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.
On this page:
- Which banks are offering coronavirus home loan support?
- Who is eligible for home loan support?
- Should you defer your home loan repayments?
- How you can protect yourself before you are impacted
Looking for a place to store cash? Below are a handful of 6-month term deposits with some of the highest interest rates in the market.
*Rates correct as at 01 April 2020. Rates based on a $50,000 deposit for 6 months.
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,” he 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
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.
If your current lender won’t give you a better interest rate, it may be worthwhile considering refinancing to another lender who will.
Thinking about refinancing to a low-rate, variable owner-occupier home loan? The table below displays some of the lowest-rate variable home loans currently on the market for owner occupiers:
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 26 March 2020. View disclaimer.
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.
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 2019) 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 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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