
The critical step is to look for an interest rate that begins with a ‘2’.
“There are potentially thousands of dollars to be saved by a simple switch of your home loan” Maggo said. “And the best part is that it’s really easy with the help of a lending specialist – you can do it whilst sitting on your couch!”
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.