COVID-affected customers should receive rate cuts not rate hikes: RateCity

COVID-affected customers should receive rate cuts not rate hikes: RateCity

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.

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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.

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.

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 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 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 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.

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 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.

What is a variable home loan?

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.

Mortgage Calculator, Repayment Type

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

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.

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.