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Time may be up for homeowners on mortgage holidays

Time may be up for homeowners on mortgage holidays

Tens of thousands of Australian homeowners who have paused their mortgage repayments due to COVID-19 are facing a major financial decision today.

By the end of September, 80,000 mortgage deferrers would have been contacted by their banks about whether they are able to restart repayments again, according to the Australian Banking Association (ABA). 

Some who are financially distressed may request to extend their deferral by another four months.

In most cases, banks will offer homeowners who have taken a ‘mortgage holiday’ four options:

  1. Resume full repayments.
  2. Switch to interest-only or part payments.
  3. Defer for an extra 4 months (will need to prove to the bank they are still in difficulty).
  4. Sell the property.

Australians have put about 393,000 home loans, worth $160 billion, on ice, which accounts for 9 per cent of all mortgages in the country, the latest data from the Australian Prudential Regulation Authority (APRA) showed.

Total value of home loans deferred$160 billion
Total home loans August$1.8 trillion
% of home loans on a deferral9.0%
Number of loan facilities deferred393,467

Source: APRA (August 2020 statistics).

In line with these figures, 8 per cent of households have paused their home loans, a RateCity survey of 1,011 mortgage holders found.

Nearly three quarters of people on deferrals say they will be able to meet their repayments when it ends, while 28 per cent either won’t be able to or do not know if they will be able to.

For those who are not in a position to resume repayments, distressed homeowners are thinking about how they can keep their head above water. Some people are considering multiple options, including:

  • Requesting their bank for an extension – 67 per cent
  • Using money from their offset or redraw to make repayments – 29 per cent
  • Switching to interest only repayments – 25 per cent
  • Selling their homes – 25 per cent
  • Borrowing money from family – 17 per cent
  • Renting out their home and living somewhere cheaper – 8 per cent.

What to consider when ending a mortgage deferral

About 20 per cent of mortgage deferrers started making full (10 per cent) or partial (9 per cent) repayments by the end of August, according to APRA.

Some Australians wrapping up their mortgage holiday may need to decide whether they can make extra repayments to catch up on the six months of unpaid repayments, or potentially extend their loan term, but face a higher overall interest bill.

If an average homeowner decides to maintain their current loan term, they may pay an extra $58 a month in repayments, and pay an extra $5,262 over the life of their loan as a result of the six-month deferral, RateCity analysis found.

The calculations assume an average mortgage holder is

  • an owner-occupier paying principal and interest
  • five years into a 30-year loans
  • has a loan balance of $400,000 when they begin the deferral
  • on the Reserve Bank of Australia’s (RBA) average rate of 3.22 per cent.

For a homeowner who wants to keep their monthly repayments the same, they will likely need to pay the loan off over a longer period. An average mortgage borrower could take an extra 14 months to pay off their home loan, with the six-month pause potentially setting them back $14,554 over the life of the loan.

RateCity.com.au research director Sally Tindall warned homeowners about the potential costs of dragging out their mortgage terms.

“For households coming off a six-month deferral, be aware that if you extend your loan term, it’ll cost you thousands of dollars more over the life of your loan,” she said.

“Consider making extra repayments to help catch up on your home loan, if your financial situation improves in the future. This will help you pay off your loan faster.”

What to consider when extending a mortgage deferral

Homeowners under financial pressure may be forced to continue holding off their repayments by another four months.

The average borrower stretching out their mortgage holidays to 10 months could potentially be set back another $8,832 over the life of the loan, and their repayments may be bumped up by $97 a month when they come off the deferral, RateCity analysis found.

Deferrers who choose to extend their mortgage term may potentially see their overall interest soar by estimated $24,621 over the life of the loan, though their regular repayments may not change.

The benefits of a rate cut

Alternatively, if the average mortgage holder secures the new customer rate when their deferral ends, their repayments may see a monthly reduction of $54, even if their loan term remained the same. Getting on the new customer rate means they are likely to be more than $27,000 better off over the loan than if they had not paused their repayments at all.

Ms Tindall said a rate cut could be a godsend for many families doing it tough.

“A rate cut will instantly help people who aren’t in a position to pay their home loans right now, as less interest will be added each month by the bank,” she said.

“It may mean the difference between keeping your family home or being forced to sell up to survive.”

When the time comes for banks to call and discuss potential options, Ms Tindall advised struggling mortgage holders to ask their banks for the interest rate offered to new customers

“Even if you’re in a position to start making repayments again, don’t be afraid to negotiate with your bank to get a better deal." 

Tips for people extending their mortgage deferral

  1. Ask for a rate cut. Your mortgage repayments might be on hold, but the interest is still accumulating in the background. The lower your rate, the less long-term damage may be done.
  2. Seek financial advice to talk over your options. Some people may have to sell their homes.
  3. Consider switching to interest-only so you are at least paying something. Your bank might try and charge you a higher rate as a result. Tell them to cut your rate, not hike it. The banks have said they are here to help. Hold them to it.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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