How to deal with your mortgage in tough times
You’ve lost your job and your income has reduced due to the Covid-19 crisis, so how do you hold onto your home? Mortgage adviser Cameron Marcroft talks to Bonnie Sumner.
Tell us about the changes you’ve seen since the lockdown began.
We’ve had many enquiries coming through from both existing and new clients about understanding their position and what options they have. If people are losing jobs, or their incomes have been reduced, they want comfort that they can get by until normality returns.
What are the biggest fears for people at the moment?
Their biggest fear is the banks saying “You haven’t paid your mortgage, we’re going to sell your house and you’re going to be homeless”. That’s the immediate concern we’re getting from a lot of clients.
What can you say to them?
Our message to them is not to panic, the banks want to work with you and we will be working alongside you to help with this process with the banks. It’s more about trying to keep them aware that there are options.
What kinds of people are you talking with?
Industries such as hospitality and tourism have already seen loss of income and employment, and sometimes this has been not only one person, but both in a relationship. So with those who are losing income, we’re working with banks and their hardship teams to go through these options.
What options are being recommended?
If they can’t carry on the way they’re going, the first option is interest only repayment – reducing their repayments quite considerably so it might give them a spare bit of change to get by. It does mean their mortgage is not reducing at all, but it’s also not increasing. Which leads us to the next solution, what’s been talked about as a mortgage repayment holiday or a mortgage deferred period. This is for people who are really struggling from job loss or a considerable drop in income and can’t afford their mortgages at all.
So they can keep the house and start paying again when their situation improves?
Yes, but there is a bit of confusion, with some clients thinking they don’t have to pay their mortgage at all. But in fact the debt level is increasing because interest is still accruing through this period. We’d only recommend this option when clients are in a really tough position with limited income, and are buying time until their income returns.
How else can people reduce mortgage commitments in the short term?
There are a few other options available, such as increasing their loan terms. For example, if they have had a mortgage for eight years and they have 22 years to go, extending that loan term to 30 years again decreases repayments. However, obviously this extends time they will spend reducing debt. Breaking their existing interest rate, which will be higher than what our current historically low rates are, is another option.
Is breaking a fixed loan and re-fixing at a lower rate costing people?
Yes it is. And at the moment, for most clients, it’s not proving to be a good move. But every circumstance is different, so talking with a mortgage adviser to do the calculations and understand your position is important.
What about borrowing against your home equity?
I wouldn’t consider borrowing more money against the equity, if the purpose is purely to give the clients extra money to get by. The alternative options are far better for managing their mortgage repayments over this challenging time. Adding to that, the lenders wouldn’t be comfortable lending more money to people who have reduced income.
What’s the short and medium term position you foresee for most of your clients?
The options we’ve discussed are short-term solutions, and the uncertainty of what we’re going into still remains – we don’t know how far into this year and potentially next year this will go. Some clients may need further assistance as we understand the scale of this crisis. The interest-only period would hopefully give some people some respite and a good year to get themselves back on track. With mortgage repayment holidays, at the moment the banks have only been offering three to six months.
And after that?
The concern is that if people have lost their jobs already, will they have their income back in three to six months’ time? Potentially not, and in that case banks may have to reconsider an additional mortgage repayment holiday. The banks, in my opinion, are doing a good job. They’re under immense pressure to deliver on short notice with everything going on, and they will still be making decisions on how they will work with clients in those positions down the track.
How are the banks looking at this?
It is going to be a long process to get back to normality, so the interest-only and mortgage repayment holiday options are open to people when they need them, and the banks will give them those options. If a client stopped making repayments, the banks aren't going to say “Hey, we’re going to sell your house and go for a mortgagee sale.” It’s not in the bank’s best interest, as they would lose millions in an unstable market if that were their only option.
What’s happening with house settlements?
Settlements supposed to occur for people moving into properties during this lockdown period mostly aren’t going to proceed. They’ve been pushed back to a post-level 4 timeframe. People can’t effectively move into a house without thwarting the lockdown guidelines, so it’s likely there will be very few settlements for now.
Are the banks prepared to lend for new house purchases?
The banks are still willing to lend on new applications. However, I would imagine they will start to tighten as they get a chance to work through their credit policies in this ever-changing environment. Refinances are becoming challenging in this lockdown period but once we come out of the lockdown, I’d imagine they will bounce back.
Is refinancing something you’re seeing?
We’ve had some clients enquiring about it, but we can also work with their existing bank to top up and restructure their lending if need be. So if there was a significant break cost such as $5k, they could top their mortgage up by $5k to get on a better interest rate and repayments, which would make a bit of a difference. It wouldn’t be as significant as an interest-only period, which is probably the most common answer to people who are losing income.
What advice would you give people who are panicking about their financial situation?
Contact your mortgage adviser and discuss the various options. Keeping your mortgage adviser in the loop on how things are panning out for you is critical – as soon as there are signs of income loss and repayments are becoming challenging then we need to be working with the clients to help them through that as best we can.
*Cameron Marcroft is an adviser with Loan Market.
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