With only a few more months left on mortgage deferrals, borrowers will soon have to make a choice regarding their mortgage repayments.
Nearly 1 million borrowers have deferred their mortgage repayments as a form of financial support during the pandemic. However, Banks are now tightening restrictions surrounding mortgage deferrals, and in the coming months many borrowers will likely have to resume their repayments. While this may cause many families financial strain, for those who can afford it, it could be in their interest to resume repayments.
Let’s take a look at:
- What mortgage holidays/deferrals are
- What the banks have said about mortgage deferrals
- The case for resuming your mortgage repayments
- The case against resuming your mortgage repayments
- The case for refinancing your mortgage
Mortgage deferrals explained
In March, during the first wave of the pandemic, the banks created a coronavirus support package worth more than $100 billion that included a six-month deferral of loan repayments. It is likely you knew this already, as around 800,000 Australians have deferred their repayments since the start of the pandemic, totalling $260 billion in home loans.
These mortgage deferrals were a necessity for many, as unemployment hit record highs and the temporary closing of businesses severely restricted the ability of many to repay their mortgages. For many, JobKeeper, and the increased rate of JobSeeker weren’t enough to maintain their mortgage repayments, and without the option to defer, hundreds and thousands would’ve end up selling their houses and risk defaulting on their mortgage, which would’ve not only been disastrous for the banking industry but the economy as a whole.
We are now a few months on and while the virus is still wreaking havoc in Victoria, the economy is beginning to reopen, meaning many who initially froze their mortgage repayments may now no longer need to do so.
Banks ‘encourage’ customers to start paying their mortgage again
In July, the banks announced a further four-month extension to these mortgage deferrals for those who need them, taking the maximum allowed mortgage deferral to January 2021.
However, it also urged borrowers who were able to do so to resume their normal repayment as quickly as possible, while also offering partial repayments to those still experiencing some level of financial difficulty.
“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,” ABA Chief Executive Anna Bligh said.
The banks have been singing the same tune. Westpac acting chief financial officer Gary Thursby urged customers to consider restarting payments when possible, while NAB chief executive Ross McEwan said it had already been checking in with customers to understand their circumstances and help them accordingly.
But the key question is: Is it actually a good idea to resume your mortgage repayments as soon as you can? Or should you wait until that September 30 deadline?
Why should you be resuming your mortgage repayments?
A minority of borrowers who have deffered their mortgage repayments are already making some repayments. As reported in The Australian in early June, 20% of Commbank customers who originally requested deferrals were now making some contributions, while 10-15% of NAB’s affected customers have done the same.
The case for resuming your mortgage repayments is two fold:
- Your mortgage will still accrue interest during the deferred period, meaning that you will the have to pay more once the deferral period ends; and
- The sooner you can pay off your home loan the less interest you accrue
Mortgage deferrals still accrue interest
The main problem with mortgage deferrals is that, although they can provide some short-term relief, interest is still accruing on the principal loan amount.
For example, a mortgage balance of $400,000 with an interest rate of 2.90% p.a. over 20 years has a minimum monthly repayment of $2,198.42. If you deferred the repayments for six months your repayments go to $0 a month for those 6 months, providing you with $13,190.52 that can go towards your living expenses during those 6 months.
By the end of the six-month deferral you’d owe an extra $5,800.02 on this loan overall, meaning you actually owe $405,800.02 now, instead of $400,000. This means that your repayments will increase once deferrals end. In this example, they would rise to $2230.30
The earlier you resume paying your mortgage repayments, the less interest will accrue and the less your repayments will increase. But the longer your deferral goes on for, the bigger your overall loan balance will be, making your repayments larger once the deferral period ends.
The sooner you can pay off your home loan the better
Home loan are, for most Australians, the biggest debt we will ever have over our lifetime. The longer you take paying off your home loan, the more expensive it will be in the end. Therefore, it stands to reason that a home loan paid off sooner will be cheaper overall. So, if you can afford your mortgage repayments now, it is in your interest to resume repayments because over the life of the loan you stand to save thousands of dollars.
Why shouldn’t you resume your mortgage repayments?
The obvious reason against resuming your home loan repayments (either partially or fully) is that you simply can’t afford to do so yet.
Australia’s effective unemployment rate (which includes those out of work and those who have opted against looking for work as the economy contracts) is currently sitting at 13.3%. Jobs and hours worked have massively declined during COVID-19, and with more outbreaks popping up across Victoria and New South Wales (at the time of writing that is), there’s a possibility that more people will be out of work again and will lack money to pay for both their home loan and the essentials.
Looking back to our calculations, a borrower with 20 years left on a loan balance of $400,000 and an interest rate of 2.9% could save $2,198.42 per month, or $13,190.52 over six months, which could be extremely useful to pay for all of life’s essentials during COVID, like:
- Fuel & Transport
Of course, with interest still accruing it will come out more expensive, but paying a few extra thousand dollars over several decades is a small price to pay if it means you can avoid defaulting on your loan during the crisis.
Extending your original deferral
There’s now the option of an additional four-month deferral, taking that September 30 deadline to a new one of January 31 for those who are still struggling. These will be offered on a case-by-case basis, and won’t be automatic, so if you don’t get in touch with your bank then you can expect to have your normal repayments resume.
“Customers with reduced incomes and ongoing financial difficulty due to COVID-19 may be eligible for a further deferral period of up to four months, during which time they will be expected to work with their bank to find the best solution to assist them to return to repayments through a restructure or variation to their loans.” – Australian Banking Association
Extending your deferral by another four months will obviously lead to even more interest being accrued too, but this might just have to be a cost you’ll have to accept in the long-run.
What if you still can’t meet your repayments?
Once the deferral period ends, if you are still unable to meet the costs of your home loan repayments, you will need to take proactive steps, communicating with your bank to figure out other arrangements.
An account that is overdue will automatically go onto a mail list where demand letters will be sent out, and should you fail to communicate with the lender you will automatically be listed as a default.
Options may 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.
You can also request a Hardship Variation from your bank, which they must respond to within 21 days.
According to the ABA, the worst thing you can do in this situation is to do nothing.
“You need to speak to your lender or mortgage broker as soon as possible,”
“If you miss paying just one scheduled home loan repayment, without notifying your lender, this gets reported to credit reporting agencies.
“Late or overdue payments appear on your credit report and may impact your creditworthiness and borrowing capacity in future.”
Don’t forget to look at switching your home loan
Over the course of this pandemic we have seen record breaking variable rates, and record breaking fixed rates. There hasn’t been a better time to refinance your home loan to a cheaper one. The latest figures from the Australian Bureau of Statistics (ABS) from May show the value of existing owner occupier home loans refinanced with a different lender was over $10 billion, which is by far the biggest on record and up 27.5% from April’s $7.9 billion, which was also a record high.
There can be big savings in refinancing your home loan, and this could be beneficial for people in both situations:
- If you’re able to resume mortgage repayments, then you could save even more by picking a loan with lower minimum repayments
- If your repayments are currently paused, you might be able to resume payments by switching to a much cheaper home loan However, many lenders would be unlikely to approve a refinance for a customer that’s currently experiencing hardship.
This is the most home loan competitive environment in history. If you haven’t had your home loan reviewed in the last two years, you may be paying too much. We urge any borrower in this position to speak to us to discuss their options. It could be as simple as negotiating a better rate with your existing lender and if they are not willing to offer you a better deal, we can do all the legwork to help you refinance your loan with another lender.
Contact us today.
Call (08) 8216 4111