The economic impacts of the COVID-19 coronavirus are now being felt around the country with reduced hours, unemployment and the first JobKeeper payment not reaching employers until 1 May1.
Some mortgage providers are offering options to customers affected by COVID-19 that could help them manage the biggest outgoing for most homeowner – their home loan.
One of these options is a pause on mortgage repayments – otherwise known as a repayment holiday – for an agreed period. While this might give immediate relief to budgets under strain, it’s important to understand the long-term implications taking this break could have on the dollar amount you end up paying.
What is a repayment pause?
It will vary depending on the provider, but broadly speaking a repayment pause means you can ask for a pause in home loan repayments for between three and six months.
During the repayment pause, unpaid interest will be capitalised monthly, which means it will be added to your loan balance.
When repayments start again, they may be higher for the remainder of your loan term so you can catch up on the missed payments. Alternatively, your provider may agree to extend the loan term. For either option, you may also end up paying a higher amount of interest over the life of the loan.
What does ‘interest capitalisation’ mean?
It means interest continues to accumulate on the whole amount of your loan balance during the pause. It’s then added on top of the existing amount you owe. Essentially, at the end of the repayment pause, your loan balance will be higher if the loan term does not change. You may pay a higher amount of interest over the life of the loan too, as illustrated below.
Additional cost of a six month repayment pause on a $400,000 loan balance with 20 years remaining*:
|Without repayment pause||With 6-month repayment pause|
|Monthly Repayments – principal and interest capitalised||$2,200||$2,274.43^|
|Total amount of repayments||$526,841
($400k principal and $126,841 interest)
($400k principal and $131,018 interest)
|Total extra cost||n/a||$4,177|
* Note: This is an example and is not reflective of any actual loan. Based on an owner occupier making principal and interest repayments on a loan with a rate of 2.89%pa and no-account fees or charges, and assuming the rate does not change for the remaining loan term. The loan balance and remaining loan term in the example is as at the start of the repayment pause. Actual figures will vary depending on your circumstances. Contact your mortgage provider to understand the cost of a repayment pause on your home loan.
^ New repayment amount when payments recommence after the repayment pause.
Alternatives to a repayment pause
It’s worth knowing there are other options to pausing your mortgage repayments if you’re experiencing financial pressure due to COVID-19. These will differ depending on your specific mortgage, so you must speak to your provider to understand which options are available to you, and the impact on your home loan in the long term including the amount of interest you may end up paying
Depending on your home loan, you may have access to a redraw facility. This allows you to ‘redraw’ or take back any extra repayments you’ve made above the minimum. However, some associated fees can vary from lender to lender, and there may be minimum and maximum amounts you can redraw, so be sure to check.
- Access your offset
Offset accounts can help you pay off your home loan ahead of its term and save money. The balance in your linked offset account is offset against your loan balance, which means you only pay interest on the remaining portion of your home loan. If you have funds in your offset account, you can access the money you have in that account while budgets are tight. Accessing money now will affect the interest you’re paying, but you can start adding to the offset again when things return to normal.
- Minimum repayments
If you don’t have a redraw or offset facility and you’ve been trying to clear your debt faster by paying over and above your minimum repayments, think about keeping that surplus in your back pocket instead and revert to paying the minimum repayment amount only. You’ll have already made gains by paying extra up until now, and it’s a fast and easy way to help your cash flow straight away.
Refinancing is where you replace your existing home loan with a new one that’s ideally more cost-effective and flexible. With record low-interest rates, refinancing may save you money and reduce your repayments. Remember to check with your existing provider to be sure the benefits outweigh the costs of refinancing as certain fees/charges may apply for both discharging your existing loan and applying for a new one. Also, an application process will apply. This means your new lender will assess your financial situation and ability to repay the loan. If you've lost your income or your debts have risen significantly, your application may not be approved.
- Interest-only repayments
Consider asking your provider if you can switch to making interest-only repayments for an agreed period. This means your repayments only cover the interest on the loan without reducing the principal, so the original amount you borrowed will not reduce while you are making interest-only repayments. Repayments will be higher at the end of the interest-only period and you will end up paying more interest over the life of your loan. Credit rules will apply, and your financial situation may need to be assessed before your provider agrees to switching to interest-only repayments and fees can apply
As you can see, a repayment pause from your home loan is just one option available. Speaking to your mortgage provider and considering your unique circumstances will mean you can make an informed decision about what is right for you.
If you need a repayment pause, don’t wait until you’ve fallen into arrears. Approach your mortgage provider as soon as possible and speak to them about the financial difficulties you are facing. They can advise you of next steps and help you get back in control.
What you can do
If you have an AMP Bank home loan, get in touch and together, we’ll help you work out what you need to do.
Talk to a financial counsellor
If you’re suffering financial hardship due to COVID-19, it may help to talk to a financial counsellor who can provide guidance on how to manage your debts and finances. For free financial counselling, call 1800 007 007 or visit the National Debt Helpline.
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