The Real Cost of a Repayment Pause
At Kingsbridge Private, we feel it is vitally important to review all options for clients in this uncertain time. Whilst it is encouraging that the banking industry, with the assistance of the ABA, has put in place measures for repayment relief for their borrowers there are matters to consider before considering applying for relief.
In short, a repayment pause ain’t no free holiday!
Whilst various lenders have instigated slightly different criteria in applying any repayment relief, the overriding consideration remains – what could this cost you in the long run?
This is not to say for those severely affected by the current environment in terms of loss of job or a vastly reduced income should not avail of a repayment pause. However for those that do have available redraw, funds in offset, or access to other funds, it can be significantly better to maintain your repayments.
Consider the example using a calculator the team at Kingsbridge Private has built (see the link below).
For a loan of $500,000 over a 30 year term at a rate of 3.5% with a 6 month repayment pause, where the interest is added to the loan and then the loan term extended at expiry to maintain the same repayments prior to the pause, sees the long term additional interest cost to you in excess of $25,000. That essentially means, it will cost you more and take you longer to pay off your loan.
Now again this is not to say that in some cases this may not be the only course of action available, however there are other measures you may be able to implement to avoid this additional cost as follows:
- Speak to us if you are still earning income, but are concerned about the coming months, as to possible refinance into some of the low fixed rates available in the market (as low as 2.09% fixed for 3 years) and the possibility of a modest increase to create a cash buffer.
- If you have available redraw in your loan and are comfortable using it, you can continue to make loan repayments using these funds to avoid the long-term costs detailed above.
- If you have funds in offset or other available funds, using these to maintain loan repayments and again avoid the longer-term costs.
- If you do need to opt for a repayment pause it is recommended, where possible, that you try and maintain the same payments you had, however redirect them to a separate account. This will create a cash buffer that, if needed, you can utilise. However if you can get out the other side with these funds intact, you can simply use them to deposit to your loan and maintain the status quo.
In summary, it’s not always appropriate to take what’s on offer, even if it seems appealing. Things aren’t always as simply as they seem.
We would strongly recommend to our clients the best action is to talk to us at Kingsbridge Private to discuss your options in more detail. We are only too happy to use our calculator to generate what the real cost to your specific scenario is, and that will assist in the decision-making progress.
Please also continue to visit our COVID-19 page at http://kingsbridgeprivate.com/covid-19-updates/ for any relevant information as we are continuing to update this as the landscape changes.