Coping with job loss and mortgage demands
Millions of Australian households have been negatively impacted by the economic shutdown from COVID-19. This situation becomes even more difficult if you’re an investor who relies on rental income to help service the debt on an investment property.
There’s no doubt the unprecedented economic shutdown on the back of COVID-19 has put many industries in peril and jeopardised thousands of jobs.
This situation is difficult enough, but if you’re an investor who relies on rental income to help service the debt on an investment property, this can be an even trickier situation.
Fortunately, both the banks and the Government have been proactive in trying to help those most affected by the crisis, rolling out a range of programs to try and cushion the blow.
So where should you start if you’ve lost your job or income?
Take a mortgage holiday
Steve Mickenbecker, Group Executive Financial Services and Chief Spokesperson at Canstar, said that while this is a tough spot for many, talking to your bank is a vital first step.
“You’ve got very few options in terms of renegotiating with a new lender if you’ve already lost income, so you’ve really got to go and talk to your existing lender,” he said.
“Lenders have set in place things like mortgage holidays, so there is a strong intent to let people get back on their feet through that offer.”
A mortgage holiday allows borrowers to effectively freeze their payments for a period of three to six months, but Mr Mickenbecker warns that this will cost more over time.
“Interest will be capitalised, so it’s not a freebie - it’s a program put in place to help you and it’s good for the bank too because the banks don’t want people to be selling up.
“Interest will be charged, so that means you’ll have a bigger loan at the end of the period, so the only way to deal with that is by increasing your payments for a period going forward or letting the loan run for a longer period.
“Either way, you’re going to be paying more interest over the life of the loan.”
There has been some level of concern that those taking a mortgage holiday will be hit by the credit agencies, but Mr Mickenbecker says that is unlikely.
“This is an exceptional set of circumstances and it has affected a huge amount of people in the community, including investors and homeowners, through either retrenchments or significant salary cuts.
“The banks have already said they will take measures themselves and we would expect the credit agencies to refrain from blotting people’s credit records, so I think people can approach this with a fair degree of confidence.”
The Government has also played a part in helping those worst affected. Mr Mickenbecker said it is too early to tell how effective these measures will be.
“It hard to judge JobKeeper just yet as applications have just gone in.
“People have to try and take advantage of JobKeeper first and try and hold onto their salary but for those who have lost their jobs, they do have JobSeeker, will basically subsidise your employer to keep paying you, to fall back on.
“People should be taking advantage of both of those programs.”
Accessing your super
One of the most effective options for those who have lost their job or income is to access their superannuation. Mr Mickenbecker suggested this is well worth considering if desperate.
“If you have lost your job, sometimes saving a house is worth pulling money out of your super, so if that’s what it comes down to, you should withdraw super.”
“If you do take it up, dip into it as a last resort - put it in a separate account and only use it if needed.
“Set it aside, assuming you qualify, and you can always re-contribute it later on.”
As the situation continues to improve, Mr Mickenbecker suggested homeowners could start looking to interest-only loans as a means of freeing up some cash.
“Interest-only is also a good idea when you start to recover.
“Maybe if your income hasn’t reached the same level as before, then interest-only could be an option.
“Lenders might be more reluctant, because you’re obviously not reducing any principal and if we face a recession, then property values will fall.
“You probably need to have an LVR (loan to valuation ratio) of 65 per cent or less to get interest-only at this stage.
“On average, it will probably save you around $400-500 per month and you’ll pay a higher rate than principal and interest but that’s all cashflow that you can use while you wait for a job.
“It’s one of those options, where it’s a little bit down the track from now - perhaps when there are some green shoots on a personal level - but it’s worth thinking about.
“Again, it puts you behind in the long term but for anyone in this scenario at the moment, preserving cash is a good thing.”
Redraw or direct debit
Andrew Woodward, Founder of The Investor's Way, said the bank’s response to COVID-19 had been extremely supportive of customers.
“The banks are providing a number of options to assist families to manage their obligations while the impact of pandemic hits hard.”
Mr Woodward agreed that the main options for investors and homeowners were mortgage holidays, accessing redraw facilities or changing to interest-only. But there are also other options to free up some cash.
“Investors can adjust their direct debit – for those people who have a direct debit for mortgage repayments, there is the option to cancel the direct debit, reduce the amount in the case that you are paying more than the required amount, or change the frequency, that is if paying weekly or fortnightly, change to monthly to reduce the amount of payments being made.
“For those customers ahead on their repayments, they have the option to redraw the available funds to assist with meeting living expenses.
“As long as you are set up for redraw, this is a reasonably simple step to take.
“These options are generally the same for homeowners and investors, which is good news for those also affected by changes to the rental market.”