While pressing pause on mortgage repayments is tempting when times are tough, KnowHow founder Bushy Martin says there are safer ways to ease financial pressure.
In the wake of COVID-19, most of the banks are offering a reprieve on home loan repayments for up to six months.
“I’m hearing people saying, ‘oh, that’s okay, we’ll just get a repayment holiday’. I want to caution you around treating that as your first option, because in my view, that should actually be your last option,” Bushy said in a recent live ‘Bush Bite’ video on Facebook.
He said we should instead consider the five R’s – redraw, revert, rainy day reserves, refinance and repayment holiday.
“The first thing you need to have a look at is – do you have money in redraw in your home loan or investments loans that you can access to cash flow the exercise in the short to medium term,” Bushy said.
“The other thing you can do is look at reverting … for a period, you may be able to negotiate switching your principal and interest loan to an interest only loan … just by switching your loan from principal interest back to interest only for a period, that’ll drop your repayments by about 35% on average.”
He said the next option is to fall back onto your rainy day financial reserves, or ‘war chest’, which can make a huge difference when covering costs during tough and tight times such as these.
Another highly effective strategy is to refinance.
“As long as you’re still employed and you’re in the right sectors, then it’s a great time to be doing it because we’re saving on average between $400 and $1200 a month for clients. At the moment, that’s nearly $5000 up to $14,000 a year put back in the skyrocket (pocket) just by moving your loans to a much more cost competitive lender.
“That’s not a quick process because the banks are all buried at the moment, but there are a number of lenders around the place who can do it reasonably quickly and significantly save some money.”
At this point, if these options don’t work for you, you’re left with the final option of repayment holiday, although Bushy reiterates this is only available for those who can prove financial hardship.
“This is not for everyone, and the banks won’t allow for everyone … you have to be able to demonstrate that you are actually really struggling financially, whether it be losing a job or a reduction in your hours … then, and only then, will they consider giving you that up to six month rental holiday or repayment deferment term.”
And even if you are eligible, Bushy still strongly warns of the ‘long shadow impacts’ and ‘the sting in the tail’ which can arise from choosing this path.
“If you’re able to get it, then the interest that you’ll pay is going to accumulate … so they’ll add that to the loan and they’ll also extend the loan period. So, the loan’s actually going to take longer to pay off and it’ll cost you a lot more.
“But the biggest risk of all is that it may impact on your credit report. There is some pressure from the government to get the banks to not let that affect your credit score or credit reporting. But it’s only a maybe, at this stage.
“I wouldn’t want to take that risk because there’s a fair likelihood it is going to appear on your credit report, at least for two years, and then it may well restrict your abilities to do anything moving forward over the next couple of years.”
Finally, Bushy addresses the ‘fear’ circulating around Prime Minister Scott Morrison’s announcement of the six-month eviction moratorium on tenants in investment properties.
“A lot of people are going ‘Good grief. Does that mean that tenants can’t pay rent?’. Let me answer that very quickly. No. Absolutely, emphatically no. Yes, on a case by case basis. Everyone needs to consider this in terms of the position of the tenancy you may have in your property.
“A six-month eviction moratorium, which is just a temporary hold, doesn’t mean that’s a rent-free card for tenants … the tenants need to again demonstrate to the property manager that they are actually in financial hardship.”
Bushy urges listeners to not be too concerned, and to watch out for more information in his other videos.
KnowHow founder Bushy Martin shares regular, live ‘Bush Bite’ videos on his Facebook page sharing tips and tricks to cut costs, boost your savings and take advantage of opportunities in property. Connect with Bushy here.
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