Episode Details

We provide answers to a number of frequently asked questions below. We will continue to add new questions and update our answers as events and government announcements unfold.

Questions about pausing loan repayments

How does the loan repayment pause work?

Banks are offering customers the ability to pause residential loan repayments for up to 6 months if they have been impacted financially by coronavirus. I provided links to each lender’s relevant webpage at the bottom of this blog post.

It is important to note that banks are not offering an interest-free period. Interest in respect to your loan will continue to accrue and be added onto your loan balance.

For example, if your interest only loan is $100,000 and your interest rate is 3% p.a. then your monthly interest bill is $250. If you request the bank to pause repayments for 6 months then at the end of this period, your loan balance will be $101,500 (being the original balance plus 6 monthly payments of $250).

Most lenders have confirmed that they will not charge interest on the unpaid interest amount (e.g. the $250 per month) during the loan repayment pause period.

Should I pause my loan repayments?

If you are unable to continue to make your loan repayments on time due to financial hardship, then pausing your loan repayments is a good solution.

However, if you do have alternative means of making repayments e.g. from cash savings, redraw, etc. then my advice would be to utilise those other mechanisms first, before you pause your loan repayments.

Should I pause my repayments if I’m concerned about losing your job in the future?

No. If your income has not yet been impacted by the coronavirus then our advice would be to continue making normal loan repayments. If your financial situation is adversely impacted in the future, then you may consider pausing repayments at that time. We anticipate that lenders will allow borrowers to do this at any time over the next six months.

Will pausing repayments affect my credit rating?

No. The Australian Banking Association has confirmed that borrowers that take advantage of the repayment pause option will have any impact on their credit rating – see here.

Should I pause repayments on all loans?

If you have suffered financial hardship, our advice is typically to put investment loan repayments on pause first and attempt to continue to make normal repayments towards your (non-tax-deductible) home loan, if possible. However, if you are not in a position to continue making home loan repayments, then pausing all loans might be your only option.

Will the accumulated unpaid interest still be tax deductible?

If you put an investment loan’s repayments on pause, the interest will be added to the loan’s balance at the end of the pause period. Therefore, when normal repayments recommence, the bank will charge interest on this higher loan balance (so more interest will be payable). This should not have any adverse impact on your tax deductions. That is, all interest charged in respect to this investment loan will continue to be fully tax deductible.

Also, you will be able to claim a tax deduction for the interest incurred (and subsequently added to the loan’s balance) during the loan repayment pause period.

Can I reduce principal and interest (P&I) repayments to interest only?

Normally, changing repayments from P&I to in