Common COVID-19 Questions: Home loan repayments & your credit score
As part of their response to the COVID-19 pandemic, the big 4 banks and other mortgage lenders have been introducing a home loan repayment pause (or mortgage deferral or mortgage repayment holiday) to help Aussies who are struggling to make their home loan repayments. If your finances have been impacted by this recent pandemic, it’s important to know how late or deferred payments can affect your credit score and what actions you can take to protect your credit reputation moving forward.
Late home loan repayments can affect your credit score
Unless you have a hardship arrangement in place with your lender, missing your repayments or defaulting on your loan can negatively impact your credit score and your ability to get approved for credit in the future.
If your financial situation is impacted by the pandemic, contact your lender as a priority to request hardship assistance. Additionally, if you have concerns about meeting your repayments after the COVID-19 assistance period, make sure you also communicate this to your lender, so that they’re aware of your situation and can examine the additional options available to you.
Can deferring your home loan repayments impact your credit score?
The Australian Banking Association (ABA), which represents 22 banks in Australia, have confirmed a 6 month home loan repayment deferral won’t impact your credit score, provided that your repayments were up to date before your request for deferral. If you’re unsure if your lender supports this initiative, contact your lender directly to discuss your options, the terms of any repayment deferral periods, and what this means for you and your credit score down the track.
How to protect your credit score
Here are some tips on how you can proactively manage your credit score during these tough times:
- Contact your lender for hardship assistance. Find out what hardship arrangements are available so you can work out how to manage your repayments.
- Make your repayments on time. Whether you have a hardship agreement in place or not, it’s important that you make the minimum payment required each month to avoid a late payment or default being recorded on your credit file.
- Consider the interest & fees in your lending options. While it may look like a quick fix for your finances, a payday loan has a lot of fees, and you will have to pay back a lot more than you borrowed. Payday loans can also negatively impact your credit score and some lenders may not approve your credit application if there’s a payday loan enquiry on your credit report. If you’re struggling to make your repayments, contact your lender as soon as possible. Your lender will have dedicated teams to help you work out a suitable repayment plan.
- Check your credit score and credit file information regularly. Monitor your credit reports closely to make sure the information is accurate and up-to-date and that any missed repayments have not been improperly reported. Different lenders have different credit reporting policies, so it’s important to check with your lender what information will be reported on your credit report during the hardship period.
Want to find out where you stand now? You can check your credit score and credit file information for free anytime, anywhere with Credit Savvy.
How do I know If I’m eligible for the COVID-19 hardship assistance?
These support measures are designed for anyone who has lost their job, is experiencing a loss of income, or has had their financial situation impacted as a result of the pandemic. Your lender may ask for supporting information or documentation to confirm your eligibility.
How do I apply for hardship assistance?
1. Work out what you can afford to pay. Reassess your financial situation and work out what you can realistically afford to pay towards your home loan each month moving forward.
2. Contact your lender directly. Explain your financial situation and see what hardship arrangement your lender can offer you based on your circumstances.
3. Prepare relevant loan documents. Your lender will ask you to provide your personal and financial details to help them review your hardship application, so be prepared to discuss your employment status, income, expenses, and assets.
Your lender must write to you within 21 days to inform you of the outcome of your hardship request. If your lender refuses your hardship request, they must give you a reason for their decision. If you’re not happy with their response, contact their internal dispute resolution team. If you cannot reach a satisfactory outcome with your lender, you can also escalate the issue to the Australian Financial Complaints Authority (AFCA).
What does interest capitalisation mean for my home loan?
If you’re on a home loan repayment deferral arrangement, this means that you can temporarily stop making your repayments for an agreed period, however, interest will continue to accrue. After the assistance period, your required repayment amount will increase to account for the interest accrued. You can either choose to stick to your original loan term, or you could extend your loan term to keep your repayments lower but repay the loan for longer.
Are there other ways to manage my home loan repayments?
We cover more details in our article to help you understand the ways you can manage your home loan under the current climate. Remember to do your research and review your financial position to decide what option is the right one for you.
Want to know more information about COVID-19?
The COVID-19 & your finances series contains tips and support information to help you manage your finances during this difficult time.