Commbank starts reducing customers' home loan repayments to the minimum

author-avatar By on May 01, 2020
Commbank starts reducing customers' home loan repayments to the minimum

Photo source: CBA

Commonwealth Bank has started to automatically reduce home loan repayments for eligible customers to the minimum amount.

The move was announced on March 19 as part of a number of measures introduced in response to the coronavirus, and CommBank (CBA) said it expected the move to affect almost 750,000 of its 1.7 million home loan borrowers. 

Customers were notified via an email last week the one-off change would be rolled out from 1-5 May.

Customers who wished to opt-out from the change could do so by changing their direct debit via the CBA app or contacting the bank directly after 6 May. 

For customers already paying the minimum, nothing will change.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers. 

CBA said in a statement the change was designed to give customers experiencing financial hardship a cash injection. 

"Over the past couple of months, and in particular since the coronavirus pandemic was declared, we have been contacted by hundreds of thousands of our customers seeking help and financial relief, particularly from those people who have been stood down by their employers or have lost their jobs," the bank said.

"This has had a significant and substantial effect on their income.

"As a consequence, we have announced several measures to support our customers including moving nearly three-quarters of a million of home loan borrowers to the monthly minimum repayment amount."

CBA said the change would release an average of $400 a month for customers but recognised the move wouldn't please everyone. 

"We do understand that this decision does not suit all of our customers and appreciate that we may have caused some of them an inconvenience."

The big four bank said it had received around 2,600 complaints as a result of the move, representing 0.35% of their affected customers. 

The move has been labelled controversial by many, as the consequences of not opting out could see the loan take longer to repay. 

Should you reduce your home loan repayments to the minimum? 

Nothing comes for free and despite the CBA figure of customers getting an extra $400 a month for reducing their payments, it's likely the move will cost more down the track. 

For customers experiencing financial hardship, lowering your repayments to the minimum might be a necessity, especially for those struggling to meet the repayments on their home. 

But for those not in this boat, keeping your repayment as is will usually be financially beneficial. 

So how does this work?

You can pay more than the minimum loan repayment and actually pay off your home loan faster, since a greater share of your repayments will be paying off the loan’s principal and less in interest.

You can pay off bigger chunks of your home loan by keeping repayments the same, as this could be much more financially beneficial than saving money to spend on items in the short term, as home loans are one of, if not the single biggest expense you’ll ever have.

In the table below you can see the tens of thousands you could save by resisting the temptation to lower your repayments after a rate cut from 4.00% p.a. to 3.50% p.a.

Interest rate

Monthly repayments

Total repayment

Total savings (from 4.00% p.a.)

Loan length

4.00% p.a.

$1,910

$687,478

N/A

30 years

3.50% p.a. (after two years of paying 4.00% p.a)

$1802

$651,312

$36,166

30 years

3.50% p.a. (after two years of paying 4.00% p.a)

$1,910 (minimum repayment of $1802 + extra payment of $108

$628,808

$58,670

27.5 years

Note: This scenario assumes there’s no more rate changes after the rate falls to 3.50 p.a%

Assuming you kept your repayments in this mock scenario at $1,910 despite the lower interest rate of 3.50% p.a (which kicked in two years into the loan), the rate cut could save you $58,670 over the life of the loan - over $22,500 more than if you’d lowered your repayments to the new minimum of $1,802.

It could also see you pay off your loan two and a half years earlier. 


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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