Will taking a loan repayment pause during COVID-19 affect my credit score?

The Australian Banking Association (ABA) has today announced that customers’ credit scores won’t be affected if they need to defer their loan repayments for up to six months due to COVID-19, provided they were up to date with their repayments beforehand.

The guarantee applies not only to repayment pauses on home loans, but also on other credit products such as credit cards and personal loans.

The industry-wide agreement is good news for diligent customers who have suddenly found it impossible to keep up with the bills after losing their job or having their income severely reduced.

ABA Chief Executive, Anna Bligh, said: “Australia’s banks are here to support customers who have lost their jobs or significantly lost income because of COVID-19… Customers in these circumstances should not have to worry about their credit rating as well.

For customers who were already behind in their loan repayments, the ABA has said banks will determine how to report the information once the repayment pause has ended, and opt to report nothing during the pause.

A relief for your credit history

CEO of the Australian Retail Credit Association (ARCA) Mike Laing believes people shouldn’t get overly worried about their credit score during COVID-19.

“Lenders are very aware this is a difficult time for a lot of Australians who, in normal circumstances, are very good at keeping up with their repayments, and they’ll take this into consideration,” says Laing.

He says when people go to apply for their next loan, the reality is lenders will look at a range of factors when assessing whether or not to approve a loan or a credit card, including bigger factors such as income and any outstanding debts.

  • While customers who have been granted a loan deferral won’t have their credit score impacted during COVID-19, people that miss repayments without an arrangement in place are still likely to have it reported to the credit agencies.

When the financial pressure gets too much

“If you are in need of assistance it’s important you contact your bank as soon as possible, with your first port of call being the website or the smart phone app due to the very high volume of calls coming into call centres,” Ms Bligh said. 

Laing says people having trouble making contact with their bank, shouldn’t worry, provided they have tried to reach out.  

“In current extra-ordinary circumstances, consumers may experience long delays in getting through to a lender. They won’t be disadvantaged by that. If they are eligible for a repayment pause, then a lender will backdate it”, he said.

Laing also recommends using credit sparingly at this time. “If you are under financial pressure, it’s best to only use your available credit as a last resort – and repay it as soon as you are able,” he said.

Tips for Aussies struggling to meet repayments

 If you can’t make a repayment because of COVID-19:

  • Talk to your bank before you miss a repayment, rather than after when damage might already be done to your credit report.
  • Contact your bank via their website or phone app. If you can’t reach them, try contacting them by email or on social media. Lenders are likely to backdate any repayment pauses if you have tried to make contact.
  • Before you pause your mortgage, ask your bank for a rate reduction to help you keep up with the repayments. Repayment pauses can provide some much-needed relief but they are likely to be costly in the long run.
  • If you are getting charged interest on your credit card, consider switching to a low rate card.
  • Try and avoid adding to the problem (where possible). If you have a credit card, you can ask your lender to lower the limit to something you know you can manage.
  • When you do get some money coming back in, try and clear your debt as quickly as possible. 
  • If you need independent help, try the National Debt Hotline: 1800 007 007

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Learn more about home loans

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

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 happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

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.