The great divide – how COVID is hurting some families and helping others

When it comes to the financial impacts of COVID-19, there are two narratives emerging amongst Australians: those who are being hurt by COVID-19, and those being helped.

For those being hurt, the ramifications may be felt for many years, even decades to come. However, there are some crucial tips that may be able to offer some relief. For those being helped, there are still ways they can use this time to their advantage.

How households finances have been hurt by the pandemic

The latest unemployment figures from the Australian Bureau of Statistics (ABS) show that almost a million Australians (7.4 per cent) are out of work. Meanwhile, 3.5 million Australians are now receiving JobKeeper payments to help keep heads above water.

Those who still need a helping hand have been able to dip into their superannuation, with the latest Australians Taxation Office figures showing 2.75 million unique applications have been approved, totalling $30.2 billion. The average amount withdrawn is $11,750. This in itself may have seriously negative impacts on an individual’s final balance.

In terms of personal debt, 800,000 households have had to pause their mortgage repayments due to hardship, according to the Australian Banking Association. Further, the latest ABS figures show new personal loans increased by $182 million from April to May, up 14.5 per cent month on month.

Tips for families financially hurting due to COVID-19

If you’re struggling to keep on top of your bills, you’re not alone. But it’s not just mortgage holders who have been offered relief by banks. In fact, there are a range of debts and bills that households may be able to request be deferred for hardship reasons.

1. What bills households can take a break from paying right now

Keep in mind that you will generally need to provide evidence that you are struggling financially with these repayments, such as evidence you’ve lost your main source of income or are now on a reduced income.

Also, remember this is not free money. You will eventually need to pay this back, and if you’ve been accruing interest on your deferred loans, the total cost now may be higher.

If you are in a position to make any repayments, try and pay what you can, even if it’s not the total bill. Further, consider negotiating with your bank or provider. You may be able to switch to a lower cost service.

• For a full list of hardship relief support offered by your bank, please visit the RateCity Relief page.

2. Reducing the impact of a mortgage repayment pause

If you’ve deferred your home loan repayments, you may be shocked to find that your repayments are potentially higher. This is because your mortgage would still have been accruing interest even while your repayments were paused.

The cost of a repayment pause extension on a $500,000 loan:

Notes: Based on an owner occupier paying principal and interest on the average rate of 3.43%. Calculations assume a borrower is 5 years into a 30-year loan with a loan balance of $500,000 when they defer for 10 months and that the loan term remains the same. People who are further into their loan may pay less. People who increase their loan term may pay more.

Here are some tips that may help reduce the impact of a mortgage repayment pause:

• Try and pay off some of your loan during the pause.
• When the pause finishes, see if you can make extra repayments to catch up.
• Negotiate a lower interest rate with your bank and if possible, try and put any savings from the rate reduction back into your mortgage.
• Call an independent financial advisor or a financial counsellor for advice. The National Debt Hotline is: 1800 007 007.

3. Potential alternatives to pausing mortgage repayments:

• Switch to minimum repayments: customers making higher repayments on their loan may ask their bank to adjust their repayments to the minimum to free up cash.
• Use your redraw facility: if you are ahead on your repayments you may be able to access them via redraw (fees may be charged).
• Request a rate cut: variable rate customers can ask their bank to lower their home loan rate. While banks typically don’t allow rate changes for fixed rate customers, if you are in financial stress, it’s still worth asking.
• Switch to interest-only repayments: many lenders will let you only pay the interest on your loan for a period of time. While it will reduce your monthly repayments in the short term, your interest rate is likely to increase and by not paying down your debt, you will pay more in interest charges over the longer term.
• Reduce repayments temporarily: instead of going on a full repayment pause, see if you can reduce your repayments. While this can potentially add thousands to your mortgage, it’s likely to be better than going on a full repayment holiday.

If you’re now considering refinancing to a lower-rate home loan, or one that offers more flexibility, you’ll want to ensure you do your research around which loans are the most competitive. Here are some low rate home loans to start you on your refinance journey:

How households have been helped financially by the pandemic

Credit card debt is at record lows, as restrictions on travel have prevented many Australians from spending money and accumulating debt. According to the latest Reserve Bank of Australia figures, in April and May Australians wiped $3.2 billion off debt accruing interest.

And with more Australians at home, bank deposits are on the rise. According to the Australian Prudential Regulation Authority’s data, between April and May Australians had $9.6 billion more in their bank accounts.

For those with children, the government’s childcare support meant that no families paid costly childcare fees from April 6 to June 13.

Tips for families being helped financially by COVID-19

For some families, COVID-19 has actually helped them save money through:

• Not paying childcare fees (day care/pre-school/OOSH)
• Reduced transport/petrol costs
• Not eating/drinking out
• Not getting regular beauty treatments
• Not paying for children’s extracurricular activities like sports/dance/swimming
• Record low home loan interest rates or falling rents

With that $9.6 billion now sitting in Australian’s bank accounts, some households may be wondering what they can do with their new savings.

You may want to put some of the money you have into a savings account as a financial buffer to help you through any tough times ahead. With no word on how long the COVID-19 pandemic will last, making a rainy-day fund isn’t the worst idea.

If you have outstanding debts, now may be the time to consider chipping away at them. Whether you have a credit card to pay off, or want to get ahead on your home loan, paying down your debts can make a real difference to how much interest you pay in total. If you’ve got multiple debts, experts generally recommend starting with the debt with the highest interest rate first.

Further, you may also want to consider renovating or upgrading your home. Investing your savings back into your home may add value to your property in the long run. Further, you may also be eligible for the $25,000 grant for home renovations on offer from the government.

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