Here's how you might be able to keep on top of your home loan

Sunday, 29 March 2020

If your income is looking a bit shaky, you may be wondering how you'll pay the mortgage for the next few months.

There has been a lot of publicity about mortgage holidays in recent days, but that is not the only option available to you.

Here are a few ways you could keep on top of your mortgage obligations, even if you have less money coming in.

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MORTGAGE HOLIDAY

The most high-profile option at the moment is a mortgage holiday. It's probably better to think of this as a 'payment deferral' rather than a holiday, though.

Your payments are put on hold but interest continues to be charged on your mortgage for the period you're not paying.

That can add tens of thousands to the cost of your loan. A six-month repayment holiday would add about $15,000 to the cost of a loan for someone with a $500,000 mortgage at 4 per cent, or about an extra $72 a month once payments began again, according to financial research site MoneyHub. If you didn't increase your repayments after the holiday and just extended the term of your loan, you'd end up paying more than $35,000 more.

Normally, a mortgage holiday would show up as a negative factor in your credit score but the banks are liaising with credit agencies to make sure that doesn't happen at the moment.

If you don't have enough of this right now, it doesn't have to mean disaster for your home loan.

Broker Glen McLeod said people could request a six-month holiday and then reduce that if they found they did not need it.

PRO: No payments for up to six months.

CONS: Expensive over the long term.

MORTGAGE HOLIDAY PLUS VOLUNTARY REPAYMENTS

Another option could be to put your loan on a holiday but continue to make voluntary payments as you can, to keep on top of your interest bill.

You would need to get in touch with your bank to work out a way to make payments on an ad hoc basis.

Another option could be to save up as much as you can in your bank account – then, when you're back on your feet and know that you can afford to resume normal mortgage payments, use it to pay off one chunk off your loan.

Banks will usually allow you to pay off up to an additional 5 per cent each year without extra fees.

PRO: Your extra repayments can help to offset the growing interest bill.

CON: It will take extra willpower to do this on a voluntary basis.

INTEREST-ONLY

You can opt to move your mortgage to 'interest-only' payments. That means that you only pay the interest owing on the amount you've borrowed. You don't actually pay back any of the principal sum.

Mortgage broker Bruce Patten said there would be no break fees charged for anyone who wanted to go on an interest-only term or repayment holiday at the moment.

PRO: You don't fall behind.

CON: You're not getting ahead. If property values slip, you could find your equity drops.

RESTRUCTURE

When you first take out a loan, you usually set it up to pay it off in 25 or 30 years. Over time, your remaining loan term reduces.

Upping mortgage payments by $10, $20, or $30 a week makes a huge difference to the time it takes to repay the loan, and the total interest paid.

If you have been paying your loan back for a while and you need to cut your repayments, you may be able to restructure and stretch your loan back out to a 25 or 30-year term again. That means you'll have less to pay each month, although you will pay more in the long run.

There would often normally be fees associated with this sort of restructure but Patten said banks were waiving them for Covid-19-related cases.

PRO: You'll reduce your payments and still be paying off your loan.

CON: You'll pay more interest over the life of your loan because it will take you longer to get rid of it.

LOOK FOR A CHEAPER INTEREST RATE

Interest rates have fallen still further this year. If you fixed your loan a couple of years ago, you may be surprised at the difference a new rate will make.

If you're nearing the end of your mortgage term, you will be able to refix on to a cheaper rate just by telling the bank which fixed (or floating) term you want.

If you still have some time to run on your fixed term, you'll need to discuss how lenient the bank is willing to be about charging you a break fee. These are normally charged to recover the interest the lender misses out on because you've changed to a cheaper rate.

PRO: Won't derail your efforts to get rid of your mortgage.

CON: Harder to do if you're not coming to the end of a fixed-term, or currently floating.