By Effie Zahos,
, May 2009
I must admit that when I first heard that the Commonwealth Bank was throwing a lifeline to unemployed homeowners by deferring repayments by up to 12 months, I thought: “Clever big bank.”
Clever because lenders have long offered hardship assistance but only the Commonwealth, now that the unemployment rate has hit a five-year high, was smart enough (and quick) to put a marketing spin on it.
Of course, it wasn’t long until every other bank, building, society and credit union jumped on to the “mortgage hardship package” bandwagon. But the real kudos should go to the federal government for putting it on the current agenda.
Put simply, thanks to the Uniform Consumer Credit Code introduced back in 1994, hardship clauses have always been part of the terms and conditions attached to home loans. If you were unable to make repayments due to temporary hardships, such as illness or unemployment, there were, and still are, several options in place to help you from going under.
Most notably, you can ask to have your contract changed so that you can better meet your repayments. As Lisa Montgomery, from non-bank lender Resi, puts it: “Banks have just formalised it.
“All lenders can offer repayment holidays,” she says. “But it’s important to note that the interest does compound. It’s definitely a short-term initiative that will need to be addressed when you get back on your feet again.”
So are hardship packages a prudent business decision by lenders or a true lifeline? A quick scan of several blog sites shows home owners are split.
Take Tom’s blog for example:
“Great scheme for those who it does help, but long-term unemployed won’t be helped at all. Remember, the key point here is a bank offering its customers a break in repayments – when do banks ever give away anything without taking it back twofold in some other way?”
Michael obviously didn’t share his view:
“It’s a pity when a corporation comes up with a good idea that someone feels duty-bound to pour cold water on it.
“I don’t bank with the Commonwealth but can recognise a great idea and feel they should be commended. After all, the people they are assisting are their clients and they happen to be adults quite capable of making up their own minds about the advisability of taking up this offer.”
So where do I sit? Somewhere in between. Look at it this way:
Capitalise interest for 12 months on a $300,000 mortgage at around 5.5 percent percent pa and you’d pay about $19,000 more than you would have over the 25-year life of the mortgage. To wipe out that extra cost in the next year you’d need to up your monthly repayments by $1947.
This assumes, of course, that you’re back in the workforce and you’ve got the income to afford this. The real problem is that with interest capitalising, some home owners could find themselves in a situation where they owe more than the house is worth.
The other problem is that, with interest compounding, some home owners could find themselves exceeding the mortgage insurance-free threshold – 80 percentof the purchase price. Would this mean that those home owners would also be up for mortgage insurance?
Now, note that mortgage insurance protects the lender, not the borrower, and it’s not cheap either.
Money will get back to you on this one as the lenders we spoke to weren’t quite sure of the answer either.
In the meantime, be aware that if financial hardship is causing you to default on your loan, don’t put your head in the sand. After all, there are now plenty of options available to help you service your loan. Some lenders are spreading the support across all personal debts including credit cards and personal loans, so it’s worthwhile asking your lender how they can help you.
Money Magazine's May 2009 issue is out now. Subscribe now.
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