Australia’s major banks have announced an extension of the home loan holiday program, allowing distressed borrowers to pause repayments for another four months.
The banks’ decision comes as Melbourne descends into lockdown for another six weeks, a situation that could cost the Australian economy $1 billion a week, according to treasurer Josh Frydenberg.
It also comes ahead of the previously announced September deadline for the home loan deferral program, with warnings this week that the abrupt end to support payments and mortgage deferrals would lead to a panicked sell-off worth $75 billion.
"Today banks are announcing the next stage of this support, which will be specifically targeted to getting people back on repayments while continuing to help those hardest hit," Australian Banking chief Anna Bligh said.
"This new phase of support avoids a cliff which would have been a terrible outcome for customers and had a negative impact on the economy."
The home and commercial loan deferrals aren’t automatic, with banks expecting customers who can afford to pay their loans to begin to do so in September.
Rather, these new loan extensions will be available only to those experiencing hardship. Customers will also have the option to restructure or vary their home loans.
As it stands, more than 800,000 customers have deferred repayments.
Frydenberg said the banks’ decision was good news for struggling Australians.
“If somebody's lost their job and they've got a residential mortgage or indeed if their business has been closed and they've got a commercial loan, then they would be cases where the customer would need to talk to their bank, and I understand it that the bank is going to be very supportive of their customers," he said.
Westpac acting chief financial officer Gary Thursby said the extensions provide “breathing space”, but added that he expects most customers to resume repayments.
“For customers who remain under stress but can still contribute towards their loan repayments, we will provide support where we can help work through options that may be available to adjust their loan,” Thursby said.
“However, we anticipate that a significant number of customers will be able to resume regular repayments when their deferral term ends. We expect these customers to start their repayments again and we would encourage as many people as possible to do so.”
CommBank chief Matt Comyn echoed his words, noting many customers are doing better than expected.
“[But] we know that some customers will require further support and we will contact them over the coming months to discuss the options that might be available to them.”
The problem with deferrals
NAB chief Ross McEwan said that while support is available, customers should know that deferrals come with costs of their own.
“The deferral has provided some much-needed relief, but we are encouraging customers who can begin repayments to do so as soon as they can. It is in the customers’ interest to repay debt sooner,” McEwan said.
While customers can defer their repayments, the interest will continue to accrue - presenting a major headache for when payments do resume.
In fact, according to Finder research, homeowners with a $500,000 loan who had spent 10 years paying it off would face an extra $11,127 over the remaining 20 years of the loan if they took a six month pause, based on a 3.90 per cent variable rate.
Personal finance expert Nicole Pedersen-McKinnon has made a similar warning.
“[Banks] are going to make all this extra money from us,” she said.
“And there are better ways. If you can get a mortgage discount, that’s going to save you potentially hundreds of dollars a month right there if you are struggling.”
She warned that taking up the offer means ultimately “paying interest on interest”, something that could add as much as $17,000 to your loan.
“We would recommend looking into getting a better rate on your home loan first if you are struggling to make your repayments,” Finder personal finance expert Kate Browne said.
“While a mortgage deferral or holiday sounds appealing in the short term, you need to seriously consider whether you’ll be able to afford this ‘holiday’ in the long run.”
The Reserve Bank kept the official interest rate at its record low 0.25 per cent on Tuesday, meaning mortgage rates are also at record lows.