Melbourne Cup Day brings excitement and fear in equal measure for two main reasons.
- Horse Racing: Masses of people dress up in their finest across the country and pretend they understand the complexities and form behind a competition of 24 horses running 2 miles. Many of us are so convinced of our ability to predict the future that we willingly bet hard cash on where the horses will finish.
- The RBA and Interest rates: Mass of mortgage holders, investment bankers, economists and mortgage brokers dress up in their finest and pretend they understand the complexities and reasons and form behind the RBA’s decisions to tinker with the interest rates. Many of us are so convinced of our ability to predict the future that we willingly bet our houses on where the future of property.
For those with a short memory, the day after the Melbourne Cup, traditionally came with the following inevitable feelings:
- Regret at having lost too many bets on a sport few people really understand.
- A promise not to drink too much next year when the same race is run.
- A muted sigh of relief that the rate on your mortgage had either stayed still or maybe even dropped, thus putting a few of those wasted dollars back in your pocket.
So what makes 2023 so different?
The traditional hangover associated with the day after the Melbourne Cup Day is usually worst felt by unlucky punters and unluckier boozers. However this year, the sombre news of a 13th consecutive rate rise in 18 months by the RBA seems to have eclipsed any brief joy found at the racetrack.
For many, this latest rise may prove the straw that broke the camel’s back in terms of mortgage affordability.
The November 2023 RBA announcement of a further 0.25% increase in rates has brought most variable rate mortgages up to approximately 6.24%, from an average of 2.24% less than 2 years ago. By any standard, that’s a hell of an increase in such a short time period.
To put this into real terms, have a look at the table below comparing a 30-year home loan in November 2021 to November 2023.
|Loan amount $1,000,000
|(30-year, P&I loan, variable rates)
If you took a mortgage out for $1m within the last two years, your repayments would have nearly doubled per month from what they began with. Ask yourself, is this increase of $2,334 per month a problem? Well, not really, so long as you won $28,008 on the Melbourne Cup. Alas, if you are like the rest of us who didn’t win or didn’t even place a bet, the lack of $2,334 per month is surely burning a sizeable hole in your pocket. This is before we even get to the increase cost of almost everything.
So what happens when you simply cannot meet your repayments?
Unfortunately too many people begin and end by putting their head in the sand. But there are measures and prescribed for hardship that any reputable lender (all retail banks and lenders) must have and make available to customers who cannot fulfill their repayments.
What is HARDSHIP?
So what do we mean by “Hardship”? Financial hardship is when a customer is willing and has the proper intention to pay, but, due to circumstances beyond their immediate control, is unable to meet their repayments or existing financial obligations. With a plan or agreement of formal hardship assistance their financial situation can be restored.
Financial hardship can be due unforeseen circumstances or unexpected events, for example:
- Unexpected changes in income and/or expenditure (e.g. During Covid shutdown).
- Changes in employment status (such as losing a job or a reduction in income).
- Significant life changes (for example martial breakdown, a death in the family, sudden Total and Permanent Disability (TPD).
- Circumstances of financial and/or domestic abuse
- Injury or illness.
- Emergency event or natural disaster.
Depending on the nature of the debt and circumstances, different banks will respond in different ways. So far, so good. However what is implicit in this is that your lender will always be willing to help you establish a financial plan to come out of your current malaise. Alas, this is rare; and from what I have seen, banks pay little attention to anything other than firstly complying with their basic regulatory requirements, and secondly pressuring the customer to return to full repayments as soon as possible. Quite often unreasonable demands are placed on them to getting rid of their arrears as quickly as they possibly can.
What you don’t know about Hardship agreements
I deal with many people who have entered into a hardship agreement with their bank. What is rarely mentioned to these people, is how difficult it can be to come out of hardship and get access to finance or refinance later on. Here are just some of the issues you will face:
- Hardship is limited and you must have a plan to return back to scheduled repayments.
- Most lenders will do anything they can to move you out of hardship and have the loan “performing” again. This is why you often receive threats from the bank so soon after getting into a hardship agreement,
- While hardship does not by itself affect your credit score, no one will lend to you while you are in hardship.
- You must be out of hardship for usually 6 months until another lender will consider lending to you.
- You must make payments on your arrears with the current bank.
- The rate on any missed payments is at a higher rate than your normal mortgage repayment. SO for example, if your normal rate was 6.49%, the arrears rate could be as high as 8.99%.
While hardship can be appealing, and in many, many cases is absolutely necessary, you should explore all and any options available to you. To most people who have gotten their home loan directly with a bank, you will find that the options presented to you by the bank are startingly limited. The person who organised your loan is rarely trained in how to deal with clients who are struggling to make ends meet. This should not surprise you. Most of these people are measured only on Sales targets. What use would you be to them when you cannot buy a new product.
There are many options available to borrowers before reaching out and accepting the poison chalice that a hardship agreement can bring. Ensure you talk to a qualified broker who knows their way around lenders and is able to come up with solutions.
The following options could be available to you:
- Put your loan on Interest Only repayments on loans for an agreed period.
- Restructure loan over to longer term, thus reducing the minimal monthly repayments.
- Refinance to another lender who is offering better rates and perhaps some cash back offer.
- Repayment holidays may be available on some home loan products whereby additional repayments above the minimum have been made over time.
- Negotiate a better rate with your current lender.
- Restructure your current debt to ensure the investment portion is maximised, thus allowing you to better control cash flow while also maximising tax deductible interest.
- Look at refinancing your SMSF loan. Nearly 70% of all SMSF loans I have ever done were for people who simply had forgotten about the high rates they were paying for an SMSF loan. In some cases clients were being charged nearly 3% more than was on offer elsewhere.
If you think you are paying too much on your mortgage, it’s because you probably are. Spare a thought too for the hundreds of thousands of borrowers who are on a low-doc (alt-doc) loan, the increase will have been even greater, and it is likely that you could easily shave at least 0.50% off what you are currently paying. If you haven’t looked at your SMSF rates, make sure that this is the next horse you back.
If you like getting ripped off, I suggest you don’t do anything further. But, just in case the above article is relevant to you, or if you think we can assist, please feel free to reach out and contact us in confidence.
We just may be able to help you!
Thanks for reading.