From 1 May 2020, Commbank’s home loan repayment is automatically changed to the minimum, to free up household spending.
By only repaying the minimum amount, CBA estimates that it will release up to $400 per month for customers who have been hard-hit by the coronavirus.
This is a blanket change that will impact over 74,000 of its customers.
While this is a welcome change for those affected, others have criticized the major bank for enforcing the repayment change without their consultation.
Many CBA customers are paying more than the minimum as their repayments have stayed the same despite cuts in their interest rate. These borrowers were paying off their home loan faster and saving thousands in interest over the term of their loan.
What is the disadvantage of paying only the minimum?
Reducing mortgage repayments to the minimum affects customers in two ways:
- It will take them longer to pay off their home loan.
- They end up paying more interest on their home loan.
Let’s take a look at an example.
If you took out a $300,000 home loan over 30 years when rates were 7% and then rates fell to 3%, you are paying $731 extra per month so you’ll save $78,646 in interest over 30 years.
If you took out your loan when rates were 4% then rates fell to 3% you’re paying $167 / month extra which saves you $29,936 in interest over 30 years.
Borrowers are getting more free cash in their account each month but are losing these savings.
This is a good decision for our economy as it injects more cash into the system.
However, borrowers have not consented and many are not aware that they’ll end up paying so much more in interest.
If you bank with CBA or another lender you can go into internet banking and adjust your repayments to be higher to pay the loan off faster or down to the minimum to increase your cash flow.
What if I want to opt-out from this?
This is a blanket change that will happen from 1 May to 5 May 2020.
If you choose to opt-out, you can do so from 6 May via the bank’s Netbank app or online.
Are the other major banks also enforcing minimum repayments?
ANZ, NAB and Westpac have said that they will not be directly enforcing their customers to repay only the minimum on their home loans.
However, reducing repayments on their home loan to the minimum amount is an option that customers can choose if they wish to do so.
How much do I save by making extra repayments?
It’s really important that if you are struggling now and just paying the minimum that you set a reminder in your diary to increase your repayments a year from now. Extra repayments are essential if you want to cut the cost of your home loan.
By making higher repayments, you reduce the principal on your loan much faster.
Our extra repayments calculator will work out how much you will save.
If you wish to speak to our mortgage brokers, call us on 1300 889 743 or fill in our free assessment form.