What are my options when the mortgage payment deferral ends?
11% of all residential mortgages worth $192 billion as of May 2020 which were deferred are due to end from September.
That means, homeowners need to go over their options now, rather than wait for their mortgage payment deferral to end.
Homeowners coming to the end of their mortgage deferral period have several options before them.
- Restart making repayments
- Extend the loan term to reduce your repayments
- Extend the repayment holiday
- Switch to a fixed-interest home loan
- Switch to interest-only
- Request financial hardship arrangements
- Sell your property
The option most suitable will depend on your individual financial circumstances.
Restart your mortgage repayments
The six-month COVID-19 mortgage payment deferral provided much-needed relief to a lot of Australians, but it also became clear that a minority of people who initially thought they needed it, didn’t end up needing them.
It is generally advisable that if you’re able to start making your usual repayments, you should start making repayments as soon as possible so as to reduce the interest you pay on the loan.
You should also consider paying more than the minimum repayments either now or in a year as this will reduce the cost of your loan over its life.
For example, paying just an extra $100 every month over your minimum repayments can save you $40,000 over 30 years on a $490,000 home loan.
Please note that for customers on fixed home loans, there is a limit on extra repayments they can make during the fixed term. If you repay more than the tolerance limit, a break fee also known as an early repayment fee will apply which can be very large.
So fixed rate customers wanting to pay extra should contact their bank to find out their tolerance limit.
Extend the loan term to reduce your repayments
Another option for homeowners is to extend their loan term so as to reduce their minimum repayments. This option is not available with all lenders.
However, those who can and opt to extend their loan term from say 25 years to 30 years could see their repayments drop from $1,897 to $1,686 per month based on a $400,000 mortgage at a 3% annual interest rate.
Conversely, the total interest paid over the life of the loan also increases by $38,056 over the 30 years if you take up this option.
Extend the mortgage deferral period
The Australian Banking Association announced that an additional 4-month extension will be granted only to those customers who genuinely need some time. This extension to the mortgage deferral will not be automatically granted.
Customers with reduced incomes and ongoing financial difficulties due to COVID-19 will be contacted by their banks as they come towards the end of their mortgage deferral period to go over their options.
With a few banks, this mortgage deferral extension of 4 months (10 months in total) cannot go beyond 31 March 2021.
As a point of note, taking the 10-months repayment pause could see your repayments increase further or your loan term being extended even further after the period ends.
You can use our repayment holiday calculator to calculate the interest payable due to this period of non-repayment.
Refinance your home loan
Refinancing your home loan after the repayment holiday to take advantage of lower interest rates and lower repayments is going to be a good option to a lot of homeowners.
However, homeowners who’ve taken a home loan deferral will need to demonstrate that they can afford the loan and have a stable income, if they want to take up this option.
You cannot refinance if you are unable to afford your loan.
Most lenders will want at least 3 to 6 months of perfect repayments on your home loan to consider your application. Some lenders only want a 3-month history, but this is just a few, and likely they will change this policy to avoid getting inundated with new applications.
Specialist lenders will consider your home loan refinance application at a higher rate as long as you’re able to make repayments now.
Most lenders have not announced their specific policy on refinancing after a repayment pause, but one of our lenders announced that aside from standard lending policies:
- An explanation for the repayment pause must be provided. This explanation should include the reason for the repayment pause, start and end date (if applicable) of the repayment pause, and what has changed to allow the applicant to commence repayments on a new home loan.
Switch to interest-only repayments
When your mortgage payment deferral period ends, you may be able to switch to an interest-only repayment for up to 12 months as part of the COVID-19 mortgage relief options.
Switching to interest-only (IO) repayment is a good option if you can pay the loan but are still facing challenges with cash flow.
For example, on a $400,000 home loan at an interest rate of 3.0% p.a., your monthly principal and interest repayments will be $1,722, whereas, with an interest-only repayment your monthly repayments will be $1,000. A difference of $722 in cash flow.
However, please note that interest-only loans are more expensive over the term. You’ll be paying an additional $4,277 in interest because of the 12 month IO period.
With most lenders when switching or extending the interest-only period, a full assessment is not required. You can request:
- Up to 12 months interest-only extension without a term extension.
- Up to 12 months interest-only extension with a term extension.
- Principal & interest to interest-only switch for up to 12 months.
It’s important to note that:
- This policy is only approved for use during the COVID-19 period and customers must apply before 30 September 2020. Otherwise, a full reassessment will be required.
- If a customer is already on a repayment pause, interest only extensions and switches can only be made after the repayment pause period has expired.
Please note that when the interest-only term expires for these loans, they will convert to principal and interest repayment meaning your repayments will increase, which you may not be able to afford. It is important that you understand this before switching.
Switch to fixed interest home loan
The current interest rates on fixed home loans are much lower than variable rates, opting into one could help reduce your repayments and give you the certainty of a fixed repayment amount.
If you were to switch to a 2.19% p.a. 2-year fixed rate from a 2.69% variable rate with a $400,000 home loan, your mortgage repayments would drop from $1,620 per month to $1,517 per month.
That’s savings of $103 every month.
What happens if you still can’t make your repayments?
Customers facing severe financial hardship and unable to make their repayments should contact their bank’s hardship department and make a hardship request.
The banks will try and work with you to find a suitable solution, which may include:
- Payment plans
- Debt consolidation
- Switching the loan to interest-only for an agreed period of time
Remember, your lender must give you a reason if they refuse your hardship request. If you’re unhappy with their response, you can contact their internal dispute resolution team.
If you and your bank are unable to come to an agreement, contact the Australian Financial Complaints Authority (AFCA) to make a complaint and get free, independent dispute resolution.
You should also contact a free financial counsellor independent of your bank. You can contact them on 1800 007 007 or through the National Debt Helpline.
Sell your property
This is an option of last resort and may be the hardest decision.
You should consider selling your property if you’re still facing significant hardship making your mortgage repayments and do not see your income level changing over the near term.
It’s much better to try and sell the property before banks start legal proceedings against you.
Generally, it is better to sell your home yourself than having the bank sell the property for you as you’re more likely to get a better price for your home as well as avoid lots of legal costs.
Moreover, you may be able to go back to the lender and negotiate a further arrangement on the basis that you are selling your home. For that, banks will want to see some evidence that you’re selling your home such as a contract of sale with your real estate agent, marketing plan for selling the home etc.
For investors with multiple properties, this may mean selling a few properties to help manage your cash flow.
Talk to us!
Don’t wait for the mortgage deferral period to end before you start going over your options.
Speak with one of our specialist mortgage brokers to go over your options by giving us a call on 1300 889 743 or by filling in our short assessment form.
Disclaimer: This page contains factual advice only. It has been prepared without taking into account your objectives, financial situation or needs. Please seek financial advice before taking any action.