Danielle Austin - 7 May, 2020

How the big banks move to minimum repayments could be detrimental

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Commonwealth Bank’s decision to implement automatic mortgage repayment reductions is facing backlash from customers, who are being asked to opt-out of a program that will lengthen the time and cost of their mortgage.

A part of its coronavirus crisis assistance package, Commonwealth Bank’s automatic rollout of its home loan reduction scheme to existing customers is facing criticism, as mortgagers question how much the reduced repayments will cost long term.

As of May 1, eligible home loan customers were automatically reduced to the minimum repayments required for their loan. Despite being given advanced notice of the change, customers were unable to opt-out of the scheme until after its staggered release. From May 6, customers could opt out of the scheme, either via the CommBank app or NetBank digital platform.

Of Commonwealth’s 1.7 million mortgagors, almost 750,000 were automatically included in the reduction scheme.

The bank says the scheme will free up an average of $400 per month for affected households. Over the next twelve months, this could see an additional $3.6 billion cash injected into Australia’s economy.

Customers were alerted to the change via email in late April, with Commonwealth explaining the scheme would give mortgagers access to cash by late May should they need it.

“By paying the minimum, you’ll have access to extra money should you need it,” said Commonwealth.

While the scheme is aimed at providing assistance to customers facing financial hardship during the coronavirus crisis, the opt-out nature of the program has angered mortgagors who don’t wish to reduce their repayments when it means lengthening their mortgage.

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While customers already making minimum repayments on their loans will be unaffected, for those ahead of their debt schedule, reduced mortgage repayments would see them paying far more in interest over the life of the loan.

For CommBank customers, who the bank says are typically 37 months ahead on their home loan repayments, this additional interest could cost customers thousands. While a reduction in repayments may be necessary for customers struggling to meet their current repayments, for those who are able to keep up with additional repayments the move will cost them more long term.

While the amount of interest saved on a loan by increased repayments varies depending on the loan conditions, mortgagers with a $500,000 at a 3.5% interest rate who were able to pay an additional $100 on their monthly repayment could save themselves around $17,000 on total interest repayments, as well as ending the loan term 18 months early.

The bank has already received around 2,600 complaints about the automation reduction, with customers citing issues with contacted a bank representative to reinstate their payments and anger at the opt-out nature of the program. While the reduction of repayments will not impact the agreed length of the loan term if customers continue to make minimum repayments, those planning on saving money by paying their loan off faster may be impacted if they don’t opt-out.

Although many other banking institutions have implemented coronavirus assistance policies, including mortgage repayment reductions, Commonwealth is the only bank that has made the scheme opt-out rather than opt-in. Many banks are offering a six-month mortgage repayment “holiday” scheme for eligible customers who apply. This has allowed customers a six-month reprieve on their repayments during the coronavirus crisis, although generally, customers will still accrue interest and other charges during this time.

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While CommBank has also moved to make six-month mortgage repayment holidays available to customers, this came with a one-off interest offset payment for customers who opted in. For eligible mortgagers who chose to participate in the home loan holiday offer, no repayments are required during the six months, but interest and charges will continue to be added to the loan balance.

The offset payment aims to rebalance these additional charges, providing customers with a one-time payment that covered the costs during the six months. The off-set payment, however, does not take into account the extension of the home loan term that the halting of repayments causes and the additional interest customers will now have to pay over the life of the loan.

Although Commonwealth customers facing financial hardship may temporarily benefit from an increased cash flow due to reduced mortgage repayments, they should also be aware of the impacts.

Words by Danielle Austin

Is your current interest rate still competitive? Contact one of our mortgage brokers to compare your options and find a deal that suits you. 

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