5 steps to take before resuming deferred mortgage repayments

5 steps to take before resuming deferred mortgage repayments

While there are Australians out there who still remain in financial distress due to COVID-19, many have been able to get back on their feet as lockdowns eased in recent months across the country.

If you're fortunate enough to be in the latter situation and have deferred your home loan repayments, you may be keen to resume repayments as soon as possible to avoid growing interest costs on your mortgage.

Before you give your lender a call, there are a few tips you can consider to help get you back on track with your mortgage repayments.

1. Budget expenses

One of the first steps you could take is to make sure you can afford to resume your mortgage repayments. Sit down and do a thorough budget of your income and outgoings. This is especially important if your household income has been reduced because of the pandemic. You should try and work out how much money you might have left after you factor in your living expenses, including your mortgage repayments. You might want to also consider whether it’s a good idea to build an emergency savings fund, if you don’t already have one set up.

2. Weigh up your options

One question you might be faced with when restarting mortgage repayments is how you plan to cover the deferred portion of the loan and the capitalised interest that came from hitting pause on your mortgage. There’s a chance your lender will be willing to discuss different options, but generally you could:

  • Bump up your monthly repayments to pay off the mortgage holiday interest as soon as possible, or
  • Extend your loan term while keeping the same repayments. This could mean it will take longer to pay off your home loan, and you may face higher overall interest costs.

As everyone’s financial situation is different, you’ll need to assess which option would suit you more. Consider consulting a financial advisor.

3. Speak with your lender

After you’ve budgeted your cash flow and decided on a repayment option that works best for your situation, you should be ready to approach your lender. It’s important to let your lender know what your current financial situation is. This might include details on your job status, a new job, increased or reduced income and working hours, as well as any new income streams. You should also notify your lender when you intend to make repayments.

Another thing your lender might want to know is how you plan to cover what you owe from your mortgage holiday. Each lender may have its own policy on how this needs to be repaid, so it’s a good idea to discuss this in advance. You may also want to use this chat to ask any questions you have to make sure you understand how your home loan has been affected by the repayment deferral.

4. Negotiate a lower interest rate

While having this discussion with your lender, it could be a good time to request a lower interest rate. It can pay in the long run to ask for even a seemingly small interest rate reduction on your home loan. For example, if you have a $350,000 home loan over 30 years, on a 4.5 per cent interest rate, and you manage to lower your rate by 0.5 per cent, you could potentially save about $100 a month. That’s equivalent to a saving of more than $37,000 over the full loan term (without factoring in further rate changes in the next 30 years). 

You may have a higher chance of securing a lower rate if you’re an owner-occupier and if you have more than 20 per cent equity in your property. You could also consider allocating the money you’ve saved from the rate cut back into your home loan by paying more than the minimum repayments.

5. Make extra repayments

If you happen to be financially comfortable enough, it’s worth thinking about making extra repayments into your home loan. If you’ve taken a mortgage holiday for several months, you may be behind on your original repayment schedule. If possible, it may be a good idea to contribute as much as you can into your mortgage to get ahead and catch up on what you’ve deferred, plus the accumulated interest during the pause.

But not every home loan allows borrowers to make extra repayments and some lenders charge a fee when you use this privilege, so it’s best to check your home loan’s included features or get in touch with your lender.

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Learn more about home loans

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.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Which mortgage is the best for me?

The best mortgage to suit your needs will vary depending on your individual circumstances. If you want to be mortgage free as soon as possible, consider taking out a mortgage with a shorter term, such as 25 years as opposed to 30 years, and make the highest possible mortgage repayments. You might also want to consider a loan with an offset facility to help reduce costs. Investors, on the other hand, might have different objectives so the choice of loan will differ.

Whether you decide on a fixed or variable interest rate will depend on your own preference for stability in repayment amounts, and flexibility when it comes to features.

If you do not have a deposit or will not be in a financial position to make large repayments right away you may wish to consider asking a parent to be a guarantor or looking at interest only loans. Again, which one of these options suits you best is reliant on many factors and you should seek professional advice if you are unsure which mortgage will suit you best.

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.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

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.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

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.

What if I can't pay off my guaranteed home loan?

If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.

A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.