Mortgage “Relief”: is it really the answer you need?
With the Covid-19 pandemic rapidly expanding into a national economic crisis, we’ve all seen how the banks are allowing people to “pause” or take “repayment holidays”. Our institutions are looking for ways to support its citizens in the face of the coronavirus pandemic, enacting rapid legislation designed to fight against economic downturn, and most banks are allowing owners to defer payments for up to 6 months and extend their loan terms based on deferral.
But this mortgage relief measure is not necessarily going to be helpful to homeowners and investors in the long-term, and may even end up being more beneficial to the banks themselves. Here’s what you need to consider if you’re thinking about delaying and capitalising your repayments.
Why mortgage relief might actually cost you more
In the long run, claiming mortgage relief may end up costing you more money. This is because mortgage relief is meant to give homeowners time to get back on their feet — not save them money. All banks have announced that interest will be capitalised, meaning that the interest you’re not paying during the deferral period will simply be tacked onto the outstanding loan balance – and a larger loan balance means more interest to be spread over an additional period. If your balance and interest cost is going to be more than when you started, it’s difficult to process these extensions as much of a “relief”.
The good news is that mortgage relief isn’t the only way that homeowners are being given a light at the end of the tunnel. The RBA has drastically reduced its cash rate and has kept it low, making it easier for homeowners to afford their repayments. We’ll look more at how refinancing can serve as an alternative to mortgage relief.
Why Refinancing Your Home Loan Is a Better Idea
There’s no doubt that some homeowners will be at a financial loss during the coronavirus crisis. Some may only have the option of taking the deferral or else risk falling too far behind. But for those who do have the possibility of refinancing, this is likely a better decision.
With the economy as it is and the rising anxiety over job security and cash flow, homeowners shouldn’t take the risk of owing more on their property once the 6-month mark has come and gone. Considering the uncertain state of the housing market, it’s especially important to plan ahead.
With the cash rate as low it is, you can save thousands of dollars — and not just spread out over the course of your 30-year mortgage. Depending on the rate of your current mortgage, the refinancing changeover can put more money back in your pocket right now. Paying less on your mortgage gives you the opportunity to take care of everything from other debts to general household expenses.
And as always, homeowners should be thinking about their savings and building it up while they have a chance. If the illness does continue to spread and more lives are put at risk, more jobs may be put on hold temporarily. Putting money away now to prepare for future events can give you a strong cushion to soften the blow if you do suffer future financial loss.
How to Know If You’re Eligible for Mortgage Relief
Conservative estimates are that at least a million people will lose their jobs over this crisis, and Westpac is forecasting unemployment to reach 7% by October. If you still need to access the immediate short-term, the first priority is to ensure you’re eligible.
Again, the terms of qualifications will vary from lender to lender, but many banks have stated that only customers who were directly affected by COVID-19 (such as people who have lost their jobs because of business closures from COVID-19) will qualify. Some banks, such as NAB, are not requiring customers to provide evidence that they were affected, while others, like Westpac are evaluating each request on a case-to-case basis. It should be noted that Westpac is extending mortgage relief for three months with the option to reapply for an additional three months.
CBA may ask you to make a formal declaration, while ANZ seems to be extending this benefit to anyone who is current with their payments. Other smaller lenders may require additional support or paperwork to check if you are eligible for these benefits.
Talk to an Expert
Before you talk to your lender about the qualifications for mortgage relief, call Shore Financial to discuss your refinancing options. Not only can we give you more information about how the cash rate will affect your payments, we can also walk you through how much extra you’ll pay in interest should you choose to take advantage of mortgage relief. Once you adequately compare the two sets of numbers, we can help you make an informed decision to secure your finances.
Let Shore Financial help you get certainty through uncertain times. Contact us today to find out how you can refinance your home loan and put thousands back into your pocket for the rainy days ahead.