Repayment holidays refer to a period of time where customers can defer loan payments if they are unable to meet their financial obligations. These benefits have been in place for sometime due to COVID-19, but it was recently decided to extend these “holidays” to accommodate those who are most affected by the economic strain.
The Australian Banking Association (ABA) has estimated that 800,000 borrowers have already taken advantage of the repayment holidays, and 61% of the loans deferred were for residential mortgages. The extension may seem like a miracle to some, but there are reasons for those who don’t necessarily need it to be cautious before calling their lender to arrange a deferral. We’ll tell you what you need to know about the repayment holidays and how they’re likely to impact you.
This extension to the repayment holidays came on the heels of discussions between APRA and ASIC where repayment trends were reviewed. The banks have all agreed that this is a necessary maneuver to give people more time to get their financial affairs in order. The exact time period will vary by lender, though most won’t decide until the expiration date of the current holiday, which is likely to be September. The indicated extension period is up to four months, though lenders have the option of extending all the way through until 31 March 2021 at the absolute latest. Lenders are also likely to consider extensions on a case by case basis.
The major banks reported a lot of economic uncertainty at the start of the pandemic, but there’s been a lot of adjustment since then. The good news is that around one in five homeowners have begun to resume paying loan installments after seeking an initial deferment. Still, that leaves 80% of customers who are still showing signs of financial hardship. It’s why executives at the Big Four Banks are braced for a potential surge in the uptake of deferral extensions.
The banks are taking a calculated risk when it comes to deferring loan payments. They’re presenting a lifeline to those who have been most impacted by COVID, allowing them to breathe a little easier while they wait for the country to get back on its feet. This reduces financial anxiety, something that many homeowners and small business owners desperately need right now. Extending the repayment holiday also stimulates cash flow in the country’s economy, giving consumers a chance to spend on goods and services across every sector.
And make no mistake about it, there are some people whose only option is to take a deferment. For those whose livelihoods have been drastically affected by COVID, it may be the only way to get the time and space necessary to start putting a savings account back in order. This decision also promotes confidence and faith in both the government and the banks. It sends a strong message to consumers that they have not been forgotten in the wake of the devastation left behind by the virus, nor are their individual concerns falling on deaf ears.
But as positive as these facts are, the plan is not without its downsides. Analysts have warned that deferring payments can only be done for so long and that the extension itself is a sign of a weak economy. Jonathan Mott, an analyst from UBS, estimated that 10% of all mortgages in the country have been deferred. Instead of continuing this trend, he believes it makes more sense to restructure the loans or transition the payments to interest-only.
By definition, the mortgage relief being offered right now is a short-term solution. And while it may seem tempting to take any support that the government and banks have on offer, homeowners really need to be thinking long-term right now. Because taking a bank up on its offer doesn’t absolve you from any of your debt — it may add to it.
The very word “holiday” can make consumers feel as though they’re not taking a big risk in accepting the mortgage relief. Yet this benefit may end up only benefitting the banks over time. It’s why homeowners who aren’t in dire need of these deferments should consider alternative measures, such as switching to an interest-only loan to reduce payments or refinancing their home loan to save on interest.
The interest that you’re not paying during a repayment holiday is going to be tacked onto the overall loan balance. A higher balance means a longer repayment period, which means you could end up spending more in interest on a higher loan balance than you would have if you had made your original payments.
Trusted consumer websites have calculated that a $500,000 mortgage at an average variable rate of 3.9% would cost nearly $50 extra a month if you still had 20 years left on a 30-year mortgage. That means that you could be paying more than $11,000 over the course of two decades if you take the holiday offer.
There’s little doubt that offering homeowners options right now is a good thing. The alternative is to begin evicting people nationwide from their homes, something that no bank or government official wants to see happen. But home loan repayment holidays should be considered only if really necessary, especially in light of its impacts in the long-term. Repayment holidays are just a short-term fix to a bigger problem.
If you’re looking for someone to help you navigate through a complicated financial landscape, Shore Financial can help. It’s our job to explain the options and help you understand more about the ramifications of each choice. If you’re looking for a way to come out of this crisis on the other side, call us today.