Should you freeze your repayments? Pros, cons and considerations

No matter what you do for a living, and how stable your income might be, life is unpredictable.

Committing to owning your own home, business or commercial property can be a daunting thought because of the uncertainty, but don’t shy away from the opportunities. Rest assured, lenders can accommodate you (more often than not) in times of financial hardship, and the Coronavirus pandemic is one of those times.

If your business or household has been hit hard by COVID-19, you might be struggling to pay the bills and meet your mortgage repayments. Thousands of Aussies are navigating this situation. We’re here to shed some light on your options, including taking a ‘holiday’ from your repayments.

What’s a mortgage repayment holiday?

We’ve seen thousands of Australians lose their jobs, take pay cuts or have their business severely impacted. To help support them during a devastating time, banks are offering mortgage repayment ‘holidays’ (also known as mortgage freezes), letting them hit pause on repayments for a period of three to six months.

While you’re not having to make repayments for this set period of time, you’ll still rack up interest on the money you owe (meaning there will be more to pay later).

How do mortgage repayment holidays work?

As the name suggests, a mortgage repayment holiday is taking a break from your monthly repayments on your home loan or business loan facility. Most lenders offer a three month ‘holiday’ with a possible extension upon reevaluation at the end of the three month period.

If your lender agrees, you might be able to get an extra three months, giving you breathing space for as long as six months.

Each lender has their own policy, so holiday repayment periods vary and how long you can ‘press pause’ for are up to the discretion of your lender.

Who is eligible?

Some lenders will offer all customers the option to take a repayment holiday if needed, while others will grant them on a case-by-case basis.

Generally, your lender will accept a request to temporarily freeze repayments if you’re:

• Facing financial hardship from losing a job or taking a significant pay cut
• Dealing with a serious injury or illness, leaving you unable to earn an income
• Going on maternity or paternity leave

If you’ve lost your job, some lenders may require emails or written evidence of termination when you apply for a mortgage freeze. If you’re still employed but have had your hours cut by at least 20%, your lender might also consider helping you out.

When determining your eligibility, lenders will also look at your repayment history. If you’ve been struggling to meet repayments prior to losing your job (or facing one of the events above) chances of being approved for a mortgage repayment holiday will be lower.

Your lender needs to be confident that this is a ‘once off’, and you’ll be able to get back on your feet in the coming months.

How to apply for a mortgage repayment holiday

Each lender will have a different application process. Contact them directly to find out what’s involved.

Lenders are particularly understanding right now due to the outbreak of Coronavirus. If you have any questions around eligibility, ask your lender and they’ll be able to look into your specific case.

What to consider before locking in your holiday…

While taking a repayment holiday can ease financial strain in the short term, it’s important to understand the longer-term drawbacks.

When you go on ‘holiday’, you’re only pressing pause on the principal portion of your repayments. This means you’re still paying interest on the money you owe. When you eventually get back to paying your principal, you’ll face one of two things:

• Higher repayments to make up for those missed during the holiday period
• An extended loan term

Either way, you’ll end up paying more (due to additional interest) for your loan than you otherwise would have.

That’s why you should only take a mortgage repayment holiday if absolutely necessary. Additional interest could equate to thousands (or tens of thousands) of dollars that you otherwise could have kept in your pocket.

No one wants to pay more money than they need to, but a mortgage repayment holiday could be the difference between keeping your property and having to sell it when the timing isn’t right.

If you want to avoid paying additional interest for a mortgage freeze, there are other options to consider that could help to relieve financial pressure, including:

• Accessing funds in your redraw facility (if you have one). A redraw facility lets you make additional payments on top of your monthly minimum, and then withdraw these funds later, if needed. If you have made additional repayments to your loan, now could be a good time to use these funds towards future loan repayments.
• Asking your lender to increase your loan term, so you repay your loan over a longer period which will reduce your monthly minimum repayments (keep in mind, this adds interest to your loan as you’ll be taking more time to pay it off). Calculate the difference between reducing your repayments and taking a ‘holiday’ from them, to figure out which option works best for you.
• Refinancing your home loan or business/commercial loan to get a better interest rate.
• Seeking financial assistance from the Government if eligible.

COVID-19: Other support measures you might find helpful

Self-employed?

If your business is taking a hit from COVID-19, consider looking into Government support measures available to you, especially if you’re trying to avoid racking up additional interest on your mortgage.

After all, pressing pause on repayments is just temporarily masking the real issue here. Accessing business support can help you maintain cash flow, steady your income and in turn, meet your financial obligations.

Current Government support measures include:

• Cash flow boosts of up to $100,000 for eligible businesses
• Increased threshold to the Instant Asset Write Off (up until June 30, 2020)
• Wage subsidies through the JobKeeper program, which can help you keep staff in the books and save money longer-term

If you need new assets for your business but can’t afford to disrupt your cash flow, Valiant can help you finance the assets you need, giving your business some breathing room.

Depending on the type of finance you choose, security is not always required, so you don’t need to worry about making down payments or putting precious assets on the line upfront.

You can also take advantage of more lenient eligibility criteria for the Instant Asset Write Off if you get in quick.

Chat to a lending expert at Valiant for free, and we’ll give you a simple breakdown of the support available to your business, including finance options tailored to your needs.

By tapping into the help on offer, we hope you’ll come out stronger than ever on the other side of COVID-19.