Why that call from the bank could cost you your home loan holiday

Big banks are calling home loan customers who are on “mortgage repayment holidays” in a bid to persuade them to start repayments, as fears grow over the crisis when JobKeeper and JobSeeker payments are reduced.

The “softly softly” approach comes as the original six-month loan repayment moratorium ends at the end of September – the same time JobKeeper and JobSeeker are due to stop. Those found to be too hard-up to restart contributions will be offered a further four months on a case by case basis.  The offer will remain on the table until March, 2021.

But all the experts warn of an impending problem for families as deferred debt hit the household budget with increased interest due to the deferral.

TogetherAustralia, the campaign for more accessible financial advice, is telling its readers:  Remember, it’s not free money – the interest is mounting up and has to be paid. 

Australia’s top 20 lenders have a total of $266 billion worth of loan repayment deferrals or 10 per cent of all loans, according to latest figures from the Australian Prudential Regulation Authority.

The banks have been working with the government to try and mitigate what has come to be called “The September Cliff”, because so much financial support is due to end at the same time.  The ANZ bank issued a warning at the weekend that the Melbourne recurrence of COVID-19 would likely see more business bankruptcies and job losses.

Australia’s largest financial institutions are keen to be seen to be helping, and banks are making personal calls to make sure customers understand the long-term effects of extending their “mortgage repayment holiday”.

They are offering different schemes, including changing the loan to interest only, moving to a fixed home loan rate or varying the loan term to reduce payments.

But they can already see the debt balloon building.

ANZ CEO Shayne Elliott told 3AW radio last week: “We can look at people’s bank accounts and see their pay levels and we can see it by industry and postcode and all that other stuff –  we can sort of see that actually, for many, while they’ve had a whack to their incomes, it’s not getting worse.”

Customers in dire financial hardship who are unable to make repayments are offered other measures including loan restructure and extended deferral periods, to help them through the pandemic.

But ANZ group executive of retail and commercial banking, Mark Hand warned some customers could dig themselves deeper into trouble by pausing their home loan repayments for too long.

“We’re not forgiving repayments, the interest is being capitalised. So whilst interest rates are low, the debt that you have at the end of the deferral period is higher than what it otherwise would have been. So that will put a strain on the cash flow of a family or a business.”

He added some people could be better off selling even in a market that has seen prices fall. “At some stage, you’re going to have to say: ‘If I can’t afford this mortgage, am I better off to rent, put my capital aside and wait until I’m in a better position to buy back into the market,” a spokesperson said.

A NAB spokesman told Clever Money: “The longer someone defers making loan repayments, they bigger the interest they accrue over the term of the loan.”

NAB CEO Ross McEwan added: “While a significant portion of businesses and homeowners that we have spoken to have started their repayments again, there are clearly many customers who may need support for a bit longer. Bankers will speak with customers about their individual circumstances and the options appropriate for them which may include loan restructure, determining alternative fund sources, hardship assistance or further deferral for up to four months.

“The deferral has provided some much-needed relief, but we are encouraging customers who can begin repayments to do so as soon as they can. It is in the customers’ interest to repay debt sooner.”

Who is owed what:

• NAB has more than 98,000 home loan customers on mortgage deferrals, owing the bank more than $39 billion. An astonishing 34 per cent of the home loan deferrals are for investor loans and 14 per cent on interest-only loans.
• ANZ has deferred more than 100,000 home and business loans.
• Commonwealth Bank has close to 1.7 million home loan customers and 128,000 are on deferred repayments.
• Westpac has helped more than 130,000 mortgage customers defer repayments for up to three months with a further three months on review.

Financial Adviser Noni Crawford of Hello Wealth Financial Strategies told Clever Money: “If financially viable, it could provide great relief to recommence paying off debt and to also avoid the loan term being extended too far into the future.

“We have to remember that the deferral option is just that, deferring the day you (still have to) repay the mortgage, so consideration is needed to determine if hardship or severe financial distress relates to you.”