Easing Your Finances with Loan Conversion
Using a suitable financing strategy in the right circumstances can save a mortgage owner a lot of money and stress. The current economy has put pressure on all of us. Those with debt may be feeling particularly stressed at the moment, while their financial commitments are especially burdensome. Fortunately, loan conversion and other support measures have been made available to ease financial strain on businesses and individuals impacted by the crisis.
What is Loan Conversion?
Fundamentally, a conversion describes the restructuring of a loan. Loan conversion can alleviate financial stress. In recent circumstances, this nearly always means changing from a principal and interest loan to an interest-only loan.
Interest-only Loans
The repayment amount of an interest-only loan covers only the interest on the amount borrowed. During the time the loan is structured as interest-only, the principal amount borrowed is not reduced when making repayments. The switch back to principal and interest repayments is always an increase and as such, can be difficult for some people to manage.
Reduction of Principal Repayments
Currently, most who are making use of loan conversion are doing so to swap their mortgage to interest only. Moving to interest only postpones principal repayments. The principal repayment is the amount of the loan which you pay back each month. Postponement periods are generally for 12 or 60 months, depending on a servicing agreement with your lender. The obligation still exists, just further down the line. Borrowers are still able to make principal repayments, should they wish to do so during the period.
Loan Conversion vs Repayment Deferment
Another financing activity which some have explored during this time is that of repayment deferment. Rather than converting a loan, the deferment option allows mortgage holders to stop their repayments for a period of 6 months. This means they have no obligation to meet principal and interest repayments during that time. Borrowers should not rush into a repayment deferment, there’s other considerations they should be aware of. Repayment deferment is recorded as a financial hardship on borrowers’ credit files, which can impact the loans and rates available to them in the future. Interest capitalises over the deferment period, meaning borrowers will need to repay the entirety of it over the remainder of the loan’s term.
Loan Conversion has the significant advantage of not affecting credit score, when compared to repayment deferment. Individuals may choose to use a loan conversion when they anticipate difficulty repaying their loans for a certain period, before their financial position will become more manageable.
Borrowers and lenders have found themselves in uncharted territory throughout the COVID-19 health crisis. The priority is survival – many are focusing only on getting by at the moment. Speaking to a financing professional is always a wise idea. Loan environments can be difficult to navigate and are sometimes unforgiving. If you’re looking to learn more about loan conversion or repayment deferment, get in touch with the team at Provide Finance.