Are home loan lenders extending mortgage holidays?

Are home loan lenders extending mortgage holidays?

As the deadline to resume deferred repayments draws closer for nearly half a million residential mortgages, many are left wondering about the fate of their home loans.

More than 485,000 mortgages worth $175 billion, or 8 per cent of the mortgage market, have been deferred since March due to COVID-19 impacts, according to the latest figures from the Australian Banking Association (ABA). 

While these deferrals were scheduled to end in September, some banks announced earlier this month that they would consider extending some repayment holidays for up to another four months.

But that doesn’t mean the banks are dishing out longer mortgage holidays for anyone who asks for it. Borrowers who are in ongoing financial difficulty due to the pandemic may have their loan restructured or varied to help get them back on track to paying off their loan.

Restructuring or varying a home loan might involve:

  • extending the overall length of the loan,
  • converting to interest-only payments for a period of time,
  • consolidating debt, or
  • a combination of these options, as well as other measures.

Those who can’t restructure their home loans may be considered for an extension to their deferral period of up to four months.

Borrowers will need to restart loan repayments if they can afford to.

ABA chief executive officer Anna Bligh confirmed that many borrowers who had paused their mortgage repayments have opted to return to paying off their loans, allowing them to avoid snowballing interest charges during their mortgage holidays.

How do you cancel your mortgage holiday?

For most mortgage holders who are ready to resume home loan repayments, a sensible way to start is to consider your options going forward. Think about whether you’d be better off increasing your monthly repayments to cover the costs of the mortgage holiday, or extending your loan term while keeping the same repayments. Your lender may be open to various options, but it’s best to discuss what your lender’s policy on post-deferral repayments is. 

Keep in mind the latter option could see a borrower facing a bigger total interest bill over the course of the loan. For an average owner-occupier mortgage-holder owing $400,000, freezing home loan repayments for six months could see their total loan balance jump by more than $7,000, RateCity calculations showed. 

Next, it’s a good idea to have a chat with your lender, and let them know:

  • about your updated financial situation,
  • when you think you’ll be ready to make repayments, and 
  • how you will repay the deferred portion of the loan and interest.

It’s worth noting that provided you had a positive repayment track record pre-coronavirus, your credit report may not be impacted if you:

  • resume repayments on your deferred loan,
  • have your loan rearranged, or
  • extend your mortgage holiday.

Alternatives to extending your mortgage holiday

Without a doubt, COVID-19 has affected the incomes and livelihoods of many Australians. And with parts of Victoria returning to stage three restrictions, hopes may be dashed for a rapid economic and labour market recovery.

If you don’t want to drag out your mortgage holiday any longer, but aren’t financially comfortable enough to continue the same repayments as they were pre-pandemic, there are a few options worth considering. You may want to speak to your lender or a financial adviser if you’re contemplating any of these options.

1.   Refinancing – While not everyone is in a position to refinance, it could be an option for people who are. As competition between home loan lenders grows, it could be a good time to see if you can snap up a lower rate or swap your home loan for one with more flexible features. More people are refinancing than before the pandemic, with the number of external refinances jumping by 29 per cent between April and May, data from the Australian Bureau of Statistics showed. However, you may not be able to refinance if you’re in a fixed-rate period, or if you’re still technically in financial hardship. Contact your lender to find out its specific policies. 

2.   Interest-only repayments – If you’re currently on principal and interest (P&I) repayments, you could consider swapping over to interest-only repayments temporarily to slash your expenses. For instance, if you were on a $300,000 home loan for 30 years on a 3 per cent interest rate, and switched from P&I to interest-only, you could expect your monthly repayments to fall by $515 – money that’s likely to go a long way in your household expenses. But keep in mind that you wouldn’t be paying down the amount you borrowed if you opt for interest-only repayments. You should also make sure you can afford higher repayments when the interest-only period ends.

3.   Access money in your offset or redraw – If you’ve been using your home loan’s offset account, or if you’ve previously made extra repayments through a redraw facility, chances are you may have some cash that you can access. While an offset account or a redraw facility may help you pay down your home loan sooner in normal circumstances, that money can also be a lifeline in times of need. You should weigh up all your options to determine if you need to use these features.

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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 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 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.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

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.

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 are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

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.

How does a redraw facility work?

A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.