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Hardship Variations Explained

January 11, 2025

Happy New Year to you all, I hope you were able to squeeze in a nice break and are feeling refreshed.

This week, the ABS reported a rise in annual inflation to 2.3% in November 2024, up from 2.1% in October. Underlying inflation, which excludes volatile items, also rose to 2.8%, driven by factors like alcohol, tobacco, recreation, and tighter rental markets. Electricity prices fell annually (-21.5%) due to government rebates, but the month-on-month increase softened the decline.

What does this mean in practical terms? Given the increase is within “manageable levels” as defined by the RBA, the chance of a rate cut in the first half of 2025 is very real. To that end, ANZ announced yesterday that they expect the RBA to reduce the cash rate by 0.25% next month, with a second cut likely in August. Whilst nobody expects the rate to come down as quickly as it went up, this is none the less, very encouraging news.

In this week’s newsletter, we take a look at what borrowers can do if they are experiencing financial hardship.

A home loan hardship variation is a formal request borrowers can make to their lender for temporary changes to their loan terms when experiencing financial difficulty.

This provision, outlined in the National Credit Code, is designed to support borrowers facing unforeseen circumstances such as job loss, illness, or other financial hardships.

What are the options?

Deferring Loan Repayments: Temporarily pausing payments to ease financial strain.
Reducing Monthly Payments: Adjusting the repayment amount to better align with reduced income.
Extending the Loan Term: Spreading repayments over a longer period to lower monthly obligations.
Switching to Interest-Only Payments: Temporarily halting principal repayments to reduce costs.

What are the consequences?

While these options can provide vital relief, they also come with potential consequences. For instance –

Increased Loan Costs: Extending the loan term or deferring repayments can result in higher total interest paid over the life of the loan.
Impact on Credit History: While approved variations may prevent defaults, missed payments before applying can affect credit scores.
Potential Equity Erosion: Interest-only periods may delay principal repayment, affecting equity growth.

So whilst hardship variations can alleviate immediate pressures, it’s essential to understand their long-term implications. We encourage all our clients to get in touch with us if they are experiencing difficulties repaying their loan to discus their options, and can also introduce them to a financial counsellor to help them better undertsnand their spending habit habits and set a budget.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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