The real cost of a repayment pause, and how to minimise the fallout

CBA’s announcement today that customers who take a six-month repayment pause will be refunded interest-on-interest charges during this time will help families struggling to make ends meet.

This measure, and the major banks’ offer of a repayment pause for people in severe financial hardship will help thousands of Australians at a time when they need it most.

But clearing the debt on the other side of a repayment pause will be an uphill battle for many families and comes at a cost.

RateCity.com.au research shows that a mortgage holder could end up paying over $17,000 extra over the remainder of their loan as the result of a six-month pause if they don’t make extra repayments on the other side. This assumes the person is five years into a 30-year loan with a balance of $400,000.

RateCity.com.au research director Sally Tindall said the banks were to be congratulated for helping people who can’t meet their mortgage repayments, but that it was important for customers to understand the long-term implications of a repayment pause and think about how they can minimise the fallout.

“A lot of people will have to resort to putting their mortgage on hold during this crisis. That’s the cold hard reality for many families,” she said.

“If that’s you, try to come up with a plan to pay the money back as quickly as possible after the pause to get your mortgage back on track.

“Repayment pauses should only be used when other avenues have been exhausted. Talk to your bank about what other options you might have, including a rate reduction or reduced repayments for a limited time.

"When it comes to paying off your mortgage, every dollar makes a difference,” she said.

What each bank does for a mortgage repayment pause:

  • CBA – home loan repayments remain the same as before the pause, but the loan term is extended. CBA will also make a one-time payment intended to offset the interest-on-interest charged to customers receiving a home loan deferral for six months.
  • Westpac – home loan repayments increase after the pause, but the loan term remains the same. Westpac is currently offering a 3-month pause with the option for a further 3 months after review.
  • NAB – home loan repayments increase after the pause, but the loan term remains the same.
  • ANZ – gives customers the option of keeping the loan term the same or extending it by six months (with a review at three months). Either option is likely to see mortgage repayments increase after the pause.

Note: customers may be able to talk to their bank about a different repayment structure.

The cost of a six month pause on a $400,000 loan balance with 25 years remaining:

  LOAN TERM REMAINS SAME LOAN TERM EXTENDED
Extra paid over life of loan $6051.69 $17,377.61
Increase in monthly repayment after pause $61.63 $0
Increase in loan term 0 15 months

Notes: Based on an owner occupier paying principal and interest on the average rate of 3.54%. Excludes interest-on-interest charges during the pause, however some banks will charge this. People who are further into their loan will pay less.

Tips for reducing the impact of a repayment pause

  • Try and pay off some of your loan during the pause.
  • When the pause finishes, see if you can make extra repayments to catch up.
  • Negotiate a lower interest rate with your bank and if possible, try and put any savings from the rate reduction back into your mortgage.
  • Call an independent financial advisor or a financial counsellor for advice. The National Debt Hotline is: 1800 007 007.

Potential alternatives to pausing mortgage repayments:

  • Switch to minimum repayments: customers making higher repayments on their loan can ask their bank to adjust their repayments to the minimum to free up cash.
  • Use your redraw facility: if you are ahead on your repayments you can access them via redraw (fees may be charged).
  • Request a rate cut: variable rate customers can ask their bank to lower their home loan rate. While banks typically don’t allow rate changes for fixed rate customers if you are in financial stress, it’s still worth asking.
  • Switch to interest-only repayments: many lenders will let you only pay the interest on your loan for a period of time. While it will reduce your monthly repayments in the short term, your interest rate is likely to increase and by not paying down your debt, you will pay more in interest charges the longer term.
  • Reduce repayments temporarily: instead of going on a full repayment pause, see if you can reduce your repayments. While this can potentially add thousands to your mortgage, it’s likely to be better than going on a full repayment holiday.

 

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Learn more about home loans

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 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.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

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.

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.

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 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.

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 difference between fixed, variable and split rates?

Fixed rate

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.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

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.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

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.