What are my options when the mortgage payment deferral ends?
11% of total housing loans worth $195 billion were deferred according to data from APRA till June this year.
Although the number of customers exiting mortgage deferrals has outpaced those requesting them, almost one in ten (9%) housing loans are still on a mortgage deferral as of 30 September 2020.
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.
Lenders may call you during the repayment holiday, this is nothing to be alarmed about, as they’re doing this to check-in to see how you are going, and discuss extending or ending the repayment deferral depending on your situation.
Freeze on forced home sales until September 2021
In welcome news, Commonwealth Bank of Australia (CBA) became the first major bank to announce a freeze on forced home sales until September 2021.
Angus Sullivan, retail banking executive of CBA said: “For Owner Occupier customers who made their home loan repayments on time for at least 12 months prior to their deferral, but are unable to recommence their full repayments, we will ensure they can remain in their home until at least September 2021.”
This means many struggling homeowners who were up to date with their repayments pre-COVID and who just needed some more time will be able to stay in their home until September 2021.
Other major banks have not yet announced anything on this.
We strongly recommend that concerned customers contact their banks to discuss their options.
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.
In fact, over 20% of deferred loans have recommenced payments, according to the Australian Banking Association.
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 would 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.
It’s worth pointing out that, taking the 10-months repayment pause could see your repayments increase further or your loan term being extended 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.
Only a handful of lenders have confirmed their policy, but generally to refinance after a repayment holiday:
- Major lenders will want at least 3 to 6 months of perfect repayments on your home loan to consider your application.
- Specialist lenders will consider your home loan refinance application at a higher rate as long as you’re able to make repayments now.
- A refinance is not possible if your income has not returned and you cannot afford the loan. Because under responsible lending guidelines (NCCP Act), it’s illegal to give customers a loan that they cannot afford.
The key to approval will be applying with the right lender based on your individual circumstances.
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 who are 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 maybe the hardest decision to make.
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.
ASIC guidance for lenders
With mortgage payment deferrals coming to an end, ASIC (Australian Securities & Investments Commission) has released the following guidelines for lenders.
- Should make reasonable efforts to contact before their loan deferral expires.
- Should provide consumers with reasonable time to consider their options.
- Must not automatically cut off the deferral period at the end of September
- Understand the situation and provide tailored assistance, e.g. changing the repayment type to interest-only after the initial deferral period ends.
- Understand customers’ unique situations when necessary.
- Keep adequate records.
- Are expected to make all reasonable efforts to work consumers to keep them in their homes if that’s in their best interests in situations where customers financial difficulties are so severe they won’t be able to repay their loan over the long term.
- Must notify customers of their right to complain to the Australian Financial Complaints Authority.
- Should make reasonable efforts to contact customers and assess the appropriateness of further assistance where a loan repayment has been missed.
Our role as brokers
We continue to reach out to customers to understand their situation.
- Educating customers is one of our major responsibilities. We want to help customers understand the additional financial cost of the loan deferral over the longer term.
- Helping customers understand their options and its implications.
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 information to educate our customers. It is not advice on managing your home loan deferral. It has been prepared without taking into account your objectives, financial situation or needs. Please seek financial advice before taking any action.