With interest rates on the way back up, there is no doubt that some households are starting to do it a big tough. Coincidentally, some big changes have kicked in from 1st of July when it comes to recording financial hardship arrangements.
In the past, if you were unable to meet your loan repayments, you could enter a financial hardship arrangement with your lender, and it couldn’t be reported in official credit reporting systems. In many cases, the repayment history in your credit report would show a blank month or possibility a missed payment during the hardship arrangement period.
Neither of these two approaches told the full story about the credit history and that a financial arrangement had been agreed upon with the lender.
What Has Changed from 1st of July 2022?
From 1st of July, the credit reporting system has introduced financial hardship information into credit reports. This means that if you enter a financial hardship arrangement that reduces monthly loan repayments, then for the next 12 months the credit report will show:
- That you were current and up to date with repayments for that hardship month, provided you made the reduced payments on time
- A flag alongside the repayment history information for the hardship month, indicating a special payment arrangement was in place.
The flag in the credit report will be referred to as ‘financial hardship information’ and can take two forms (A or V) depending on the type of arrangement:
- A – indicates there was an arrangement for the month that temporarily deferred the repayments (which will need to be repaid later or be subject to a further arrangement).
- V – means the loan was varied that month to reduce the repayments.
The good news is that the financial hardship information flag will only stay on the credit report for 12 months, whereas regular repayment history information stays for 24 months.
Is All This Good or Bad News?
It comes with pros and cons.
The changes are intended to give the ability to ‘protect’ your credit report if you experience financial hardship. In no way are they designed to exclude you from applying for credit. However, a financial hardship arrangement flag may prompt prospective lenders to make further inquiries to better understand the situation.
If the hardship arose because of a temporary reduction in work hours, but you are now back in stable employment, in most cases it should not cause any major issues for a loan application, especially if proof can be provided to the lender.
Hardship arrangements can stem from a natural disaster that’s completely outside of your control, such as flood or bushfire, which can be explained to a lender.
The financial hardship information cannot be used by a credit reporting body to calculate the credit score, whereas regular repayments that are missed outside a hardship arrangement will impact your credit score.
Are You Having Trouble Meeting Your Repayments? Get in Touch!
The Reserve Bank of Australia has been aggressively raising the official cash rate in recent months, which means monthly repayments would most certainly have gone up if you are on a variable loan rate.
If you are on a fixed loan rate, you also need to think ahead to where your monthly repayments might be when the fixed-rate period ends and reverts to a variable rate.
If you think more rate rises may soon strain your monthly budget, now is a good time to start putting extra money away into an offset or savings account to build up a buffer.
Other options that can help include refinancing and debt consolidation, both of which can help reduce monthly repayments.
Whatever the circumstances, we are here to support you however we can.
Phone: 1300 855 022
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Connect with Louisa on Linkedin.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not consider the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether in business, health or financial.