What is capitalisation on a home loan?

What is capitalisation on a home loan?

Financial distress is never easy to deal with for anyone. If you’ve lost your job or are facing a pay cut, you would rightly be worried about how you might pay your outstanding debts, such as a home loan or a car loan. Most Australian lenders offer borrowers a repayment pause, giving them a break lasting up to six months from making any payments whatsoever. However, in most cases, this is not unconditional relief, and your loan is still accumulating interest. You’re likely to find that the interest on your home loan has been capitalised during the pause, increasing the total loan amount you have to repay. 

What happens if you capitalise the interest on your home loan?

A home loan is a long term debt that you repay over a period that can range from 10 to 30 years. During this time, you’re likely to go through many life changes and face unexpected situations. If these changes make it difficult for you to continue your home loan repayments, you should discuss it with your lender. You may be able to request your lender make certain hardship variations during these times. 

These variations can include being able to request either a revision of the home loan terms or of the expected repayments. They also include reducing your repayments by switching to interest-only for a short duration rather than principal and interest. Another option is a repayment pause, or deferral, which allows you to take a break from making any payments for a set period negotiated by you and your lender. However, a deferral or pause doesn’t stop the interest on your home loan from accruing. The interest just gets capitalised or added to the principal of your loan. Once you restart payments, interest will be calculated based on this larger sum, therefore increasing the total cost you pay on your home loan.

As a borrower, you have to repay the borrowed amount and any interest accrued on your loan, and you have limited room for negotiation once you’ve accepted the loan. You should always discuss your financial situation with your lender before making any changes such as a pause. You can also consider putting small amounts into your loan even when you have repayments paused to help minimise the impact. Make sure to discuss this with your lender as well because you may incur fees or they may see these payments as meaning you’re able to begin repayments again. If you have an offset account, you could put funds into it and transfer them to your loan once the pause is over. The money in this account will also work to lower the interest you accrue.  

How can I prevent the capitalisation of my home loan interest?

If you find yourself in a situation where you’ll miss a home loan repayment, you should discuss it with your lender immediately. Not doing so may lead to the lender reporting a payment delay or default against you, which can bring down your credit score. The lender may then appoint a hardship officer to review your case and suggest an alternative repayment plan. Your lender may offer you a repayment pause which then means any interest will then capitalise into the principal of your home loan. 

To avoid capitalisation of your home loan interest, you can instead discuss a short-term plan for lowering the size of your repayments. For instance, if your current repayments are $1,000 a month, you could request reducing this to $500 or $700, based on what you can afford. You may also need to specify the duration you wish for this lowered repayment to be in place. You should remember that lowering your repayments is like a partial deferral, and will result in a small increase in the total amount you need to repay to the lender. 

Another option lenders offer to help you lower your repayments without capitalising your interest, is switching to an interest-only repayment plan. Typically you repay part of the principal or loan amount and part of the interest accrued on the principal in your repayments. You can ask your lender if you can temporarily pay only the interest on the loan. Doing this will bring down the repayment amount, and it won’t capitalise the interest. You’ll need to work out these arrangements with your lender, and there will likely be a strict timeline for how long you’re able to be on interest-only repayments.

You can also consider reviewing your budget while making these lesser repayments. There may be expenses that you can put off without incurring additional debt. Or you may choose to wait to use your holiday savings and instead divert them into making home loan repayments. Consider checking if you can split your utility payments into two or more instalments so that you can save up a bit for paying the full utility bill. 

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Learn more about home loans

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Can you remove a cosigner from a home loan?

Taking out a home loan is an act of financial responsibility and a cosigner on a home loan shares that responsibility. For this reason, removing a cosigner from a home loan may not be straightforward. Usually, you can add a cosigner, or become a cosigner, when applying for the home loan. In such a circumstance, the lender may ask you to stipulate the conditions for a cosigner release, which are the terms for removing a cosigner from the home loan. For instance, you may agree that you can remove a cosigner once half the loan amount has been repaid.

However, not stipulating such conditions doesn’t mean it’s impossible to remove a cosigner. If the primary home loan applicant has a sufficiently high credit score and has not delayed any repayments, the lender may be willing to remove the cosigner. You should confirm that doing so doesn’t affect the terms of the loan. If the lender doesn’t agree to remove the cosigner, the primary home loan applicant may have to refinance the loan in order to do so. If there were specific reasons for needing a cosigner and those reasons are still valid, then you may have some challenges with refinancing.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.



How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.