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.

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 apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

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.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

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 is the average length of a home loan?

Most Aussie lenders offer home loans with a 30-year term, meaning that you should pay back the full loan amount and the interest you owe on the amount in 30 years. 

However, home loans can also have a shorter or longer term. They may be as low as ten years or up to 45 years, depending on the product and lender. 

It’s worth remembering that a longer loan term usually means you’ll end up paying a lot more interest in total, but your scheduled repayments may be more manageable. In contrast, you could opt for a shorter loan term if you are comfortable making large repayments in exchange for paying less interest over the term of the loan.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

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.