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 deferral 9.0%
Number of loan facilities deferred 393,467

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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Learn more about home loans

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.

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

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.

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.

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.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

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.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).