Concerned about meeting your mortgage payments? It might be time to take a holiday

In our current state of hibernation (sounds a little better than isolation), there are obviously many borrowers concerned about how they are going to meet their ongoing mortgage commitments. Fortunately, support has come from our governments in the form of economic stimulus such as the JobKeeper initiative, along with assistance from many of our banks. The key contribution from our lenders has come in the form of a “mortgage holiday”, but what does a mortgage holiday mean and is it the right move for you?

How does a mortgage holiday work?

A mortgage holiday means borrowers can simply pause their mortgage payments for a set period. For each individual bank, the process of freezing your loan payments may be different. Below are some of the different approaches that CBA, Westpac, NAB and ANZ are offering to their customers.

All the major banks (CBA,  NAB Westpac and ANZ) are offering their customers the ability to pause their mortgage payments for up to six months. CBA and ANZ banks are allowing borrowers to extend their loan term by six months,  so that the monthly payment remains the same when they start back up again.

Westpac is currently allowing those who have lost their job or experienced a decrease in income to contact them to discuss a three-month deferral, with another three-month extension possible after a review. NAB are allowing a deferral of up to 6 months too. When NAB and Westpac borrowers loan payments start back up again, they will be higher as the loan term remains the same and the deferred interest is simply added onto the loan (also referred to as interest capitalisation).

What are some of the other banks offering?

AMP, Bank of Australia, Bank of Melbourne, Bank SA, ING and St George are all offering the opportunity for customers to request a 3-month payment holiday, with the opportunity to extend for another three months following a review.

Bankwest, BCU, Bendigo, HSBC, Macquarie and ME Bank are offering a 6-month mortgage payment holiday for those affected financially due to COVID19.

Will this mortgage freeze negatively impact my credit score?

A credit report contains a track record of your borrowing activity and is relied upon by banks when they are assessing your application for new finance. Initially, it was understood that those borrowers who were electing to take a mortgage holiday would have their credit score impacted, however common sense has prevailed and this will no longer be included on the credit report for those borrowers whose mortgage was up to date pre COVID19 and then elected to pause their payments.

What are your alternatives if you are concerned about making your payments?

A mortgage holiday may seem like the best way forward, but there are other options that you can explore that may be more suited to your personal circumstances. These options include:

Interest rate review

• Speak to your mortgage broker or bank to see if your current interest rate is competitive. Rates have changed dramatically over the last 24 months and rates that begun with a 3% or 4% are no longer as competitive. Current fixed rates are as low as 2.19% for some borrowers, so now is a great time to review your rate. An interest rate saving of 1% on a $1m loan equates to a saving of $10,000 in interest per year

Request an interest only loan

• Talk to your bank or mortgage broker to see if it is possible for you to switch to an interest only loan, even if only for a short term. Loans that include a principal and interest payment, typically have a greater impact on a borrower’s monthly cash flow

Reduce your payment amount by extending your loan term

• Look at having your loan term extended so that you can permanently bring down your monthly payment. Generally, loan terms can be put in place for up to 30 years, so re-extending the loan term will reduce your payments on a more permanent basis. This could be important to borrowers who foresee a reduction in their income lasting longer than the six-month payment holiday

It’s not a one size fits all approach

Making changes to your loan comes with considerations and every borrower’s situation will be unique. Director of Orium Finance, Luke Heavey, believes borrowers making changes to their loan structures should consult their mortgage broker or bank prior “It’s not a one size fits all approach. For some borrowers extending their loan term to permanently reduce their monthly payment could provide the silver bullet, however for other borrowers this could simply result in them repaying more interest over a longer term”

“Additionally, some borrowers could benefit from a multi-tiered approach that utilises several strategies to achieve the best results. For example, we recently workshopped a client who was on a principal and interest loan of 3.14% and paying approximately $10,000 per month. By reducing their rate down to 2.19% and securing an interest only term, our borrowers’ monthly commitment has more than halved. Our client is now able to get through this period without getting behind on their payments and has a more manageable medium term solution moving forward. They plan to convert back to principal and interest once they’re confident their situation has stabilised”

Is their any downside to taking a mortgage payment holiday?

For some borrowers, a mortgage payment holiday could be the right move (and only move) to allow them to get through this period. But for those borrowers with options, it could be prudent to take a different approach. Whilst credit agencies have confirmed borrowers credit reports will not be negatively impacted due to a COVID19 payment holiday, what we do not know at this stage is how other lenders will look at those borrowers in the future.

For example, a borrower on a fixed rate who takes advantage of a mortgage deferral now, may find that their ability to switch to cheaper rate with another lender in the future is more difficult. This could also impact borrowers who are looking to switch lenders in the future to achieve a certain outcome. An example of this would be a borrower with one partner on maternity leave who is looking to undertake a home renovation or move to a bigger home; but needs to switch to a lender who has a more favourable credit policy for maternity leave.

We understand that more than ever our lending environment is constantly evolving, and we recommend you speak with a finance professional before undertaking any changes to your loan structure. The team at Orium Finance are here to help you, your family, or your friends, so please get in touch by clicking here if you wish to discuss your options in more detail