After a series of rapid interest rate rises, home owners are seeing huge hikes in their monthly repayments — and some are wondering how they'll manage.
If you're struggling to pay your mortgage, one option is to ask your lender to enter a financial hardship arrangement.
"Banks are very willing and open to do what they can for borrowers, particularly if it's a temporary situation," says Louise Jansson, acting director of advice at the Financial Rights Legal Centre.
For example, if you've lost a job or are dealing with a health issue, you might be able to switch to interest-only payments for a few months while you get back on your feet.
While these arrangements can provide much-needed relief, they can affect your credit score and increase the total cost of your home loan.
And financial advocates are calling for banks to provide longer-term solutions for financially stretched customers.
A need for a 'long-term' solution
Matthew Martin is the legal director of Mortgage Stress Victoria, a not-for-profit based in Melbourne's western suburbs that helps people in financial distress.
He says as many as 40–50 per cent of Mortgage Stress Victoria's clients have experienced family violence. Many are also dealing with mental health issues or long-term unemployment.
"[We're seeing] more urgent matters and also more people coming through who haven't been in financial hardship before: people who haven't had a particular event happen to them, like an injury or loss of employment," he says
"It's just [that] the interest rate rises have caught up with them and they can no longer afford their mortgage long-term."
While hardship arrangements are a useful tool for people dealing with a temporary setback, Mr Martin says the banks need to do more.
"We're wanting the banks to be offering people things like discretionary interest rate reductions, where there is room to move on the interest rate, or loan-term extensions … so the mortgage payments are spread out over a longer period of time and the repayment amount is reduced," he says.
"Or even waivers of interest to help out customers when they're in need.
"In this current climate, with interest rates going up, it does require long-term hardship assistance — because it is a long-term problem."
Why it helps to speak to your bank early on
If you've had a financial setback, it's understandable why you might be reluctant to contact your bank.
But Ms Jansson says it's better to speak to your bank early in the piece.
"Some of the bad experiences [happen] when people don't reach out for help early."
"They might … take out a short-term loan to meet their mortgage repayments or [use] buy now, pay later products to meet their daily living expenses," she says.
"In those circumstances, by the time they reach out to the bank, that can make it really difficult for them to find a solution for their mortgage."
Importantly, lenders have obligations under credit laws to consider customers' requests for hardship arrangements, and banks often have specialised teams working on hardship arrangements.
You can get help to speak to your bank from a free, confidential financial counsellor by contacting the National Debt Helpline.
You can also call your bank or write to them yourself. The Financial Rights Legal Centre has a free letter template you can use to ask for a hardship variation.
How hardship arrangements affect your credit report
If you ask your bank for a temporary hardship variation, it will appear on your credit report, and it could affect your ability to borrow money in the future.
But that shouldn't discourage you from seeking help, Mr Martin says
"It does get noted on your credit report that you've been in a hardship arrangement, but that is better than having a note on your credit report that you've missed a repayment and you're not in a hardship arrangement," he says.
It's also important to understand that while switching to interest-only repayments will reduce your regular repayment, it can lead to you paying more interest over the life of your loan.
"Switching [to] interest-only might help temporarily. The interest still accrues, it's still owed and it doesn't solve the long-term problem of the affordability of the mortgage," Mr Martin says.
It's important to consider all of your debts, not just your mortgage
It's understandable why you might choose to prioritise your mortgage if you're in financial stress: no-one wants to lose their home.
But Ms Janssen says it's important to have a plan for all your debts and bills.
"The home is very important, you want to protect your home, but some of these other sorts of debt can put your home at risk as well," she says.
"Council rates and energy providers have hardship arrangements as well. So, taking advantage of some of those can help people to continue [to pay] their mortgage.
"Some other debts, like strata [fees], don't have hardship obligations. So, getting behind in those can be a real risk."
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