There are a lot of reports in the media about financial support to small business following the Corona Virus outbreak so I thought I would fore-arm you with some information if you find yourself in this situation.
As an example, the repayments on a $500k loan over 15 years P&I at 4% are $3,698 pm, however the repayments on $500k over 14 years P&I at 4% are $3,891 pm. I.e., almost $200pm more
If your loan is currently $500,000, your interest rate is 3% and your repayments are $2,200 pm, at the time that the bank provides you with a 6 month repayment holiday then you will have approx. $13,200 extra in your business/household budget ($2,200 x 6).
However, the loan continues to attract interest during this period & your $500k loan will increase up to approx. $507,500. At the same time the loan will reduce under its normal monthly amortisation arrangement and hence at the end of this 6 months the loan limit will be approx. $494,300.
This does not cause any problem for your lender or you and you can resume your repayments of $2,200 pm all the way through to the end of your loan (which will simply take an extra 6 months to clear). No additional or penalty interest will ever be charge to you and as far as your lender is concerned there is nothing you need to do.
However, it becomes a problem should you seek to refinance onto a better rate with another lender or simply seek to borrow additional funds to do some renovations. This could be years down the track. The problem is that your loan limit is now showing $494,300 but your account balance is showing $507,500 and whilst this has been done with the full approval and knowledge by your bank, it is actually in arrears according to all other lenders.
If you want to borrow additional funds from your current bank the story is similar in that you are “still under financial hardship provision” and hence they will not lend you any further money.
The only way out from this position is to attempt to catch up the $13,200 that you are behind by making additional repayments to your loan.
This article is not intended to dissuade you from seeking repayment relief from your bank if you need it. It is simply giving you the tools to hopefully deal with the matter in an informed manner.
The best solution to any of the above is to seek the repayment holiday (or interest only term), but in doing so obtain confirmation from your bank that once you return to normal repayments that they will
Note: Many lenders may not agree to this approach.
- Make an assessment of how bad this will actually get for you & your business.
- Put together a financial budget and then assess what items can be cut or reduced
- Approach your bank and have a frank discussion with them. There are a number of measures that can be taken such as:
- Moving onto interest only payments for 6 month or a year
- A repayment holiday where you don’t make any payments to your loan for the next 6 months
- Reduce your monthly payments for a period
- By moving to interest only for 12 months
As an example, the repayments on a $500k loan over 15 years P&I at 4% are $3,698 pm, however the repayments on $500k over 14 years P&I at 4% are $3,891 pm. I.e., almost $200pm more
- Take a repayment holiday for 6 months
If your loan is currently $500,000, your interest rate is 3% and your repayments are $2,200 pm, at the time that the bank provides you with a 6 month repayment holiday then you will have approx. $13,200 extra in your business/household budget ($2,200 x 6).
However, the loan continues to attract interest during this period & your $500k loan will increase up to approx. $507,500. At the same time the loan will reduce under its normal monthly amortisation arrangement and hence at the end of this 6 months the loan limit will be approx. $494,300.
This does not cause any problem for your lender or you and you can resume your repayments of $2,200 pm all the way through to the end of your loan (which will simply take an extra 6 months to clear). No additional or penalty interest will ever be charge to you and as far as your lender is concerned there is nothing you need to do.
However, it becomes a problem should you seek to refinance onto a better rate with another lender or simply seek to borrow additional funds to do some renovations. This could be years down the track. The problem is that your loan limit is now showing $494,300 but your account balance is showing $507,500 and whilst this has been done with the full approval and knowledge by your bank, it is actually in arrears according to all other lenders.
If you want to borrow additional funds from your current bank the story is similar in that you are “still under financial hardship provision” and hence they will not lend you any further money.
The only way out from this position is to attempt to catch up the $13,200 that you are behind by making additional repayments to your loan.
- Point C is simply a combination of points a. & b.
This article is not intended to dissuade you from seeking repayment relief from your bank if you need it. It is simply giving you the tools to hopefully deal with the matter in an informed manner.
The best solution to any of the above is to seek the repayment holiday (or interest only term), but in doing so obtain confirmation from your bank that once you return to normal repayments that they will
- Formally extend the term of the loan by the same period that your holiday or interest only term was for, AND
- Ensure that the loan limit is adjusted to cover the debt at the back end of the repayment holiday. Again you will need to seek Formal approval to this aspect, not just verbal advice that “everything is ok”
Note: Many lenders may not agree to this approach.
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