Managing Financial Commitments in Uncertain Times
*link to online budget tool HERE
There's been a lot of talk recently about options to ease financial stress in regards to mortgages at this time. In particular 'Repayment Holidays' (which are really deferments, not 'holidays' at all) or going 'Interest Only'.
When it comes to making a decision in regards to either of these two options one-size DOES NOT fit all. And even more importantly it's vital for anyone considering either of these options to
a) Seek professional advice
b) Understand the long-term implications that each of these options can have on your financial situation.
What is a Repayment Holiday?
A repayment holiday/ Home Loan repayment deferral allows you to pause your loan repayments for a period of time, generally up to six months.
Although you won't have to make any scheduled repayments the banks still charge you interest on a monthly basis on what you owe, which is then added to your outstanding balance. So while you are not making payments the total amount owed to the bank will increase.
To get an idea of how this can impact you lets take a look at these two examples.
If you have an $100,000 loan over 25 years with an average interest rate over that time of 5%. You'd be making fortnightly principal & interest payments of $269 & would pay total interest of $75,278
On the other hand if you had exactly the same scenario however you had a 6mths repayment holiday during that time you're total interest costs would be $77,804.19 and additional $2,526.19 Of course depending on how many years you've had the loan prior to the repayment holiday will also impact the total interest you pay. Hence why it is so important you seek advice based on your PERSONAL situation.
Now lets take a look at the other scenario, an interest only loan.
WHAT IS AN INTEREST ONLY LOAN?
Placing your home loan on interest only means that for a specified period of time you will only be required to pay the interest costs incurred on the loan.
Unlike a repayment holiday, during this time you will make regular repayments but only on the interest charged to your loan. Meaning at the end of the specified period the loan amount outstanding to the bank will be the same amount as when you put the loan on interest only. However your payments will increase at the end of the interest only period to 'catch-up' on the principal payments that were missed.
As you can see taking a repayment holiday or going interest only can certainly help out in the short-term however it can also have significant impact on the overall amount you repay to the bank in the long term.
There are ways you can mitigate this impact such as increasing your repayments when you revert back to a principal & interest loan, making lump sum payments etc. However this is something that requires active management of your loans & is best done in conjunction with someone (like the Focus team) who can provide you with quality impartial advice, specific to your situation.
There are also other options if you are currently experiencing financial pressure other than what's been mentioned above which maybe better suited to your situation.
So overall our best advice to you in these uncertain times is, just pick up the phone & have a chat with us. The earlier you review things the more options you have, and most importantly you'll get a lot more peace of mind.
As always our services are FREE