Were you one of the thousands of mortgage holders who paused repayments due to the economic impact of COVID-19? Here’s what you need to know if you’re coming to the end of your freeze period.
The ability to pause mortgage repayments offered much-needed relief to hundreds of thousands of Aussie households – not only during the first weeks of the COVID-19 restrictions, but throughout an unexpectedly tumultuous economic period.
Australian Treasurer, Josh Frydenberg, confirmed the country had entered a recession only last week. And the latest ABS unemployment figures show that the jobless rate is now 7.1 per cent, the highest it’s been in 19 years.
A huge side effect of pausing repayments that Australian households may not have expected is that in the long run, mortgage deferrals come at a huge cost
This is because lenders continue to charge their customers interest even when the loan is paused.
The $7,000 home loan pause
Analysis from RateCity shows that for the average mortgage holder with $400K owing, after pausing their repayments for six months, their total balance would have risen to $407,203.
After the deferral, they would start paying $62 a month more on their loan. In one year, this would climb to $744, which may mean missing out on a new phone, or ditching your next local weekend away.
The real cost of a mortgage repayment pause on a $400K loan:
|Increase in loan balance after the six-month pause||$7,203|
|Increase in monthly repayment after pause||$62|
Notes: Based on an owner occupier paying principal and interest with an outstanding loan balance of $400K, 5 years in to a 30-year loan, when they take a 6-month repayment pause. Based on the average discounted variable rate from the big four banks. Assumes the customer keeps their loan term the same and interest is charged during the pause.
Banks pump the breaks on deferrals
Now that restrictions are starting to lift across Australia, some lenders are increasinglytrying to check in with customers to ensure people aren’t on repayment holidays if they don’t need to be.
Commonwealth Bank is no longer automatically offering mortgage deferrals and will now do it on a case by case basis. NAB has said it’s checking in with customers who are on pause to see if they still need it.
A third of ANZ customers who deferred loan repayments have now restarted repayments, according to ANZ group executive of Australia retail and commercial, Mark Hand.
“[We’re] seeing some customers call us to unwind the arrangement because they’ve got some certainty, they’ve got that confidence going forward,” he said.
“In rough numbers, about a third of our [business and home loan] customers who took a deferral are making some payments – not full payments – although nearly 5 per cent are now back to making full payment.”
Customers returning to making mortgage repayments may be a positive sign of the times, according to Domain economist, Trent Wiltshire.
Mr Wiltshire said the early return to repayments “reflected rising consumer sentiment and was a promising sign for the housing market.”
“Consumer confidence is rising and some of the job advertisement numbers are starting to pick up, which is a sign that the labour market is looking a bit stronger than expected,” he said.
“People were offered these deferrals and they took them as they were fearful because they had lost their job or thought they would … but the economy has opened quicker than expected, it’s ramping up quite quickly and that may have left some people in a better position than they expected to be.”
What to consider if you’re nearing the end of your mortgage holiday
If you’re coming to the end of your repayment pause period and hadn’t realised the potential interest costs, you may be wondering how you can budget for your new, higher bill.
If you’re now in a better financial position, it may be worth considering asking for a lower rate or even refinancing to a lower rate lender.
Thanks to the Reserve Bank of Australia cash rate sitting at a record low of 0.25 per cent, home loan rates have never been lower. And, typically, the lowest rates are reserved for new customers as a means to get them on the books.
As you near the end of your mortgage repayment pause, call up your lender and request to be moved to a lower rate that its offering new customers.
If that doesn’t work, while you may be thankful to your lender for allowing you to pause mortgage repayments, there’s still no need to be loyal to a bank if it’s going to cost you more in the long run.
Consider refinancing to one of the lower rate providers out there. There are currently 108 lenders offering home loans with rates under 3 per cent, according to the RateCity database.