Coronavirus home loan support: Should you defer your mortgage repayments?

author-avatar By on March 26, 2020
Coronavirus home loan support: Should you defer your mortgage repayments?

Photo by Parker Gibbons on Unsplash

To help those struggling to repay their home loan because of coronavirus-related financial stress, some banks are allowing borrowers to defer their mortgage repayments for up to six months. But what are the ramifications of choosing to do so?

As the coronavirus (COVID-19) pandemic grinds the country to a halt, hundreds of thousands of people are losing their jobs and may no longer be able to make their mortgage repayments. To help ease some of the pain, most banks are rolling out home loan support for impacted customers, including deferring home loan repayments for up to six months.

For those who have lost their jobs and can’t make their home loan repayments anymore, this would undoubtedly be a welcome relief. But before you jump on the phone to your bank, there are some potential ramifications of deferring your mortgage repayments you should be aware of first.

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

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^

Rates correct as of October 27, 2021. View disclaimer.

Which banks are offering coronavirus home loan support?

What the big four banks are offering

Westpac: Westpac customers who have lost their job or suffered a loss of income as a result of COVID-19 should contact the bank for three months' deferral on their home loan mortgage repayments, with extension for a further three months available after review.

NAB: Home loan customers experiencing financial hardship will be able to pause their home loan repayments for up to six months - however, you will need to increase loan repayments over the remaining loan term to completely repay the full amount.

Commonwealth Bank: Commonwealth Bank is allowing “all home loan customers” to defer repayments for up to six months. Commonwealth Bank will also reduce loan repayments to the minimum required under their loan contract from 1 May.

ANZ: ANZ customers impacted by the coronavirus will be able to defer their home loan repayments for six months, with a three-month review.

What smaller banks are offering

Here is a snapshot of what some of the smaller banks are offering to customers impacted by the coronavirus. If you’re unsure what your bank is offering, check directly with them.

Suncorp: Suncorp Bank customers will “have an opportunity to defer scheduled loan repayments on a case-by-case basis".

St George, Bank of Melbourne, Bank SA: As St George, Bank of Melbourne and Bank SA are all subsidiaries of Westpac, they have announced similar home loan relief packages including a six-month deferral of home loan repayments.

Macquarie Bank: As of March 20, all home loan customers can defer their mortgage repayments for up to six months.

Bank Australia: Bank Australia will allow customers to defer repayments for three months, with the option to extend to six. Certain fees will also be waived.

Bendigo and Adelaide Bank: Customers will be able to defer repayments for six months, and some fees will also be waived.

Who is eligible for home loan support?

In most cases, if you have lost your job or income as a result of the coronavirus crisis, you should qualify for mortgage relief. It’s best to keep documents such as a letter of termination or proof of income loss just in case. In the wake of the virus, some banks are allowing all customers to defer their mortgages, no questions asked while others allow customers to do so on a case-by-case basis.

If you’re unsure whether you are eligible to receive home loan support, it’s best to check directly with your bank or lender.

Should you defer your home loan repayments?

If you’ve just lost your job and face the possibility of losing your home because you can no longer pay your mortgage, then deferring your home loan repayments for six months sounds like a no brainer, right?

Commonwealth Bank says they have already received over 15,000 requests for home loan repayment holidays since the offer rolled out.

According to NAB, putting your repayments on hold would free up an extra $1,834 per month for a borrower with a $400,000 mortgage.

However, it’s still wise to understand what the implications of deferring your mortgage are before you get on the phone to your bank.

Even though your mortgage repayments would be paused (or reduced), it’s no mortgage ‘holiday’. Interest is still accruing on the principal loan amount, which means that the interest you don’t pay during your period of deferral is added to your outstanding loan balance.

This is called interest capitalisation.

This means you will either have to increase your repayment amount or make more frequent repayments after, which could end up making your home loan more expensive in the long run.

Let’s take a look at flight attendant Jack, whose mortgage balance was $250,000 with an interest rate of 2.80% p.a. over 25 years.

Before the coronavirus pandemic, Jack’s minimum monthly repayments were $1,170 and he managed to get his home loan balance down to $230,000.

However, he just lost his job and now needs to defer his mortgage repayments for six months so he doesn’t risk losing his house.

During this six month deferral, interest is still accruing onto the principal of his home loan balance. The interest that was charged in the first month then has interest charged on it during the second month, which has interest charged on it in the third month, and so on.

By the end of Jack’s six-month deferral, he now owes an extra $2,943.05 on top of his previous loan balance of $230,000. So Jack now owes $232,943.05

That may not sound like much, but because his loan term remains the same (he still has 20 years remaining on his loan) his monthly repayments will increase from $1,065 to $1,096 per month. While that’s only an extra $29.59 each month, that money can really add up over the course of the loan.

If you choose to defer your home loan repayments for up to six months, your loan balance will be bigger than it was before and you’ll still have to keep up with your repayments.

PRDnationwide chief economist Dr Diaswati (Asti) Mardiasmo said some borrowers make the mistake of assuming their mortgage is simply ‘frozen’ for the deferral period.

“One of the misconceptions of deferring mortgage repayments is that there is no further impact on the mortgage itself – it does not mean that you are “free” of a mortgage for six months or that someone else (for example the bank) is now paying it,” she told Savings.com.au.

But despite eventually having to pay more once the deferral period is over, Property Mavens CEO Miriam Sandkuhler said the low interest rate environment could make it worth it.

“At such low interest rates, the total amount may ultimately not be that consequential,” she told Savings.com.au.

“This is a good time to consider talking to your broker regarding loan restructuring and/or refinancing if you have been lagging behind with taking advantage of the current low interest rates.”

For those who are faced with a choice of either losing their home because they can’t make their repayments or temporarily deferring their mortgage and paying more in interest later, that extra interest could be a very small price to pay.

I haven't been financially impacted by the coronavirus yet, but how can I protect myself just in case?

For borrowers who haven’t been financially impacted by the coronavirus yet but want to prepare just in case things change, there are steps you can take to protect yourself.

Ask for a lower interest rate

Interest rates are the lowest they’ve ever been right now, with many home loan interest rates starting with a 2 or a 3.

If your jaw just dropped like my dad's did when I told him that (he’s still paying over 4% on his home loan!) then now is the time to get in touch with your lender and demand a better rate.

Refinance

If your current lender won’t give you a better interest rate, it may be worthwhile considering refinancing to another lender who will.

Switch to interest-only repayments

If your pay has taken a bit of a haircut due to the coronavirus, another option is to switch to interest-only repayments for a bit. This will reduce your monthly repayments which can give you a bit of breathing room.

Just be aware that interest-only repayments can often make your home loan more expensive in the long run.

Because you’re not paying off the principal over the interest-only period, you’ll end up paying more interest over the life of your loan than someone who has been paying both principal and interest.

Savings.com.au’s two cents

If you’ve just lost your job or otherwise find yourself in a position where you are temporarily unable to continue making your mortgage repayments, then taking a ‘mortgage repayment holiday’ would seem like the obvious thing to do - particularly if the alternative option is losing your house.

However, it’s still important to make sure you are fully informed about the potential ramifications of doing so before you get in contact with your bank.

Deferring your mortgage repayments simply kicks the payments further down the road and will increase your repayments and the overall balance of your loan because interest is still accruing in the background.

You will still need to repay the full loan amount after the period of deferral is over, either by increasing your repayment amount or making more frequent repayments after.

It’s possible you may be able to extend your loan term to keep your repayments lower, but this will also cost you more in interest in the long run.

Worried about the impact deferring your mortgage repayments could have on your credit score? We’ve written a guide explaining what you need to know.


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 2020. They are (in descending order): Great Southern Bank, 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.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

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.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Emma Duffy is Assistant Editor at Your Mortgage and  Your Investment Property Mag, which are part of the Savings Media Group. In this role, she manages a team of journalists and expert contributors committed to keeping readers informed about the latest home loan and finance news and trends, as well as providing in-depth property guides. She is also a finance journalist at Savings.com.au which she joined shortly after its launch in early 2019. Emma has a Bachelor in Journalism and has been published in several other publications and been featured on radio.

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