Half of all mortgage deferrals come up for review: ABA

Half of all mortgage deferrals come up for review: ABA

About half of all people who deferred their mortgage following the sudden blow of COVID-19 will be contacted by the big four banks in the next couple of months to evaluate their ability to resume repayments, a banking industry association has said.

And if they can’t, they’ll have to consider a range of other options, such as another deferral, a loan restructure or downsizing their property

Mortgage repayments are due, for many

Almost 900,000 mortgage repayments were put off by the 20 largest banks following the brunt of COVID-19 in March -- an effort that delayed the repayments of about $266 billion, according to the Australian Prudential and Regulation Authority (APRA).

Six months on and the banks are contacting half of all of the people who deferred their repayments -- about 450,000 people in September and October -- to see if they can resume repayments or find other solutions, Anna Bligh said, chief executive of the Australian Banking Association. 

“The loan deferral measure offered to customers by Australia’s banks has led to the largest ever customer contact process in the industry’s history,” she said.

“There’s an additional 5000 new or redeployed staff working to ensure customers understand their options.”

About two-thirds of the mortgages deferred were for personal accounts. The ABA estimates 80,000 will be contacted by the end of September with a further 180,000 being contacted by the end of October.

What will be on the table in these phone calls?

The purpose of contacting nearly half a million people is to find out the progress of their financial recovery, and to identify the next steps needed to see that recovery through, the bank’s association said.

“It’s the bank’s job to set out all the options and implications and ensure customers have the information and the time to make the right decision to suit their needs,” Ms Bligh said.

“As customers who are able to begin their repayments again, it allows banks to focus their support on those who really need it.”

There’s a range of options on the table for people still recovering from a loss of income due to the COVID-19 pandemic, these include:

Restructuring their loan

This can include converting to an interest only loan for a period of time or increasing the term of the loan to lower mortgage repayments. 

The financial regulators have warned this option should be undertaken when it’s in the financial interest of customers.

Extending mortgage holidays

Financial regulators have paved the way for mortgage deferrals to be extended. Some mortgage holders will have the option of postponing repayments for four more months.

Home loan repayments can be deferred for a maximum of ten months in total -- provided the deferral was put in place before 30 September, 2020, APRA has said. People who request a deferral of their home loan repayments thereafter will receive a mortgage holiday of six months until 31 March, 2021.

Interest continues to be charged on deferred mortgages, and so the reprieve of a mortgage holiday may be offset by the potentially thousands of dollars added to the loan.

The Australian Banking Association has warned mortgage holidays will not be automatically extended.

‘Tailored options’ -- may include downsizing

Others who can’t afford to pay their mortgage “over the longer term will be offered tailored assistance that addresses their needs,” the banking association said. 

Executives at three of the four big banks have recently said customers may need to downsize their home or investment if they find they are overextended in the current financial climate.

The role of the banks, the role of mortgage payers 

The financial regulators issued open letters to the banking industry spelling out their expectations: exhaust all options to make sure people keep their homes -- when it is in their best interests. 

The letters, issued by the Australian Securities and Investment Commission (ASIC) and APRA, also recognised the obligations of mortgage holders, who are to resume repayments when they financially recover.

“APRA expects Authorised Deposit-taking Institutions (ADI, commonly known as banks) to proactively engage with affected borrowers between now and the end of the current deferral period to determine whether to grant an extension on the deferral period, to restructure or to recognise a loan as impaired,” John Lonsdale said, deputy chair of APRA. 

“ADIs should be encouraging borrowers that can restart repayments to do so, and to identify, monitor and manage those loans where this is not possible. 

“APRA will be engaging closely with ADIs on their credit risk management practices for affected loans.”

Of the 900,000 personal and business loans that have had payments deferred, about 109,000 were able to resume payments by the end of July, ABA said.

Another 100,000 are expected to resume in the month of August, they added.

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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 is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

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 percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

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.

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.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

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.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.