The true cost of deferring your home loan
When the COVID-19 pandemic struck in 2020 and Australians everywhere were forced to stop work and stay at home, the big banks reached out to affected customers offering to suspend their loan repayments and provide some much-needed financial relief.
So great was the demand for this support, that at the height of the pandemic, the Australian Prudential Regulation Authority estimated one in ten of all home loans were subject to some type of repayment holiday or deferral arrangement.
While the number of deferred loans eased towards the end of 2020, the emergence of the COVID-19 Delta strain saw hardship assistance requests again rise in August 2021, almost tripling from 20,000 to 57,000 cases.
This surge reflected the renewed lockdowns in NSW and Victoria and the need by many borrowers to, once again, reduce the financial pressures they were facing by contacting their bankers and arranging to have their loan repayments temporarily suspended.
For many, particularly those self-employed, deferring or reducing their loan repayments gave them some much needed breathing space to review their financial position, find alternate employment and think through their long-term options.
Most home loan deferrals allow the borrower to reduce or suspend their repayments for a limited period without incurring any penalties or having the situation impact their credit rating, as would typically be the case.
The big downside is that the interest owing on the loan continues to be charged and is added to the overall account balance, effectively capitalising the interest, creating an even larger debt.
For new home buyers with relatively small amounts of equity in their home, this can quickly become disastrous. They may soon find their debt is greater than the potential value of the property that their loan is secured against.
Unless you are able to quickly regain employment and ideally boost your regular loan repayments to make up missed payments, you might find yourself struggling to get on top of your loan.
It can also have serious ramifications for anyone nearing retirement who was dependent on paying off their home loan in a normal orderly way before they stopped work. Unfortunately, they may now find their debt growing rather than reducing.
For Paul and Mary, who were both in their sixties and hoping to retire within the next five years, it proved a worrying time, as they faced reduced employment options through lockdowns and struggled to pay their bills.
“Fortunately, we were able to have a long conversation with our adviser in terms of what it all meant for us, and together we put together a strategy that allayed some of our fears and left me sleeping better at night,” Mary said.
“As long as we stayed on track and maintained our income and super contributions, we then should be able to draw down on our super to ensure our home is fully paid when we do retire, so for us, we should be in much the same position overall as we were.”
Others may not be so lucky. The challenge is to be proactive. The sooner you take action to minimise the financial impact of the pandemic, the more options you have and the more likely you will achieve a good outcome.
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