When it was announced by major banks and lenders that they would be temporarily pausing mortgage repayment requirements, it’s not surprising that many mortgage-holders assumed banks were offering an interest-free period. Unfortunately, that assumption was very wrong. Even during a pause, the interest still accrues as normal, just the penalties for not paying have been dropped – but only for those who applied.
Recognising this easily-made error, the team at WhiteStar quickly got the message out that the repayment pause was merely an option, for those who have lost income, to suspend payments for a few months without penalty. We strongly advised that it should only be used in an emergency, and not simply ‘because you can’.
Many people also wrongly assumed it was automatic. The policy only provided an assurance to those who specifically applied for it, that they wouldn’t be penalised if payments were not made in full each month.
It must also be remembered that all that accrued interest still needs to be paid – potentially adding years to a mortgage. In fact, lenders stand to make more interest in the long run, and it is for this very reason that we urged caution in signing up for the scheme.
Naturally, for those customers who have lost significant income due to Covid-19, but still need to put food on the table, this option is generous and valuable. However, those who only saw a slight dip in income, or are not affected at all, should continue to meet their loan obligations. And while most lenders are not asking for actual evidence (although you may be required to confirm you are actually affected), it really comes down to individuals asking themselves, “Do I really need to do this?”
When looking to answer this question, it is important consider other factors that may have consequences down the track, such as:
- Additional interest and time added to your loan in the long-term
- Possible restrictions for refinancing to consolidate other debts
- Potential difficulties down the track for refinancing to obtain a cheaper rate
- Possible challenges in trying to increase financing for home improvements, new car or investment.
It is also important to remember that, even though they may not be incurring penalties, or be treated as if you’re in arrears, non-payments will still appear on your statements. These non-payment records could cause a new lender – or even the current one – to reject a new application.
Many borrowers have reconsidered the decision to put their mortgage on hold and chose to continue as normal , making other small changes elsewhere to their spending and expenses.
So, in closing, we strongly advise that if you can pay your mortgage without major hardship, you should keep doing so. And of course, with the potential for rates as low as 2.09% to save you thousands, as well as ease cashflow pressure, now could be a great time to look into your options to refinance for a better rate or consolidate debts. So have a chat with a WhiteStar mortgage broker today.