Nearly 3 million Australians are asking for a rent reduction or mortgage repayment pause as the coronavirus pandemic wreaks havoc on Aussies’ ability to pay bills.
Also read: How will we pay for coronavirus?
Of those 2.9 million Australians, 1.2 million are homeowners who have already contacted or plan to contact their lender for a deferral in their mortgage repayments, new insight from Finder.com.au has revealed.
Many major lenders have offered to put borrowers’ home loan repayments on hold for six months.
However, Finder personal finance expert Kate Browne warned Australians to be cautious in taking up the offer.
“Whether you own your own home or are renting, it’s time to re-evaluate your expenses and see where you can cut down,” she said.
“If you have a home loan, a pause in your mortgage payments should be your last resort.”
That’s because even though homeowners can pause their repayments, the interest will still accrue: Yahoo Finance heard from one home-owner that deferring repayments on her two mortgages would leave her $40,000 out of pocket.
In fact, homeowners with a $500,000 loan who had spent 10 years paying it off with an average variable rate of 3.90 per cent would be slugged an extra $11,127 over the remaining 20 years of the loan if they took up the six month pause.
And homeowners who take up the pause with a $400,000 loan would still need to pay an extra $8,902 over the remaining 20 years.
But that could blow out to an extra $17,000: Expert’s warning
Speaking on the Yahoo Finance Breakfast Club, personal finance expert Nicole Pedersen-McKinnon raised the same warning.
She said borrowers need to be aware that it’s a repayment holiday, not an interest holiday.
“[Banks] are going to make all this extra money from us,” she said.
“And there are better ways. If you can get a mortgage discount, that’s going to save you potentially hundreds of dollars a month right there if you are struggling.”
And, she continued, borrowers who decide to extend their loan by six months, rather than increasing their repayment sizes at the end of the six month period, will also be worse off.
“You will ultimately pay interest on interest,” she said, flagging that borrowers with $400,000 loans are looking at as much as $17,000 added to their loan if they choose to extend the repayment period.
What do I do instead?
Pedersen-McKinnon said borrowers should always try to negotiate a better rate, and even consider fixing a portion of their loan.
Finder’s Browne echoed that. “We would recommend looking into getting a better rate on your home loan first if you are struggling to make your repayments,” she said.
“While a mortgage deferral or holiday sounds appealing in the short term, you need to seriously consider whether you’ll be able to afford this ‘holiday’ in the long run.”
She said refinancing can save borrowers enough to avoid having to pause repayments.
“Covid-19 has hit the economy hard but the silver lining is that home loan interest rates have never been lower,” Browne said.
The critical step is to look for an interest rate that begins with a ‘2’.
“There are hundreds of dollars to be saved simply by switching,” Browne said.