The steps to take ahead of your mortgage deferral expiring

Tens of thousands of Australians who took out a mortgage deferral are about to have to start paying their loans again. These are the next steps you must take.

The clock is ticking for tens of thousands of cash-strapped mortgage deferral customers who will soon have to start making repayments again.

At the height of the pandemic about 900,000 borrowers deferred their loans after suffering significant income hits.

But latest Australian Banking Association data shows of the big four banks, 75 per cent of customers who deferred their loans have started repaying.

And as of November, only 1 in 10 loans that reached the end of their six-month deferral had their repayment holiday extended.

ABA chief executive officer Anna Bligh said it was “good sign for the new year” that borrowers were able to start meeting repayments again.

Australian Banking Association chief executive officer Anna Bligh said a majority of borrowers who took how a mortgage deferral have started repaying their loans again. (AAP Image/Bianca De Marchi)

“It’s great news that the vast majority of Australians who deferred their loans are in a strong enough position to resume repayments,” she said.

There are now about 125,000 mortgages deferred and of all loan types about 225,000 put on hold.

For borrowers who still have a deferred loan, they have until the end of March to start meeting their repayments again.

These are the steps borrowers should be taking to ensure they take action soon and work out a plan of attack with their lender.

1. CALL YOUR BANK

ANZ’s head of home loans John Campbell said borrowers shouldn’t wait for their bank to contact them ahead of the deferral period ending.

Instead they should take a proactive approach by picking up the phone and discussing their options with them sooner rather than later.

“We encourage people to engage early with the bank, don’t wait until the last minute,” he said.

“The banks, ourselves included, will clearly be reaching out to customers as well using a variety of channels whether it be calls, emails, or text messages.

“All the banks are staffed up to have these conversations with customers so don’t sit there and panic at home.”

2. KNOW YOUR FINANCES

Borrowers should have a clear understanding of where they are financially to ensure they can explain their situation to their lender.

For instance, their JobKeeper payments might have ended and they are back at work or they may have had circumstances change that will impact their bottom line.

“People should have as much information and clarity as they can on their sustainable income and expenses,” Mr Campbell said.

“Then they can say what they think their income and expenses will be going forward, that will help that bank help with what we call the ‘statement of position’.”

Financial comparison website RateCity’s spokeswoman Sally Tindall said borrowers should also have a clear picture of what fees and charges are associated with their loan.

“Before you call, look up the home loan rate your bank is offering new customers and ask to go on that rate,” she said.

“While many banks aren’t likely to suggest a rate cut as part of the solution, if you ask for one, you’ll be putting them on the spot.

“A customer facing the toughest financial test of their lives should not be on a higher interest rate than a new customer.”

Borrowers on an owner occupier principal and interest loan with a loan-to-value ratio less than 80 per cent should be chasing an interest rate around the 2.5 per cent mark.

Some of the cheapest deals even have a “1” in front.

3. COMING OFF THE DEFERRAL

It's important customers are prepared for coming off the deferral period because lenders won't automatically give an extension after March when they are due to end.

Sara Smith, 39, said she and husband Adam O’Sullivan, 48, were forced to defer their loan on their four-bedroom apartment in North Melbourne in March.

The pair suffered a combined income hit of about 70 per cent.

Mrs Smith said she voluntarily reduced her hours to help care for their son Macklin, 3, who was unwell and had to undergo surgery.

Her job in the events industry was also impacted because of the Victorian lockdowns.

“We both went on to JobKeeper, I’m still on it and working 10 hours a week and my husband found a new job,” Mrs Smith said.

“The first time it was easy to get the repayment holiday and it took the stress out and our private health insurance also went on hold and that saved us $500 a month.”

Sara Smith, 39, deferred her mortgage during the pandemic after suffering an income hit. Picture: Jason Edwards.

Mrs Smith said the six-month repayment holiday helped to ease the burden of meeting her $3820 monthly mortgage repayments.

But Mrs Smith said she tried to extend the repayment holiday in October and was knocked back.

The couple have now started repaying their loan again.

4. OTHER OPTIONS

ABA’s Ms Bligh said if borrowers are unable to start repaying their loan again they should be having an open conversation with their lender to work out other solutions.

“Many Australians are still facing a difficult financial path ahead and banks are ready to do everything they can to help their customers survive,” she said.

Banks might be able to switch customers to interest-only which will lower their monthly repayments or to allow the borrower to make lower principal and interest repayments.

This will help ease the borrower back into making regular repayments.

Mr Campbell said “it’s in the best interests of the customer and the bank” to get the borrower back “repaying something”.

He also said the bank will also assess the customer is on the right product – for instance a fixed or variable loan.

Mr Campbell said the bank might also look at the option of debt consolidation such as credit cards and get it all rolled into one loan on a better interest rate.

Ms Tindall also said moving to an “interest-only loan can be a good halfway measure”.

“However, Australia’s largest banks have confirmed COVID-affected customers will have their rates hiked if they switch to interest-only payments,” she said.

“That said some banks have said they’ll consider individual cases – so be prepared and present your case.”

RateCity spokeswoman Sally Tindall said borrowers who took out a mortgage deferral should make sure they are on the best deal when talking to their bank. Picture: Supplied.

For those who still cannot meet their repayments they have their situation escalated to the hardship team where they will then reassess other options.

Customers can also get independent free help from a financial counsellor by contacting the National Debt Helpline on 1800 007 007.

5. BE WARY OF INTEREST CHARGES

During the deferral period interest charges continue to accrue and it can add thousands of dollars extra to the loan costs.

RateCity figures found if a 30-year loan with an average rate of 3.16 per cent is deferred for six months at the five year mark with $300,000 owing, the extra charges paid over the life of the loan will be $3840.

Ms Tindall said don’t be afraid to ask your bank for a rate cut.

“As a customer in financial difficulty, you should be on the lowest available rate,” she said.

“Decide whether to extend out your loan term.

“Extending your loan term will keep your monthly repayments the same but will cost significantly more in the long term.”

For instance if a borrower has deferred their loan for six months this period could be added onto their loan term when they start making repayments again, pushing the length of their loan out further.

However customers should be given the option to roll these accruing charges into their existing loan term – this will mean they will have higher repayments once the repayments resume.

@sophieelsworth

Originally published as The steps to take ahead of your mortgage deferral expiring