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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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 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.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

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.

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 is the difference between fixed, variable and split rates?

Fixed rate

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.

Variable rate

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.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

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.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

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.

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.

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 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.