How to resume home loan repayments if you've frozen your mortgage

Banks have deferred the mortgage repayments of well over 400,000 borrowers in response to the COVID-19 pandemic, equating to one in 14 of all home loans, according to the Australian Banking Association.

From owner-occupiers fearful of how long the pandemic could last to investors anticipating a rent shortfall, borrowers across the country have signed up for a three to six-month pause on their loan repayments.

And while these deferrals were providing genuine relief for many families, Property Planning Australia managing director David Johnston believed up to 80 per cent of deferrals were not financially necessary.

“A lot of people were battening down the hatches, doing anything they could do to preserve their cashflow, taking opportunities before they had certainty whether they needed to or not,” he says.

“The reality is that probably the majority of people who thought they might need it, didn’t really need it at all.”

Managing director at homeloanexperts.com.au Otto Dargan gives the example of one couple who inquired about a mortgage payment holiday.

“They were both government employees and still in their jobs,” he says. “It was clear from this that they didn’t understand that the interest isn’t waived, it’s just added on to the amount that they owe.”

While Dargan says the number of people reversing mortgage payment deferrals is currently low, he expects the trend to escalate as borrowers look to resume repayments sooner than anticipated.

Johnston says you may want to resume your repayments because your circumstances are fine, or at least better than expected.

“You may have put the deferral in place just because you had uncertainty but so far so good,” he says.

If you’ve found yourself in this situation, what should you do?

Can I cancel my home loan holiday?

Most lenders have offered eligible clients a three-month pause on their loan repayments with the potential to extend for a further three months.

But if you want to cut your repayment holiday short, Johnston says it’s as easy as resuming repayments.

“With almost all loans, you can keep making regular repayments,” he says.

You’ll also want to touch base with your lender or mortgage broker to update your situation and to confirm how you’ll be repaying the deferred payments and interest.

Will my repayments increase because I froze my mortgage?

One of the key concerns for borrowers considering a repayment holiday is the impact it would have on repayments when the holiday ends.

Johnston says your lender may agree to extend the loan period of a mortgage that has been deferred due to the COVID-19 crisis by whatever period will allow the resumption of repayments at or close to pre-pause repayment levels.

“This means your repayment amount doesn’t change, despite having paid less off,” he says.

Other lenders may expect you to repay the deferred sum plus the capitalised interest within your original loan timeframe, which would push up your monthly repayments.

You will need to check in with your lender to confirm their policy in this regard.

Can I switch from a repayment holiday to a refinance?

The Australian Prudential Regulation Authority has advised that repayment holidays taken due to the COVID-19 crisis would not count as “mortgage in arrears” and would not be recorded on your credit file, provided the borrower had been meeting their repayment schedules prior to the pandemic.

This is good news for borrowers considering refinancing. The bad news is that the majority of lenders still require a history of six months with all repayments made on time before they will consider a refinance application.

Dargan says they’re yet to see if lenders will adjust their refinance policies due to the COVID-19 crisis.

“We believe a more reasonable approach would be to also consider a borrower’s repayment history prior to taking a repayment holiday and to confirm that their income has been restored, so the bank can see that they can repay their home loan without any hardship.” 

Can I take a second COVID-19 pandemic-related repayment holiday?

Dargan says people who end their repayment holiday early have no guarantee that they can take out a new repayment holiday, so it’s best to discuss your options with your lender prior to ending a repayment holiday.

However, that’s easier said than done in the current climate.

“Many lenders are almost impossible to contact at the moment which will cause more issues later this year when repayments resume,” says Dargan. “Borrowers will need to speak to their lender but lenders will not have the staff required to handle so many inquiries.”

If you can’t get hold of your lender by phone, submit an email query so at least you have a written record of your communication.

Is refinancing better than freezing mortgage repayments?

Both Johnston and Dargan agree that for those who can afford to continue making repayments, refinancing is the best option.

“Refinancing has been the most taken-up approach within our business,” Johnston says.

He says the key reasons to refinance, both in response to the financial impact of the pandemic and in general, include accessing a lower interest rate or accessing interest-only repayments, both of which should lower repayments.

Refinancing can also allow borrowers to restructure their loan while their income remains stable, release equity to increase cashflow if income is affected in the coming weeks and months, and consolidate debts to improve cashflow.