Australians have already deferred a whopping $160 billion in loan repayments. But what happens when the holiday is over?
Before I launch into my paternal rant by warning of the dangers of taking a mortgage holiday, I must first acknowledge that the federal government is doing a tremendous job. The stimulus measures that have been announced and the government’s efforts to flatten the curve of COVID-19 contagion are commendable.
But we are a nation of individuals, all with our unique quirks, desires, expenses, and lifestyles. When it comes to finances, our personalities and character defects tend to overpower our efforts to balance the books. It is therefore vital that we are aware of our own financial position before rushing to the bank for a six-month mortgage holiday.
For three key reasons:
1) Your hardship could be longer than your holiday
If you are facing financial hardship, a mortgage repayment holiday of between three to six months may seem like the best option. However, it is important that you first take stock of why you are in financial hardship in the first place: have you lost your job as a direct result of COVID-19? Or were you already on the brink of financial hardship before the pandemic?
If you have lost your job, how likely are you to regain full employment by the time your repayment holiday is over? Remember – a mortgage holiday, like all holidays, will come to an end. Will your financial position be any better when it does?
2) You may not be able to apply for credit
This is something that few people consider when the promise of a mortgage holiday is on the table. What happens if you require credit in the next 12 months? While some banks say that deferring repayments as a result of COVID-19 won’t impact you’re ability to borrow, don’t believe the hype: you’ll be hard pressed to find a credible lender willing to offer you finance once you have effectively declared that you are in financial hardship.
3) The illusion of free money
Deferring your mortgage repayments could effectively boost your household income over the period of your mortgage holiday, depending on your financial situation. This has all the hallmarks of a significant pay rise. Do not be fooled – this is an illusion that undisciplined borrowers can easily fall into.
If you are truly in financial hardship, then act accordingly and only spend what you have been used to spending prior to deferring the repayments on your mortgage. Preferably less. This is the time to tighten your belts.
Any excess money should be saved for that critical day when the holiday comes to an end. The last thing you need is a nasty surprise when your repayments kick in again. Believe me, there will be some who suddenly realise they’ve blown their money on internet shopping sprees and home food deliveries during the COVID-19 lockdown.
It is essential at this time to be disciplined about your finances and have a strategy in place. Deferring your mortgage repayments is no holiday – it’s called hardship for a reason.