There’s a lot of information flying around about the (very welcome) support packages and options for residential and commercial mortgage holders. But it can be overwhelming and confusing.
Terms such as ‘repayment suspension’, ‘mortgage pause’, ‘mortgage freeze’, ‘mortgage deferment’ and ‘mortgage holiday’ sound like an oasis for worried mortgage holders. They all mean the same thing – not having to make repayments for up to six months.
(I never use the term ‘mortgage holiday’ as it sounds far too pleasant for an option with significant downsides.)
While a mortgage pause may be appropriate in your circumstances, it should only be a ‘break glass in emergency’ option of last resort – there are several actions that you should consider first that can buy you time, or potentially avoid the need to pause at all.
So pause before you pause. Contact your mortgage broker to get independent advice tailored to your situation. Lenders can be difficult to reach, especially in high demand times like now; our existing networks give us better access to lenders, so we can get a response for you sooner.
Call Credo: 03 9032 6700
The downside of a mortgage pause
If you ever experience financial hardship – for example, due to the impacts of COVID-19 – you can apply to your lender to put your home loan repayments on hold for up to six months.
However, you need to be aware that interest will continue to be charged and added to your loan during the period your repayments are paused. So effectively, you’ll be charged interest on interest.
Just as importantly, lenders typically only give you one shot at a mortgage pause. Your six month repayment freeze starts on the day you hit pause. You need to consider what will happen after the six months pause is up. Are you certain you’ll be able to recommence your repayments?
For these reasons, we urge clients to explore all other options and tools available before pulling the trigger on a pause. If a pause is your best option, you need to think through when is the best time to take this action. Being prepared will ensure you use this option to your advantage.
Four options to consider before pausing your mortgage
These are not normal times. All options should be on the table for consideration. So instead of going straight to a pause, consider these options to buy yourself some time:
- Dip into your savings or offset. In a perfect world you wouldn’t do this, but the ground has shifted so fast, so soon, that this is worth considering for a fortnight or month. Also look to tighten your household spending belt. (Download our free budget planner to help with this.)
- Access your redraw. Consider putting redraw funds into another account to access as needed, or feed it into your loan repayments.
- Move to an interest only loan if possible. Let’s discuss if this is an option for you, as shifting to interest-only for a short period will make your repayments far more manageable, and won’t put you behind as much as a pause once things turn around.
- Ask for a waiver on fixed rate break fees. If you fixed your rate a while back and are paying a higher rate, you can ask your lender to waive the fees to move to a lower rate.
If your circumstances mean you can’t explore these options, then a mortgage pause can help preserve your money until you get back on your feet. Pulling the pause trigger should not affect your credit score, which is what might happen if you did nothing.