The coronavirus pandemic has dramatically impacted the lives of millions of Australians. People have lost their jobs, their primary source of income and many have been facing financial hardship.
Back in April, banks and mortgage lenders offered significant mortgage relief through home loan deferrals. The initial timeline for these deferrals was set at six months, but now, as we near the September deadline, new extensions are available.
In July, the Australian Banking Association (ABA) announced that lenders would be extending mortgage relief for people who are still experiencing financial difficulties due to COVID-19. The ABA website states,
“As customers approach the end of their six-month loan repayment deferral period, Australia’s banks will implement a new phase of support to assist customers to get back to making their repayments.”
Financial support for thousands of Australians
ABA’s June data indicated that just over 485,000 mortgages were granted deferrals. And while many people have already started making repayments again, there are still thousands of Australians who need support.
Anna Bligh, ABA’s CEO, explained, “Those who are able to repay their loans will resume doing so, which is in the best interests of those customers and allows support to be directed to those who need it.”
For people who are still under financial stress, there will be up to an additional four months deferral available. Lenders will contact customers directly in the lead up to the end of their initial deferral.
They will discuss their financial position and determine eligibility for a further extension. A restructure or variation to their loan might be an alternative option and be helpful for getting them back into a suitable repayment plan. ABA’s website says,
“A deferral extension of up to four months will not be automatic; it will be provided to those who genuinely need some extra time. Many customers may need less than four months to either restructure their loan or get back into full repayments.”
“If, during or at the end of any deferral, customers continue to be severely financially impacted and are unable to make repayments, they will be assisted through their bank’s hardship process to determine the best long-term solution for their individual circumstances.”
Downside to deferral
There’s no doubt that for many, mortgage deferral has been extremely helpful over the last six months, but it does come with some drawbacks. The most significant of these is the continued accumulation of interest.
During the deferral period, any unpaid loan payments are added to the balance of the loan. Plus, even though payments are deferred, interest is still being accrued, so the loan balance will be higher at the end of the deferral as interest will be accrued on a larger amount. This means that at the end of the deferral period, monthly repayment amounts will increase, or the length of the loan will need to be extended.
If you have been deferring your mortgage, we recommend discussing your current financial position with your lender to make sure you understand the long-term ramifications.
Paying off your mortgage more quickly
Once you are in a position to recommence mortgage repayments, there are a number of options available to help you get ahead more quickly.
Making fortnightly repayments is a great way to bring your balance down. By paying half your monthly amount every two weeks, you end up with 13 months’ worth of payments made over the year. This could significantly reduce your overall mortgage term.
If you can afford to pay more than the minimum, or even make additional payments throughout the year, it can help to save you thousands in interest over the life of your loan.
And it is always worthwhile comparing lenders and making sure that you have the best interest rate available. In the current low-rate environment there is a lot of competition, so it could be highly beneficial to discuss what your lender can offer you.
Seek professional advice
We know that 2020 has been challenging and that there is still a lot of financial uncertainty ahead. In times like this, it is helpful to discuss your personal situation with a professional financial adviser.