Home owners warned to think twice about costly mortgage holidays

The big banks have offered mortgage deferrals for customers facing hardship. These are the risks.

The big banks have offered mortgage deferrals for customers facing hardship. These are the risks. Photo: Getty/TND

As the big banks allow home owners to put the brakes on mortgage repayments, borrowers are being advised to consider the long-term ramifications.

Last month, all the Big Four banks announced they would provide a six-month loan deferral – with a review after three months – as part of their coronavirus hardship measures.

Applications are open to customers who lost their job or had their income slashed by 20 per cent.

And following the Reserve Bank’s two rate cuts in March, the major banks also slashed home loan rates by an average of 0.29 percentage points.

However, as written previously in The New Daily, a six-month moratorium results in higher repayments over the life of the loan as interest accumulates throughout the holiday.

Calculations by consumer comparison website Finder have revealed exactly how much more borrowers will pay if they take the banks up on their offer.

Customers who are 10 years into paying off a $400,000 mortgage, and on an average variable rate of 3.90 per cent, would pay an additional $8902 over the remaining 20 years of their loan.

That’s equivalent to $37 extra per month.

And for those with a $500,000 mortgage using those same variables, that extra amount balloons to $11,127 over the life of the mortgage, or another $46 every week.

Alternatives to taking out a mortgage ‘holiday’

Finder personal finance expert Kate Browne said calling loan deferrals  ‘mortgage holidays’ downplayed the risks.

She told The New Daily borrowers should only enter an arrangement if they have done their homework.

“The only reason you would want to pause your repayments is if you are facing significant financial hardship,” Ms Browne said.

Your lender is still keeping the meter running even if they don’t collect monthly repayments – so stopping payments is going to cost you more than the word holiday implies.’’

Ms Browne said households affected by the coronavirus pandemic – but not at their wit’s end – have other options available, including:

  • Refinancing and asking their lender for a lower interest rate, or switching to a more competitive rival
  • Organising a temporary mortgage repayment reduction if income has been reduced temporarily (i.e. reduced working hours)
  • Temporarily switching to an interest-only (IO) loan for 12 months to reduce monthly repayments.

Although banks imposed penalties on IO loans after a crackdown on speculative investing by the Australian Prudential Regulation Authority in 2015, they could help households avoid slipping into arrears.

Ms Browne said the only downside for home owners in entering an IO loan is they won’t build equity in their home.

“Considering the current downward projections for property prices, it’s definitely a risk,” Ms Browne said.

“And repayments will jump up when a loan reverts to principal and interest, as they usually entail high interest rates.

“But if you’re really well informed and a savvy borrower, an interest-only loan can work well.”

Could mortgage ‘holidays’ alter credit scores?

There are also concerns that taking out a mortgage holiday could affect a borrower’s credit history.

Falling behind on mortgage repayments would normally erode credit scores and hinder someone’s ability to acquire new loans for a minimum of five years.

But APRA last month said banks should not be treating repayment holidays as a “period of arrears” while the pandemic unfolds.

And Australian Retail Credit Association CEO Mike Laing said that obtaining coronavirus-related hardship assistance should not negatively affect one’s credit score.

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