If you are coming to the end of your six-month repayment pause on your home loan and aren't sure if you should defer, switch or resume - here’s what you need to know.
Were you one of the 800,000 Australians who pressed pause on their home loan when the pandemic hit earlier this year? As we come to the end of the six month ‘repayment pause’, banks are starting to reach out to customers and determine the next steps for resuming payments. The good news is that the Australian Banking Association has announced that they would grant a further four-month extension to customers needing more time to get on their feet. However, there are a few things to bear in mind before you try and take advantage of the extra time.
Pressing pause is not automatic
The first thing you need to know is that this second extension or ‘repayment pause’ is not automatic and will be granted on a case by case basis. If they haven’t already, your lender will be in touch with you shortly to plot those important next steps. Available for those who continue to face reduced incomes and ongoing financial difficulties as a result of COVID-19, this ‘phase two’ extension will only be accessible for those who cannot afford to resume their repayments or vary their loan.
It might be important to note that even in normal, non-pandemic times (wow, remember those?!) - all banks have hardship support programs in place for customers, including the option to take a ‘repayment holiday’ or pause on repayments for a set period of time due to circumstances such as parental leave, injury or extended travel. However, due to the extraordinary and, dare we say ‘unprecedented’ (sorry), circumstances created by COVID-19, repayment pauses were widely made available to almost all homeowners who applied.
This time around though, you can expect it to be somewhat harder to obtain an additional four month extension on your repayment pause, and you’ll have to commit to working with your bank to find a solution that will enable you to resume repayments by the end of the four months.
There will be no ‘phase three’
Since it was first announced, over 800,000 people made the call to defer their repayments throughout this crisis, with banks having to deploy extra staff to deal with demand. Many would have hoped that the pandemic would be a distant memory by now, but given many Australians are still struggling financially as a result of the pandemic, it’s time for ‘phase two’. Depending on your industry, type of work, and ability to access government support schemes, there might still be tough times ahead. And so - if you need to, do not hesitate to take advantage of the extension to the repayment pause, and take away one of the likely causes of your stress right now. Banks have already announced that the repayment pause cannot extend beyond March 2021, so now is the time to do it.
Pausing doesn’t mean no interest
One of the good things about the repayment pause is that it does not count as ‘mortgage in arrears’ and therefore does not affect your credit rating or file. However, it’s important to understand that, when you hit the pause button on your loan repayments, you still continue to accrue interest, which is then added on to your loan balance.
For example - if you took a 10-month repayment pause on a $500,000 loan, you could see your balance increase to $512,083 (calculated based on a five-year-old loan at an interest rate of 2.9% p.a. with a loan term of 30 years). This might be fine if you expect to be able to make up for lost time after the pause is over, but if you’re likely to be in this same situation a year from now, it might be time to consider some other options.
There are other options than hitting the pause button
If you’re no longer eligible for the repayment pause, or you’re thinking that an extension might not be the best option for you - there are still plenty other ways to get back on track with your home loan. From doing a rate review to switching to a cheaper product, there are plenty of tricks of the trade to help you through these turbulent times, and remember, we’re only a phone call away.
To chat through your options, or get help reducing your mortgage costs, give us a call on 1300 664 603 or send us an email ➝ [email protected]
And if you need a free financial counsellor independent of your bank call the National Debt Helpline on 1800 007 007.