Updated: 16 April 2019 (updates are made in blue)
We have been receiving lots of questions from clients in regard to managing their finances and investments during the coronavirus shutdown. As such, we have decided to maintain and update this page which provides answers to some of these questions. We will continue to add new questions and update our answers as events and government announcements unfold.
Questions about pausing loan repayments
1. 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.
2. 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. This will avoid your loan balance increasing and consequently increasing the amount of interest payable over the life of the loan.
3. Should I pause my repayments if I’m concerned about losing your job in the future?
No, unless a change in income is imminent. 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.
4. 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 not have any impact on their credit rating – see here.
5. 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.
6. 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.
7. Can I reduce principal and interest (P&I) repayments to interest only?
Normally, changing repayments from P&I to interest only would require a lender to re-contract the loan and that would normally trigger a full loan assessment process. However, we understand that some lenders are working on their ability to do this without requiring the borrower to submit a full application. We will update this page if any new information comes to hand.
8. What if my loan to value ratio exceeds 80% after 6 months?
If you pause your loan repayments, your loan amount will be higher at the end of the pause period (because of the capitalised interest). Also, if the property’s value falls, this will increase your loan to value ratio (LVR) too.
Typically, as long as you resume making normal loan repayments on time, there is nothing that will invite the bank to reassess your loan position (including LVR). It is natural for property values to fluctuate over the term of a loan which is why they only lend you 80% of the value in the first instance.
9. What if you still don’t have employment after 6 months?
If you are still unemployed after the 6 month loan repayment pause has expired, you will need to contact your bank to come to an arrangement. This may include you selling the property within a certain period of time so that you are able to repay the loan. It is important that you are proactive with your communication with the bank as it will help you maintain control over the decision making process.
Landlords and tenants
10. How does the ban on evictions work?
Government has enforced a 6-month moratorium on evictions of commercial and residential tenants who are unable to meet their commitments due to the impact of the coronavirus.
Therefore, if your tenant is unable to pay their rent due to coronavirus, you cannot evict them for at least 6 months.
11. What should I do if my tenant says they cannot pay their rent?
The first step is to ascertain to what extend the tenant’s financial position has been impacted by coronavirus. This might include obtaining documentation from the tenant’s employer/s or accountant (if they are self-employed) to confirm any changes to their income levels.
This information will help inform your response. Essentially, you need to form a view on two matters:
- To what extent the coronavirus situation has reduced the tenant’s income; and
- The likelihood of the tenant recovering their income once the shutdown restrictions have been lifted. This includes how long that recovery period might take.
12. What support is available to tenants?
Tenants that have been impacted by coronavirus may qualify for certain support and benefits including JobKeeper and JobSeeker payments. Also, some State’s are offering tenants/landlords additional compensation e.g. Vic may offer $2,000 where tenant continues to pay at least 30% of the normal rent amount and has less than $5,000 of savings (finer details of this package are yet to be released as at 16 April 2020).
A landlord can and should take into account the level of government support a tenant is receiving when assessing a request for rent reduction.
13. Once you have all the information, what agreement should you make with the tenant?
The government released its Code of Conduct in respect to commercial tenancies on 7 April 2020 (see here). Whilst this Code does not apply to residential tenancies, it perhaps provides some hints for residential landlords.
The Code talks about the concept of proportionality. So, if a tenant’s income has fallen by 50%, then landlords are expected to agree to a rent reduction of 50%.
The Code also states that rent reductions can be offered in the form of (1) waivers and (2) deferrals. At least 50% of the total rent reduction must be in the form of a waiver. Landlord must offer a commercial tenant a period of at least 2 years to repay any deferred rent (this is less likely to apply to residential tenancy agreements, as its rare for a lease period to exceed 1 year).
14. Can you provide an example of what a residential tenant agreement might look like?
Example: Tenants have been temporality stood down by their employer but expect to return to full employment when the when shutdown restrictions are lifted. The tenants were paying you $300 per week in rent.
You agree with the tenant to reduce the rent to nil for 3 months (saving the tenant $3,600). Half of this reduction is a waiver i.e. you do not seek to recover it. The remaining half is a deferral. As such, you ask the tenant to sign a new 1-year tenancy agreement which commences at the end of the rent reduction period at a rate of $335 per week (being the original $300 plus 50% of $3,500 over 52 weeks).
On 15 April 2020, the Victorian government released some further information about how and when to negotiate with tenants – click here. NSW has also published guidance here and, at this stage, its commentary is probably more useful than Victoria’s.
Whilst it is not clear how much of a rent reduction should come in the form of waivers (versus deferral), it is our view that this depends on (1) the quantum (%) of the reduction and (2) the financial position of the landlord. If you offer the tenant a relatively small reduction (say 25%), then it is probably reasonable to expect that 100% of the reduction is a waiver. However, if you are reducing the rent to nil for a period of time, then it is reasonable to expect that some of this reduction will be a deferral (and need to be repaid by the tenant).
15. What compensation is available to landlords?
Victoria, NSW and Queensland have announced that landlords may be entitled to a 25% reduction in land tax liabilities if they have provided a rent reduction to their tenant. The ability to defer payment of land tax until 2021 is also available in some States.
We will post more information (links) here as soon as it becomes available.
16. What if I (the landlord) have also been financially impacted by COVID-19?
Of course, it is possible that you (as a landlord) could have been negatively financial impacted by the COVID-19 situation to the same or greater extent than your tenant e.g. if you have lost your job. This could impair your ability to offer a rent reduction.
If this is the case, you should consider putting your loan on pause and openly communicate your position with your managing agent so that your circumstances can be taken into account when determining what support you are able to provide to your tenants.
17. What if my tenant cannot pay any rent for 6 months and then leaves?
Unfortunately, there is not much you can do. You may be able to claim against the tenant’s bond. You also may be able to claim on your landlord insurance policy (see more below).
I expect that the government may come out with a package to compensate landlords that have suffered financial loss as a result of its moratorium on evictions. Watch this space.
18.Will landlord insurance cover me for loss of rent?
The answer to this question will depend on the term of your cover so you should consult the insurance company and/or read its Product Disclosure Statement (normally found on its website).
Many insurance providers have ceased issuing new policies due to coronavirus.
Most policies exclude your ability to successfully claim if you have agreed to a tenant paying a lower or no rent. Therefore, this cover is unlikely to be of any benefit during the coronavirus period. You may be able to claim for loss of rent after the eviction moratorium has been lifted (depending on your policy, of course).
Do you have any other questions?
If you have any questions that are not covered above, you can email us, and if we believe that other people will benefit from them, we will post the question and answer here.