Banks extend mortgage deferrals, but what’s the cost?

Australian banks have today announced that they will allow mortgage holders in severe financial hardship to extend their mortgage repayment pause by up to four months.

However, homeowners may want to consider the alternatives before extending a repayment pause, to avoid the additional cost in the long run.

Potential alternatives to pausing mortgage repayments

• Use money in your offset or redraw, if available.
• Request a rate cut or switch to a lower fixed rate.
• Switch to interest-only repayments or reduced repayments for a period of time. While this could increase your rate and/or the overall interest bill, paying something is usually better than nothing.

RateCity research shows a mortgage holder who extends their deferral could end up paying $9,769 extra over the remainder of their loan, if they pause their home loan for 10-months and don’t make extra repayments to catch up. This assumes the person is five years into a 30-year loan with a balance of $400,000.

• Not sure what hardship support your bank may be offering? Check out RateCity's Harship Relief page. 
  

The cost of a repayment pause extension on a $400,000 loan:

Notes: Based on an owner occupier paying principal and interest on the average rate of 3.43%. Calculations assume a borrower is 5 years into a 30-year loan with a loan balance of $400,000 when they defer for 10 months and that the loan term remains the same. People who are further into their loan will pay less. People who increase their loan term will pay more.

Sally Tindall, research director at RateCity said the banks were doing the right thing by customers in need, but it is important for people to understand the long-term implications of a repayment pause.

“It’s great to see the banks are proactively checking in with customers to help them explore their options and make absolutely sure they need to be on a home loan deferral,” she said.

“Yet, the reality is, thousands of families will have no choice but to keep their home loan on hold.

“If that’s you, try to come up with a plan to pay the money back after the pause to get your mortgage back on track.

“Repayment pauses should only be used when other avenues have been exhausted. Talk to your bank about what other options you might have, including a rate reduction or reduced repayments for a limited time.

"When it comes to paying off your mortgage, every dollar makes a difference,” she said.

Tips for reducing the impact of a repayment pause

• Try and pay off some of your loan during the pause.
• When the pause finishes, see if you can make extra repayments to catch up.
• Negotiate a lower interest rate with your bank and if possible, try and put any savings from the rate reduction back into your mortgage.
• Call an independent financial advisor or a financial counsellor for advice. The National Debt Hotline is: 1800 007 007.

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