The real cost of a repayment pause – and how you can minimise the fallout

As the major banks offer home loan repayment pauses for people in severe financial hardship during the COVID-19 crisis, one financial comparison website is encouraging home owners to check the fine print and exhaust all other avenues before taking up the offer.

RateCity.com.au research shows that a mortgage holder could end up paying over $17,000 extra over the remainder of their loan as the result of a six-month pause if they don’t make extra repayments on the other side. This assumes the person is five years into a 30-year loan with a balance of $400,000.

In a move that will help families struggling to make ends meet, CBA announced this week that customers who take a six-month repayment pause will be refunded interest-on-interest charges during this time.

This measure, and the major banks’ offer of a repayment pause for people in severe financial hardship, will help thousands of Australians at a time when they need it most.

But clearing the debt on the other side of a repayment pause will be an uphill battle for many families and comes at a cost.

RateCity.com.au research director Sally Tindall said the banks were to be congratulated for helping people who can’t meet their mortgage repayments, but that it was important for customers to understand the long-term implications of a repayment pause and think about how they can minimise the fallout.

“A lot of people will have to resort to putting their mortgage on hold during this crisis. That’s the cold hard reality for many families,” she said.

“If that’s you, try to come up with a plan to pay the money back as quickly as possible after the pause to get your mortgage back on track.

“Repayment pauses should only be used when other avenues have been exhausted. Talk to your bank about what other options you might have, including a rate reduction or reduced repayments for a limited time.

“When it comes to paying off your mortgage, every dollar makes a difference,” she said.

What each bank does for a mortgage repayment pause:

CBA – home loan repayments remain the same as before the pause, but the loan term is extended. CBA will also make a one-time payment intended to offset the interest-on-interest charged to customers receiving a home loan deferral for six months.

Westpac – home loan repayments increase after the pause, but the loan term remains the same. Westpac is currently offering a 3-month pause with the option for a further 3 months after review.

NAB – home loan repayments increase after the pause, but the loan term remains the same.

ANZ – gives customers the option of keeping the loan term the same or extending it by six months (with a review at three months). Either option is likely to see mortgage repayments increase after the pause.

Note: customers may be able to talk to their bank about a different repayment structure.

The cost of a six-month pause on a $400,000 loan balance with 25 years remaining:

Notes: Based on an owner occupier paying principal and interest on the average rate of 3.54%. Excludes interest-on-interest charges during the pause, however some banks will charge this. People who are further into their loan will pay less.

Tips for reducing the impact of a repayment pause

• Try and pay off some of your loan during the pause.
• When the pause finishes, see if you can make extra repayments to catch up.
• Negotiate a lower interest rate with your bank and if possible, try and put any savings from the rate reduction back into your mortgage.
• Call an independent financial advisor or a financial counsellor for advice. The National Debt Hotline is: 1800 007 007.

Potential alternatives to pausing mortgage repayments:

• Switch to minimum repayments: customers making higher repayments on their loan can ask their bank to adjust their repayments to the minimum to free up cash.
• Use your redraw facility: if you are ahead on your repayments you can access them via redraw (fees may be charged).
• Request a rate cut: variable rate customers can ask their bank to lower their home loan rate. While banks typically don’t allow rate changes for fixed-rate customers if you are in financial stress, it’s still worth asking.
• Switch to interest-only repayments: many lenders will let you only pay the interest on your loan for a period of time. While it will reduce your monthly repayments in the short term, your interest rate is likely to increase and by not paying down your debt, you will pay more in interest charges the longer term.
• Reduce repayments temporarily: instead of going on a full repayment pause, see if you can reduce your repayments. While this can potentially add thousands to your mortgage, it’s likely to be better than going on a full repayment holiday.