What to do if your income has taken a hit.
There is a lot of uncertainty in the air at the moment and one of the biggest concerns for both investors and lenders is around people’s incomes.
The unprecedented economic shutdown has seen some areas get hit harder than others, and if you’re in a highly impacted industry you could potentially have lost some or all of your income.
So what do you do with your current home loan if you have taken a serious hit or been made redundant because of COVID-19?
Lost Your Job or Earnings
If you’ve lost income because of COVID-19 then you might be eligible for the Governments JobSeeker package. So this might be the case for those who run their own businesses or if you have lost hours as a result of COVID-19.
If you’ve been made redundant because of COVID-19, your income protection policy may cover you for redundancy, but that’s only if it includes redundancy cover. Redundancy cover is an optional extra on a lot of policies so you will need to check.
However, there are also a few more catches here as well. Generally speaking, you would have needed to have served a six-month no-claim period and in that time, your employer must not have indicated that you would be made redundant. There is also a 38 day period before you can make a claim if you are made redundant.
In many cases, you do have income protection as a part of your superannuation if you have a balance greater than $6,000, but this will need to be checked on an individual basis.
One of the common mistakes borrowers are making is assuming that Lenders Mortgage Insurance (LMI) is there to protect them when they have trouble paying off their loan. This is not the case and LMI is in place to protect the lending institution.
LMI applies to loans that have an LVR of more than 80%, meaning that they are riskier loans to the bank. Unfortunately, it won’t help if you’ve lost your income.
The Government has also implemented the JobKeeper package, which is targeted at businesses to allow them to keep their staff employed. Each employee could be entitled to $1500 per fortnight, so the first place to check is with your employer.
Can You Refinance?
If you do find yourself with reduced income one of your options will be to refinance your current loan or look at the other various options to decrease your monthly payments.
However, if you’ve lost your job completely, it will be difficult to take up this option in the current environment.
At the moment, lenders are taking a very close look at borrowers incomes, more so than ever before, to determine if they are going to be able to meet repayments going forward. This applies to new loans and also refinancing through a different lender.
There are even cases where borrowers that had been pre-approved are now being declined when the time comes to settle on a property. This is because credit conditions are continuing to tighten and lenders are trying to protect themselves.
If you have a loan and don’t have the serviceability to refinance now that your income has been hit, you could speak to your broker or your bank and see if they can reduce your rates. As that can be done without needing to apply for a new loan or refinance.
With rates in the low 2s, this can be an option for many people who are being impacted the most.
If you have a two-income household you might have some options with some lenders, but again it will be worth talking to your mortgage broker.
There is also another option if you’ve lost your income and that is to take a mortgage holiday. But this should probably be the last resort and something to speak to your mortgage broker about.
Most lenders are currently offering borrowers a 3-6 month mortgage holiday if their incomes are impacted by COVID-19, but it’s important to note that all expenses and interest will be capitalised. In the end, it will cost you more to take up this option, but if it’s your only option, you might just have to wear the extra costs.
While the current situation is a tricky one if you’ve seen a hit to your income, hope isn’t lost. The first thing you should be doing is speaking to a mortgage broker to get your loan costs under control so you can ride out the storm.
