Batten Down The Hatches!
Lenders have been proactive and are taking the extraordinary step of offering to defer affected customers (business or home loan) mortgage repayments for up to six months. Some have also announced huge reductions in interest rates for home loan and business customers. These are great initiatives, however, we implore you to proceed carefully when thinking about deferring your loan repayments. Do not rush into this. If you feel there are no other options be sure to ask your Lender and/or Adviser the following questions so you fully understand the implications of hardship provisions:
- Is interest capitalized during the deferral period?
- Is the loan term extended?
- What will the expected repayment be at the end of the deferral period?
- Will a repayment deferral period impact your credit score?
- Will you be able to refinance at the end of the deferral period?
Some of our colleagues in the Mortgage Broking industry have already shared cases of their clients who have called Lenders to take advantage of these provisions. Their clients were granted access very quickly and without much discussion at all. They had no idea what this meant for their contracted loan repayments over the long term and further to the above question (number four), they were unaware that Comprehensive Credit Reporting (CCR) is now a key part of most loan approval decisions, so any impact on their credit score may affect their future ability to obtain credit.
What steps can you take now?
A quality business adviser will discuss emergency planning, commonly referred to in business as a ‘Business Continuity Plan’ (BCP), with their clients. Executive teams and IT departments across the country have probably been running on very little sleep over the past few weeks as they enact their own BCP’s, mainly focused on remote workforces and data security. Everyday Australians should also be thinking about how to operate their finances in BCP mode. Think about what you can do now to smooth out any coming bumps in the road that cannot be seen yet. Below is a short list of steps that might help.
- Speak to your Broker or Lending Manager – If you feel like you’re unable to repay your loans over the coming 3 – 6 months then reach out to your Broker or Lending Manager. With a clear head, they should be able to guide you through your options.
- Start a budget – Writing down an income versus expenses budget moving forward is one thing, but it’s very rare for this to match what has actually been happening. Companies have become very good at taking our money via small monthly subscriptions, which are either forgotten about or which don’t seem expensive when considered individually. The rise of ‘tap and go’ payments also makes it difficult to accurately track expenses. Understanding where your money is going right now is critical. There are many software programs that allow full collation of all expenses to linked bank accounts via a data feed. This will help you build a realistic budget and cut out unnecessary costs. It’s time to reign in the spending!
- Understand your equity position – Get a bank valuation completed so you know your true net asset position. It will make negotiating (see below) easier.
- Utilize offset accounts – This can help to reduce interest costs and store any excess funds.
- Understand redraw facilities – Excess loan repayments might be accessible via ‘redraw’. What is available to you? Do you have access to other automatic credit?
- Consider reducing repayments to the minimum contracted level – Most lenders will not bring your repayment down when interest rates drop so your minimum contracted repayment might actually be a lot lower than what you’re paying presently.
- Negotiate a lower interest rate – Lenders might be willing to reduce your variable interest rate if you discuss your desire to move to another Lender with competitive interest rates. Lenders will ‘price for risk’ so if you have 20% or more equity in the property it’s likely they will negotiate with you. A good call script will assist here. You may also consider some of the 1 – 3 year fixed interest rate loans that have come into the market last week. Some are 2.19% pa.
- Consider switching to interest-only repayments – This might be an appropriate short term strategy to reduce cash flow strain. The switching process is cumbersome at most Lenders and if you’re successful, be aware that it will be likely to increase the total amount of interest paid over the life of your loan. But at least you will avoid potentially being tarnished with a loan under hardship provisions.