Your Mortgage Is on Hold. What Are the Implications?
If you're taking a mortgage repayment holiday, you're probably wondering about the long term effects. What will it mean for your mortgage? How will it impact your credit score?
How deferring your mortgage repayments affects interest
With the coronavirus reaping so much financial distress on so many Australians, taking a holiday from home loan repayments is a welcome relief for many. However, it's important to understand that this deferral is not a break from interest charges. The interest you incur during this period is added to your mortgage, affecting the overall cost of your loan.
At the end of the payment holiday, your lender may give you the option to either increase your monthly repayments or extend the term to cover the extra interest accrued. They should also offer the possibility of a hardship plan, where they will work with you on measures to help you catch up with your commitments.
As your mortgage broker, we can talk you through your options and answer any specific queries you may have. Your questions might include asking about the impact of coming out of a fixed-term or making any other changes to mortgage terms while on a repayment holiday.
Does a mortgage holiday affect your credit rating?
There will be no effect whatsoever on your credit rating provided your bank sanctions your repayment holiday, and you were up to date with repayments before COVID-19.
When your lender formally grants you a mortgage holiday, the Australian Banking Association has confirmed that banks will apply a 'zero' to your record. This means that when you're granted a COVID-19 related deferral on your mortgage, credit bureaus are told you haven't missed a payment. This information is emulated in your credit report and reflected in your credit score.
If you were in arrears before your repayment holiday, your credit score would continue to reflect that you're a higher risk. As these scores are generated from the information in your credit report, there will already be a history of late or missed payments from financial institutions, telecommunications and utilities.
If you stopped making mortgage repayments but didn't get your lender's approval to take a break, this will affect your credit rating. Your missed payments will be reported to the credit bureaus as 'missing', which will affect your credit score in the same way that it would have before COVID-19.
Consider these options as alternatives to taking a repayment holiday:
Lower your repayments to the minimum
Take back any extra repayments sitting in your redraw account
Ask for a reduction in your mortgage interest rate.