Should you defer your mortgage payments during COVID-19?

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Australians are being offered mortgage repayment deferrals of a minimum three months period from their banks to offset individual financial strain during COVID-19. The Australian Banking Association has also confirmed that Australians who are choosing to defer their home mortgage payments during this time will not have their credit rating negatively impacted. However, while the consequences of delaying payments have lessened and it is tempting to save money in the meantime, there are a few things you need to be aware of before jumping the gun.

Interest capitalisation
In the case that you are applying to defer your mortgage payments, be wary that your bank will be applying interest capitalisation. Interest capitalisation means that you have to pay interest for not only your original loan, but also any unpaid interest you did not pay during your deferral as well. As a result, your loan in the long-term will be more than the original loan agreement you had with your bank. While some banks are offering to cover this “interest on interest” in the form of a small one-off payment, you should consider the long term effects of deferring your mortgage loans before making a decision and factor in interest capitalisation applications respective to your bank.

Refinancing possibilities
Instead of jumping straight onto an offer to deter your mortgage payments, consider other refinancing possibilities first. If your bank is not willing to discuss lowering interest rates with you, it may be worthwhile to consider refinancing to another lender with lower interest rates suitable for your financial circumstances. Make sure to speak with your accountant or research other bank options first before refinancing. Another refinancing possibility is switching to interest-only repayments in the meantime. While this will mean paying more interest in the long-run, it may give you some breathing room to regroup and plan your finances for the next few years before tackling your mortgage repayments.

Accessing other avenues
Talk to your bank about accessing other avenues and options they may have available to help you pay your mortgage loans. For example, if you have been paying above the minimum monthly repayment amount previous to COVID-19, ask to repay your loan at the bare monthly minimum instead for the next months. If you have additional money sources you can access during offsets, now is the time to collect that as well. Redrawing in your eligible loan (any bonus payments you made previously) is another avenue to consider instead of deferring your mortgage home loan.

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