Updated: Mar 30, 2020
Things are moving incredibly fast now that we imminently face further businesses closures. We await further clarification in terms of stimulus options, including what “hibernation” might look like to provide a more positive safety net than what is currently available for individuals and their employers.
As it stands currently, the only stumulus option for mortgage holders facing hardship is to “defer” payments, and the myriad of questions around what this means is clogging up lender phone lines.
Here’s the beginning of a Surf Coast Finance FAQ that we’ll build on over the coming days, weeks, possibly months. Feel free to send more questions that are weighing on your mind and we’ll attempt to answer them in general terms.
What does “deferral” of repayments actually mean?
Most lenders are offering 3-6 month deferrals of home loan repayments to clients who lose their income. Deferral means that you still remain liable for the interest over that period, and it will be capitalised over the period of non-repayment. In most cases the situation will be reviewed in 3 months and continue for up to 6 months (at this stage). At the end of the deferral period, clients will be given the option to pay the interest owed in a lump sum, or add it to their remaining loan balance to pay over the remaining loan term. This means that the repayments after the deferral will likely be higher than currently being paid.
How do I qualify for a deferral?
Each lender will differ in their qualifying assessment, but in most cases, where one or more of the incomes in the household has been significantly reduced or lost at least temporarily, you will qualify on the first hurdle.
However most lenders will also look to see if there are “redraw” or other savings available that would enable the loan to continue to be repaid.
Whether to dip into these savings will depend on how much you have set aside, and how much cashflow continues to flow to the household. Using redraw funds allows you to cease making repayments until the funds have been depleted, and can be an excellent and less stressful option. If excess savings are minimal however, it may make sense to preserve these savings for the imminent rainy days ahead.
If you wish to retain control of how any savings are used, consider moving those savings before discussing hardship options with the lender.
Should we proactively consider deferral if our job is at risk?
Most people’s lives and incomes will be impacted by this crisis. What is important to note is that the current stimulus package option of “deferral” does not create any financial “benefit” aside from repayment timing, and it need only be used if necessary. In fact, any deferral in principal payments, whether optional or as a result of such a deferral, always results in more interest being paid over the life of the loan. There are also other options to consider before or in conjunction with deferral – see below.
You should also refrain from calling lenders until a hardship situation has been substantiated. Some lenders are experiencing call volumes of up to 4,000 per day, and a very high percentage of people are asking “what if” questions. Although it is completely understandable that we want certainty at the moment, in real terms it’s not helpful to the lender, or others who already face severe hardship.
What are the other options to consider?
Use redraw or other savings if available to sustain repayments at current levels. Emotionally this is often the least preferred option, but financially it is equal to or better than other options.
Move the loan to interest only. Normally, this option requires the bank to “re-assess” the borrowers’ ability to repay the loan over the reduced loan term. For example, a 30 year loan with a 5 year interest only period must be repaid over a 25 year term, and the reduced income would need to support this new calculation. For this reason, "moving" lenders and initiating this strategy will not be a viable option for anyone facing any form of hardship. However some lenders will offer this to existing clients as a short term measure.
Reduce repayments via a reduced interest rate. To avoid re-assessment of the loan, this will involve looking at new fixed rate offerings with the current lender. Many lenders have used the emergency rate cut to lock in very low fixed rates, rather than reducing variable rates. Fixed rates are currently available as low as 2.09% for Owner Occupied Principal & Interest Loans. Locking the low rate in ahead of a hardship claim can be quite beneficial.
Will deferring my loan/s affect my credit score?
The offered "deferral" packages being offered by most lenders are an extension of their current Hardship Provisions available to all borrowers who hit unexpected issues in repaying their loan. Under normal circumstances, moving onto a hardship program would affect the borrowers' credit scores and is therefore something that is avoided at all costs. Most lenders have already categorically announced that this will not be the case, however no formal announcement has been made.
Where can I get more specific information about what options are available?
The ATO has detailed policies and FAQs for individuals and small business in the follwoing areas:
We do believe that more favourable stimulus will be announced in the coming days, which will be required as more businesses look to close their doors in the short to medium term. Please know that we are here to help as and when required, and will continue to update you with relevant insights beyond the mainstream media flow.
If you would like to discuss your personal situation with either Lanie or Nicola, please book in a 15 minute consult via our automated booking system.