Australian home owners hit hardest by the pandemic will have the option to continue their mortgage holidays beyond September.
But financial advisers warn that would come at a price.
As Victorians digested news of another city-wide lockdown, the major banks said on Wednesday that home owners suffering severe financial hardship in September could extend their loan deferrals by four months.
That will provide much-needed relief to many of the 800,000 customers who have collectively deferred $260 billion of loans since the pandemic began.
But finance experts have warned home owners to think twice about the extension offer, as interest continues to accrue when repayments are paused.
The true cost of further extensions
The true cost of a six-month mortgage holiday will vary based on the size and length of the loan.
But customers on an average-sized Australian mortgage ($474,062 over 30 years) will see their monthly repayments increase from $2113 to $2178, according to calculations from Canstar.
That’s an extra $65 every month.
Deferring repayments for ten months, meanwhile, would push repayments on an average-sized mortgage to $2222 a month – an increase of $109.
The other option is to keep repayments at their pre-virus levels but increase the length of the loan.
Customers taking this route would add an extra 15 months onto the length of an average-sized mortgage if they deferred for six months.
A 10-month pause would an extra two years.
What to consider before extending
Jules Knox, director and personal financial adviser at wealth management firm Evalesco, said requesting a further four-month extension should be a “last resort”.
“The short-term impact on your budget is less outgoing expenses,” she said.
“But after those four months, or whenever the repayment holiday ends, you could be up for higher repayments than before.”
If possible, Ms Knox said it makes sense to pay whatever you can afford rather than continue paying nothing at all.
Ideally, mortgage holders should continue to pay off the principal and interest on their loans, but even interest-only payments are better than “kicking the can down the road” while the interest keeps accruing.
If borrowers cannot afford to restart repayments and need to extend their deferrals, Ms Knox said they should use the time to get other finances in order.
During those four months, borrowers should try to pay down higher-interest debts like credit card bills, and put some money aside to cover repayments once the holiday ends.
“The other thing that’s key is using that time to possibly renegotiate with their lender, to renegotiate the rate or even the term of the loan,” Ms Knox added.
The banks stressed that extensions will only be given to customers with a genuine need, Ms Knox said.
And anyone with a genuine need for an extension will also have a good case for needing to renegotiate – something Ms Knox said banks will hopefully recognise.
“You’ve got nothing to lose either way,” she said.
Importantly, Ms Knox added, borrowers should keep in regular contact with their bank.