Will a mortgage holiday affect your credit score?

Photo by Daniel Thiele on Unsplash

Many banks have introduced home loan repayment holidays amid coronavirus hardships, but one credit reporting agency says it could impact your credit score.

Despite the measures put in place to help borrowers during economic fallout from COVID-19, credit reporting agency Experian says mortgage holidays could still affect credit scores. 

Experian Australia & New Zealand's general manager of credit services Tristan Taylor said unless individuals have made special arrangements with their lender, the system acts "as per normal".

"Missing credit repayments will still negatively impact credit scores, which could affect future credit applications," he told Savings.com.au.

"If ever there has been a time to proactively manage your financial situation, it's now.

"Ensure you contact your financial service provider to discuss your options if you're concerned."

Similarly, mortgage holidays are also not true 'holidays', and interest still accrues on the loan in that time, and can add up to thousands extra owed on your home loan.

• How to check your credit score

On 23 March, the Australian Prudential Regulation Authority (APRA) said mortgage holidays would not count as 'mortgage in arrears' - falling behind on debt repayments can stay on your record and affect your credit score for upwards of five years.

“Where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears," the authority said in a press release.

“Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured."

The mortgage deferral programs announced by many banks last week comes off the back of more than 30,000 job losses in the aviation, hospitality, and tourism sectors. 

Westpac also predicts an unemployment figure of 11% by June - for reference, in February that figure was 5.1%. 

Looking to fix your home loan? Below are some owner-occupier fixed loans with some of the lowest interest rates in the market.

What will mortgage holidays mean for mortgage bonds?

At the high-level, corporate debt rating agencies Fitch, S&P, and Moody's could downgrade mortgage bonds' credit ratings if there are significant amounts of deferred mortgages in them.

If a downgrade on a mortgage bond were to occur, due to there being less liquidity, it would theoretically make investing in that bond less attractive, which could tighten credit availability at the consumer level. 

This means that pools of mortgages on mortgage holidays - despite not technically being in arrears - could prevent ratings agencies from dishing out the top-flight AAA rating, according to Westpac's Head of Securitisation and Covered Bond Strategy Martin Jacques.

"As an example, S&P have said that if they expect missed interest payments for six months with full payment after that, the agency would limit the ratings on any affected note to a maximum of A-," he said in a report on 23 March.

In an FAQ released on 26 March, S&P said Australian prime mortgage bonds have cash reserves of an average of around nine months, and 11 months for riskier bonds, even if cash inflows on transactions in the bonds fell to zero.

This means that most prime RMBS could weather the storm of six-month mortgage holidays, without a credit downgrade, however more stress could be placed on riskier bonds.

S&P said the biggest default risk comes from self-employed borrowers, who are "most likely" to use mortgage deferral offers.

Self-employed borrowers make up 15% of mortgages in the prime RMBS sector, and 45% in the non-conforming sector. 

If cash flowing through an RMBS fell to zero, which S&P describes as "a scenario that remains unlikely", that bond would default, resulting in investors losing money, and potentially triggering a housing market crash.

This is where the Australian Office of Financial Management has stepped in, announcing last week a $15 billion package designed to make the Government an investor in corporate mortgage bonds, propping up cash flows to a potentially wounded industry.

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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): 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.

*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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