Keep in mind the following information is General Advice and is obviously not personalised for your unique needs, objectives or financial situation. Please get in touch with your advisor before taking any action on the below points so they can advise on the appropriateness of this for you.
With the severe economic impacts of COVID-19, many people are experiencing significant difficulties making repayments on their loans. If you are a part of this group, you might not realise it, but there’s an option to defer repayments.
Who Can Apply
Anyone with a home or a business loan can apply for a 6-month loan repayment pause to ease the financial strain of the outbreak. If successful, applicants won’t be required to make any principal or interest repayments for the next 6 months.
It’s important to note that if you wish to defer repayments, any interest over the 6-month period will be capitalised onto the loan. Deferring payment does not make it a free loan, however, for a time it pauses your payment obligations.
Each lender may treat deferred repayment differently. This means you may find that after the 6-month period, loan repayments may increase because you have a higher principal amount borrowed (from interest capitalisation). This would also mean a shorter loan term in which you must repay. In some cases, lenders may ask for the full 6 months’ repayment plus interest, after the conclusion of the pause – a substantial amount to make in one go.
Therefore, in some circumstances, it may be advantageous to look at switching to an interest-only loan for an amount of time, say 12 months, which may reduce repayments by almost half. This would allow you to avoid bill shock linked to stopping repayments completely for a time. Alternatively, you could also start with an interest-only loan and then defer repayments later, if needed.
Other borrowers may wish to look at refinancing to reduce the cost of borrowing with cheaper rates. Doing so could reduce cashflow, as the loan term may be extended as well. Lenders are providing various rate cuts at the moment; therefore, you may find quite a bit of discrepancy on home loan rates which makes it beneficial to refinance.
Currently, many lenders are treating the deferred repayment application very similarly to the Financial Hardship application. Similar policies are applied whereby lenders ask for information on assets, liabilities, incomes and expenses for any business forecasting over the next 12 to 18 months, or longer.
Lenders are typically only offering deferral arrangements to existing clients. You can expect great difficulty if you plan to move to a new lender and ask a repayment deferral. Additionally, some lenders are offering deferred repayments on business credit cards.
As always, regardless of what you choose, borrowers wishing to alter their financial arrangements should seek professional advice. If you’re interested in deferring repayments, speak to your Morrows Advisor.