Almost 430,000 loans have been paused - are there better alternatives?

One in 14 Australian mortgages have been paused during the COVID-19 pandemic, figures from the Australian Banking Association show. 

This comes after Australia’s banks offered home loan customers experiencing financial difficulty the option to take repayment holidays for up to six months. 

The result: more than 429,000 mortgages totalling $153.5 billion have been paused.

However, there is concern from the industry regarding the long-term ramifications of repayment holidays when there are other options available for those looking to ease their mortgage stress.

“While it’s great that mortgage holidays are available in this situation, it definitely shouldn’t be your first option,” Domain Home Loans executive director and Lendi chief executive David Hyman said.

“This is not a pause in the mortgage, it’s just a pause in the repayments. It’s also going to mean you’re going to pay more over the life of the loan.”

The interest accumulated during a six-month pause can equate to extra thousands being paid during the course of your home loan – a point customers should be wary of before choosing to pause.

“I would suggest doing it as a last resort once other options have been exhausted,” financial adviser at Wealth Train Daniel McGregor said. 

“It’s been shown a six-month pause in the early stages of a $400,000 loan could add $17,000 to the cost of a mortgage, and that’s when it’s important to look at the longer term implications.”

What are the other options? Experts say the first should be scrutinising the interest mortgage holders are currently paying. If a rate starts with a three or has remained the same for over 12 months, chances are the borrower is paying too much and refinancing becomes a viable option.

“What we recommend people do first and foremost is have a look at their loan and make sure they’re on the right rate,” Hyman said. “They can do that through a mortgage platform like Lendi or Domain Home Loans.”

Hyman added some lenders were offering interest rates as low as 2.1 to 2.2 per cent. Even though refinancing does come with a set of fees, these could be offset with the savings made on a lower interest rate.

“Sometimes, those savings can be a whole percentage point and even on a small mortgage, will have a meaningful impact,” he said. “So, if you haven’t refinanced since, there’s never been a better time to.”

“Many people are paying ‘lazy tax’,” McGregor agrees. “They’re paying higher than necessary interest on their mortgage. So, now presents a real reason for many people to start looking at finding a better deal. 

“They can reach out to a mortgage broker for help if they’re not confident to do it themselves. Sometimes, they can demand a better rate from their current lender and that may be a 20 to 30-minute phone call.”

Another option to consider is switching from principal and interest repayments to interest only. It’s important to note that interest-only repayments subsequently increase the amount of interest paid over the life of the home loan, but it can b a better option in the long term when compared to a complete repayment pause.

“It means you’re able to smooth out your cash flow a little bit while not having your loan increase in size over time.” Hyman said. 

Many mortgage holders may have been paying more than the minimum repayments they’ve been required to make.

If a borrower has been ahead on their home loan repayments before a period of financial stress, they may have the option to redraw money from the loan to then meet the minimum repayment amount set by their provider.

“If they’ve been paying higher than the minimum repayments, in many cases people will have redraw facilities or offset accounts attached to their loans and that can provide a source of funds to help people maintain their repayments,” McGregor said.

Each lender will be different, so it’s important for borrowers to contact theirs to see if these options are available. A phone call to the lender sooner rather than later can relieve some stress and avoid the last-resort option of taking a repayment holiday.

“Making financial decisions with your eyes open is always better than the alternative,” McGregor said.