- 26 Mar, 2020

Repayments deferred but not forgotten: the truth about mortgage holidays

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The big 4 banks have agreed to let borrowers ‘hit pause’ on their loan repayments, agreeing to 6-month mortgage repayment holidays, but what does this really mean?

As part of the response to the ongoing Covid-19 pandemic, many financial institutions have announced that they will be giving struggling mortgage customers a reprieve, offering to suspend mortgage repayments for a period of up to 6-months.

The announcement was made as part of the banks’ Covid-19 support packages and followed last week’s interest rate cuts.


Already this week, large lines have been seen at Centrelink offices across the country, as the newly unemployed line up for Jobseeker benefits, following the social and economic fallout of the Covid-19 pandemic and the strict social distancing measures put in place on Sunday night.

Now, Australia is set to receive more job losses due to further restrictions put in place on Tuesday, which are due to take effect midnight Wednesday.

Chief Economist at Westpac, Bill Evans believes that over the next three-months Australia’s unemployment rate will rise to levels similar to those seen during the last recession, predicting a lift to 11.1%.

“Economic disruptions are set to be larger as the government moves to address the enormous health challenge which the nation now faces,’ he said.

“Despite releasing new forecasts only last week we are now revising those forecasts in light of the current extraordinary circumstances.”

Repayments deferred but not forgotten: the truth about mortgage holidays

What are the banks doing?

CBA

CBA have announced that they will be allowing home loan customers who require assistance due to Covid-19 to defer their repayments for up to 6-months.

During this time no repayments will be required however, interest and charges will still be added to the loan balance.

Once the support period is over, the loan balance will be recalculated, and loan term extended so that the usual monthly repayment can be kept the same.

CBA customers can apply here: Loan deferment request form

NAB

As part of their Covid-19 support package, NAB will be allowing eligible customers a 6-month pause on their home loan repayments, with a 3-month checkpoint for review.

During this period, redraw access will not be available, and customers will need to make up for missed repayments over an agreed time period.

NAB customers can apply here: registration form

Related: RBA makes emergency rate cuts in response to coronavirus crisis

ANZ

ANZ will be allowing customers a 6-month hold on repayments, with a 3-month check-in halfway.

During this time interest will be capitalised and added to the outstanding loan balance.

ANZ customers can apply for financial hardship assistance here: ANZ application form

Westpac

Westpac is offering customers who have lost their jobs or experienced a loss of income due to Covid-19 a 3-month deferral on their home loans, with a 3-month extension available after review.

Westpac customers can apply here: Westpac assistance form

How does a mortgage repayment holiday work?

Intended as a way to help those impacted by Covid-19 avoid loan default, a mortgage holiday puts your home loan repayment obligations on pause.

While on a mortgage holiday, you will be able to keep your house while putting a freeze on mortgage repayments; a welcomed reprieve for those experiencing reduced income or job losses.

However, once your mortgage holiday is over, you will be forced to continue with repayments, and your mortgage balance will be higher.

Why will my mortgage balance be higher?

To continue with the vacation analogy, this is because a repayment holiday is more like taking ‘leave without pay’, rather than annual leave.

Unlike annual leave, where you get a break from work and get paid for it, when you take ‘leave without pay’ you just get the break, along with the security that your job (in this case mortgage) will still be there when you get back.

Similarly, when you’re on a mortgage repayment holiday, your loan repayments are just put on pause (not forgotten about).

This means your loan balance will still be sitting against your bank’s checkbook, and in most cases, still accruing fees and charges – making your returning mortgage balance higher.

Depending on your bank, this may lead to your loan term being recalculated and extended, so that your usual monthly repayment won’t need to be increased. In other cases, you might need to increase your monthly repayments to meet the original term.

Are mortgage repayment holidays worth it?

Depending on your circumstances, a mortgage repayment holiday may well be worth it.

Even though you will be coming out the other side with more debt, for those who are truly experiencing financial difficulties due to the ongoing impacts of Covid-19, a mortgage holiday can give you the time you need to regroup.

However, other options should also be considered. For example, if you have been making extra home loan repayments through a redraw facility, you might be able to use these to help cover you financially.

Remember, your mortgage broker or lender should be able to help you access your options.

I’m not with one of the big 4. Am I still eligible for a mortgage holiday?

So far, the big 4 have all said that they will be supporting mortgage deferrals for those impacted by Covid-19, but this does not mean that customers with smaller lenders miss out.

Smaller banks such as Bank Australia, Bank of Queensland, Bendigo Bank and ING have all said that they will be offering customers who have experienced financial hardship due to Covid-19 the option to apply for deferral of home loan repayments (exact details with individual banks).

If you do not bank with one of the banks listed here, get in touch with your lender to find out whether loan deferral due to Covid-19 is an option for you.

Will a mortgage holiday be treated as a period of arrears?

On Monday, the Australian Prudential Regulation Authority (APRA) announced that banks will not be able to treat customers who have chosen to take up a Covid-19 support package as having gone through a period or arrears, or as having restructured their loan.

“Where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears,” the announcement said.

“Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured.”

“APRA will be writing to all authorised deposit-taking institutions (ADIs) to advise them of the specific reporting treatment for loans subject to these support arrangements.”

Words by Kathryn Lee

Sources:

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