As jobless figure creeps, more people defer mortgage repayments

Homeowners who deferred their mortgages are making less repayments than when the pandemic first struck, putting them in the position where they will likely face compounding interest charges in the thousands, according to data released by the financial regulator.

The findings come as the number of people out of work due to the pandemic is reportedly expected to inch towards a double-digit percentage.

The state of mortgage deferrals 

The Australian Prudential Regulation Authority (APRA), the government’s watchdog over the banking, insurance and superannuation industry, provided some insight into the toll the COVID-19 pandemic is placing on households and the measures taken by banks to cushion the blow.

Over the months of April, May and June this year, banks and other financial institutions have halted mortgage repayments on $255 billion worth of housing and small business loans. 

About $40 billion worth of deferred repayments were added in the month of June alone -- five billion less than the month before it.

The total value of borrowers that put a stop to their ‘mortgage holiday’ over the three months was worth $21 billion. Of that, the vast majority -- $18 billion -- was repaid in the month of June. 

“Overall the composition of loan repayment deferrals remains relatively stable with the most noticeable change being increased loans exiting from repayment deferral -- from $2 billion in May to $18 billion in June,” APRA said in a statement.

“The majority of these loans have returned to a performing status.”

Who is repaying what?

A significant number of people have continued to meet some or all of their mortgage repayments, despite taking the banks up on a deferral.

Nine per cent of borrowers made partial repayments in June -- down from 13 per cent in April.

While 11 per cent of people on a mortgage holiday continued to make full repayments -- down from 21 per cent in April.

The deferral of home loan repayments helped cushion the swift economic fallout from the COVID-19 pandemic, but compound interest continues to be calculated on these loans -- adding thousands of dollars in many cases.

The cost of deferring a $400,000 principal-and-interest variable loan with a remaining term of 20 years, where interest is calculated at 3.5 per cent per annum, would be $6960 over three months, and $13,919 after six months, according to Westpac’s home loan deferral calculator.

Rising unemployment

The release of data comes as the RBA is reportedly expected to revise the unemployment rate.

The bank had originally forecast in May an unemployment rate of 10 per cent for June, but had lowered it due to promising signs of recovery.

However, the Australian Financial Review reports the repeat lockdown in Victoria, due to a surge in COVID-19 cases, will result in the original 10 per cent projection being realised. An announcement is expected to be made on Friday.

Governor Philip Lowe said the pandemic had made the future outlook “highly uncertain” in a statement released yesterday, after it was announced the cash rate will be held at the record low of 0.25 per cent.

“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” he said.

“As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia. 

“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy.”

Refinancing surges as banks pass on low interest rates

Financially, not everyone has been affected by the COVID-19 pandemic sweeping the globe, and those still employed seem to be making the most of low mortgage interest rates. 

A recent RateCity survey of 1009 home loan borrowers found that 43 per cent are looking to refinance -- that’s up from 19 per cent in a survey conducted after the banking royal commission in 2018.

Switching a mortgage onto the lowest variable loan rate on the market could save $2805 in the first year, a RateCity analysis found, and $19,235 over five years -- including switching costs -- on a typical $400,000 loan.

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