How much could you pay for extending your mortgage freeze?

Australians experiencing financial hardship may welcome the news that the big banks are offering to extend mortgage holidays. But while this could provide welcome relief in the short term, what could freezing your mortgage for longer end up costing you in the longer term?

The situation

Earlier this year, many of Australia’s leading banks offered to defer mortgage payments for customers whose health or workplace had been affected by the COVID-19 pandemic. In most cases, this was to be a three-month mortgage freeze, with the option to extend for a second three months following a review of your finances from your bank.

But while some Australians are already going back to making their mortgage payments, there are plenty still doing it tough. And with many mortgage deferrals scheduled to expire in September, at the same time as the government’s JobKeeper relief package, those Australians who are already in a difficult financial situation could risk seeing things get much worse all at once.

With this in mind, Australia’s big banks recently announced that Australians may be able to apply to further extend their mortgage deferral for up to four more months. This could mean making no mortgage repayments for a maximum of 10 months, or until the end of March 2021, whichever comes first.

The extra cost

However, a mortgage holiday doesn’t mean a free ride. While your repayments are on hold, interest is still charged on your loan and capitalised into your principal (in other words, added to the balance owing). The longer you defer your mortgage, the more you may owe on your home loan when the time comes to start making payments again.

This may increase the cost of your monthly mortgage repayments for your remaining loan term. Alternatively, you could keep making the same repayments and extend your loan term for longer, however this could mean paying much more in total interest charges.

How much extra you could expect to pay on your home loan each month after a mortgage freeze could vary, depending on the size of your loan, your interest rate, and remaining loan term. That said, the longer you defer your repayments, the more you can usually expect to pay afterwards.

To give you a general idea, previous RateCity research found that if you froze the payments on an average home loan for 6 months, then made higher repayments for the remaining loan term, after 12 months you would have paid an extra $744 in mortgage payments, or about as much as you would to buy a new smartphone or go away for a weekend.

More recent RateCity calculations show that if you deferred the repayments on an average loan for 10 months, then made higher repayments for the remaining loan term, after 12 months you would have paid an extra $1224 in mortgage payments, or about as you would to buy a new mid-to-high range fridge, dishwasher or washing machine.

So before you consider deferring your home loan for a few more months, you may want to estimate whether you could afford to add the equivalent of a major purchase to your household budget every year for the rest of your home loan’s remaining term.

Is your mortgage freeze worth the extra long-term costs?

While extending your mortgage deferral for an extra four months could provide much-needed financial relief in the right circumstances, think about whether the capitalised interest charges could end up making your loan more expensive than it’s really worth to you in the long run.

If, after your payment deferral runs out, you expect you’ll struggle to manage your mortgage and other personal finances, consider contacting your lender to find out if you can negotiate a lower interest rate, swap to interest-only payments for a limited time, or make some other arrangement with the lender’s hardship team. Depending on your situation, you may also be able to look at refinancing with a lower cost lender, since many banks have been slashing interest rates for new customers recently. A mortgage broker, financial advisor or a financial counsellor may also be able to offer advice.

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