One of the financial support measures in response to COVID-19 is sometimes referred to as “freezing” mortgage repayments.
Whilst freezing your mortgage repayments sounds awesome, it may not be as good as you think.
The lenders are not offering to forgive or waive your repayments. The offer is to defer the repayments.
Of the six major bank lenders’ websites I reviewed today, all are offering up to six months deferral.
Typically, this is for an initial three-month deferral with an optional extension for another three months on review.
It could cost you more overall and take you longer to repay
A repayment deferral doesn’t fully pause your mortgage.
Since you won’t be making repayments the interest accrued will be higher, and will be added to the outstanding loan balance (‘capitalised’). The capitalised interest then compounds each month, making you further behind.
Some lenders may extend the loan term, whilst others may require you to increase your repayments to catch up.
Naturally, if you have no income and no savings then using these financial hardship provisions are a lifeline. My intent is to help you be aware of the terms so you don’t get a painful surprise once your situation improves.
If you’re ahead with repayments
Bravo to both CBA and NAB who were open & clear on their websites about how they will treat redraw of existing over-repayments.
- CBA’s policy: “Any available redraw you have will be drawn on first during the 6 month support period.” 1https://www.commbank.com.au/latest/coronavirus.html?ei=hp-ban-cvp-default-coronavirus Accessed 25th March 2020
- NAB’s policy: “redraw will be revoked for customers during this repayment pause.” 2https://www.nab.com.au/personal/customer-support/covid19-help/home-owners-support Accessed 25th March 2020
If you are ahead on your repayments then consider first using the available redraw to meet expenses before applying to defer your repayments.