Has Covid-19 temporarily affected your ability to repay the mortgage? Now more than ever, it’s important to look at what support options might be available, and understand the pros and cons of each.
As you may have heard, the mortgage deferral scheme has been extended to 31 March 2021 from its original deadline of 27 September 2020. But mortgage deferrals are just one of the possible solutions – and it may not be the most appropriate one for you.
Here are some common forms of mortgage assistance your lender may offer.
Mortgage repayment deferrals
Mortgage repayment deferrals (often referred to by the somewhat misleading term of ‘mortgage repayment holidays’) have always been an option in financial hardship, but they have had a resurgence during Covid-19.
In short, mortgage deferrals allow you to press pause on your repayments, providing much-needed cash flow relief in times of need. The drawback, however, is that you’re taking a break from repayments but not from the mortgage itself, so your interest will continue to accrue in the background.
To pay off this extra, at the end of the deferral period, you’ll have two options:
- Increase your repayment amounts (your mortgage will still be paid off in the originally agreed timeframe), or
- Extend your mortgage term (repayments will stay the same, subject to interest rate changes, but you’ll pay more interest over time).
Before taking advantage of a mortgage deferral, please don’t hesitate to contact our SHARE mortgage advisers. Conditions vary from lender to lender, and depending on your circumstances, the drawbacks may offset the benefits.
‘Interest only’ switch
Your lender may offer you the opportunity to temporarily switch to an interest-only mortgage. This allows you to keep making regular repayments, but in smaller instalments, as you’re only paying the interest portion of the loan.
Keep in mind that the difference between interest-only and ‘interest and capital’ repayments may not be significant if your mortgage is relatively new. Early in the loan, most of what you pay is interest, but the ratio reverses over time – and that’s when switching to interest-only can make the most difference to your budget.
The other key thing to know is that, because you’re not reducing the ‘principal’, the overall amount you owe will remain the same. So once the interest-only period has expired, you’ll need to either:
- Keep the same mortgage term but increase your repayment amounts, or
- If possible, extend your mortgage term (again, repayments will stay the same, but you’ll pay more interest overall).
While switching to interest-only can offer much-needed respite, it may not be the right solution for you. Please don’t hesitate to contact us if you’d like to learn more.
Extending your loan term
If you’re in financial hardship, your lenders may also allow you to extend your mortgage term (provided you still meet lending criteria)
By spreading the payments out over a longer term, this option will reduce the repayment amounts. Importantly, you’ll continue to pay down both the principal and interest portions of your loan.
However, if you stretch the mortgage past its original due day, you’ll also end up paying more in interest overall. Once again, it’s important to make sure that the short-term financial relief is worth the long-term costs – please get in touch to discuss this further.
Contact the SHARE team
Our SHARE mortgage advisers work with multiple lenders on a daily basis, and know what each is currently offering in support of customers.
If your finances have been affected by Covid-19 and you’re looking for financial assistance, we can talk you through the different options and how they relate to your situation. Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.