Some banks are offering borrowers the ability to defer their home loan payments for up to 6 months – as a landlord myself I wanted to get a better understanding of how this works and what the consequences are of doing so.
As many home owners and landlords face difficult decisions on how they’ll get through the economic impact of the Coronavirus, there has been a push from the media and the Government for banks to get on board and help out landlords who are facing job loss and a loss of rental income from their tenants.
As a landlord myself, I was curious as to what the banks were offering and how it would effect myself and my clients. So I spent some time going through what the major banks were offering.
Here’s what I found:
Westpac
Westpac customers who have lost their job or suffered a loss of income as a result of COVID-19 should contact the bank for three months' deferral on their home loan mortgage repayments, with extension for a further three months available after review.
NAB
Home loan customers experiencing financial hardship will be able to pause their home loan repayments for up to six months - however, you will need to increase loan repayments over the remaining loan term to completely repay the full amount.
Commonwealth Bank
Commonwealth Bank is allowing “all home loan customers” to defer repayments for up to six months. Commonwealth Bank will also reduce loan repayments to the minimum required under their loan contract from 1 May.
** UPDATE 2/4/20**
The Commonwealth Bank on today announced it will make a one-time payment to all customers who are receiving a home loan deferral because of the coronavirus. Group executive Angus Sullivan said this meant for an average loan of $350,000, CBA would be refunding approximately $45 to offset the effect of interest on interest over the six-month period.
ANZ
ANZ customers impacted by the coronavirus will be able to defer their home loan repayments for six months, with a three-month review.
This all seems very helpful but what does it actually mean to you and how will it impact your repayments moving forward?
If you have lost your job then any relief being offered by the banks probably feels like a godsend right now. But before you give your bank a call, it’s important to understand how this will effect your loan and repayments after the 6 months.
Even though you will be pausing your mortgage repayments, the interest and fee’s on your loan will still be accruing during this period and added to your total loan amount – the term used by the banks was ‘interest capitalisation’.
Interest Capitalisation means that at the end of the deferred payment period, your repayments will increase to cover the interest accrued during this period.
Here’s an example (your specific situation may differ depending on your loan amount and interest rate – so please discuss the particulars with your bank or mortgage broker):
Let’s say you have a mortgage owing of $500,000 with an interest rate of 2.80% p.a. over 25 years.
Before the coronavirus pandemic, your minimum monthly repayments were $2,340 and you managed to get your home loan balance down to $460,000.
If you decide to defer your mortgage for 6 months, those minimum repayments will increase – here’s why.
During the six month deferral, interest will still accrue onto the principal of the home loan balance. The interest that was charged in the first month then has interest charged on it during the second month, which has interest charged on it in the third month, and so on.
By the end of the six-month deferral, you will now roughly owes an extra $5,886.10 on top of your previous loan balance of $460,000. So your mortgage will now be $465,886.10
This is based on the loan term remaining the same (if you have 20 years remaining on your loan) your monthly repayments will increase from $2,130 to $2,192 per month – provided interest rates don’t increase. While that’s only an extra $62 each month, that money can really add up over the course of the loan.
If you choose to defer your home loan repayments for up to six months, your loan balance will be bigger than it was before and you’ll still have to keep up with your repayments.
This is definitely an option worth looking into If it will help you get through the next 6 months – please contact you mortgage broker or lender to find out how it will impact you directly.
