What has happened?

To ‘batten down the hatches’ is a nautical term from the early 19th century. When a ship was about to enter rough seas, the captain would order the crew to batten down the hatches to prevent the ship from sinking. Our government is trying to flatten the COVID-19 curve to prevent the same devastating and overwhelming chaos in our medical system that is currently occurring in Italy and increasingly around the world. Quite simply, they’re also concurrently trying to prevent a financial system collapse. It seems that no matter where you look the rapid spread of COVID-19 is having a major impact on the economy. Yesterday, the federal government announced the largest stimulus package in the nation’s history. They have indicated that it’s likely there will be more to come. This alone should tell us that we are in uncharted waters and the economic effects of this virus are going to be felt for some time to come. Mark Korda, one of Australia’s leading financial insolvency experts, wrote an excellent article in The Australian Financial Review on Friday last week. He discusses steps that need to be taken by our government and business community to “prevent catastrophic damage to Australia’s businesses”. Yesterday’s stimulus package announcement and proposed temporary changes to insolvency laws appear to support some of his suggestions. This is real and it feels quite sudden, but I fear that too many Australians are unaware of the potential severity of this event. Regardless of the security of your employment, this must be taken seriously. Lenders have been proactive and are taking the extraordinary step of offering to defer affected customers (business or home loan) mortgage repayments for up to six months. Some have also announced huge reductions in interest rates for home loan and business customers. These are great initiatives, however, I implore you to proceed carefully when thinking about deferring your loan repayments. Do not rush into this. If you feel there are no other options be sure to ask your Lender and/or Adviser the following questions so you fully understand the implications of hardship provisions:

1. Is interest capitalized during the deferral period?
2. Is the loan term extended?
3. What will the expected repayment be at the end of the deferral period?
4. Will a repayment deferral period impact your credit score?
5. Will you be able to refinance at the end of the deferral period?

Some of my colleagues in the Mortgage Broking industry have already shared cases of their clients who have called Lenders to take advantage of these provisions. Their clients were granted access very quickly and without much discussion at all. They had no idea what this meant for their contracted loan repayments over the long term. Further to the above question around impact to credit score, APRA announced on Monday, “Where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears.” This should go some way to alleviating concerns around the impact on credit scores but I expect this will be a manual reporting process at each lender so thorough checking of your credit file at the end of the deferral period should be undertaken.

What steps can you take now?

A quality business adviser will discuss emergency planning, commonly referred to in business as a ‘Business Continuity Plan’ (BCP), with their clients. Executive teams and IT departments across the country have probably been running on very little sleep over the past few weeks as they enact their own BCP’s, mainly focused on remote workforces and data security. Everyday Australians should also be thinking about how to operate their finances in BCP mode. Think about what you can do now to smooth out any coming bumps in the road that cannot be seen yet. Below is a short list of steps that might help.

• Speak to your Broker or Lending Manager – If you feel like you’re unable to repay your loans over the coming 3 – 6 months then reach out to your Broker or Lending Manager. With a clear head, they should be able to guide you through your options.
• Start a budget – Writing down an income versus expenses budget moving forward is one thing, but it’s very rare for this to match what has actually been happening. Companies have become very good at taking our money via small monthly subscriptions, which are either forgotten about or which don’t seem expensive when considered individually. The rise of ‘tap and go’ payments also makes it difficult to accurately track expenses. Understanding where your money is going right now is critical. There are many software programs that allow full collation of all expenses to linked bank accounts via a data feed. This will help you build a realistic budget and cut out unnecessary costs. It’s time to reign in the spending!
• Understand your equity position – Get a bank valuation completed so you know your true net asset position. It will make negotiating (see below) easier.
• Utilize offset accounts – This can help to reduce interest costs and store any excess funds.
• Understand redraw facilities – Excess loan repayments might be accessible via ‘redraw’. What is available to you? Do you have access to other automatic credit?
• Consider reducing repayments to the minimum contracted level – Most lenders will not bring your repayment down when interest rates drop so your minimum contracted repayment might actually be a lot lower than what you’re paying presently.
• Negotiate a lower interest rate – Lenders might be willing to reduce your variable interest rate if you discuss your desire to move to another Lender with competitive interest rates. Lenders will ‘price for risk’ so if you have 20% or more equity in the property it’s likely they will negotiate with you. A good call script will assist here. You may also consider some of the 1 – 3 year fixed interest rate loans that have come into the market last week. Some are 2.19% pa.
• Consider switching to interest-only repayments – This might be an appropriate short term strategy to reduce cash flow strain. The switching process is cumbersome at most Lenders and if you’re successful, be aware that it will be likely to increase the total amount of interest paid over the life of your loan. But at least you will avoid potentially being tarnished with a loan under hardship provisions.

  Click here to join us for a live online presentation on Thursday the 2nd of April at 7pm (AEDT) to gain a further insight how the current economic state could affect your mortgage and what steps you can take now.   Author details Karl Bower is Managing Director of Bower & Co. Advisory (www.bowerco.com.au), a boutique Mortgage Broker firm with a mission to help their clients reduce debt, protect their assets and build wealth. The business was established in 2006 and Karl has worked in the banking and financial services industry since 1995.   General disclaimer The information provided in this article is for general information only. Please do not rely on the content as a substitute for specific legal or financial advice. Before making any decisions, you should consider your specific objectives, financial situation and needs. Originally published via Bower & Co. Advisory who have given permission to Reach Markets to share the content.   Reach Markets Disclaimer This article is provided by Karl Bower, Managing Director of Bower & Co. Advisory (www.bowerco.com.au). The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Reach Markets. Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing [email protected]. This publication contains general securities advice and does not take into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.