What deferring mortgage repayments means for your credit score

The coronavirus crisis is wreaking havoc on the economy – but there’s some good news for Aussies needing to pause mortgage repayments.

The COVID-19 outbreak has left many Aussies out of work and devastated household finances.

But there is one piece of good news.

Today, the Australian Banking Association confirmed anyone granted a six-month deferral on loan repayments on their mortgage or other credit products will not have their credit rating affected as a result, as long as they were up to date with repayments before COVID-19.

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CEO Anna Bligh said banks had worked hard to ensure that when repayment deferrals were granted to customers impacted by the pandemic, credit reporting was conducted in a consistent and fair manner.

“Australia’s banks are here to support customers who have lost their jobs or significantly lost income because of COVID-19 through initiatives such as offering a six month deferral on mortgage repayments. Customers in these circumstances should not have to worry about their credit rating as well,” Ms Bligh said.

“If a customer is granted a deferral on their mortgage and other credit products because of COVID-19, banks will report customers as not having missed a repayment, provided they were all up to date when granted relief.”

For those customers who are already behind in repayments when they are granted a deferral due to COVID-19, banks will not report the repayment history information and leave the field blank for the duration of the deferral period. When the COVID-19 repayment deferral period has ended, banks will determine how to report the repayment history information.

“There may be other factors which can affect a customer’s credit rating, but customers accepting a COVID-19 loan repayment deferral can rest easy that the deferral will not be one of them,” Ms Bligh said.

“If you are in need of assistance it’s important you contact your bank as soon as possible, with your first port of call being the website or the smart phone app due to the very high volume of calls coming into call centres.”

According to consumer education website CreditSmart, consumers who are struggling should contact their credit providers directly, as most lenders are offering pauses or deferrals on mortgage repayments for up to six months along with deferrals on personal loans, credit cards and auto loans.

Australian Retail Credit Association CEO Mike Laing said under normal circumstances missed loan repayments were recorded in a consumer’s credit report as part of the 24-month record of repayment history information.

For each month you miss a payment, the repayment history information will worsen – but Mr Laing said for consumers who have been granted COVID-19 assistance from their lender, a payment pause or deferral wouldn’t show as a missed payment on their credit report.

Instead, the repayment history information will either be reported as “up to date” or no repayment history information will be reported.

The ABA confirmed credit scores wouldn’t be affected by COVID-19 deferrals.

Additionally, lenders will not list defaults against any consumer that has been granted assistance due to hardship resulting from COVID-19.

“If you apply for credit in the future, before approving your loan, lenders will take your whole situation into consideration – not just whether you needed help with repayments during COVID-19 but also things like what your income and expenses will be going forward,” he said.

“Seeking assistance from your lender due to COVID-19 will not exclude you from applying for credit in the future.”

“Once the crisis is over, consumers will be back in the market buying properties, cars and other things on credit. We know that many Australians are currently experiencing financial pressures due to COVID-19. Lenders are doing their best to help Australians through these difficult times – and get back on track once the recovery begins.”

Meanwhile, Canstar has researched the financial implications of pressing pause on home loan repayments, which may be the only option for some mortgage holders experiencing financial hardship.

According to Canstar, a borrower who took out a $400,000 home loan one year ago and pauses repayments for six months could experience two potential outcomes.

If at the end of the “mortgage holiday” they keep their repayments the same, it will take an extra year and five months to repay and they will face an extra $18,931 in interest costs.

But if they increased their repayments afterwards, the loan time would remain the same and the extra interest costs would amount to $6478.

Finder insights manager Graham Cooke said the new relaxed measures around credit reporting would bring much-needed relief for home loan customers.

“Previously, if you were granted a deferral on your mortgage it would be listed on your credit history and potentially lower your credit score,” he said.

“Under the new measures, banks will no longer be reporting missed repayments in relation to COVID-19. This means mortgage customers will have one less thing to worry about.

“If you’re unsure what your credit score is, you can check it for free using the Finder App.”

But Finder found cash-strapped mortgage holders could plunge deeper into debt by deferring their mortgage repayments.

Home loan customers will still need to repay any deferred payments at a later date, and most banks will continue to charge interest at the usual compounded rate. However, the Commonwealth Bank has announced it will pay interest charges so customers won’t be worse off if they defer repayments.

Mr Cooke said many homeowners weren’t aware of the long-term implications of deferring their repayments.

“Times are tough right now. If you’ve lost employment and aren’t earning a regular income, putting a freeze on your mortgage repayments may be the only feasible option,” he said.

“But this can have long-term financial repercussions – you will eventually need to make up the lost payments either by increasing the repayment amount or extending your mortgage term.”