Coming off a ‘mortgage holiday’? Ask your bank these questions

Coming off a ‘mortgage holiday’? Ask your bank these questions

Hundreds of thousands of people are going to be hearing from their banks to see if they’re ready to resume making their mortgage repayments

A number of options will be raised depending on each person’s financial situation. Some of them may involve restructuring.

But there’s some questions to ask and matters to consider before making such a long term decision. Here’s a few.

1. Ask: “Can you cut my interest rate?”

Banks have said they’re prepared to help people struggling financially due to the extraordinary circumstances brought about by the COVID-19 pandemic. 

An impactful way for them to do this is by reducing the interest rate you’re being charged, Sally Tindall said, research director at RateCity. 

“As a customer in financial difficulty, you should be on their lowest available rate,” she said. “This alone could potentially save you thousands of dollars over the life of your loan.”

The recent fall in interest rates has resulted in even big banks offering cheaper mortgages than average. 

The average customer is on a rate of 3.22 per cent, according to RBA July figures, but there are ‘big four’ banks offering variable loans from 2.69 per cent and fixed loans of 2.19 per cent.

If this customer -- an owner occupier paying principal and interest with a remaining 25 year term -- was to switch their $500,000 balance to the 2.69 variable rate, they’d pay $137 less a month in repayments.

They’d save $2630 in interest in the first year. Over five years, they’d save $12,661.

2. Ask: Would restructuring save me more money than deferring?

Banks are offering some customers a few options that will likely lower their mortgage repayments so that they can be resumed, but these options could affect the amount that would need to be repaid over the life of the loan.

These options may include converting your mortgage to an interest-only loan, extending the loan term, or deferring mortgage repayments for a further four months.

Interest only loans generally charge a higher rate of interest

The repayments on an interest only loan is typically less than the principal and interest repayment, but these loans generally have higher interest rates.

“If you switch to interest-only repayments because that’s all you can afford to pay, make sure your bank doesn’t hike your rate,” Ms Tindall said.

“Customers shouldn’t be hit with a rate hike at a time when they can’t make ends meet.”

Repaying your loan over a longer term could cost more money

Another option is to stretch the repayment of a loan over a longer period of time, so that less money needs to be repaid each month.

Extending your loan term will reduce your monthly repayments but will cost significantly more in the long term, Ms Tindall said.

Deferring repayments does not stop interest charges

If you’ve deferred mortgage repayments for six months but still haven’t recovered financially, the banks and financial regulators have made it possible to extend the deferral for a further four months.

It’s a welcome relief option if you’ve lost your job or income, but taking it up is likely to leave you spending more money on your mortgage.

Deferring the repayments does not stop interest from being charged. Interest will keep being calculated on the growing balance of the loan, likely adding thousands of dollars over its term

Extra repayments can shave these costs down, but not everyone will be able to make them, Ms Tindall said.

“Customers coming off a deferral must decide whether they can afford to make higher repayments to catch up on their mortgage, or extend out their loan term and keep their repayments the same,” she said.
 
“While paying extra on your mortgage will help you get back on track, a lot of people just won’t be in a position to make extra repayments right now.

3. Ask: “Can you waive my fees?”

Fees can be enough to offset the benefits of a low interest rate on a mortgage, and this is one reason why banks present a comparison rate alongside the advertised rate -- because it factors in fees when it comes to the servicing cost of the loan.

Asking your bank to waive fees while you are in financial difficulty then could make meeting your mortgage repayments easier, while freeing up funds to help you meet the other commitments in your life.

4. Do: Get independent financial advice

Banks have gone on record claiming they’ll help customers recover their financial footing, but it’s worth getting independent financial advice too.

Financial advice can be obtained for free or at a very low cost, depending on your financial circumstances. Consider your situation and speak to a financial advisor or a mortgage broker. 

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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 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 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.

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.

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Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

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What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

Mortgage Calculator, Repayment Frequency

How often you wish to pay back your lender. 

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.