Opinion
How to get a bit of breathing space on your home loan
Nicole Pedersen-McKinnon
Money contributorBack in the blur of the COVID-19 conditions and economy, it’s possible you asked for – and received – a mortgage reprieve.
No one quite knew at the time, even lenders as they issued them, but the home-loan holidays ended up being exactly that: straight-up repayment waivers with your loan term simply extended for the ‘slippage’.
To get loan help over the line explain how you intend to turn your circumstances around and understand that nothing – ever – is freeCredit: Peter Riches
Today, you can forget about pandemic-level mortgage breaks – but you can still get vital breathing space. And it seems lenders concede, and the National Debt Helpline confirms, that tens of thousands of borrowers are doing just that.
Here are the five things you need to know to both secure a new-look home-loan holiday and make sure it helps not hinders you:
1. Most lenders are, mostly, offering a maximum three-month repayment pause. Like in COVID-19, they are fairly readily granting these. But in 2020, there was a possible three months and then, if you were still in trouble, potentially more months on top.
Now, falling further than 90 days into arrears in dollar terms – even if your lender agrees to it – could actually get you into trouble. Those arrears could be three months of paying nothing or, say, six months of making half your required minimum repayment.
New-look home-loan holidays are intended to get people through a temporary bad patch with a little breathing space.
What is the trouble of which I type? At an effective 90 days, your lender could then turn around and require you to pay back every bit you are behind. And fast – even over a matter of months. The issue is this:
2. Nowadays, at the end of a hardship arrangement, your repayments will go up to make up for it. This is to pay off the extra you owe after any hardship arrangement finishes because most lenders are no longer extending loans.
And beyond 90 days behind, it becomes harder to what is called “capitalise” that amount – spread it over the remaining life of your loan.
After this point, you will usually be required to submit a full “capitalisation application” and pass the assessment to do so. Before it, a simplified capitalisation application should be possible.
Neither of these is a new serviceability assessment of your ability to meet repayments and therefore – assuming you resume paying what your lender requires – your loan itself should never be recalled.
But a full capitalisation assessment will be hectic. Lots of documentation; lots of budgetary proof. You want the simplified one.
3. However, the capitalisation team will assess whether you will be allowed to add the small amount you are now behind, to your loan. Over the remaining life of your loan, this will increase your usual monthly payments by only a little bit.
But if they deem that you are now back on your financial feet, or they say you can now stretch to it anyway, that they will deny you capitalisation, and that’s when you will be forced to pay back your arrears in, say, six months.
So, your repayments after a reprieve could go way up.
Know, too, that if you take up an option to go interest-only (so basically mark time for a bit) instead of to entirely pause repayments, despite this sounding smart, they will likely still want interest catch-up contributions from you after that period is over.
This post-COVID time around, most lenders are doing what is required to ensure they extend no loans.
4. In the pandemic, many lenders were taking required monthly repayments from any mortgage overpayments you had sitting directly in your loan, before waiving them under a hardship arrangement. They would typically exhaust your savings first.
Check your lender’s policy now. And consider moving money – before asking for mortgage concessions – to the safety of a mortgage offset or unrelated account.
5. The good news is that a hardship arrangement can no longer hurt your credit score, as it could in COVID. Where one exists, your lender must mark your repayment as on time even if there is no such repayment.
However, there will also appear a note on your credit file for 12 months after the hardship arrangement commences. If you apply for any type of credit – or even a phone contract – in the next year, the provider is likely to take a dim view.
New-look home-loan holidays are not intended for borrowers with ongoing solvency issues due to the current levels of interest and expenses, but to get people through a temporary bad patch with a little breathing space.
To get loan help over the line, use words like that, explain how you intend to turn your circumstances around and understand that nothing – ever – is free.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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