Were you one of the many thousand Australians who paused their mortgage repayments due to the economic turmoil of COVID-19? Well, if your deferral period is coming to an end, here are some things you might need to know about your freeze period.
The six-month mortgage repayment grace period given to thousands of Australian banking customers under mortgage deferral schemes, combined with the Government’s JobKeeper program, enabled thousands of households to stay afloat after the COVID-19 virus took hold in March.
The relief offered much needed relief to many home loan customers, not only because of the social distancing rules put in place, but also due to the unexpectedly tumultuous economic period.
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In early June Treasurer Josh Frydenberg admitted the country is in recession, despite the technical criteria or two consecutive quarters of GDP shrinkage not being met. Australia entered its first recession in 29 years after the economy went backwards by 0.3% in the March quarter, with the impact of the bushfires and the coronavirus ending the nation’s extraordinary, uninterrupted run of economic growth.
The latest unemployment figures released by the Australian Bureau of Statistics showed that the jobless rate is 7.1%, the highest it’s been in 19 years. Between April and May Australia lost a further 227,000 jobs, resulting in a total loss of 835,000 jobs.
A massive side effect of pausing repayments that Australian households may not have expected is that in the long run, mortgage deferrals could come at a huge cost.
This is because lenders continue to charge their customers interest even when the loan is paused.
Analysis from RateCity shows that for the average mortgage holder with $400K owing, after pausing their repayments for six months, their total balance would have risen to $407,203.
After the deferral, they would start paying the increase in loan balance after the six months pause of $7,203 which would equal to $62 a month more on their loan. In one year, this would climb to $744, which may mean missing out on a new phone, or ditching your next local weekend away.
What are the banks doing?
The Australian Banking Association stated in its media release that in the period March 2020 – April 2020, there was a total amount of $224 billion loans deferred and $165 billion mortgages deferred.
Australian Banking Association CEO, Anna Bligh said, “these new figures, released today, shows banks working overtime to ensure assistance is given where needed to customers who are affected by this crisis,” she said.
“The surge in demand for assistance from banks shows that the economic impacts continue to be felt, and by no means is the nation through this crisis.”
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Now that most restrictions are lifting across Australia, some lenders are increasingly trying to check in with customers to ensure people aren’t taking a deferral period or are on ‘repayment holidays’ if they don’t need to be.
Commonwealth Bank is no longer automatically offering mortgage deferrals; however, they will present assistance on a case by case basis. NAB has said it’s checking in with customers who are on the pause to see if they still need it.
A third of ANZ customers who deferred loan repayments have not re-started their repayments, according to an interview with Rate City and ANZ group executive of Australia retail and commercial, Mark Hand.
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What to consider if you’re nearing the end of your mortgage deferral period
If you had failed to realise the potential interest costs, you may be wondering how you can budget for your new bill.
Thanks to the Reserve Bank of Australia cash rate sitting at a record low of 0.25%, it may be worth considering asking for a lower rate or even refinancing to a lower rate lender.
Words by Ece Demir
- Where to now for homeowners on mortgage freezes
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