Mortgage holidays: Almost one in two resume home loan repayments

Mortgage holidays: Almost one in two resume home loan repayments

Almost half of all Australians who deferred their mortgages have resumed repayments, according to data from seven large banks, indicating the country is speedily recovering from its first recession in nearly three decades. 

About 500,000 mortgages were deferred at the height of the pandemic, the Australian Banking Association (ABA) said, but six months on and 244,000 people have resumed repayments.

“This is a good sign for the economy,” Anna Bligh said, chief executive of the ABA. “It shows that more Australians are getting back on their feet.”

Although 45 per cent of people were able to resume their repayments, it’s unclear how long it’ll take to get the remaining 55 per cent back on their feet. Many will have the option of extending mortgage deferrals for a further four months.

The return to form for 244,000 mortgage holders follows the sudden economic fallout brought by the COVID-19 pandemic, when 932,000 people lost their jobs in the six months until June, and the country’s economy shrank by 7 per cent, putting it into its first recession in 29 years.

About 15 per cent are unlikely to afford their loans

The Reserve Bank of Australia anticipates the last 15 per cent will struggle to repay their mortgages. 

“Some borrowers may be able to restructure their debt (such as by extending the term or temporarily switching to interest-only payments) and lower their repayments,” the RBA said, in its recent Financial Stability Review.

“However, some borrowers may need to sell their property to repay their debt.”

An estimated 2 per cent of all deferrals would default on their loans and fall into arrears, the RBA said, double the current average.

This could result in a sell-off of homes, they said, and lead to prices potentially dropping further in markets where demand is already weak, such as Sydney and Melbourne.

Westpac’s chief economist estimates 60,000 homes could flood the market next year, temporarily halting the property market’s recovery.

Businesses are slower to recover

Small and medium businesses have been showing signs of recovery too, but their pace trails that of resumed mortgages. 

Of the 200,000 businesses that paused their loan repayments, about 82,000 have been able to resume, accounting for 41 per cent.

“These loan deferrals have helped hundreds of thousands of Australian families and small businesses survive the pandemic,” Ms Bligh said.

A sharp rebound atypical to most recessions

There’s an adage favoured by economists: ‘recessions take the lift down, recoveries take the stairs up.’

But the fallout and recovery from the coronavirus pandemic has been quicker than expected.

“This is not your typical recession,” Craig James said, chief economist at CommSec.

“The Reserve Bank may have identified a litany of risks, but none are being converted into events. 

“In fact economic data continues to surprise on the upside.”

Key economic factors indicate that -- while the COVID-19 pandemic is contained and the government is providing a range of stimulus payments -- a sense or economic normalcy is returning.

Australians looking to buy their own home secured a record amount in new loans for the month of August, according to the Australian Bureau of Statistics, driven by the strong presentation of first home buyers. However, investor loans continue to trail.

Consumer confidence has also lifted by 32 per cent in August and September, according to the Westpac-Melbourne Institute Index of Consumer Sentiment, pushing it to its highest level since July 2018. 

The growing confidence was attributed to the containment of the coronavirus pandemic, the federal budget drafted in response, and an expectation further financial relief is on the way from the RBA.

But economists warn the path forward is riddled with uncertainties owed to the pandemic, particularly as the government pulls away the safety net of stimulus payments such as JobSeeker, JobKeeper and Homebuilder. 

Did you find this helpful? Why not share this news?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

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 much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

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.

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.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.