Consumer advocate, RateCity, believes COVID-affected customers should not have to pay a higher rate if they can only afford to make interest-only repayments on their home loan when their six-month deferral ends.
From September, homeowners on a deferral who can’t resume their repayments can potentially extend the pause by an extra four months or switch to interest-only repayments.
Moving to interest-only can be a good halfway measure, as the repayments are significantly lower than normal. However, Australia’s three largest banks have confirmed these COVID- affected customers are likely to be charged a premium for moving on to this loan type, although they will review on a case-by-case basis.
Sally Tindall, research director at RateCity, said: “The banks have been told by ASIC to be fair and flexible in their negotiations, and to help people stay in their home, if it’s in their best interests.”
“Yet some banks are planning on charging COVID-affected customers a higher rate if they switch to interest-only repayments,” she said.
“These customers should be getting a rate cut, not a rate hike. Asking people to pay more interest when they are in financial distress doesn’t seem fair or reasonable.
“Some of these people, through no fault of their own, have had their livelihood striped from them. They don’t know when they’ll be back on their feet again and they are stressed and scared.
“They need genuine help from the banks, not a bigger interest bill.
“When your bank calls, ask them for a rate cut to help relieve the pressure. They’ve said they are here to help – hold them to it,” she said.
What you should ask your bank when they call:
- Ask for a rate cut, especially if your rate is higher than the new customer rate. If you are in financial hardship, you should not be paying more.
- Check you are on the right home loan. If there’s no money in your offset, there’s little point paying for one.
- Ask for your annual fee to be waived this year (if you pay one).
- Find out the monthly and life-of-loan cost of each option so you know what you are committing to
Mortgage deferral extension vs interest only repayments:
The cost of each scenario, based on owner occupier owing $400,000 with 25 years remaining.
|Scenario||Monthly repayments||Extra paid over life of loan||Length of support|
|Extend deferral by 4 months||$0 for an extra 4 months. $2,125 after that.||$10,418||10 months|
|Switch to interest-only for 12 months after a deferral||$1,401 for 12 months. $2,138 after that.||$13,729||18 months|
|Base case (no COVID-19 support)||$2,020||$0||None|
See notes below.
Potential options if you can’t pay your mortgage:
- Use money in your offset or redraw, if available.
- Switch to interest-only repayments. While this could increase your rate and the overall interest bill, paying something is better than nothing.
- Ask your bank for a loan deferral, or if you are already on one, an extension.
- Sell or rent the property.
Notes: Based on the average discounted variable rate from the big four banks for owner occupiers paying principal and interest or interest-only where applicable. Assumes a customer has already deferred their loan for 6 months, that the loan term remains the same after the deferral, that customers choosing to switch to interest only will be charged a higher rate and that interest on interest is charged. Base case assumes the customer continued paying their home loan throughout COVID-19. Some lenders refund interest-on-interest charges for a period of time.
CBA, Westpac and NAB have all confirmed that customers who move to interest-only terms after a deferral, will have their rates aligned to the banks’ interest-only products. At the time of sending, ANZ had not confirmed which rates customers who move to interest-only would be charged.