How to Reduce Your Loan Repayments During COVID-19.
As virtually all economies around the world have moved into various stages of the shutdown, thanks to government-ordered social distancing measures, there will no doubt be lingering impacts on a range of different jobs and industries.
If you operate a business or work in an area that is focused on tourism and hospitality, travel, retail, fitness or entertainment just to name a few, you or your business will likely have been impacted in a negative way.
Even if there is not a direct hit to your income, going forward it will still take some time before the economy returns to normal and it could be some time before the positive sentiment improves as well.
In the short term, it might be a good idea to try and look at how you can reduce your mortgage repayments.
With the RBA taking an aggressive approach and slashing the official cash rate to a record low of 0.25%, we are seeing mortgage rates that we’ve never seen before and perhaps won’t see again for another 50 years.
On top of the RBA, the Federal Government has also announced a host of measures to help those with mortgages cope better, and see out the current crisis.
Top 4 Ways to Reduce Your Loan Repayments
- Refinance
The most obvious way to reduce your loan repayments is to find a better deal on a home loan. With many lenders offering very competitive rates to new applications, you may have the potential to lock in a very low introductory or fixed rate for the next few years.
It would certainly be enough time to see out the current social distancing measures and the economy should well and truly be back on track by that stage.
Even if your business is not being impacted by COVID-19, this is still the best time in history to get a mortgage and you need to make the most of it and find the most competitive rate you can.
2. Extend your Loan Term
Another option if you can’t find a better rate and need to reduce your payments is to push out your loan term. You can do that by restructuring your loan or taking out a new loan.
That way, you can push the loan term out to another (new term of) 30 years for example, which would effectively lower your weekly or monthly payments.
The catch is that you will be paying more interest in the long run, but as a short-term measure, this can help to reduce your payments. Again, you can always refinance or increase your payments after the dust settles in the coming months.
3. Change to an Interest Only loan
Changing your payments to interest-only is another effective way you can reduce your payments on a weekly or monthly basis.
However, as the name suggests, you are only making interest payments on your outstanding debt. That means that you won’t be paying off the debt and if your goal is to own the property fully unencumbered then that is also something to consider.
As a short-term measure to reduce payments this is a good option. Most interest-only loans are only for a period of five years, after which they revert back to principal and interest. Again this will be more than enough time to see out the current shutdown and economic fallout.
4. Take a Mortgage Holiday
The Government and major banks understand the unprecedented nature of the current crisis and the impact this is having on various industries.
As such, the vast majority of lenders are now offering borrowers a ‘mortgage holiday’, whereby their loan repayments are stopped for a period of 3-6 months if they qualify.
This is something that you need to organise in conjunction with your lender and won’t be automatically applied. Importantly, there won’t be any impact on your credit score if you choose to take up this option.
The interest and fees and charges that you are due to pay will still be accrued, they will simply be applied to your payments later. So this might mean your payments increase after your holiday is over. But nevertheless, this is a great initiative for those who are impacted the most.
While the current situation will no doubt improve in the coming months, it’s important to have a financial plan in place to see you through the turmoil.
Simply refinancing your loan to free up some more cash on a weekly basis is a prudent strategy in and of itself, as the situation continues to evolve rapidly and we don’t have a clear roadmap for what lies ahead.
