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What is mortgage restructuring?

Vidhu Bajaj avatar
Vidhu Bajaj
- 5 min read
What is mortgage restructuring?

When paying off a long-term debt like a mortgage, you may need to review your income and household expenses periodically to ensure that you are not in danger of falling behind on your loan repayments. However, if you are finding it difficult to make ends meet, you may consider speaking to your lender about restructuring your mortgage to relieve the pressure of timely mortgage repayments, at least temporarily.

Disclaimer

This article is over two years old, last updated on April 22, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

How can mortgage restructuring help me?

You may find it surprising, but most lenders are willing to work with their customers to prevent them from defaulting on their home loans. Generally, all lenders provide hardship assistance to help their customers through tough times. If you are going through a difficult time, you can contact your lender and ask them to change your loan repayments because you are experiencing financial difficulty. The lender will want to know why you are finding it difficult to make your repayments and how long your financial problems are likely to last.

Depending on your financial situation and how much you can afford to pay, the lender may agree to restructure your mortgage by changing the terms of your loan. The lender may reduce your repayments to something you can realistically afford to pay or defer your repayments temporarily. Some lenders may even agree to reduce the interest rate charged on your loan or allow you a fee waiver, but this is not very common.

It's worth noting that mortgage restructuring isn't going to reduce your debt. Even if you defer the payments for a few months, you'll still owe the payments you miss and the interest on it. Another option may be increasing the loan term to reduce your repayment size, but the longer the loan term, the more you are likely to pay in interest. Mortgage restructuring will also not fix any late payments that have already been reported to the credit reporting agencies. The aim of mortgage restructuring is simply to help you avoid defaulting on your loan while you work on a realistic plan to bring your financial situation on track and get back to normal repayments.

Sometimes, it's also possible to restructure your mortgage when switching homes. This is also known as home loan porting or substitution of security, and it is a common home loan feature offered by many lenders. Home loan porting allows you to continue with the same home loan, substituting your current home with your new home as security.

Think of it as transferring your internet connection to your new home – the address on the bill changes, but everything else stays the same. Similarly, porting your home loan allows you to transfer your existing mortgage to your new property, including your remaining balance, term, and the interest rate.

You may choose this option to avoid the time and money spent on closing an existing loan and setting up a new one, but you might miss out on more competitive rates offered by other lenders. Moreover, you can generally only use this option if you purchase a home that's equal to or higher in value than your current home.

What is the difference between home loan restructuring and refinancing?

Restructuring your mortgage refers to renegotiating the terms of your loan with the same lender. If your circumstances have changed, mortgage restructuring can help make your home loan repayments easier, at least temporarily. This is generally done by reducing the repayment size or allowing a repayment holiday for a few months to help you get your finances back on track.

Refinancing could also help ease the pressure of your monthly repayments by replacing one loan with another, preferably with a lower interest rate, to reduce your monthly outgoing. Besides a reduced interest rate, you may also want to refinance your loan for debt consolidation or cashing out the equity you have accumulated in your home. However, it's worth checking the cost of refinancing to make sure it doesn't outweigh the savings you are likely to pocket. A mortgage broker can help you crunch the numbers to make an informed choice.

As refinancing involves taking out a new loan in place of your existing loan, lenders are likely to carry out a valuation of your property and check your creditworthiness before approving you for a loan. A high credit score could help you secure lower interest rates and more favourable terms while refinancing your home loan. But if you have already missed out on a couple of loan repayments due to your financial situation or cannot show enough disposable income to pay off the loan, you may not be able to refinance your home loan with another lender.

In general, refinancing can be helpful to reduce your loan repayments by switching to a lower interest rate, but it may not be helpful if you are struggling to make ends meet. It's worth speaking to your lender if you think you risk falling behind on your repayments to seek assistance in paying off your mortgage without defaulting. If your circumstances still don't improve as you expected after restructuring your mortgage, you may call the National Debt Helpline for a long term solution to bring your finances back on track.

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Product database updated 23 Jul, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.