Your loan deferral is ending. What happens now?
Financial assistance during the pandemic has come from all quarters to ensure most Aussies can chart a course through these trying times.
There have been government assistance packages and stimulus spending. Community groups and other bodies offering charitable support or advocacy.
But it was financial institutions who devised what would be among the most widely utilised strategies to help bolster the financial resilience of Australian households.
Very early on in the shutdown, major lenders agreed to allow most borrowers to defer their loan repayments for a six-month period.
It allowed their clients to buy some time. A half year’s relief from having to contribute thousands of dollars a month toward covering loan commitments felt like a Godsend. We could re-prioritise essential spending and work toward ensuring we had secure employment or assistance income while the moratorium was in effect.
But it certainly wasn’t ‘free money’. The terms of the deferral meant that any unpaid funds would be capitalised back into the loan, meaning you would be paying interest on the total deferred over the course of the loan period.
Still, it was a welcome offering from lenders, and we Aussies took to it in droves.
According to news reports, the Australian Prudential Regulation Authority (APRA) said payments on mortgages worth a total of $192 billion had been deferred in the period to 31 May, 2020, which represented about 11 per cent of all residential mortgages.
But many of those who’ve been on deferral will see their full repayments reinstated come the end of this month (September) and it’s brought some anxiety to many.
If you’re among that number, what can you expect over the coming months especially if you’re still under financial pressure?
Is the end nigh?
Firstly, let’s address a long-held mistruth about banks that might help put you at ease.
Despite the less-than-favourable perception of financiers among the public, seizing a borrower’s assets is not their primary agenda.
Financiers make profits by lending money and collecting interest over a long time period. They do not maximise returns by acquiring assets and tying up time, personnel and resources disposing of those assets in an often vein attempt to recoup the balance of a loan.
Secondly, and just as importantly, the robust banking industry we have in this country is as keen as any sector to help support Aussies in need. They understand what’s happened to borrowers as a result of the pandemic – with job losses and hits to income – was not of their doing. A strong economy is good for everyone – including bankers and their shareholders – so if they can offer support at this time, they will.
If you’d like further proof, consider this. A loan repayment deferral during the pandemic will NOT be used against a borrower in future loan applications. This has been made abundantly clear to those of us in the mortgage broking business.
If you’re still cynical about a bank’s motivations, then at least consider how bad the PR would be for lenders if during a crisis, they started repossessing homes and putting families onto the street. The repercussions would be enormous.
So, I firmly believe lenders want to find solutions that keep their borrowers on the books and the community safe as we continue to navigate the crisis.
What are the solutions?
If your repayment deferral period is coming to an end but you still need assistance, what are your option over the coming months?
Well, you can ask for an extension to the loan deferral period.
On 8 July 2020, the Australian Banking Association announced member banks would be extending eligible customers’ deferral periods to the end of March 2021, however that extension was not automatic and would require reapplication.
Australian Banking Association CEO Anna Bligh has been quoted as saying, “This next phase of bank support will avoid a ‘cliff’ for customers in September and give them the breathing space they need to work with their bank and get back on their feet financially.
“Those who are able to repay their loans will resume doing so, which is in the best interests of those customers and allows support to be directed to those who need it. Encouragingly, many customers have already chosen to resume making repayments.”
A second option is to refinance. Interest rates are at historic lows. In addition, many of us who were worried about our employment status at the start of this crisis has found ways to adapt and thrive this year. It’s worth noting while the July unemployment rate was historically significant at 7.5 per cent, the August measure came in at 6.8 per cent.
So, if you have the ability to refinance (and the best way to find that out is to speak to a mortgage broker) then there might be an opportunity to strike an excellent deal on your loan at present.
There are also some great cashback offers available to you as we recently wrote about here https://intuitivefinance.com.au/are-cashback-offers-worth-it/
There are other possible solutions too. For example, many lenders will consider reverting your loan to interest-only for a year, thus reducing your monthly repayment while not adding to your principle. This will help borrowers buy a bit more time, but also avoid the capitalised deferral amount and its related interest cost becoming a burden in the long run.
Expect though, this time around that you will be asked more questions and that you’ll likely have to prove that hardship still applies. If this is the case, then don’t worry, the banks will support you.
But if you just want to extend and you aren’t in genuine hardship, then this time around it might not be so easy.
Remember, when the 1st wave of Coronavirus hit the country, the whole nation acted and every lender and every borrower did not know what was about to hit us. Now we have a greater understanding and whilst states like Victoria, who are experiencing still a very harsh lockdown, most other states have resumed to business-as-usual and are living with the Virus. You only needed a phone call then and your loan was deferred.
The end of the loan deferral period will be stressful for some, but don’t be paralysed into inaction. Instead, seek advice from a mortgage broker and discover what options are available to help you through the next few trying months.