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.