Australia’s major banks are offering an additional four months home loan deferral for customers struggling with financial stress.
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The move comes after the banks originally announced a six-month mortgage deferral offer, scheduled to end in September.
However, experts are warning borrowers should only consider deferring their mortgage as a last resort.
“Some people refer to these deferments as a 'mortgage holiday', but that is a misnomer,” Finder money specialist Taylor Blackburn said.
“Finder research found that if you were 10 years in on a $400,000 loan with an average variable rate of 3.90 per cent, pausing repayments for 6 months would cost you an extra $8,902 over the remaining 20 years of the loan.”
But if you took on the extra four months deferral, that will add another $6,031 to your loan - or an extra $14,933 over the remaining 20 years of the loan.
And that’s before considering the extra cost if your interest rate is higher.
“Our advice is consumers should only use this additional deferment as an absolute last resort,” said Blackburn.
Instead, borrowers who have the capacity should consider refinancing their home loan.
Switching from a 3.90 per cent interest rate to 2.44 per cent would wipe $85,000 off over the course of 30 years.
“Think of deferment on your house like sitting in a parked cab in the rain. The cabbie (the lender) is allowing you to stay in the cab (your house) for free, but he or she is keeping the meter running. The longer you sit in a cab that isn't taking you anywhere, the more you pay for the ride.”
Principal left after 10 years
Interest earned after 6 months
Interest earned on a further 4 months
Total interest earned from pausing repayments
Based on the average interest rate by state, deferring could add as much as an extra $127 to monthly repayments, according to Canstar modelling.
Or if borrowers chose to add time to their loan, they would need close to another two years of repayments to pay it off, Canstar finance expert Steve Mickenbecker said.
“An extra two years of repayments sounds like a hefty cost for taking a repayment pause,” he said.
“While the cost is hefty, if it saves you financially and saves your house through these tough times, it is worthwhile.”
Canstar found that if borrowers choose to keep the loan term at 30 years, their monthly repayments will increase on average by $106, although it varies state by state depending on average home value and interest rate.
Here’s how it worked that out: