Uncertainty is rife among Australians who have frozen their mortgage repayments, as the end of the first phase of bank support looms, new RateCity research showed.
More than 70 per cent of people on mortgage deferral plans believe they’ll be able to meet their repayments when it ends, but nearly a third either won’t be able to or don’t know if they’ll be able to resume repayments, a RateCity survey of 1011 mortgage holders found.
Of those who aren’t sure if they can make repayments when the mortgage deferral ends, more than two thirds are relying on the hope that their lenders will extend their repayment holiday – the option most preferred by those contemplating their next move.
Some Australian banks have indicated that they would consider extending mortgage pauses for up to another four months for those who genuinely needed it. This would bring the total repayment deferral to 10 months for mortgage holders who opt for the extension.
Some mortgage deferrers are considering multiple options, including:
- Switching to interest-only repayments (25 per cent).
- Using money from their offset or redraw to make repayments (29 per cent).
- Considering selling their homes (25 per cent).
- Borrowing money from family (17 per cent).
- Renting out their home and living somewhere cheaper (8 per cent).
How much does a 10-month mortgage deferral cost?
Many Australians resorted to putting their mortgages on hold during COVID-19. While one in 13 survey respondents took a mortgage deferral, one in 20 used money in their redraw or offset, and about 2 per cent switched to interest-only or part-payments.
The Australian Banking Association reported that about 485,000 mum-and-dad mortgages worth a combined $175 billion have been put on ice.
But not everyone who paused their mortgages knew what they were in for. Almost 60 per cent of people who froze their repayments did not know how much extra it could cost them over the life of the loan.
Of those who were unaware of the long-term repercussions, nearly one in five didn’t know that their bank was still charging them interest while the loan was paused.
RateCity analysis found that an average homeowner who defers their mortgage for 10 months could expect to pay an extra $12,000 over the life of their 25-year loan. This calculation assumes that the mortgage holder:
- Is an owner-occupier paying principal and interest;
- Has a loan balance of $500,000; and
- Is paying the average interest rate of 3.42 per cent.
As no one knows how interest rates will move in the next few decades, the calculation doesn’t factor in potential rate changes during the loan term.
|The cost of a repayment pause extension on a $500,000 loan|
|Loan balance after the 10-month pause||$514,434|
|Increase in monthly repayment after pause||$127|
|Extra paid over life of loan||$12,158|
Source: RateCity. Notes: Based on an owner-occupier paying principal and interest on the average rate of 3.42%. Calculations assume a borrower is 5 years into a 30-year loan with a loan balance of $500,000 when they defer for 10 months and that the loan term remains the same. People who are further into their loan will pay less. People who increase their loan term will pay more.
How a mortgage deferral can help
Putting a home loan on hold may prove to be costly, but the option has been a lifeline for some. In March, mortgage holder Arpan Sodhi requested his lender Bendigo Bank for a repayment holiday, after his international moving business experienced a downturn.
Pausing their home loan repayments saved his family about $5,000 a month – money they couldn’t afford to pay while their income was down to JobKeeper.
“Everything suddenly became so uncertain with the business, the revenue, the sales and everything,” he told RateCity.
“Those months that we're not paying our debt, what we're doing is we're saving that money for ourselves.”
Mr Sodhi said approaching his lender was “pretty straight-forward” and has allowed them some extra cash for everyday expenses, instead of worrying about paying back the bank during the deferral period.
“It was definitely relieving, if someone tells you not to pay your mortgage for six months, it's definitely a relief.”
While the business owner is scheduled to restart repayments in August, he said the bank was open to the option of extending the deferral if he needed it.
‘We always have the chance to repay that interest fee, (which may be) another $30, $40 a month for the life of the loan, which is quite helpful I would say.”