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When COVID-19 struck, banks gave eligible customers an option to pause their repayments for six months from March, due to the volatile economic climate. Hundreds of thousands of Aussies took up the offer.

Home loan deferrals were due to end in September, but banks announced borrowers who are still experiencing difficulties could apply for further deferrals of up to four months. For those still considering this option, it’s important to understand the financial implications – you may end up paying more in interest over the course of your loan.

And once the deferral period ends, what next? Before making any financial decision, it’s best to seek professional advice about what’s right for you. Here are some of the options you may like to consider in consultation with your advisors.

Increase your repayments

If finances permit, you could increase your repayments when they resume so that you can pay off your mortgage in the same loan term and “catch up”.

Pros:

  • You won’t have to extend your loan term to cover the repayments.

Cons:

  • You’ll need to budget for the larger repayment, which may create additional financial stress.

Extend your loan term

You may consider extending your loan term from say 25 years to 30. By stretching the mortgage over a longer period of time, your repayments may decrease and remain as close to pre-deferral levels as possible.

Pros:

  • If you’re struggling financially, your repayments will be more manageable.

Cons:

  • You’ll be paying your home loan off longer and may pay more interest over the life of the loan.

Switch to interest-only repayments or make reduced payments

Instead of paying principal and interest, you could talk to your lender about switching to interest-only until you get on top of things financially.

You could also ask about making reduced repayments over the coming months. If you’ve been paying more than the minimum repayment amount, this could be an option.

Pros:

  • Repayment will reduce as no principal component will need to be paid (temporarily).

Cons:

  • Interest-only loans generally charge a higher rate of interest.
  • You won’t be making a dent in your home loan balance if you pay interest-only.
  • If you reduce your repayments, it may take you longer to pay off your loan.

Consolidate your debt

If you’re paying off several debts and you have sufficient equity, you may be able to roll your debts into your home loan.

Pros:

  • You may decrease your interest payable and your monthly repayment (for example if you’re paying off multiple credit cards at higher interest rates).
  • One repayment rather than multiple may make your life easier.

Cons:

  • You may be subject to Lender’s Mortgage Insurance (LMI).
  • In some instances, you may pay more interest over the course of the loan.

Access your redraw or offset facility

If you have a redraw facility and you’ve made extra loan repayments, you may be able to use these funds to cover your loan repayments while you’re going through a tough time financially. Same goes if you have savings sitting in an offset account.

Pros:

  • You’ll avoid getting into home loan arrears.

Cons:

  • Any money taken out of your redraw or offset account will no longer be reducing your interest.