5 steps to take before resuming deferred mortgage repayments

While there are Australians out there who still remain in financial distress due to COVID-19, many have been able to get back on their feet as lockdowns eased in recent months across the country.

If you're fortunate enough to be in the latter situation and have deferred your home loan repayments, you may be keen to resume repayments as soon as possible to avoid growing interest costs on your mortgage.

Before you give your lender a call, there are a few tips you can consider to help get you back on track with your mortgage repayments.

1. Budget expenses

One of the first steps you could take is to make sure you can afford to resume your mortgage repayments. Sit down and do a thorough budget of your income and outgoings. This is especially important if your household income has been reduced because of the pandemic. You should try and work out how much money you might have left after you factor in your living expenses, including your mortgage repayments. You might want to also consider whether it’s a good idea to build an emergency savings fund, if you don’t already have one set up.

2. Weigh up your options

One question you might be faced with when restarting mortgage repayments is how you plan to cover the deferred portion of the loan and the capitalised interest that came from hitting pause on your mortgage. There’s a chance your lender will be willing to discuss different options, but generally you could:

• Bump up your monthly repayments to pay off the mortgage holiday interest as soon as possible, or
• Extend your loan term while keeping the same repayments. This could mean it will take longer to pay off your home loan, and you may face higher overall interest costs.

As everyone’s financial situation is different, you’ll need to assess which option would suit you more. Consider consulting a financial advisor.

3. Speak with your lender

After you’ve budgeted your cash flow and decided on a repayment option that works best for your situation, you should be ready to approach your lender. It’s important to let your lender know what your current financial situation is. This might include details on your job status, a new job, increased or reduced income and working hours, as well as any new income streams. You should also notify your lender when you intend to make repayments.

Another thing your lender might want to know is how you plan to cover what you owe from your mortgage holiday. Each lender may have its own policy on how this needs to be repaid, so it’s a good idea to discuss this in advance. You may also want to use this chat to ask any questions you have to make sure you understand how your home loan has been affected by the repayment deferral.

4. Negotiate a lower interest rate

While having this discussion with your lender, it could be a good time to request a lower interest rate. It can pay in the long run to ask for even a seemingly small interest rate reduction on your home loan. For example, if you have a $350,000 home loan over 30 years, on a 4.5 per cent interest rate, and you manage to lower your rate by 0.5 per cent, you could potentially save about $100 a month. That’s equivalent to a saving of more than $37,000 over the full loan term (without factoring in further rate changes in the next 30 years). 

You may have a higher chance of securing a lower rate if you’re an owner-occupier and if you have more than 20 per cent equity in your property. You could also consider allocating the money you’ve saved from the rate cut back into your home loan by paying more than the minimum repayments.

5. Make extra repayments

If you happen to be financially comfortable enough, it’s worth thinking about making extra repayments into your home loan. If you’ve taken a mortgage holiday for several months, you may be behind on your original repayment schedule. If possible, it may be a good idea to contribute as much as you can into your mortgage to get ahead and catch up on what you’ve deferred, plus the accumulated interest during the pause.

But not every home loan allows borrowers to make extra repayments and some lenders charge a fee when you use this privilege, so it’s best to check your home loan’s included features or get in touch with your lender.

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