Article by Patrick Lynch, Head of Operations
We live in interesting times. As we self-isolate, the world continues to change. For those who are working, there are adjustments. What about those who were made redundant, are on leave without pay, or on reduced hours? Even with the job seeker and job keeper supports now available, we’ve heard from many clients, friends and family members who are concerned about how this emergency might affect their ability to pay their loans.
Whatever your current circumstances, don’t feel stuck. There are options when it comes to your home loans. Hopefully, the following will provide some guidance – for more detail, reach out.
Interest Rate and Refinancing
The simplest solution could be to approach your Bank or Lender and say ‘I want a cheaper rate’. If you are on a variable rate, principal and interest, home loan, with a loan to value ratio below 80%, there are interest rates in the market that start with a 2 (i.e. maximum of 2.99%). Call your Lender and ask what they can do or get your Broker to submit a pricing discretion request on your behalf.
Few Lenders passed on the recent RBA emergency rate cut to variable rate loan holders, but there were significant cuts in fixed rate loans, with rates of c 2.30%. As well as a lower rate and lower repayments, this gives certainty of the amount. However, fixed rate loans mostly don’t provide you with the benefit of an offset account and, if you repay during the fixed rate period, you could end up paying an early repayment premium to break the loan.
If your Lender doesn’t make a suitable interest rate offer, what can you do? You might have heard of a ‘loyalty tax’, whereby existing customers pay more than new customers. If you have the ability (income, borrowing capacity and security), now might be a time to consider refinancing. Sometime the threat of refinancing can cause a Lender to sharpen the rate. But if not, consider moving.
Bank policies are changing fast and some Lenders are increasing rates, limiting their exposure to sectors of the economy particularly hit by Covid-19, asking more questions, etc. Your Broker can find the most appropriate Lender, which might include a sharper interest rate and refinance rebates, and guide you through to settlement.
Cash Flow and Repayments
Don’t limit your thinking to the lowest rate.
It may be that you’re already ahead on your repayments. If your interest rate has been falling since June, when the first RBA cash rate cuts were announced, but you kept the same principal and interest repayment, then you may have been repaying more than you need. Ask the Lender to revert to the minimum required – CBA have announced they will do this without asking as of 1 May. Those extra payments might be accessible through redraw.
If cash flow is important:
- Can you extend the loan term? Perhaps you have 23 years remaining on an initial 30-year loan. If you re-contracted, i.e. extended your loan term, then your repayments are lower as you are repaying the same principal over a longer term (but with a higher interest bill).
- Can you switch from paying principal and interest to interest only payments? Again, this can result in a larger interest bill and you’ll need to make up the principal repayments over a shorter term, but your loan expense is lower during the interest only period.
Payment Holidays
There is another option, and this is one that anyone with significant income issues or loan concerns should consider. What about not paying the loan at all? We’re not suggesting ignoring the problem, as defaulting on a loan should be a last resort. If you are in complete distress, contact your Lender.
Luckily, many Lenders have taken the Government’s guidance and are offering loan deferments or holidays, where no payments are required for a short (up to 6 months) period on a case-by-case basis. Some Lenders may require evidence of distress, but the majority appear to be offering this without question. There is also relief available from Lenders (and Government support) for small businesses impacted by COVID-19; any business that hasn’t already contacted their Lender should do so to access a deferral of loan repayments.
Note: the loan isn’t frozen – interest continues to accrue (including interest on interest) and is added to the loan. The higher balance is paid off over the remaining shorter loan term, through a higher monthly payment.
With interest rates at historic lows, the additional cost may not be that large. If the choice is between losing your home because you can’t make repayments or a short deferral until things recover (paying more interest later), we’d expect most borrowers would choose to keep their home. We’ve provided a few links and phone numbers at the end of this article for some of the main Banks and Lenders should you need to request a payment holiday. If you do choose to apply for this relief, you might want to access any redraw first.
Offset vs Redraw
Clients have asked us what they should do with extra cash/ savings (e.g. from redundancy payments) – place into an offset account or in redraw against the loan. There are many considerations here. If your Lender is one of the major or second tier Banks, you likely have a true offset account. The benefit of an offset account is it reduces that portion of your loan on which you pay interest, enabling you to potentially clear the loan earlier. Money sitting in an offset account is your money, not the Banks.
The Government, through the Financial Claims Scheme, protects deposits up to a limit of $250,000 per account holder at certain authorised deposit-taking institutions (see list here) should the institution fail. Anyone with cash at Lenders not on the list won’t have the same protection.
These Lenders might have quasi-offset accounts, which have similar benefits as full offsets but might better be considered redraw. With redraw, you pay a lump sum into the loan, again with the effect of reducing the interest charge. These additional repayments can be withdrawn, subject to certain limits and at the Lender’s discretion (i.e. it isn’t your money). If you have been using redraw, consider whether you may need those funds in the future.
Closing considerations
We would expect any relief to extend beyond home loan and SME clients, as the effect COVID-19 is having on the economy is widespread. In fact, we understand CBA has announced support measures for credit card customers unable to make their minimum repayment on time in March.
What we don’t expect is for interest rates to fall further, despite the billions the RBA and Government are injecting into Banks and smaller Lenders. The capacity to cut is limited and the RBA has commented that the official cash rate could remain at current low levels for up to 3 years. Factor this into any fixed vs. variable rate decisions.
There is a lot more information available to anyone with concerns on their income, and we would suggest speaking with a financial advisor who is qualified to assist (e.g. early withdrawal from Superannuation, investing lump sums from redundancy, etc.). Also, don’t limit yourself to just your loans – if you have other regular outgoings, such as utilities, insurance, etc., contact them and see what they can do for you (here’s an old article that might be useful). And, in very recent good news for anyone with children, there is free childcare available during this emergency.
But if you need guidance on your home or investment loan, speak with your Lender or Broker, including here at Long Property; we’ll try to help.
Links and phone numbers for selected Lenders, to request relief
- ANZ or call 1800 252 845
- CBA or call 13 30 95
- NAB or call 1800 701 599
- Westpac or call 1800 067 497
- Bank of Melbourne or call 1800 600 266
- Macquarie Bank or call 1300 363 330
- Resimac or call 1300 793 741
Please bear in mind that there have been and will likely be a lot of requests, such that hold times could be long and action take time. Have relevant information available (e.g. loan account numbers, customer access codes, etc.) and remember – the person at the other end is trying to help; be considerate. We’ll all get through this together.
Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
