Press pause on pausing your mortgage by reading this first...
If you have a mortgage and have had your hours cut or you have been stood down, reaching to grab the phone to organise for your mortgage to be paused, may come with an increased expense in your life that will carry well into the future, as well as costing you valuable time.
Whilst I applaud our banks for making this option available to help so many Australians keep the roof above our heads, I think it is so important that we all know and understand the consequences of pausing our mortgages before doing so and also know alternative options available to you that may actually be far better for your financial wellbeing.
Pausing your mortgage isn’t actually a new “Covid-Concept” people have been able to pause their mortgages with their banks for years, for example when having a baby, (marketed as a “Pregnancy Pause”) you can put your mortgage repayments on hold whilst on maternity leave.
But the cold hard truth behind this pause, regardless of what and why you use it, is that the interest accrues whilst on pausing, adding to the balance of your home loan, meaning that your mortgage goes up. Which inevitably means going deeper into debt, costing you more interest and taking longer to pay your home off.
For example, say I have a $450,000 mortgage, with an interest rate at 3% p.a. making the cost of interest $1,125 per month. By pausing my mortgage for 6 months, my home loan will actually be increasing by $1,125 per month, plus new interest on the increased loan amount, which grows each month. That is to say, your mortgage is capitalising.
Assuming I pause my mortgage for 6 months, by the end of this pause period, my mortgage will now be over $456,750.
Now whilst I wholeheartedly understand that some people have no option but to pause their mortgage, I want to share with you 7 options that are worth considering before doing this.
1. Switch to Interest Only
The benefit of doing this is the your mortgage doesn’t increase, it flat lines. This is because you only have to make payments of the interest on the loan. So if you are on a tight budget, instead of my mortgage repayment being $2,600 pm, it is only $1,125 pm and you able to tread water until you get back on your feet again and can switch back to principal and interest.
2. Rent it out
If you are really stuck you could always look at moving out of your home and renting it out or event renting a bedroom out. Whilst this isn’t ideal, it means that someone else is helping pay your mortgage for you, whilst you find more cost effective accommodation. This doesn’t have to be forever, but it does buy you some time and helps reduce the risk of having to sell at potentially one of the worst times possible. Plus if you work from home, your tax deductions on your new rent can help fatten up your tax refund, that can be put towards the mortgage.
3. Use your redraw
Having seperate savings account floating around in cyberspace isn’t efficient. That $10,000 spread across 3-4 different accounts earning you a combined total of $100 p.a. post tax in interest compared to saving you $11,000 in after tax interest and 13 months off you home loan (assuming a $500,000 mortgage at 2.59% p.a.) puts you in such a better position financially. So consolidate your savings accounts or emergency money and put that valuable cash in your redraw facility so that it offsets the interest against your mortgage in the meantime.
4. Budget Baby
If you don’t have a budget, now is the time to do one. Effective budget templates can help you fine tune it down to the essentials, leaving you with valuable left overs than can be directed towards your home loan. If you subscribe to our newsletter, The Sugar Hit (check your junk mail), you will automatically get sent 3 different budget templates (each template tailored for specific financial circumstances) and a free eBook to help kick start your journey to financial freedom.
Dedicate some time over the long weekend to do this and you will start to feel so much more in control and see there is light at the end of the tunnel.
5. Sell & Stockpile
Look around you and see what items you can sell. This includes everything from cars to mobile phones and fashion accessories to furniture. As you start collecting the cash, aim to start building as many months as possible of mortgage repayments. Remember, now is about buying time. Do brainstorm as many different ideas as possible and put them into action.
Stay well and stay at home.
Canna Campbell is the founder and director of SASS Financial Services, a boutique financial planning firm. She is Channel 9’s exclusive ‘money expert’, founder of financial media platform SugarMamma.TV and best selling author of The $1000 Project and Mindful Money.