The big four banks are extending mortgage deferrals on payments for an additional 4 months. While this is welcome news for the 800,000 borrowers who have taken up this offer, it does pose significant risk to some.
In early April I first reported on the banks first wave of loan deferral programs. Even then I explained how interest would continue to accrue and that borrowers who take up the program would undoubtedly end up paying more in the long term. However, for some, there were limited options. The same is true again now. Just last week NAB announced the extension of their loan deferral program and they have done so with a good understanding of the pitfalls and complications that come with a loan deferral. NAB was first to implement such an extension and the news of the other big banks following suite is certainly welcome as it will mitigate the ‘economic cliff’ that Australia was heading towards in September, with the end of JobKeeper and JobSeeker coinciding with the end of the loan deferral programs.
Aussies should only defer their loans if necessary.
For example: the impact of opting out for the now-available 10 months will add $9769 to a five-year-old loan with a balance of $400,000 and a 30-year term.
The risks don’t stop their. You are also in danger of losing any over-payments you have sitting in your mortgage as they could be subsumed into your loan balance.
ME Bank made an example of this in April when it justified reclaiming redraw amounts by recalculating borrowers’ loan progress. Luckily, the bank reversed it’s decision. The truth is, this rectification would not have occurred if it had not been for the public backlash it received, as it was acting within its rights. It is standard practice for loan contracts to put the right on your lender to have rights to your extra repayments should you get in financial trouble.
Here is a summary of the actions the big four banks are taking.
ANZ – 100,000 repayment mortgage deferrals
Redrawing your money and putting it into an offset account is crucial if you hold your mortgage with ANZ. If you don’t, your overpayments could be subsumed into your loan.
At the point of loan deferral ANZ will subsume any additional payments that have been made towards paying down the loan during its life.
“Customers are pro-actively encouraged to access their redraw funds and move them into another account before taking up the assistance – through phone conversations or via email. As part of discussions to apply for the COVID Assistance Package and treat the redraw and advance, we require consent either verbally or via an electronic submission form.” – ANZ spokesperson
Fixed-rate customers are, however, unable to redraw. Essentially, should they find themselves forced to pause their mortgage due to financial hardship, they will not be able to redraw any advance balance.
“This means customers wishing to take up the COVID Assistance only have the option to capitalise their advance balance,”- ANZ spokesperson
CBA – 128,000 mortgage repayment mortgage deferrals
Redrawing overpayments and moving them into an offset is critical with CBA as well. Even where a repayment deferral period is granted, if you have extra funds in your loan account, repayments will come from them, which essentially nullifies any benefit you would have received from a deferral period.
CBA is telling customers this will happen and advising them to move their money out if they don’t want to see it gradually depleted.
“The advice we provided customers entering into a deferral was that any available redraw will be drawn on first during the six-month deferral period and if customers needed to access their redraw during the deferral period, they should transfer their available redraw to another account.” – CBA spokesperson
NAB – 98,000 mortgage repayment mortgage deferrals
NAB has not gone down the same road as CBA or ANZ. NAB will not touch your redraw during the deferral period, ensuring that it is safe and available to you when you need it.
“NAB provides the flexibility for our customers to use redraw during a repayment pause, and a pause is possible even if there’s an available balance in redraw – i.e. the redraw available doesn’t need to be drawn down before deferral,” – NAB spokesperson.
Westpac – 130,000 mortgage deferrals in the first three months, with a further three months available on review.
Similar to NAB, Westpac will not touch borrowers’ redraw accounts during the deferral period.
“Westpac customers with a redraw facility can continue to access available funds during the COVID-19 home loan repayment deferral period.” – Westpac spokesperson.
With all the major banks, the potential four-month mortgage repayment extension is only available where borrowers still can’t afford the repayments. All banks will prefer to enter into alternative, “flexible” arrangements, such as switching to interest-only, extending interest-only periods and moving you to a fixed rate.
It would be better for you to negotiate an interest-rate cut, to reduce repayments without growing your loan. If you need support doing so, do not hesitate to contact us at FMA.
If you are considering a mortgage deferral period, and would like to organise to move your redraw to an offset account, please do not hesitate to contact us.