What to do if your mortgage holiday is over but you can't afford to pay
Six months after the introduction of deferrals, many Australians who requested one are now starting to resume their repayments for their deferred loans.
According to data released by Australia's banking regulator, the Australian Prudential Regulatory Authority (APRA), at the height of the pandemic nearly 500,000 home loans had received payment deferrals, but by the end of September the number of home loans deferred had fallen to less than 325,000.
For those Australian households whose initial six-month deferral has yet to expire, it is important to be aware that an extension of up to four months may be available but will not be automatic. The additional pause period is still only a temporary measure and it will be reserved for those customers who really cannot afford to make repayments right now but have a reasonable chance of doing so if given additional time.
Plus, for most loans, the interest charged isn't going anywhere; it has still been accruing and will be added to the balance of your loan.
So, whether you are on your initial deferral or an extended deferral, what can you do if you find that you need more time before you can restart payments?
Your lender may agree to extend the pause or deferral for a few more months, if they can see that you have a reasonable chance of making repayments at the end of that time. However, you need to carefully consider whether it is in your interest to ask for an extension if you can't - and probably won't be able to - start repaying within a reasonable time.
Over the coming months, some Australians will unfortunately need to recognise that they won't be able to repay their debts even if their lender agrees to extend a payment pause or deferral for a few more months - and they will need a more permanent solution to their debt situation.
Recognising this early on, and taking steps to deal with your loan or loans on your own terms, should help you in the long term, including by minimising the impact of extra interest that is being added to your loan.
Acting early may also help protect your credit rating. If you've agreed a COVID-19 payment pause or deferral with your lender, your credit report will not show any missed repayments and your lender will not report that you've 'defaulted' during the pause or deferral.
However, this is only temporary, and your lender may, in the next few months, start reporting whether you have been making your payments on time. Eventually, if you don't pay your loan for an extended period, your lender may also report a 'default' on your report. Your repayment history stays on your credit report for two years. A default stays on your report for five years (even if later paid) and will make it harder for you to get credit in the future. Recognising now that you may not be able to afford the loan in the long term - and taking action to come up with a permanent solution - may help you avoid having negative information recorded on your credit report or reflected in your credit score.
Consider other ways to deal with the debt
If you're struggling to repay your debts and you don't think an extension of a few months will help - or your lender won't agree to an extension - you still have options to help you deal with that debt. These options will depend on your situation and the types, value and number of credit accounts that you have.
Importantly, taking action to find a permanent solution to your debt situation will help you deal with the stress and uncertainty that come from not being able to make your repayments. For example, agreeing to a permanent solution with your lender will mean that you won't receive debt collection calls from the lender.
Many lenders will consider requests to waive some of your debt if you show that there's little possibility of you being able to pay them. If you can offer a portion of the value of the debt, some lenders may accept that in full and final settlement of what you owe. Ultimately, bankruptcy may be an option for some Australians (although it's worth looking at the other options first as this step may not be necessary if you can get your lenders to agree to a different approach).
Some customers may need to consider whether they should sell their home or investment property if they can't restart paying in a reasonable timeframe. Being in control of how and when your house is sold may even help you to maximise the amount of money that you take away from the sale - this is known as 'equity' and is equal to what your home is sold for less what you owe and what it costs to sell the house.
Talk to people you trust
Recognising that you can't afford to repay your debts is a big step at any time, and the uncertainty caused by the COVID-19 pandemic makes it even more difficult to make important life decisions.
Working out what options are available to you is not something you need to do without first talking to people you can trust for advice.
Talking to your bank or lender is a great start. Reliable, free financial counselling is also available from services such as the National Debt Helpline (ndh.org.au - 1800 007 007). ASIC's MoneySmart website also contains a list of free counselling services (moneysmart.gov.au/managing-debt/financial-counselling)
Talking to a financial counsellor is particularly a good idea if you have loans with more than one lender as they may be able to help you to agree something with all those lenders.
Take care to avoid businesses that offer a quick and easy 'fix' to your financial problems. These services are usually costly, ineffective and may involve taking out more loans - which can make your financial situation even worse.
Take the next step
If you can't make your repayments at the moment (or won't be able to when your arrangement with your lender is due to end), the following questions will help you work through your options.
If you answer yes to these questions, it may be a good idea to talk to your lender or a free financial counsellor about your options.
Those options may not be easy, but they could save you money in the long term and help you keep control of your financial future.
- Were you in trouble with your finances before the COVID-19 pandemic?
- Has your income permanently dropped?
- Will your financial situation get worse?
- Have your other unpaid expenses shot up during the pandemic?
- Have you already tightened your belt as far as you can?
- Are you finding that the personal toll of dealing with financial stress is too much?
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