The lifespan of a loan agreement can range from several months to 40 years. During this time, borrowers may experience financial hardship due to unforeseen circumstances. Loss of employment, business failure and health issues are just a few reasons that can result in you struggling to make your mortgage repayments. In these situations, you should speak with your lender to discuss alternate options before you fail to make a repayment. One possible option is modifying the loan agreement through a loan amendment. This article explains what a loan amendment is and compares it to other options that may be available to you as a borrower.
The Fundamentals of a Loan Amendment
A loan amendment is a permanent change to the terms of an existing loan. This change is agreed to by both parties and can make repayments more affordable for you. It can also be beneficial for the lender if the amendment costs are lower than the costs of your default.
A loan amendment may modify the loan’s terms by:
- reducing the interest rate on the loan;
- converting the loan from a variable interest rate to a fixed rate;
- extending the length of the term of the loan;
- changing the regularity of repayments; or
- decreasing the principal amount of the loan (although this is uncommon).
Loan Amendment Process
If you are considering a loan amendment, the steps you will need to take are listed below:
- review the terms of the loan documents to understand your rights and obligations. The document will also tell you how you can make amendments to it;
- determine the modified terms of repayment that you are capable of making;
- contact the lender to discuss your situation. Request an amendment to the loan agreement before failing to make a repayment; and
- sign an agreement to finalise the loan amendment.
The lender will often require supporting documents from you to assess your income situation, such as:
- a letter of hardship;
- financial statements;
- tax returns; and
- business plans.
The lender will use these documents to understand your financial distress and determine whether to approve a loan amendment. Ultimately, the lender is looking for assurance that you can move forward from the hardship and be in a position to make the agreed repayments after the loan amendment.
Loan Amendment vs Forbearance Agreement
Another option open to you and the lender is entering into a forbearance agreement. A forbearance agreement states that the lender allows you to miss or reduce your mortgage payments for a specific period (the forbearance period). The lender will refrain from exercising the rights that arise from your default of the loan agreement during this period. In return, the lender will often require you to meet specific requirements, such as creating a plan to resolve your financial issues. They will expect you to resume full payments at the end of the forbearance period, plus make additional payments.
The main difference between a loan amendment and a forbearance agreement is that the latter usually provides short-term relief for borrowers who have temporary financial difficulties. On the other hand, a loan amendment is a permanent solution for borrowers who may never be able to repay their existing loan.
Loan Amendment vs Refinancing
Refinancing involves repaying an existing loan with a new and different loan. Refinancing often involves the borrower obtaining a loan with a different interest rate and term length. It is attractive to borrowers when the current interest rates are lower than the rates on their existing loan.
The key differences between a loan amendment and a refinancing arrangement are outlined in the table below.
|Effect on Existing Loan||Alters the existing loan.||Swaps the existing loan with a new loan.|
|Relationship with Lender||Borrower works with the original lender.||Borrower can refinance with original lender or a new lender.|
|Credit Rating||Borrower can have a poor credit rating but still be successful in amending the loan.||Borrower generally needs to have an excellent credit rating to qualify for refinancing.|
|Additional Fees||Lender may not charge fees for a loan amendment.||Borrower must pay costs to close and repay the current loan (such as entry, exit, application and valuation fees).|
Tip: You should always think about your relationship with the original lender. The original or existing lender may provide you with better service and offer incentives (such as waiving fees) to keep you from moving to a competitor.
A loan amendment adjusts the terms of a loan agreement to help the borrower when they cannot afford to make repayments. It also provides a long-term solution for the borrower rather than the short-term relief offered by a forbearance arrangement. It can also be less costly compared to a refinancing arrangement.
If you need assistance with formalising or understanding the terms of a loan amendment, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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