As lockdown fatigue sets in – and income is squeezed in households – families are again seeking mortgage repayment holidays.
The Australian Banking Association reports that almost 15,000 borrowers have deferred their payments since July 8. Of these, more than two-thirds were in New South Wales. Adding in deferrals on business loans, 80 per cent of which are in NSW, the figure has grown to more than 20,000.
With lockdowns now in Queensland and Victoria, too, that number is set to explode. In the initial COVID-19 shutdown last year, almost 500,000 home loan holidays were granted.
However, there is more you need to know about mortgage repayment holidays than the immediate financial relief they provide.
Firstly, these repayments are not forgiven. They are rolled into your loan and increase its value. This means that if you do not make extra payments down the track, you will end up paying more interest.
Sure, it is good of the banks to provide repayment holidays but they still benefit in the long run.
However, there is another, more significant way you could be disadvantaged… this time affecting people who are ahead on their mortgage payments. Any overpayments you have made could be subsumed into your loan balance.
It has long been in loan contracts that a lender can snaffle any additional money you have sitting in a loan if you get into financial trouble. They can take this off what you owe them.
Even if your lender is not doing this, it may approve a repayment holiday but then still take your regular mortgage payments from your previous overpayments. That is probably not what you intended when you asked for a break!
It may be prudent to redraw any excess funds you have overpaid on your loan before you ask for a repayment holiday. And to the credit of many banks, that is what they are advising their customers to do. However, if your lender has not mentioned it, be sure to ask.
Still, don’t expect a positive response if you are on a fixed-rate mortgage.
Fixed-rate mortgages typically have no redraw facility. In this instance, if you need a repayment holiday, recapitalisation of the loan may be inevitable.
Assuming you can get your surplus out before you hit pause on your payments, what to do with these funds instead?
Where possible, the money should go into a mortgage offset account that runs alongside your home loan. This saves you an identical amount as if you instead sat overpayments directly in your loan. There are strategic advantages in doing this, too.
By paying extra into an offset account, the loan balance doesn’t technically fall… only the interest you pay falls. The huge advantage of this is keeping your options open for the future.
If you want to relocate later, a nice home deposit might be sitting readily available in your offset account. You could even take this further and hold on to your initial property to rent it.
Because your loan balance has never technically fallen below your scheduled repayment terms, it could be a viable investment property.
The usual approach for an investment property is to maximise tax deductions, including for interest.
Whether you intend in the immediate future to apply for a repayment holiday or not, your finances will be safer and more flexible with an offset account. By parking every single dollar you have in one, you could get out of debt years earlier.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek their own professional advice before making financial decisions.
Article Source: www.brisbanetimes.com.au