Mortgage payment deferral: Banks extend home loan pauses

Lenders are offering some home loan customers the option of deferring their mortgage repayments for a further four months, if they are in financial hardship due to COVID-19. We take a look at what a repayment pause could mean for borrowers, and what you may need to consider.

As the coronavirus pandemic swept the world earlier this year, a number of Australian banks offered borrowers what some commentators described as a financial lifeline – the chance to defer their mortgage repayments while they grappled with the economic fallout of COVID-19.

This allowed borrowers to apply for a “repayment holiday” of up to six months from their lender – although in many cases, interest on the loan that accrued during that time was to be capitalised (added on to the total cost of the loan).  Many banks required a three-month check-in, and that borrowers begin repayments again as soon as they were able. That six-month period was set to end in September for many borrowers.

According to the Australian Prudential Regulation Authority (APRA), payments on mortgages worth a total of $192 billion had been deferred in the period to 31 May, 2020. That represents about 11% of all residential mortgages, based on APRA’s data.

On 8 July, the Australian Banking Association (ABA) announced that member banks would be extending eligible customers’ deferral periods for up to a further four months, to the end of March. However, ABA CEO Anna Bligh said that extension was not automatic.

“This next phase of bank support will avoid a ‘cliff’ for customers in September and give them the breathing space they need to work with their bank and get back on their feet financially,” Ms Bligh said.

“Those who are able to repay their loans will resume doing so, which is in the best interests of those customers and allows support to be directed to those who need it. Encouragingly, many customers have already chosen to resume making repayments.”

Ms Bligh said banks would work with customers to help them find the best options to restructure or vary their loans, which could include:

• Extending the length of the loan
• Converting to interest-only payments for a period of time
• Consolidating debt
• A combination of these and other measures

She said banks would be contacting borrowers who had paused payments, to discuss their financial capacity and the added deferral period.

Can I still ask for a home loan repayment deferral?

It could still be possible to talk to a lender about a home loan deferral and other COVID-19 financial hardship measures, if your circumstances have changed. However, a review of the big four banks’ websites suggests that the ability to access the deferral period now could vary depending on the lender.

Canstar finance expert Steve Mickenbecker said it was important to contact your bank as soon as possible if you were facing a change in your income, or suspected you might be in the future.

He said before you called, it was generally a good idea to:

• Have a thorough understanding of your financial position, including how far ahead or behind you might be on your loan, and how your income has changed or is likely to change
• Read through the bank’s online information about its relief packages, noting any special conditions that may apply
• If you haven’t already given it to your bank, gather important information your bank might need, including:
  • a family expenses budget
  • details of new income levels
  • any government support you may have applied for
  • the shortfall in funds you may experience trying to cover family expenses
  • whether or not you will need to access any funds in an offset or redraw account to cover everyday costs

He said the last point could be particularly important, as banks might be inclined to ask you if you could use funds in your offset account or redraw facility as home loan repayments, instead of offering the option of extending your repayment pause.

What impact will taking a COVID-19 repayment break have on my home loan?

And what is “interest capitalisation”?

Canstar’s investigations have revealed many banks were applying “interest capitalisation” – where the unpaid interest is added on to the principal of the loan, which would mean you pay interest on that unpaid interest, too. In that case, the balance of the loan would typically be higher after the deferral period, and repayments would be higher, too. Fees, such as monthly package fees, could also be added to your loan balance.

How much you end up paying will likely come down to how big your mortgage is, how long you’ve had your loan for and what options your lender gives you at the end of the “holiday” period. Many banks have a mortgage deferral calculator that could help.

What is the cost of a six-month mortgage repayment deferral?

In dollar terms, Canstar analysis shows a six-month mortgage holiday on a $400,000 loan could set a typical borrower back by as much as $21,833, by the end of the loan. (This assumes they’ve only recently taken out the loan over a 30-year term with a 20% deposit, that they make principal and interest repayments on the average variable interest rate from Canstar’s database and that they opt to take the full six-month repayment holiday. It also assumes that at the end of the holiday, they choose to keep their repayments the same, that is they don’t try to play catch-up with the accrued interest.)

If, on the other hand, our hypothetical borrower had already had this loan for five years, the cost of taking a mortgage holiday would fall down to $17,373. If they’d had the loan for 15 years, the cost of pausing their repayments would be $8,666.

“So based on what we’ve seen so far, using this repayment pause option will obviously put you behind in terms of paying off your loan,” Mr Mickenbecker said.

“But, for many people, surviving is going to be the goal here, and not losing your house could be worth extending your loan repayment period for a time.”

What happens to loan repayments after the deferral period?

Repayments could be higher after the deferral period, depending on the agreement between the borrower and the lender. Canstar investigations showed that some banks on our database were offering customers the option of adjusting their loan length (for example, from 25 years to 30 years) to keep repayments close to pre-pause levels. Another option could be to keep the loan length the same but adjust post-pause repayments to a higher amount to achieve this timeframe.

If a borrower believed they would still be struggling to pay their loan after the deferral period, they could talk to their bank about options. The ABA states that “If, during or at the end of any deferral, customers continue to be severely financially impacted and are unable to make repayments, they will be assisted through their bank’s hardship process to determine the best long-term solution for their individual circumstances.”

And to the question of whether banks would start repossessing homes if people couldn’t pay their mortgages after the deferral period, Mr Mickenbecker believed that was unlikely at this stage.

“That would be the absolutely last resort for the banks,” he said. “For one, it would be a bad look while we are all trying to pull together to get through this. And banks are also much better off with people still in their houses, making partial repayments and doing what they can to keep their homes.

“Investors are in the same boat, and could be facing many of their tenants losing their jobs and not being able to pay rent. Investors are stressed as well, and we have to remember that not all investors are property moguls – a lot of them are just mums and dads who just happen to have investment properties to help them build long-term retirement wealth. They could also be looking down the barrel at losing their jobs, too.

“So we really are all in this together.”

What are some other options if I don’t want to take a repayment holiday?

Some people may consider changing their home loan in an effort to make themselves more financially resilient to the economic conditions created by COVID-19. Theses measures could include:

Interest-only repayments

One option you may consider is to ask your lender to revert your repayments to interest only. This way, interest isn’t compounding on the loan amount over the holiday period. It could be a good idea to find out if there are any fees and charges related to this, although some banks have announced they would be waiving fees for this kind of loan change. The APRA removed its supervisory benchmark on interest-only residential mortgage lending by authorised deposit-taking institutions (ADIs) back in December 2018 so your lender may well be open to this mortgage relief strategy.

Stay with lender but restructure loan

Other options could include staying with a principal-and-interest loan, but restructuring it, such as moving from a variable to a fixed rate, or switching to a split variable/fixed arrangement. Some banks on our database are changing or waiving their fees for loan restructuring, however, it could pay to check what fees and charges may apply to loan changes.

A new loan with a new lender: Can I refinance my loan during the COVID-19 crisis?

Another option could be to refinance – to look for a different lender with better COVID-19 packages and/or a more competitive interest rate.

Mr Mickenbecker said home loan rates have never been as low in Australia as they are now – with a record low recorded at just 1.99% (with varying comparison rates) for some loans on Canstar’s database.

“They are at crazy lows,” Mr Mickenbecker said.

“If you have already been retrenched, or think you are likely to be, consider carefully if you want to refinance,” he said. “It could be more difficult to be approved.

“But for anyone who is experiencing ‘business as usual’, this could be a very good time to consider making some savings on your home loan by finding a lower interest rate.

“Many people want to get their bills down, and mortgage repayments are the single biggest expense in many households. If you could even reduce your rate by 1 percentage point, the savings could be considerable over the term of your loan.”

It is important to keep in mind, however, that there could be fees and charges that apply to changing loan structures within the same bank, or refinancing with another bank. There could also be break fees charged by your bank if you wanted to swap lenders. You may want to consider all of these possible costs, as well as any benefits of refinancing, before making a decision.

Will asking for help affect my credit score?

No. Asking for a repayment pause or other form of home loan help from your lender would normally potentially impact your credit score. However, the Australian Banking Association (ABA) CEO Anna Bligh stated on 5 April that consumers granted a six-month deferral of repayments due to the impact of coronavirus would “not have their credit rating affected as a result of that deferral, provided they were up to date with repayments prior to COVID-19”.

More recently, the ABA said on 8 July that “for customers who recommence repayments on their existing loan or enter into a new repayment arrangement, their credit report will not be impacted, provided they meet the new repayment arrangements. If you are granted an extended deferral period approved by your bank your credit report will not be impacted.”