Freezing Mortgage during Coronavirus (Covid-19)
Thinking of a freezing your mortgage during the this Covid-19 Pandemic? Make sure you know what you are getting yourself into.
The current volatility of market conditions during the Covid-19 pandemic is causing much anxiety for everyone and unfortunately with many people being stood down without pay or even losing their jobs, the top most issue for many people is ensuring that they continue to have food on the table and have a roof over their heads.
Undoubtedly as it has been reported in the news recently, many of the big banks are being sympathetic to an extent with mortgage payments and are currently offering a variety of mortgage payment deferrals or pauses for up to 6 months (i.e. freezing your mortgage) – However, it comes at a price – and you need to be aware of how it may impact you for the long term.
The catch of this mortgage pause is the concept of interest capitalisation – this is where interest you stopped paying during the period of pausing your mortgage payments gets added to your outstanding loan balance.
To give you an example, if you have a $450,000 home loan at an interest rate of 3%, you would be paying $1,125 a month in interest and if you decided to pause your repayments for up to 6 months, the total of $6,750 in delayed payments of interest will be added to your current outstanding balance.
Whilst some of the good news is that it won’t affect your credit rating in current situation should you wish to freeze your mortgage (read more about that here), it may however have a long term impact on your ability pay down that loan, as it becomes a case of owing even more to your bank after this crisis is over.
It is understandable that for a number of people, this may be the only way out given personal circumstances, and whilst your inability to pay your mortgage may hopefully be just a short-term issue, you need to be aware the situation of interest capitalisation may not disappear even in 6 months.
Ensure you have a chat with your bank or mortgage lender to see if there are other options available to you, including switching payments to interest only, refinancing your mortgage with falling interest rates, or even using a redraw facility. Make sure that you research all options available to you and do your calculations before going down the path of mortgage deferral.
Also consider other ways of getting money into your pocket without necessarily freezing your mortgage payments.
- Ask your credit card companies if they can waive interest charges and late fees.
- Check if your car loan repayments can be changed to interest only payments.
- Check if you may qualify for Job Seeker payments – register your intention to claim via your MyGov account.
- You may be able to draw down your superannuation up to a value of $10, 000 for FY19/20 as well as an additional $10,000 in FY20/21 depending on meeting select criteria (seek advice from qualified advisors prior to taking this action).
However, whilst deferring the housing loan may be one area of concern, there may be some of you who are facing additional debts that are also putting immense pressure on you, and you would like to know what all your options are for your complete and total financial position.
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